SILA REALTY TRUST, INC.
10-Ks and 10-Qs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________
FORM 10-K
(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: 000-55435
CARTER VALIDUS MISSION CRITICAL REIT II, INC.
(Exact name of registrant as specified in its charter)
|
Maryland
|
46-1854011
|
|
|
(State or Other Jurisdiction of
Incorporation or Organization)
|
(I.R.S. Employer
Identification No.)
|
|
|
4890 West Kennedy Blvd., Suite 650
Tampa, FL 33609
|
(813) 287-0101
|
|
|
(Address of Principal Executive Offices; Zip Code)
|
(Registrant’s Telephone Number)
|
|
Securities registered pursuant to Section 12(b) of the Act:
|
Title of each class
|
Name of each exchange on which registered
|
|
|
None
|
None
|
|
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $0.01 per share
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 Section 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 of this chapter) 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, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “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 pursuant to Section 7(a)(2)(B) of the Securities Act. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
There is no established market for the Registrant’s shares of common stock.
As of June 30, 2017, the last business day of the Registrant's most recently completed second fiscal quarter, there were approximately
76,316,000
shares of Class A common stock,
1,703,000
shares of Class I common stock and
21,815,000
shares of Class T common stock held by non-affiliates, for an aggregate market value of approximately
$756,760,000
,
$15,506,000
and
$209,012,000
, respectively, assuming a market value of $10.078 per Class A share, $9.162 per Class I share and $9.649 per Class T share, the offering prices per share as of June 30, 2017 in the registrant's public offering exclusive of any discounts for certain categories of purchasers. The estimated share value of each of our Class A common stock, Class I common stock and Class T common stock is $9.18 per share as of June 30, 2017, which was approved by the Registrant's board of directors on September 28, 2017.
As of
March 16, 2018
, there were approximately
81,988,000
shares of Class A common stock,
8,146,000
shares of Class I common stock,
37,365,000
shares of Class T common stock and
0
shares of Class T2 common stock of Carter Validus Mission Critical REIT II, Inc. outstanding.
Documents Incorporated by Reference
Portions of Registrant’s proxy statement for the 2018 annual stockholders meeting, which is expected to be filed no later than April 30, 2018, are incorporated by reference in Part III. Items 10, 11, 12, 13 and 14.
CARTER VALIDUS MISSION CRITICAL REIT II, INC.
(A Maryland Corporation)
TABLE OF CONTENTS
|
|
|
Page
|
|
Item 1.
|
||
|
Item 1A.
|
||
|
Item 1B.
|
||
|
Item 2.
|
||
|
Item 3.
|
||
|
Item 4.
|
||
|
Item 5.
|
||
|
Item 6.
|
||
|
Item 7.
|
||
|
Item 7A.
|
||
|
Item 8.
|
||
|
Item 9.
|
||
|
Item 9A.
|
||
|
Item 9B.
|
||
|
Item 10.
|
||
|
Item 11.
|
||
|
Item 12.
|
||
|
Item 13.
|
||
|
Item 14.
|
||
|
Item 15.
|
||
|
Item 16.
|
||
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this
Annual Report on Form 10-K
of Carter Validus Mission Critical REIT II, Inc., other than historical facts, may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. We intend for all such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Securities Act and the Exchange Act, as applicable by law. Such statements include, in particular, statements about our plans, strategies and prospects, and are subject to certain risks and uncertainties, as well as known and unknown risks, which could cause actual results to differ materially from those projected or anticipated. Therefore, such statements are not intended to be a guarantee of our performance in future periods. Such forward-looking statements can generally be identified by our use of forward-looking terminology such as “may,” “will,” “would,” “could,” “should,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “continue,” or other similar words. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this
Annual Report on Form 10-K
is filed with the U.S. Securities and Exchange Commission, or SEC. We make no representation or warranty (express or implied) about the accuracy of any such forward-looking statements contained in this
Annual Report on Form 10-K
, and we do not undertake to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. We caution investors not to place undue reliance on forward-looking statements, which reflect our management’s view only as of the date of this
Annual Report on Form 10-K
. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results. The forward-looking statements should be read in light of the risk factors identified in the Item 1A. Risk Factors section of this
Annual Report on Form 10-K
.
1
PART I
Item 1. Business.
The Company
Carter Validus Mission Critical REIT II, Inc., or the Company, or we, is a Maryland corporation that was formed on January 11, 2013, which elected to be taxed as a real estate investment trust, or a REIT, under the Internal Revenue Code of 1986, as amended, or the Code, for federal income tax purposes commencing with its taxable year ended December 31, 2014. Substantially all of our business is conducted through Carter Validus Operating Partnership II, LP, a Delaware limited partnership, or the Operating Partnership, formed on January 10, 2013. The Company is the sole general partner of the Operating Partnership and Carter Validus Advisors II, LLC, or our Advisor, is the special limited partner of the Operating Partnership. As of
December 31, 2017
, we owned
53
real estate investments, consisting of
70
properties, comprising approximately
5,190,000
rentable square feet of single-tenant and multi-tenant commercial space located in
37
metropolitan statistical areas, or MSAs, and one micropolitan statistical area, or µSA. As of
December 31, 2017
, the rentable space of these real estate investments was
97.7%
leased.
We commenced our initial public offering of $2,350,000,000 of shares of our common stock, or our Initial Offering, consisting of $2,250,000,000 of shares in our primary offering and up to $100,000,000 of shares pursuant to our distribution reinvestment plan, or DRIP, on May 29, 2014. We ceased offering shares of common stock pursuant to our Initial Offering on November 24, 2017. At the completion of our Initial Offering, we had accepted investors subscriptions for and issued approximately
125,095,000
shares of Class A, Class I and Class T common stock, including shares of common stock issued pursuant to our DRIP, resulting in gross proceeds of
$1,223,803,000
, before selling commissions and dealer manager fees of approximately
$91,503,000
.
On November 27, 2017, our follow-on offering, or our Offering, of up to $1,000,000,000 in shares of Class A common stock, Class I common stock, and Class T common stock pursuant to a registration statement on Form S-11, or the Follow-On Registration Statement, was declared effective by the SEC.
On September 28, 2017, our board of directors, at the recommendation of the audit committee, which is comprised solely of independent directors, unanimously approved and established an Estimated Per Share NAV, as defined below, of $9.18 as of June 30, 2017 of each of our Class A common stock, Class I common stock and Class T common stock for purposes of assisting broker-dealers that are participating, or participated, in the Initial Offering and the Offering in meeting their customer account statement reporting obligations under National Association of Securities Dealers Conduct Rule 2340. As a result of our board of directors' determination of the Estimated Per Share NAV, our board of directors approved the revised primary offering prices of $10.200 per Class A share, $9.273 per Class I share, and $9.766 per Class T share, effective October 1, 2017.
Further, the board of directors approved $9.18 as the per share purchase price of Class A shares, Class I shares and Class T shares pursuant to the DRIP, effective October 1, 2017. The Estimated Per Share NAV is not subject to audit by our independent registered public accounting firm. We intend to publish an updated estimated per share NAV on at least an annual basis.
On October 13, 2017, we registered 10,893,246 shares of common stock under the DRIP pursuant to a registration statement on Form S-3, or the DRIP Registration Statement, for a price per share of $9.18 per Class A share, Class I share and Class T share for a proposed maximum offering price of $100,000,000 in shares of common stock, or the DRIP Offering. The DRIP Registration Statement was automatically effective with the SEC upon filing and we commenced offering shares of common stock pursuant to the DRIP Registration Statement on December 1, 2017. On December 6, 2017, we filed a post-effective amendment to our DRIP Registration Statement to register shares of Class T2 common stock at $9.18 per share.
On June 2, 2017, we filed Articles Supplementary to the Second Articles of Amendment and Restatement with the State Department of Assessments and Taxation of Maryland reclassifying a portion of our Class A common stock, Class I common stock and Class T common stock as Class T2 common stock. On December 6, 2017, we filed Post-Effective Amendment No. 1 to our Registration Statement on Form S-11 to register shares of Class T2 common stock, which was declared effective by the SEC on February 20, 2018.
We ceased offering shares of Class T common stock in our Offering at of the close of business on March 14, 2018. As of March 15, 2018, we are offering, in any combination with a dollar value up to the maximum offering amount, shares of Class A common stock at a price of $10.200 per share, shares of Class I common stock at a price of $9.273 per share, and shares of Class T2 common stock at a price of $9.714 per share. The offering prices are based on the most recent estimated per share net asset value, or Estimated Per Share NAV, of $9.18 of each of our Class A common stock, Class I common stock and Class T common stock, and any applicable per share upfront selling commissions and dealer manager fees. We continue to offer shares of Class T common stock pursuant to our DRIP Offering. We refer to the "Offering", "Initial Offering" and "DRIP Offering" collectively as the "Offerings."
2
As of December 31, 2017, we had accepted investors’ subscriptions for and issued approximately
126,560,000
shares of Class A, Class I and Class T common stock in our Offerings, resulting in receipt of gross proceeds of approximately
$1,237,638,000
, before share repurchases of $20,584,000, selling commissions and dealer manager fees of approximately
$91,898,000
and other offering costs of approximately
$23,357,000
.
Substantially all of our business is managed by our Advisor. Carter Validus Real Estate Management Services II, LLC, an affiliate of our Advisor, or our Property Manager, serves as our property manager. SC Distributors, LLC, an affiliate of our Advisor, or our Dealer Manager, serves as the dealer manager of our Offerings. The Dealer Manager has received and will continue to receive fees for services related to our Offerings. Our Advisor and Property Manager have received and will continue to receive fees for services related to our acquisition and operational stages. The Advisor also may receive fees during our liquidation stage.
We were formed to invest primarily in quality income-producing commercial real estate, with a focus on data centers and healthcare properties, preferably with long-term net leases to creditworthy tenants, as well as to make other real estate investments that relate to such property types. Other real estate investments may include equity or debt interests, including securities, in other real estate entities. We also may originate or invest in real estate-related debt. We expect real estate-related debt originations and investments to be focused on first mortgage loans, but they also may include real estate-related bridge loans, mezzanine loans and securitized debt.
Except as the context otherwise requires, “we,” “our,” “us,” and the “Company” refer to Carter Validus Mission Critical REIT II, Inc., our Operating Partnership and all wholly-owned subsidiaries.
Key Developments during
2017
and Subsequent
|
•
|
As of
March 16, 2018
, we had accepted investors' subscriptions for and issued approximately
84,975,000
shares of Class A common stock,
8,152,000
shares of Class I common stock,
37,521,000
shares of Class T common stock and no shares of Class T2 common stock in our Offerings, resulting in gross proceeds of approximately
$841,384,000
,
$74,555,000
,
$360,650,000
and $0, respectively, before selling commissions and dealer manager fees of approximately $166,615,000.
|
|
•
|
We currently pay, and intend to continue to pay, monthly distributions to our stockholders equal to an annualized rate of 6.40% for Class A common stock, assuming a purchase price of $10.200 per share of Class A common stock, 7.04% for Class I common stock, assuming a purchase price of $9.273 per share of Class I common stock, 5.68% for Class T common stock, assuming a purchase price of $9.766 per share of Class T common stock and 5.72% for Class T2 common stock, assuming a purchase price of $9.714 per share of Class T2 common stock. Additionally, as of
March 16, 2018
, we had paid aggregate distributions, since inception, of approximately $137,511,000 ($62,524,000 in cash and $74,987,000 reinvested in shares of common stock pursuant to the DRIP).
|
|
•
|
As of
December 31, 2017
, we had purchased
53
real estate investments, consisting of
70
properties, comprising approximately
5,190,000
of gross rental square feet for an aggregate purchase price of approximately
$1,611,055,000
.
|
|
•
|
During the year ended
December 31, 2017
, we entered into
seven
notes payable and assumed one note payable that are each collateralized by real estate assets. As of
December 31, 2017
, the aggregate principal balance outstanding of our notes payable was
$468,135,000
.
|
|
•
|
During the year ended
December 31, 2017
, we increased the borrowing base availability under the secured credit facility by
$116,431,000
by adding
12
properties to the aggregate pool availability, and we removed one property from the collateralized pool, which decreased the aggregate pool availability by $18,645,000. This resulted in a net increase of the borrowing base availability of $97,786,000.
|
|
•
|
As of
March 16, 2018
, we had a $250,000,000 outstanding balance under the secured credit facility.
|
|
•
|
During the
year
ended
December 31, 2017
, we received valid repurchase requests related to approximately
1,880,820
Class A shares, Class T shares and Class I shares of common stock (1,793,424 Class A shares, 81,939 Class T shares and 5,457 Class I shares), all of which were repurchased in full, for an aggregate purchase price of approximately
$17,159,000
(an average of
$9.12
per share).
|
|
•
|
As of
March 16, 2018
, we, through our wholly-owned subsidiaries, acquired 54 real estate investments, consisting of 72 properties, for an aggregate purchase price of $1,662,016,000 and comprising of approximately 5,323,000 gross rental square feet of commercial space.
|
Our principal executive offices are located at 4890 West Kennedy Blvd., Suite 650, Tampa, Florida 33609. Our telephone number is (813) 287-0101.
3
Investment Objectives and Policies
Our primary investment objectives are to:
|
•
|
acquire well-maintained and strategically-located, quality, mission critical real estate investments in high-growth sectors of the U.S. economy, including the data center and healthcare sectors, which provide current cash flow from operations;
|
|
•
|
pay regular cash distributions to stockholders;
|
|
•
|
preserve, protect and return capital contributions to stockholders;
|
|
•
|
realize appreciated growth in the value of our investments upon the sale of such investments in whole or in part; and
|
|
•
|
be prudent, patient and deliberate with respect to the purchase and sale of our investments considering current and future real estate markets.
|
We cannot assure stockholders that we will attain these objectives or that the value of our assets will not decrease. Furthermore, within our investment objectives and policies, our Advisor has substantial discretion with respect to the selection of specific investments and the purchase and sale of our assets, subject to the approval of our board of directors. Our board of directors may revise our investment objectives and policies if it determines it is advisable and in the best interest of our stockholders.
Investment Strategy
Primary Investment Focus
There is no limitation on the number, size or type of properties we may acquire or the percentage of net proceeds of our Offerings that may be invested in a single investment. We intend to focus our investment activities on acquiring mission critical net-leased properties, preferably with long-term leases, to creditworthy tenants that are primarily in the data center and healthcare sectors. We expect that most of our properties will be located throughout the continental United States; however, we may purchase properties in other jurisdictions. We may also invest in real estate-related debt and securities that meet our investment strategy and return criteria, provided that we do not intend for such investments to constitute a significant portion of our assets, and we will evaluate our assets to ensure that any such investments do not cause us to fail to lose our REIT status, cause us or any of our subsidiaries to be an investment company under the Investment Company Act of 1940, as amended, or the Investment Company Act, or cause our Advisor to have assets under management that would require our Advisor to register as an investment adviser under the Investment Advisers Act of 1940, as amended, or the Advisers Act. We expect the sizes of individual properties that we purchase to vary significantly, but we expect most of the properties we acquire are likely to have a purchase price between $5,000,000 and $200,000,000. The number and mix of properties and other real estate-related investments comprising our portfolio will depend upon real estate market conditions and other circumstances existing at the time we acquire the properties and other real estate-related investments, and the amount of proceeds raised in our Offerings.
Investing in Real Property
Our Advisor uses the following criteria to evaluate potential investment opportunities:
|
•
|
“mission critical” (as defined below) to the business operations of the tenant;
|
|
•
|
leased to investment grade and other creditworthy tenants, preferably on a net-leased basis;
|
|
•
|
long-term leases, preferably with terms of six years or longer, which typically include annual or periodic fixed rental increases; and
|
|
•
|
located in geographically diverse, established markets with superior access and visibility.
|
We believe that net-leased properties, as generally compared to properties with other lease structures, offer a distinct investment advantage since such properties typically provide more stable and predictable returns to the property owner, require less operating capital, have less recurring tenant turnover and, with respect to single-tenant properties, often are located in superior locations that are less dependent on the financial stability of adjoining tenants. Further, since we intend to acquire properties that are geographically diverse, we expect to minimize the potential adverse impact of economic slowdowns or downturns in specific geographic markets. We believe that a portfolio consisting of freestanding, single-tenant and multi-tenant mission critical properties that are long-term net-leased to creditworthy tenants will enhance our liquidity opportunities for investors by making the sale of individual properties, multiple properties or our investment portfolio as a whole attractive to institutional investors and by making a potential listing of our shares attractive to the public investment community.
We consider “mission critical” properties as those properties that are essential to the successful operations of the companies within the industries in which such companies operate.
4
As determined appropriate by our Advisor, we may acquire properties in various stages of development or that require substantial refurbishment or renovation. Our Advisor will make this determination based upon a variety of factors, including the available risk-adjusted returns for such properties when compared with other available properties, the effect such properties would have on the diversification of our portfolio, and our investment objectives of realizing both current income and capital appreciation upon the sale of such properties.
To the extent feasible, we will continue to seek to achieve a well-balanced portfolio of real estate investments that is diversified by geographic location, age and lease maturities. We also will focus on acquiring properties in the high-growth data center and healthcare sectors. We expect that tenants of our properties will be diversified between national, regional and local companies. We generally target properties with lease terms of six years or longer. We may acquire properties with shorter lease terms if the property is in an attractive location, is difficult to replace, or has other significant favorable attributes. We expect that these investments will provide long-term value by virtue of their size, location, quality and condition, and lease characteristics.
Many data center and healthcare companies currently are entering into sale-leaseback transactions (as described below) as a strategy for applying capital to their core operating businesses that would otherwise be invested in their real estate holdings. We believe that our investment strategy will enable us to take advantage of this trend and companies’ increased emphasis on core business operations and competence, in today’s competitive corporate environment, as many of these companies attempt to divest of their real estate assets.
We have incurred, and intend to continue to incur, debt to acquire properties when our board of directors determines that incurring such debt is in our best interest. In addition, from time to time, we may acquire certain properties without financing and later incur mortgage debt secured by one or more of such properties if favorable financing terms are available. We would use the proceeds from these loans to acquire additional properties and other real estate-related investments. We intend to limit our aggregate borrowings to 50% of the fair market value of our assets (calculated after the close of our Offering and once we have invested substantially all the net proceeds of our Offering), unless excess borrowing is approved by a majority of our board of directors, including a majority of our independent directors.
We believe that our investment focus may present lower investment risks and greater stability to investors than other sectors of today’s commercial real estate market, such as the office and multifamily property sectors. By acquiring a large number of mission critical properties, we believe that lower-than-expected results of operations from one or a few investments will have a less significant effect on our ability to realize our investment objectives than an alternative strategy in which fewer or different properties are acquired.
Creditworthy Tenants
In evaluating potential property acquisitions, we apply credit underwriting criteria to the existing tenants of such properties. Similarly, we will apply credit underwriting criteria to possible new tenants when we are re-leasing properties in our portfolio (to the extent applicable). We expect many of the tenants of our properties to be creditworthy national or regional companies with high net worth and high operating income.
A tenant is considered creditworthy if it has a financial profile that our Advisor believes meets our criteria. In evaluating the creditworthiness of a tenant or prospective tenant, our Advisor will not use specific quantifiable standards, but will consider many factors, including, but not limited to, the proposed terms of the property acquisition, the financial condition of the tenant and/or guarantor, the operating history of the property with the tenant, the tenant’s market share and track record within its industry segment, the general health and outlook of the tenant’s industry segment, and the lease length and other lease terms at the time of the property acquisition.
We monitor the credit of our tenants to stay abreast of any material changes in credit quality. We monitor tenant credit by (1) reviewing the credit ratings of tenants (or their parent companies) that are rated by nationally recognized rating agencies, (2) reviewing financial statements that are publicly available or that are required to be delivered to us under the applicable lease, (3) monitoring news reports and other available information regarding our tenants and their underlying businesses, (4) monitoring the timeliness of rent collections, and (5) conducting periodic inspections of our properties to ascertain proper maintenance, repair and upkeep. As of
December 31, 2017
, we have not identified any material change in any of our tenants' credit quality.
Description of Leases
We acquire properties subject to existing tenant leases. When spaces in properties become vacant, existing leases expire, or we acquire properties under development or requiring substantial refurbishment or renovation, we anticipate entering into net leases. Net leases typically require tenants to pay, in addition to a fixed rental, all or a majority of the costs relating to the three broad expense categories of real estate taxes (including special assessments and sales and use taxes), insurance and common area maintenance (including repair and maintenance, utilities, cleaning and other operating expenses related to the property). There are various forms of net leases, most typically classified as triple net, or absolute net. Triple net leases
5
typically require the tenant to pay, in addition to a fixed rental, all costs related to real estate taxes, insurance, utilities and common area maintenance of the property, including the roof and structure of the property. Generally, the leases require each tenant to procure, at its own expense, commercial general liability insurance, as well as property insurance covering the building for the full replacement value and naming the ownership entity and the lender, if applicable, as the additional insured on the policy. As a precautionary measure, we may obtain, to the extent available, secondary liability insurance, as well as loss of rents insurance that covers two years of annual rent in the event of a rental loss. Tenants will be required to provide proof of insurance by furnishing a certificate of insurance to our Advisor on an annual basis. With respect to multi-tenant properties, we expect to have a variety of lease arrangements with the tenants of these properties. Since each lease is an individually negotiated contract between two or more parties, each lease will have different obligations of both the landlord and tenant. Many large national tenants have standard lease forms that generally do not vary from property to property. We will have limited ability to revise the terms of leases to those tenants. We expect that multi-tenant properties will be subject to "gross" leases. "Gross" leases typically require the tenant to pay a flat rental amount and require us to pay for all property charges regularly associated with ownership of the property.
A majority of our acquisitions generally have lease terms of six years or longer at the time of the property acquisition. As of
December 31, 2017
, the weighted average remaining lease term of our properties was
10.34
years. We have acquired and may continue to acquire properties under which the lease term is in progress and has a partial term remaining. We also may acquire properties with shorter lease terms if the property is in an attractive location, difficult to replace, or has other significant favorable real estate attributes. Under most commercial leases, tenants are obligated to pay a predetermined annual base rent. Some of the leases also will contain provisions that increase the amount of base rent payable at points during the lease term. In general, we will not permit leases to be assigned or subleased without our prior written consent. If we do consent to an assignment or sublease, the original tenant will generally remain fully liable under the lease unless we release that tenant from its obligations under the lease.
Investment Decisions
Our Advisor may purchase on our account, without the specific prior approval of our board of directors, properties with a purchase price of less than $15,000,000, so long as the investment in the property would not, if consummated, violate our investment guidelines or any restrictions on indebtedness and the consideration to be paid for such properties does not exceed the fair market value of such properties. Where the purchase price is equal to or greater than $15,000,000, investment decisions will be made by our board of directors upon the recommendation of our Advisor.
In evaluating and presenting investments for approval, our Advisor, to the extent such information is available, considers and provides to our board of directors, with respect to each property, the following:
|
•
|
proposed purchase price, terms and conditions;
|
|
•
|
physical condition, age, curb appeal and environmental reports;
|
|
•
|
location, visibility and access;
|
|
•
|
historical financial performance;
|
|
•
|
tenant rent roll and tenant creditworthiness;
|
|
•
|
lease terms, including rent, rent increases, length of lease term, specific tenant and landlord responsibilities, renewal, expansion, termination, purchase options, exclusive and permitted uses provisions, assignment and sublease provisions, and co-tenancy requirements;
|
|
•
|
local market economic conditions, demographics and population growth patterns;
|
|
•
|
neighboring properties; and
|
|
•
|
potential for new property construction in the area.
|
Investing in and Originating Loans
We may originate or acquire real estate loans. Our criteria for investing in loans are substantially the same as those involved in our investment in properties. We may originate or invest in real estate loans (including, but not limited to, investments in first, second and third mortgage loans, wraparound mortgage loans, construction mortgage loans on real property, preferred equity loans, and loans on leasehold interest mortgages). We also may invest in mortgage, bridge or mezzanine loans. Further, we may invest in unsecured loans or loans secured by assets other than real estate; however, we will not make unsecured loans or loans not secured by mortgages unless such loans are approved by a majority of our independent directors. A bridge loan is short-term financing for an individual or business until permanent or the next stage of financing can be obtained. A mezzanine loan is a loan made in respect of certain real property that is secured by a lien on the ownership
6
interests of the entity that, directly or indirectly, owns the real property. These loans would be subordinate to the mortgage loans directly on the underlying property.
Our underwriting process typically involves comprehensive financial, structural, operational and legal due diligence. We do not require an appraisal of the underlying property from a certified independent appraiser for an investment in mortgage, bridge or mezzanine loans, except for investments in transactions with our directors, our Advisor or any of their affiliates. For each such appraisal obtained, we will maintain a copy of such appraisal in our records for at least five years and will make it available during normal business hours for inspection and duplication by any stockholder at such stockholder’s expense. In addition, we will seek to obtain a customary lender’s title insurance policy or commitment as to the priority of the mortgage or condition of the title.
We will not make or invest in mortgage, bridge or mezzanine loans on any one property if the aggregate amount of all mortgage, bridge or mezzanine loans outstanding on the property, including our borrowings, would exceed an amount equal to 85% of the appraised value of the property, as determined by our board of directors, including a majority of our independent directors, unless substantial justification exists, as determined by our board of directors, including a majority of our independent directors. Our board of directors may find such justification in connection with the purchase of mortgage, bridge or mezzanine loans in cases in which it believes there is a high probability of our foreclosure upon the property or we intend to foreclose upon the property in order to acquire the underlying assets and, in respect of transactions with our affiliates, in which the cost of the mortgage loan investment does not exceed the appraised value of the underlying property.
When evaluating prospective investments in and originations of real estate loans, our management and our Advisor will consider factors such as the following:
|
•
|
the ratio of the total amount of debt secured by property to the value of the property by which it is secured;
|
|
•
|
the amount of existing debt on the property and the priority of that debt relative to our proposed investment;
|
|
•
|
the property’s potential for capital appreciation;
|
|
•
|
expected levels of rental and occupancy rates;
|
|
•
|
current and projected cash flow of the property;
|
|
•
|
the degree of liquidity of the investment;
|
|
•
|
the geographic location of the property;
|
|
•
|
the condition and use of the property;
|
|
•
|
the quality, experience and creditworthiness of the borrower;
|
|
•
|
general economic conditions in the area where the property is located; and
|
|
•
|
any other factors that our Advisor believes are relevant.
|
We may originate loans from mortgage brokers or personal solicitations of suitable borrowers, or we may purchase existing loans that were originated by other lenders. Our Advisor will evaluate all potential loan investments to determine if the term of the loan, the security for the loan and the loan-to-value ratio meet our investment criteria and objectives. An officer, director, agent or employee of our Advisor will inspect the property securing the loan, if any, during the loan approval process. We do not expect to make or invest in mortgage or mezzanine loans with a maturity of more than ten years from the date of our investment, and anticipate that most loans will have a term of five years. We do not expect to make or invest in bridge loans with a maturity of more than one year (with the right to extend the term for an additional one year) from the date of our investment. Most loans that we will consider for investment would provide for monthly payments of interest and some also may provide for principal amortization, although many loans of the nature that we will consider provide for payments of interest only and a payment of principal in full at the end of the loan term. We will not originate loans with negative amortization provisions.
Investing in Real Estate Securities
We may invest in non-majority owned securities of both publicly-traded and private companies primarily engaged in real estate businesses, including REITs and other real estate operating companies, and securities issued by pass-through entities of which substantially all of the assets consist of qualifying assets or real estate-related assets. We may purchase the common stock, preferred stock, debt, or other securities of these entities or options to acquire such securities. However, any investment in equity securities (including any preferred equity securities) must be approved by a majority of our directors, including a majority of our independent directors, not otherwise interested in the transaction, as being fair, competitive and commercially reasonable.
7
Acquisition Structure
We have and expect to continue to acquire fee interests in properties (a fee interest is the absolute, legal possession and ownership of land, property, or rights), although other methods of acquiring a property may be utilized if we deem them to be advantageous. Our focus is on acquiring commercial real estate predominantly in the data center and healthcare sectors, but we also may acquire other real property types, including office, industrial and retail properties.
To achieve our investment objectives, and to further diversify our portfolio, we have invested and will continue to invest in properties using a number of acquisition structures, which include direct and indirect acquisitions, joint ventures, leveraged investments, issuing units in our Operating Partnership in exchange for properties and making mortgages or other loans secured by the same types of properties which we may acquire. Further, our Advisor and its affiliates may purchase properties in their own name, assume loans in connection with the purchase or loan and temporarily hold title to the properties for the purpose of facilitating acquisition or financing by us or any other purpose related to our business.
Joint Ventures
We may enter into joint ventures, partnerships and other co-ownership partnerships for the purpose of making investments. Some of the potential reasons to enter into a joint venture would be to acquire assets we could not otherwise acquire, to reduce our capital commitment to a particular asset, or to benefit from certain expertise a partner might have. In determining whether to invest in a particular joint venture, we evaluate the assets of the joint venture under the same criteria described elsewhere in this
Annual Report on Form 10-K
for the selection of our investments. In the case of a joint venture, we also evaluate the terms of the joint venture as well as the financial condition, operating capabilities and integrity of our partner or partners. We may enter into joint ventures with our directors and our Advisor (or its affiliates) only if a majority of our board of directors, including a majority of our independent directors, not otherwise interested in the transaction, approves the transaction as being fair and reasonable to us and on substantially the same terms and conditions as those received by the other joint venturers.
We may enter into joint ventures in which we have a right of first refusal to purchase the co-venturer’s interest in the joint venture if the co-venturer elects to sell such interest. If the co-venturer elects to sell property held in any such joint venture, however, we may not have sufficient funds to exercise our right of first refusal to buy the other co-venturer’s interest in the property held by the joint venture. If any joint venture with an affiliated entity holds interests in more than one property, the interest in each such property may be specially allocated based upon the respective proportion of funds invested by each co-venturer in each such property.
International Investments
We intend to primarily invest in real estate located in the United States; however, we may also invest in assets located outside of the United States. While we do not have specific locations identified, we could invest in real estate located in North America or Europe, or such other location as determined by our board of directors.
Disposition Policy
We intend to hold each asset we acquire for an extended period of time, generally five to seven years, or for the life of the Company. However, circumstances may arise that could result in the earlier sale of some assets. The determination of whether an asset will be sold or otherwise disposed of will be made after consideration of relevant factors, including prevailing economic conditions, specific real estate market conditions, tax implications for our stockholders, and other factors. The requirements for qualification as a REIT for federal income tax purposes also will put some limits on our ability to sell assets after short holding periods.
The determination of whether a particular property should be sold or otherwise disposed of will be made after consideration of relevant factors, including prevailing economic conditions, specific real estate market circumstances, and current tenant creditworthiness, with a view to achieving maximum capital appreciation. We cannot assure stockholders that this objective will be realized. The selling price of a property that is net-leased will be determined in large part by the amount of rent payable under the lease and the “sales multiple” applied to that rent. If a tenant has a repurchase option at a formula price, we may be limited in realizing any appreciation. In connection with our sales of properties, we may lend the purchaser all or a portion of the purchase price. In these instances, our taxable income may exceed the cash received in the sale. The terms of payment will be affected by custom in the area in which the property being sold is located and the then-prevailing economic conditions.
In addition, if during the period ending two years after the close of the Offering, we sell assets and then reinvest in other assets, we will pay our advisor 2.0% of the contract purchase price of each property acquired (including our pro rata share of debt attributable to such property) and 2.0% of the amount advanced for a loan or other investment (including our pro rata share of debt attributable to such investment); provided, however
,
that in no event shall the aggregate acquisition fee paid in respect of such sale or reinvestment exceed 6.0% of the contract purchase price of each property (including our pro rata share
8
of debt attributable to such property) or 6.0% of the amount advanced for a loan or other investment (including our pro rata share of debt attributable to such investment).
Qualification as a REIT
We qualified and elected to be taxed as a REIT under Sections 856 through 860 of the Code. To maintain our qualification as a REIT, we must meet certain organizational and operational requirements, including a requirement to currently distribute at least 90.0% of our REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gain, to our stockholders. As a REIT, we generally will not be subject to federal income tax on taxable income that we distribute to our stockholders.
If we fail to maintain our qualification as a REIT in any taxable year, we would then be subject to federal income taxes on our taxable income at regular corporate rates and would not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year during which qualification is lost unless the Internal Revenue Service grants us relief under certain statutory provisions. Such an event could have a material adverse effect on our net income and net cash available for distribution to our stockholders.
Distribution Policy
The amount of distributions we pay to our stockholders is determined by our board of directors and is dependent on a number of factors, including funds available for payment of distributions, our financial condition, capital expenditure requirements, annual distribution requirements needed to maintain our status as a REIT under the Code and restrictions imposed by our organizational documents and Maryland law.
We currently pay, and intend to continue to pay, monthly distributions to our stockholders. We currently calculate our monthly distributions on a daily record and declaration date. Therefore, new investors will be entitled to distributions immediately upon the purchase of their shares. Because all of our operations are performed indirectly through our Operating Partnership, our ability to continue to pay distributions depends on our Operating Partnership’s ability to pay distributions to its partners, including to us. If we do not have enough cash from operations to fund distributions, we may borrow, issue additional securities or sell assets in order to fund distributions, or make distributions out of net proceeds from our Offerings. We have paid, and may continue to pay, distributions from sources other than from our cash flows from operations. Subject to certain limited exceptions, there is no limit to the amount of distributions that we may pay from Offering proceeds.
In accordance with our organizational documents and Maryland law, we may not make distributions that would: (1) cause us to be unable to pay our debts as they become due in the usual course of business; (2) cause our total assets to be less than the sum of our total liabilities plus senior liquidation preferences, if any; or (3) jeopardize our ability to maintain our qualification as a REIT.
To the extent that distributions to our stockholders are paid out of our current or accumulated earnings and profits, such distributions are taxable as ordinary income. To the extent that our distributions exceed our current and accumulated earnings and profits, such amounts constitute a return of capital to our stockholders for federal income tax purposes, to the extent of their basis in their stock, and thereafter will constitute capital gain. All or a portion of a distribution to stockholders may be paid from net offering proceeds and thus, will constitute a return of capital to our stockholders.
See Part II, Item 5. "Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities—Distributions," for further discussion on distribution rates approved by our board of directors.
Financing Strategies and Policies
We believe that utilizing borrowing is consistent with our investment objectives and has the potential to maximize returns to our stockholders. Financing for acquisitions and investments may be obtained at the time an asset is acquired or an investment is made or at a later time. In addition, debt financing may be used from time to time for property improvements, tenant improvements, leasing commissions and other working capital needs. The form of our indebtedness will vary and could be long-term or short-term, secured or unsecured, or fixed-rate or floating rate. We will not enter into interest rate swaps or caps, or similar hedging transactions or derivative arrangements for speculative purposes, but may do so in order to manage or mitigate our interest rate risk on variable rate debt.
We will not borrow from our Advisor, any member of our board of directors, or any of their affiliates unless a majority of our directors, including a majority of our independent directors, not otherwise interested in the transaction, approves the transaction as being fair, competitive and commercially reasonable and no less favorable to us than comparable loans between unaffiliated parties.
9
Conflicts of Interest
We are subject to various conflicts of interest arising out of our relationship with our Advisor, and its affiliates, including conflicts related to the arrangements pursuant to which our Advisor and its affiliates will be compensated by us. Our agreements and compensation arrangements with our Advisor and its affiliates were not determined by arm’s-length negotiations. Some of the potential conflicts of interest in our transactions with our Advisor and its affiliates, and the limitations on our Advisor adopted to address these conflicts, are described below.
Our Advisor and its affiliates try to balance our interests with their duties to other programs. However, to the extent that our Advisor or its affiliates take actions that are more favorable to other entities than to us, these actions could have a negative impact on our financial performance and, consequently, on distributions to our stockholders and the value of our stock. In addition, our directors and officers and certain of our stockholders may engage, for their own account, in business activities of the types conducted or to be conducted by our subsidiaries and us.
Our independent directors have an obligation to function on our behalf in all situations in which a conflict of interest may arise, and all of our directors have a fiduciary obligation to act on behalf of our stockholders.
Interests in Other Real Estate Programs
Affiliates of our Advisor act as executive officers of our Advisor and as directors and/or officers of Carter Validus Mission Critical REIT, Inc., which is the other publicly registered, non-traded REIT currently offered, distributed and/or managed by affiliates of our Advisor. Affiliates of our officers and entities owned or managed by such affiliates may acquire or develop real estate for their own accounts, and have done so in the past. Furthermore, affiliates of our officers and entities owned or managed by such affiliates may form additional real estate investment entities in the future, whether public or private, which may have the same investment objectives and policies as we do and which may be involved in the same geographic area, and such persons may be engaged in sponsoring one or more of such entities at approximately the same time as our shares of common stock are being offered. Our Advisor, its affiliates and affiliates of our officers are not obligated to present to us any particular investment opportunity that comes to their attention, unless such opportunity is of a character that might be suitable for investment by us. Our Advisor and its affiliates likely will experience conflicts of interest as they simultaneously perform services for us and other affiliated real estate programs.
Any affiliated entity, whether or not currently existing, could compete with us in the sale or operation of the properties. We will seek to achieve any operating efficiencies or similar savings that may result from affiliated management of competitive properties. However, to the extent that affiliates own or acquire a property that is adjacent, or in close proximity, to a property we own, our property may compete with the affiliate’s property for tenants or purchasers.
Every transaction that we enter into with our Advisor or its affiliates is subject to an inherent conflict of interest. Our board of directors may encounter conflicts of interest in enforcing our rights against any affiliate in the event of a default by or disagreement with an affiliate or in invoking powers, rights or options pursuant to any agreement between us and our Advisor or any of its affiliates.
Other Activities of Our Advisor and Its Affiliates
We rely on our Advisor for the day-to-day operation of our business. As a result of the interests of members of its management in other programs sponsored by affiliates of our Advisor and the fact that they also are engaged, and will continue to engage, in other business activities, our Advisor and its affiliates have conflicts of interest in allocating their time between us and other programs sponsored by affiliates of our Advisor and other activities in which they are involved. However, our Advisor believes that it and its affiliates have sufficient personnel to discharge fully their responsibilities to all of the programs sponsored by affiliates of our Advisor and other ventures in which they are involved.
In addition, each of our executive officers also serves as an officer of our Advisor, our Property Manager and/or other affiliated entities. As a result, these individuals owe fiduciary duties to these other entities, which may conflict with the fiduciary duties that they owe to us and our stockholders.
We may acquire properties or interests in properties from entities affiliated with our Advisor. We will not acquire any properties from entities affiliated with our Advisor unless a majority of our directors, including a majority of our independent directors, not otherwise interested in the transaction, determine that the transaction is fair and reasonable to us. The purchase price of any property we acquire from our Advisor, its affiliates or a director will not exceed the current appraised value of the property. In addition, the price of the property we acquire from an affiliate may not exceed the cost of the property to the affiliate, unless a majority of our directors, including a majority of our independent directors, determines that substantial justification for the excess exists and the excess is reasonable. During the
year
ended
December 31, 2017
, we did not purchase any properties from our Advisor, its affiliates or any directors.
10
Competition in Acquiring, Leasing and Operating of Properties
Conflicts of interest will exist to the extent that we may acquire, or seek to acquire, properties in the same geographic areas where properties owned by Carter Validus Mission Critical REIT, Inc., the other publicly registered, non-traded REIT offered, distributed and/or managed by affiliates of our Advisor, or any other future programs which may be sponsored by affiliates of our Advisor, are located. In such a case, a conflict could arise in the acquisition or leasing of properties if we and another program sponsored by affiliates of our Advisor were to compete for the same properties or tenants in negotiating leases, or a conflict could arise in connection with the resale of properties if we and another program sponsored by affiliates of our Advisor were to attempt to sell similar properties at the same time. Conflicts of interest also may exist at such time as we or our affiliates, managing properties on our behalf, seek to employ developers, contractors or building managers, as well as under other circumstances. Our Advisor will seek to reduce conflicts relating to the employment of developers, contractors or building managers by making such prospective employees aware of all such properties seeking to employ such prospective employees. In addition, our Advisor will seek to reduce conflicts that may arise with respect to properties available for sale or rent by making prospective purchasers or tenants aware of all such properties. However, these conflicts cannot be fully avoided in that there may be established differing compensation arrangements for employees at different properties or differing terms for resales or leasing of the various properties.
Our Dealer Manager
Since our Dealer Manager is an affiliate of our Advisor,
we will not have the benefit of an independent due diligence review and investigation of the type normally performed by an unaffiliated, independent underwriter in connection with the offering of securities.
Affiliated Property Manager
The properties we acquire are managed and leased by our Property Manager, which is an affiliate of our Advisor, pursuant to a property management and leasing agreement. Our Property Manager is affiliated with the property manager of an affiliated real estate program, Carter Validus Mission Critical REIT, Inc., which may be in competition with our properties. Management fees paid to our Property Manager are based on a percentage of the rental income received by the managed properties.
Joint Ventures with Affiliates of Our Advisor
We may enter into joint ventures with other programs sponsored by affiliates of our Advisor (as well as other parties) for the acquisition, development or improvement of properties. We will not enter into a joint venture with our Sponsor, our Advisor, any director or any affiliate thereof, unless a majority of our directors, including a majority of our independent directors, not otherwise interested in such transaction, approve the transaction as being fair and reasonable to us and on substantially the same terms and conditions as those received by the other joint ventures. Our Advisor and its affiliates may have conflicts of interest in determining which programs sponsored by affiliates of our Advisor should enter into any particular joint venture agreement. The co-venturer may have economic or business interests or goals that are or that may become inconsistent with our business interests or goals. In addition, should any such joint venture be consummated, our Advisor may face a conflict in structuring the terms of the relationship between our interests and the interest of the co-venturer and in managing the joint venture. Since our Advisor and its affiliates will control both us and any affiliated co-venturer, agreements and transactions between the co-venturers with respect to any such joint venture will not have the benefit of arm’s-length negotiation of the type normally conducted between unrelated co-venturers.
Receipt of Fees and Other Compensation by Our Advisor and Its Affiliates
A transaction involving the purchase and sale of properties may result in the receipt of commissions, fees and other compensation by our Advisor and its affiliates, including acquisition and advisory fees, property management and leasing fees, disposition fees, brokerage commissions and participation in net sale proceeds. Subject to oversight by our board of directors, our Advisor will have considerable discretion with respect to all decisions relating to the terms and timing of all transactions. Therefore, our Advisor may have conflicts of interest concerning certain actions taken on our behalf, particularly due to the fact that such fees generally will be payable to our Advisor and its affiliates regardless of the quality of the properties acquired or the services provided to us.
Employees
We have no direct employees. The employees of our Advisor and its affiliates provide services for us related to acquisition, property management, asset management, accounting, investor relations, and all other administrative services.
We are dependent on our Advisor and its affiliates for services that are essential to us, including asset acquisition decisions, property management and other general administrative responsibilities. In the event that these companies are unable to provide these services to us, we would be required to obtain such services from other sources.
11
Reportable Segments
We operate through two reportable business segments – commercial real estate investments in data centers and healthcare. See
Note 11—"Segment Reporting"
to the consolidated financial statements that are a part of this Annual Report on Form 10-K.
Insurance
See the section captioned “—Description of Leases” above.
Competition
As we continue to purchase properties for our portfolio, we are in competition with other potential buyers for the same properties, and may have to pay more to purchase the property than if there were no other potential acquirers or we may have to locate another property that meets our investment criteria. Although we generally acquire properties subject to existing leases, the leasing of real estate is highly competitive in the current market, and we may experience competition for tenants from owners and managers of competing projects. As a result, we may have to provide free rent, incur charges for tenant improvements, or offer other inducements, or we might not be able to timely lease the space, all of which may have an adverse impact on our results of operations. At the time we elect to dispose of our properties, we will also be in competition with sellers of similar properties to locate suitable purchasers for our properties.
Concentration of Credit Risk and Significant Leases
As of
December 31, 2017
, we had cash on deposit, including restricted cash and escrowed funds, in certain financial institutions that had deposits in excess of current federally insured levels. We limit cash investments to financial institutions with high credit standing; therefore, we believe we are not exposed to any significant credit risk on our cash deposits. To date, we have not experienced any loss of or lack of access to cash in our accounts.
The following table shows the segment diversification of our real estate properties based on contractual rental revenue as of
December 31, 2017
:
|
Industry
|
Total Number
of Leases |
Gross
Leased Area (Sq Ft) |
2017
Contractual Rental Revenue (in thousands) (1) |
Percentage
of 2017 Contractual Rental Revenue |
|||||||||
|
Data Centers
|
42
|
|
2,948,000
|
|
$
|
42,308
|
|
46.2
|
%
|
||||
|
Healthcare
|
72
|
|
2,124,070
|
|
49,194
|
|
53.8
|
%
|
|||||
|
114
|
|
5,072,070
|
|
$
|
91,502
|
|
100.0
|
%
|
|||||
|
(1)
|
Contractual rental revenue is based on the total revenue, excluding straight-line rental revenue, recognized and reported in the accompanying
consolidated statements of comprehensive income (loss)
.
|
Based on leases of our properties in effect as of
December 31, 2017
, the following table shows the geographic diversification of our real estate properties that accounted for 10% or more of our contractual rental revenue as of
December 31, 2017
:
|
Location
|
Total Number
of Leases |
Gross
Leased Area (Sq Ft) |
2017
Contractual Rental Revenue (in thousands) (1) |
Percentage
of 2017 Contractual Rental Revenue |
|||||||||
|
Atlanta-Sandy Springs-Roswell, Georgia
|
15
|
|
977,912
|
|
$
|
11,062
|
|
12.1
|
%
|
||||
|
Oklahoma City, Oklahoma
|
11
|
|
398,543
|
|
8,950
|
|
10.0
|
%
|
|||||
|
26
|
|
1,376,455
|
|
$
|
20,012
|
|
22.1
|
%
|
|||||
|
(1)
|
Contractual rental revenue is based on the total revenue, excluding straight-line rental revenue, recognized and reported in the accompanying
consolidated statements of comprehensive income (loss)
.
|
12
Environmental Matters
All real properties and the operations conducted on real properties are subject to federal, state and local laws and regulations relating to environmental protection and human health and safety. In connection with ownership and operation of real estate, we may be potentially liable for costs and damages related to environmental matters. We intend to take commercially reasonable steps to protect ourselves from the impact of these laws, including obtaining environmental assessments of all properties that we acquire. We also carry environmental liability insurance on our properties, which provides coverage for pollution liability, for third-party bodily injury and property damage claims.
Available Information
We electronically file our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports with the SEC. We have also filed our Registration Statement on Form S-11, amendments to our Registration Statement and supplements to our prospectus in connection with our Offerings with the SEC. Copies of our filings with the SEC may be obtained from the SEC’s website,
http://www.sec.gov
. Access to these filings is free of charge. In addition, we make such materials that are electronically filed with the SEC available at
www.cvmissioncriticalreitii.com
as soon as reasonably practicable. They are also available for printing by any stockholder upon request.
Item 1A. Risk Factors.
The factors described below represent our principal risks. Other factors may exist that we do not consider to be significant based on information that is currently available or that we are not currently able to anticipate.
Risks Related to an Investment in Carter Validus Mission Critical REIT II, Inc.
The prior performance of real estate investment programs sponsored by affiliates of our Advisor may not be an indication of our future results.
We were incorporated on January 11, 2013 and, therefore, have a limited operating history and our stockholders should not rely upon the past performance of other real estate investment programs sponsored by affiliates of our Advisor to predict our future results. Although members of our Advisor’s management have significant experience in the acquisition, finance, management and development of commercial real estate, the prior performance of real estate investment programs sponsored by the members of our advisor's management team and other affiliates of our Advisor may not be indicative of our future results.
We may not succeed in achieving our goals, and our failure to do so could cause our stockholders to lose all or a portion of their investment.
Because this is a “blind pool” offering, stockholders will not have the opportunity to evaluate our investments before we make them, which makes an investment in us more speculative.
We have not identified all of the properties we will acquire with the net proceeds from our offering. Additionally, we will not provide stockholders with information to evaluate our investments prior to our acquisition of properties. Since we currently have not identified all of the properties we intend to purchase, our offering is considered to be a “blind pool” offering. We intend to invest the net offering proceeds in net-leased properties, primarily in data centers and healthcare sectors, preferably with long-term leases to creditworthy tenants located throughout the continental United States. We also may, in the discretion of our advisor, invest in other types of real estate or in entities that invest in real estate.
The shares sold in our offering will not be listed on an exchange for the foreseeable future, if ever, and we are not required to provide for a liquidity event. Therefore, if stockholders purchase shares in our offering, it will be difficult for stockholders to sell their shares and, if stockholders are able to sell their shares, they will likely sell them at a substantial discount.
The shares offered by us are illiquid assets for which there is not expected to be any secondary market nor is it expected that any will develop in the future. Moreover, investors should not rely on our share repurchase program as a method to sell shares promptly because our share repurchase program includes numerous restrictions that limit stockholders' ability to sell shares to us, and our board of directors may amend, suspend or terminate our share repurchase program at any time. In particular, the share repurchase program provides that we may make repurchase offers only if a stockholder has held our shares for a minimum of one year, we have sufficient funds available for repurchase and to the extent the total number of shares for which repurchase is requested does not exceed 5% of the number of shares of our common stock outstanding on December 31
st
of the previous calendar year. Our board of directors may reject any request for repurchase of shares, suspend (in whole or in part) the share repurchase program at any time and from time to time upon notice to our stockholders and amend or terminate our share repurchase program at any time upon 30 days’ notice to our stockholders. Therefore, it will be difficult for stockholders to sell their shares promptly or at all. If stockholders are able to sell shares, they may only be able to sell them at a
13
substantial discount from the price they paid. Investor suitability standards imposed by certain states may also make it more difficult to sell shares to someone in those states. The shares should be purchased as a long-term investment only.
In the future, our board of directors may consider various forms of liquidity, each of which is referred to as a liquidity event, including, but not limited to: (1) dissolution and winding up our assets; (2) merger or sale of all or substantially all of our assets; or (3) the listing of shares on a national securities exchange. In the event that a liquidity event does not occur on or before the seventh anniversary of the completion or termination of our primary offering, then a majority of our board and a majority of the independent directors must either (a) adopt a resolution that sets forth a proposed amendment to the charter extending or eliminating this deadline, or the Extension Amendment, declaring that the Extension Amendment is advisable and directing that the proposed Extension Amendment be submitted for consideration at either an annual or special meeting of our stockholders, or (b) adopt a resolution that declares that a proposed liquidation of the company is advisable on substantially the terms and conditions set forth in, or referred to, in the resolution, or the Plan of Liquidation, and directing that the proposed Plan of Liquidation be submitted for consideration at either an annual or special meeting of our stockholders. If our board seeks the Extension Amendment as described above and the stockholders do not approve such amendment, then our board shall seek the Plan of Liquidation as described above. If the stockholders do not then approve the Plan of Liquidation, the company will continue its business. If our board seeks the Plan of Liquidation as described above and the stockholders do not approve the Plan of Liquidation, then our board will seek the Extension Amendment as described above. If the stockholders do not then approve the Extension Amendment, the company will continue its business. In the event that listing on a national stock exchange occurs on or before the seventh anniversary of the completion or termination of the primary offering of our initial public offering, the company will continue perpetually unless dissolved pursuant to any applicable provision of the Maryland General Corporation Law.
We may be unable to liquidate all assets. After we adopt a Plan of Liquidation, we would likely remain in existence until all our investments are liquidated. If we do not pursue a liquidity transaction, or delay such a transaction due to market conditions, shares may continue to be illiquid and stockholders may, for an indefinite period of time, be unable to convert their investment to cash easily and could suffer losses on their investment.
We may suffer from delays in locating suitable investments, which could adversely affect our ability to make distributions and the value of our stockholders’ investment.
We may suffer from delays in locating suitable investments, particularly as a result of our reliance on our Advisor at times when management of our Advisor is simultaneously seeking to locate suitable investments for other affiliated programs. Delays we encounter in the selection, acquisition and, if we develop properties, development of income-producing properties, likely would adversely affect our ability to make distributions and the value of our stockholders’ overall returns. In such event, we may pay all or a substantial portion of our distributions from the proceeds of our Offering or from borrowings in anticipation of future cash flow, which may constitute a return of our stockholders’ capital. Distributions from the proceeds of our Offering or from borrowings also could reduce the amount of capital we ultimately invest in properties. This, in turn, would reduce the value of our stockholders’ investment. In particular, if we acquire properties prior to the start of construction or during the early stages of construction, it typically will take at least several months to complete construction and rent available space. Therefore, our stockholders could suffer delays in the receipt of cash distributions attributable to those particular properties. If our Advisor is unable to obtain suitable investments for us, we will hold the uninvested proceeds of our Offering in an interest-bearing account or invest such proceeds in short-term, investment-grade investments. If we cannot invest all of the proceeds from our Offering within a reasonable amount of time, or if our board of directors determines it is in the best interests of our stockholders, we will return the uninvested proceeds to investors and our stockholders may receive less than the amount they initially invested.
The Estimated Per Share NAV of each of our Class A common stock, Class I common stock and Class T common stock are estimates as of a given point in time and likely will not represent the amount of net proceeds that would result if we were liquidated or dissolved or completed a merger or other sale of the company.
The offering prices per Class A share, Class I share, Class T share and Class T2 share are based on our Estimated Per Share NAV of each of our Class A common stock, Class I common stock and Class T common stock as of June 30, 2017, as determined by our board of directors on September 28, 2017, which we refer to collectively as our Estimated Per Share NAV, and any applicable per share upfront selling commissions and dealer manager fees.
The price at which stockholders purchase shares and any subsequent values are likely to differ from the price at which a stockholder could resell such shares because: (1) there is no public trading market for our shares at this time; (2) the price does not reflect, and will not reflect, the fair value of our assets as we acquire them, nor does it represent the amount of net proceeds that would result from an immediate liquidation of our assets or sale of the company, because the amount of proceeds available for investment from our Offering is net of selling commissions, dealer manager fees, other organization and offering expense reimbursements and acquisition fees and expenses; (3) the estimated value does not take into account how market fluctuations affect the value of our investments, including how the current conditions in the financial and real estate markets may affect the
14
value of our investments; (4) the estimated value does not take into account how developments related to individual assets may increase or decrease the value of our portfolio; and (5) the estimated value does not take into account any portfolio premium or premiums to value that may be achieved in a liquidation of our assets or sale of our portfolio. Further, the value of our shares will fluctuate over time as a result of, among other things, developments related to individual assets and responses to the real estate and capital markets. The Estimated Per Share NAV does not reflect a discount for the fact that we are externally managed, nor does it reflect a real estate portfolio premium/discount versus the sum of the individual property values. The Estimated Per Share NAV also does not take into account estimated disposition costs and fees for real estate properties that are not held for sale. There are currently no SEC, federal and state rules that establish requirements specifying the methodology to employ in determining an estimated value per share; provided, however, that pursuant to FINRA rules, the determination of the estimated value per share must be conducted by, or with the material assistance or confirmation of, a third-party valuation expert and must be derived from a methodology that conforms to standard industry practice. Subsequent estimates of our Estimated Per Share NAV will be done at least annually. Our Estimated Per Share NAV is an estimate as of a given point in time and likely does not represent the amount of net proceeds that would result from an immediate sale of our assets.
The purchase prices you pay for shares of our Class A common stock, Class I common stock, Class T common stock and Class T2 common stock are based on the Estimated Per Share NAV of each of our Class A common stock, Class I common stock and Class T common stock at a given point in time, and any applicable per share upfront selling commissions and dealer manager fees. Our Estimated Per Share NAV is based upon a number of estimates, assumptions, judgments and opinions that may not be, or may later prove not to be, accurate or complete, which could make the estimated valuations incorrect. As a result, our Estimated Per Share NAV may not reflect the amount that you might receive for your shares in a market transaction, and the purchase price you pay may be higher than the value of our assets per share of common stock at the time of your purchase.
The per share price for Class A shares, Class I shares, Class T shares and Class T2 shares in our primary offering and pursuant to our DRIP are based on our most recent Estimated Per Share NAV of each of our Class A common stock, Class I common stock and Class T common stock as of June 30, 2017, and applicable upfront commissions and fees. Currently, there are no SEC, federal or state rules that establish requirements specifying the methodology to employ in determining an Estimated Per Share NAV. The audit committee of our board of directors, pursuant to authority delegated by our board of directors, was responsible for the oversight of the valuation process, including the review and approval of the valuation process and methodology used to determine our Estimated Per Share NAV, the consistency of the valuation and appraisal methodologies with real estate industry standards and practices and the reasonableness of the assumptions used in the valuations and appraisals. Pursuant to the prior approval of the audit committee of our board of directors, which is solely comprised of our independent directors, in accordance with the valuation policies previously adopted by our board of directors, we engaged Robert A. Stanger & Co., Inc., or Stanger, an independent third-party valuation firm, to assist with determining the Estimated Per Share NAV. Our Estimated Per Share NAV was determined after consultation with our advisor and Stanger. Stanger prepared an appraisal report summarizing key information and assumptions and providing a value on 49 of our 62 properties in our portfolio as of June 30, 2017. In addition, Stanger relied upon the appraisal reports prepared by third parties other than Stanger on 11 properties acquired in the six months preceding June 30, 2017 and the book value of two properties, which were under development as of June 30, 2017. Stanger also prepared a net asset value report, which estimates the per share NAV of each of our Class A, Class I and Class T common stock as of June 30, 2017. The valuation was based upon the estimated value of our assets less the estimated value of our liabilities divided by the number of shares outstanding on an adjusted fully diluted basis, calculated as of June 30, 2017, and was performed in accordance with the valuation guidelines established by the Investment Program Association Practice Guideline 2013-01, Valuations of Publicly Registered Non-Listed REITs. The Estimated Per Share NAV was determined by our board of directors. Subsequent estimates of our per share NAV for each of our Class A common stock, Class I common stock, Class T common stock and Class T2 common stock will be prepared at least annually. Our Estimated Per Share NAV is an estimate as of a given point in time and likely does not represent the amount of net proceeds that would result from an immediate sale of our assets. The Estimated Per Share NAV is not intended to be related to any values at which individual assets may be carried on financial statements under applicable accounting standards. While the determination of our most recent Estimated Per Share NAV was conducted with the material assistance of a third-party valuation expert, with respect to asset valuations, we are not required to obtain asset-by-asset appraisals prepared by certified independent appraisers, nor must any appraisals conform to formats or standards promulgated by any trade organization. Other than the information included in our Current Report on Form 8-K filed on September 28, 2017 regarding the Estimated Per Share NAV, we do not intend to release individual property value estimates or any of the data supporting the Estimated Per Share NAV.
It may be difficult to accurately reflect material events that may impact our estimated per share NAV between valuations, and accordingly we may be selling and repurchasing shares at too high or too low a price.
Our independent third-party valuation expert will calculate estimates of the market value of our principal real estate and real estate-related assets, and our board of directors will determine the net value of our real estate and real estate-related assets and liabilities taking into consideration such estimates provided by the independent third-party valuation expert. Our board of
15
directors is ultimately responsible for determining the estimated per share NAV. Since our board of directors will determine our estimated per share NAV at least annually, there may be changes in the value of our properties that are not fully reflected in the most recent estimated per share NAV. As a result, the published estimated per share NAV may not fully reflect changes in value that may have occurred since the prior valuation. Furthermore, our advisor will monitor our portfolio, but it may be difficult to reflect changing market conditions or material events that may impact the value of our portfolio between valuations, or to obtain timely or complete information regarding any such events. Therefore, the estimated per share NAV published before the announcement of an extraordinary event may differ significantly from our actual per share NAV until such time as sufficient information is available and analyzed, the financial impact is fully evaluated, and the appropriate adjustment is made to our estimated per share NAV, as determined by our board of directors. Any resulting disparity may be to the detriment of a purchaser of our shares or a stockholder selling shares pursuant to our share repurchase program.
We expect that most of our properties will continue to be located in the continental United States and would be affected by economic downturns, as well as economic cycles and risks inherent to that area.
We expect to use a significant portion of the net proceeds of our Offering to acquire commercial real estate located in the continental United States; however, we may purchase properties in other jurisdictions. Real estate markets are subject to economic downturns, as they have been in the past, and we cannot predict how economic conditions will impact this market in both the short and long term. Declines in the economy or a decline in the real estate market in the continental United States could hurt our financial performance and the value of our properties. The factors affecting economic conditions in the continental United States include, but are not limited to:
|
•
|
financial performance and productivity of the publishing, advertising, financial, technology, retail, insurance and real estate industries;
|
|
•
|
business layoffs or downsizing;
|
|
•
|
industry slowdowns;
|
|
•
|
relocations of businesses;
|
|
•
|
changing demographics;
|
|
•
|
increased telecommuting and use of alternative work places;
|
|
•
|
infrastructure quality;
|
|
•
|
any oversupply of, or reduced demand for, real estate;
|
|
•
|
concessions or reduced rental rates under new leases for properties where tenants defaulted;
|
|
•
|
increased insurance premiums; and
|
|
•
|
increased interest rates.
|
Our stockholders may be more likely to sustain a loss on their investment because our Sponsor does not have as strong an economic incentive to avoid losses as do sponsors who have made significant equity investments in their companies.
Our Sponsor has only invested $200,000 in us through the purchase of 20,000 Class A shares of our common stock at $10.00 per share and may not have as much economic incentive as do sponsors who have invested more equity in their companies. Additionally, if we are successful in raising enough proceeds to be able to reimburse our Sponsor for our significant organization and offering expenses, our Sponsor will have little exposure to loss in value of our shares. Without this exposure, our investors may be at a greater risk of loss because our Sponsor may have less to lose from a decrease in the value of our shares as does a sponsor that makes more significant equity investments in its company.
Distributions paid from sources other than our cash flows from operations, including from the proceeds of this Offering, will result in us having fewer funds available for the acquisition of properties and real estate-related investments, which may adversely affect our ability to fund future distributions with cash flows from operations and may adversely affect a stockholder's overall return.
We have paid, and may continue to pay, distributions from sources other than from our cash flows from operations. For the
year
ended
December 31, 2017
, our cash flows provided by operations of approximately
$51.8 million
was a shortfall of approximately
$9.5 million
, or
15.5%
, of our distributions paid (total distributions were approximately
$61.3 million
, of which
$29.0 million
was cash and
$32.3 million
was reinvested in shares of our common stock pursuant to our DRIP) during such period and such shortfall was paid from proceeds from our DRIP Offering. For the year ended
December 31, 2016
, our cash flows provided by operations of approximately
$25.0 million
was a shortfall of approximately
$15.6 million
, or 38.4%, of our distributions paid (total distributions were approximately
$40.6 million
, of which
$17.7 million
was cash and
$22.9 million
was reinvested in shares of our common stock pursuant to our DRIP) during such period and such shortfall was paid from proceeds
16
from our DRIP Offering. Until we acquire additional properties or real estate-related investments, we may not generate sufficient cash flows from operations to pay distributions. Our inability to acquire additional properties or real estate-related investments may result in a lower return on a stockholder's investment than he or she may expect.
We may pay, and have no limits on the amounts we may pay, distributions from any source, such as from borrowings, the sale of assets, the sale of additional securities, advances from our Advisor, our Advisor’s deferral, suspension and/or waiver of its fees and expense reimbursements and Offering proceeds. Funding distributions from borrowings could restrict the amount we can borrow for investments, which may affect our profitability. Funding distributions with the sale of assets may affect our ability to generate cash flows. Funding distributions from the sale of additional securities could dilute stockholders' interest in us if we sell shares of our common stock to third party investors. Funding distributions from the proceeds of our Offering will result in us having less funds available for acquiring properties or real estate-related investments. Our inability to acquire additional properties or real estate-related investments may have a negative effect on our ability to generate sufficient cash flow from operations from which to pay distributions. As a result, the return investors may realize on their investment may be reduced and investors who invest in us before we generate significant cash flow may realize a lower rate of return than later investors. Payment of distributions from any of the aforementioned sources could restrict our ability to generate sufficient cash flows from operations, affect our profitability and/or affect the distributions payable upon a liquidity event, any or all of which may have an adverse effect on an investment in us.
If we are unable to raise substantial funds, we will be limited in the number and type of investments we may make and the value of our stockholders’ investment in us will fluctuate with the performance of the specific properties we acquire.
We are dependent upon the net proceeds we receive from our Offering to conduct our activities. If we are unable to raise substantial proceeds from our Offering, we will make fewer investments resulting in less diversification in terms of the number of investments owned, the geographic regions in which our investments are located and the types of investments that we make. In such event, the likelihood of our profitability being affected by the performance of any one of our investments will increase. Additionally, subject to our investment policies, we are not limited in the number or size of our investments or the percentage of net proceeds we may dedicate to a single investment. Our stockholders’ investment in our shares will be subject to greater risks to the extent that we lack a diversified portfolio of investments. In addition, our inability to raise substantial funds would increase our fixed operating expenses as a percentage of gross income, and our financial condition and ability to pay distributions could be adversely affected.
A high concentration of our properties in a particular geographic area, or of tenants in a similar industry, would magnify the effects of downturns in that geographic area or industry.
As of
December 31, 2017
, we owned
53
real estate investments, located in
37
metropolitan statistical areas, or MSAs, and one micropolitan statistical area, of which
two
MSAs accounted for 10.0% or more of our contractual rental revenue for the year ended
December 31, 2017
. Real estate investments located in the
Atlanta-Sandy Springs-Roswell, Georgia MSA and the Oklahoma City, Oklahoma MSA
accounted for
12.1%
and
10.0%
, respectively, of our contractual rental revenue for the year ended
December 31, 2017
. Accordingly, there is a geographic concentration of risk subject to fluctuations in each MSA’s economy. Geographic concentration of our properties exposes us to economic downturns in the areas where our properties are located. A regional or local recession in any of these areas could adversely affect our ability to generate or increase operating revenues, attract new tenants or dispose of unproductive properties. Similarly, if tenants of our properties become concentrated in a certain industry or industries, any adverse effect to that industry generally would have a disproportionately adverse effect on our portfolio.
If our Advisor loses or is unable to obtain key personnel, our ability to implement our investment strategies could be delayed or hindered, which could adversely affect our ability to make distributions and the value of our stockholders’ investment.
Our success depends to a significant degree upon the contributions of certain of our executive officers and other key personnel of our Advisor, including John E. Carter, Todd M. Sakow, Michael A. Seton and Lisa A. Drummond, who would be difficult to replace. Our Advisor does not have an employment agreement with any of these key personnel and we cannot guarantee that all, or any particular one, will remain affiliated with us and/or our Advisor. If any of our key personnel were to cease their affiliation with our Advisor, our operating results could suffer. Further, we do not currently intend to separately maintain key person life insurance on John E. Carter, Todd M. Sakow, Michael A. Seton and Lisa A. Drummond or any other person. We believe that our future success depends, in large part, upon our Advisor’s ability to hire and retain highly skilled managerial, operational and marketing personnel. Competition for such personnel is intense, and we cannot assure our stockholders that our Advisor will be successful in attracting and retaining such skilled personnel. If our Advisor loses or is unable to obtain the services of key personnel, our ability to implement our investment strategies could be delayed or hindered, and the value of our stockholders’ investment may decline.
17
Our rights and the rights of our stockholders to recover claims against our officers, directors and our Advisor are limited, which could reduce our stockholders’ and our recovery against them if they cause us to incur losses.
Maryland law provides that a director has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in the corporation’s best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. In addition, subject to certain limitations set forth therein or under Maryland law, our charter provides that no director or officer will be liable to us or our stockholders for money damages, requires us to indemnify and advance expenses to our directors, officers and Advisor and our Advisor’s affiliates and permits us, with approval of our board of directors or a committee of the board of directors' to indemnify our employees and agents. Although our charter does not allow us to indemnify or hold harmless an indemnitee to a greater extent than permitted under Maryland law and the North American Securities Administrators Association REIT Guidelines, or the NASAA REIT Guidelines, we and our stockholders may have more limited rights against our directors, officers, employees and agents, and our Advisor and its affiliates than might otherwise exist under common law, which could reduce our stockholders’ and our ability to recover against them. In addition, we may be obligated to fund the defense costs incurred by our directors, officers, employees and agents or our Advisor and its affiliates in some cases, which would decrease the cash otherwise available for distribution to stockholders.
The failure of any bank in which we deposit our funds could reduce the amount of cash we have available to pay distributions, make additional investments and service our debt.
We currently have cash and cash equivalents and restricted cash deposited in certain financial institutions in excess of federally insurable levels. The Federal Deposit Insurance Corporation only insures interest-bearing accounts in amounts up to $250,000 per depositor per insured bank. While we monitor our cash balance in our operating accounts, if any of the banking institutions in which we deposit funds ultimately fails, we may lose our deposits over $250,000. The loss of our deposits may have a material adverse effect on our financial condition.
Cybersecurity risks and cyber incidents may adversely affect our business by causing a disruption to our operations, a compromise or corruption of our confidential information, and/or damage to our business relationships, all of which could negatively impact our financial results.
A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of our information resources. These incidents may be an intentional attack or an unintentional event and could involve gaining unauthorized access to our information systems for purposes of misappropriating assets, stealing confidential information, corrupting data or causing operational disruption. The result of these incidents may include disrupted operations, misstated or unreliable financial data, liability for stolen assets or information, increased cybersecurity protection and insurance costs, litigation and damage to our tenant and investor relationships. As our reliance on technology has increased, so have the risks posed to our information systems, both internal and those we have outsourced. There is no guarantee that any processes, procedures and internal controls we have implemented or will implement will prevent cyber intrusions, which could have a negative impact on our financial results, operations, business relationships or confidential information.
Risks Related to Conflicts of Interest
We are subject to conflicts of interest arising out of our relationships with our Advisor and its affiliates, including the material conflicts discussed below. See the “Conflicts of Interest” section of Part I, Item I. of this
Annual Report on Form 10-K
.
Our Advisor faces potential conflicts of interest relating to the purchase and leasing of properties, and such conflicts may not be resolved in our favor, which could adversely affect our investment opportunities.
Affiliates of our Advisor have sponsored and may sponsor one or more other real estate investment programs in the future. We may buy properties at the same time as one or more of the other programs sponsored by affiliates of our Advisor and managed by officers and key personnel of our Advisor. There is a risk that our Advisor will choose a property that provides lower returns to us than a property purchased by another program sponsored by affiliates of our Advisor. We cannot be sure that officers and key personnel acting on behalf of our Advisor and on behalf of managers of other programs sponsored by affiliates of our Advisor will act in our best interests when deciding whether to allocate any particular property to us. In addition, we may acquire properties in geographic areas where other programs sponsored by affiliates of our Advisor own properties. Also, we may acquire properties from, or sell properties to, other programs sponsored by affiliates of our Advisor. If one of the other programs sponsored by affiliates of our Advisor attracts a tenant that we are competing for, we could suffer a loss of revenue due to delays in locating another suitable tenant. Our stockholders will not have the opportunity to evaluate the manner in which these conflicts of interest are resolved before or after making their investment.
18
Our Advisor faces conflicts of interest relating to joint ventures with its affiliates, which could result in a disproportionate benefit to the other venture partners at our expense.
We may enter into joint ventures with other programs sponsored by affiliates of our Advisor for the acquisition, development or improvement of properties. Our Advisor may have conflicts of interest in determining which program sponsored by affiliates of our Advisor should enter into any particular joint venture agreement. In addition, our Advisor may face a conflict in structuring the terms of the relationship between our interests and the interest of the affiliated co-venturer managing the joint venture. Since our Advisor and its affiliates will control both the affiliated co-venturer and, to a certain extent, us, agreements and transactions between the co-venturers with respect to any such joint venture will not have the benefit of arm’s-length negotiation of the type normally conducted between unrelated co-venturers, which may result in the co-venturer receiving benefits greater than the benefits that we receive. In addition, we may assume liabilities related to the joint venture that exceed the percentage of our investment in the joint venture.
Our Advisor and its officers and certain of its key personnel face competing demands relating to their time, and this may cause our operating results to suffer.
Our Advisor and its officers and employees and certain of our key personnel and their respective affiliates are key personnel, general partners and sponsors of other real estate programs having investment objectives and legal and financial obligations similar to ours and may have other business interests as well. Because these persons have competing demands on their time and resources, they may have conflicts of interest in allocating their time between our business and these other activities. During times of intense activity in other programs and ventures, they may devote less time and fewer resources to our business than is necessary or appropriate. If this occurs, the returns on our investments may suffer.
Our officers and directors face conflicts of interest related to the positions they hold with affiliated entities, which could hinder our ability to successfully implement our business strategy and generate returns to our stockholders.
Certain of our executive officers and directors, including John E. Carter, who also serves as the chairman of our board of directors, Todd M. Sakow, Michael A. Seton and Lisa A. Drummond, also are officers and/or directors of our Advisor, our Property Manager, and/or other affiliated entities. As a result, these individuals owe fiduciary duties to these other entities and their stockholders and limited partners, which fiduciary duties may conflict with the duties that they owe to us and our stockholders. Their loyalties to these other entities could result in actions or inactions that are detrimental to our business, which could harm the implementation of our business strategy and our investment and leasing opportunities. Conflicts with our business and interests are most likely to arise from involvement in activities related to:
|
•
|
allocation of new investments and management time and services between us and the other entities,
|
|
•
|
our purchase of properties from, or sale of properties to, affiliated entities,
|
|
•
|
the timing and terms of the investment in or sale of an asset,
|
|
•
|
development of our properties by affiliates,
|
|
•
|
investments with affiliates of our Advisor,
|
|
•
|
compensation to our Advisor, and
|
|
•
|
our relationship with our Property Manager.
|
If we do not successfully implement our business strategy, we may be unable to generate cash needed to make distributions to our stockholders and to maintain or increase the value of our assets.
Our Advisor faces conflicts of interest relating to the performance fee structure under the Advisory Agreement, which could result in actions that are not necessarily in the long-term best interests of our stockholders.
Under the Advisory Agreement, our Advisor or its affiliates are entitled to fees that are structured in a manner intended to provide incentives to our Advisor to perform in our best interests and in the best interests of our stockholders. However, because our Advisor does not maintain a significant equity interest in us and is entitled to receive substantial minimum compensation regardless of performance, our Advisor’s interests are not wholly aligned with those of our stockholders. In that regard, our Advisor could be motivated to recommend riskier or more speculative investments, or to use additional debt when acquiring assets, in order for us to generate the specified levels of performance or sales proceeds that would entitle our Advisor to fees. In addition, our Advisor’s or its affiliates’ entitlement to fees upon the sale of our assets and to participate in sale proceeds could result in our Advisor recommending sales of our investments at the earliest possible time at which sales of investments would produce the level of return that would entitle our Advisor to compensation relating to such sales, even if continued ownership of those investments might be in our best long-term interest. The Advisory Agreement requires us to pay a performance-based termination fee to our Advisor or its affiliates if we terminate the Advisory Agreement and have not paid our Advisor a subordinated incentive listing fee to our Advisor in connection with the listing of our shares for trading on an
19
exchange. To avoid paying this fee, our independent directors may decide against terminating the Advisory Agreement prior to our listing of our shares even if, but for the termination fee, termination of the Advisory Agreement would be in our best interest. In addition, the requirement to pay the fee to our Advisor or its affiliates at termination could cause us to make different investment or disposition decisions than we would otherwise make in order to satisfy our obligation to pay the fee to the terminated Advisor. Moreover, our Advisor will have the right to terminate the Advisory Agreement upon a change of control of our company and thereby trigger the payment of the performance fee, which could have the effect of delaying, deferring or preventing the change of control.
There is no separate counsel for us and our affiliates, which could result in conflicts of interest.
Morris, Manning & Martin, LLP acts as legal counsel to us and also represents our Advisor and some of its affiliates. There is a possibility in the future that the interests of the various parties may become adverse and, under the Code of Professional Responsibility of the legal profession, Morris, Manning & Martin, LLP may be precluded from representing any one or all such parties. If any situation arises in which our interests appear to be in conflict with those of our Advisor or its affiliates, additional counsel may be retained by one or more of the parties to assure that their interests are adequately protected. Moreover, should a conflict of interest not be readily apparent, Morris, Manning & Martin, LLP may inadvertently act in derogation of the interest of the parties, which could affect our ability to meet our investment objectives.
Risks Related to Our Offering and Our Corporate Structure
The limit on the number of shares a person may own may discourage a takeover that could otherwise result in a premium price to our stockholders and may hinder a stockholder's ability to dispose of his or her shares.
Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. In this respect, among other things, unless exempted (prospectively or retroactively) by our board of directors, no person may own more than 9.8% in value of the aggregate of our outstanding shares of stock or more than 9.8% (in value or number, whichever is more restrictive) of the aggregate of the outstanding shares of our common stock. This restriction may have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all our assets) that might provide a premium price for holders of our common stock, and may make it more difficult for a stockholder to sell or dispose of his or her shares.
Our charter permits our board of directors to issue stock with terms that may subordinate the rights of common stockholders or discourage a third party from acquiring us in a manner that might result in a premium price to our stockholders.
Our charter permits our board of directors to issue up to 500,000,000 shares of common stock, of which 175,000,000 are designated as Class A shares, 75,000,000 are designated as Class I shares, 175,000,000 are designated as Class T shares, and 75,000,000 are designated as Class T2 shares, and 100,000,000 shares of preferred stock. In addition, our board of directors, without any action by our stockholders, may amend our charter from time to time to increase or decrease the aggregate number of shares or the number of shares of any class or series of stock that we have authority to issue. Our board of directors may classify or reclassify any unissued common stock or preferred stock into other classes or series of stock and establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms and conditions of repurchase of any such stock. Thus, if also approved by a majority of our independent directors not otherwise interested in the transaction, who will have access, at our expense, to our legal counsel or independent legal counsel, our board of directors could authorize the issuance of additional preferred stock with terms and conditions that could have a priority as to distributions and amounts payable upon liquidation over the rights of the holders of our common stock. Preferred stock could also have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all our assets) that might provide a premium price for holders of our common stock.
Maryland law prohibits certain business combinations, which may make it more difficult for us to be acquired and may limit our stockholders’ ability to exit the investment.
The Maryland Business Combination Act provides that certain business combinations between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An interested stockholder is defined as:
|
•
|
any person who beneficially owns, directly or indirectly, 10% or more of the voting power of the corporation’s outstanding voting stock; or
|
20
|
•
|
an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then outstanding stock of the corporation.
|
A person is not an interested stockholder under the statute if our board of directors approved in advance the transaction by which the person otherwise would have become an interested stockholder. However, in approving a transaction, our board of directors may provide that its approval is subject to compliance, at or after the time of the approval, with any terms and conditions determined by our board of directors.
After the five-year prohibition, any such business combination between the Maryland corporation and an interested stockholder generally must be recommended by our board of directors of the corporation and approved by the affirmative vote of at least:
|
•
|
80% of the votes entitled to be cast by holders of outstanding voting stock of the corporation; and
|
|
•
|
two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom (or with whose affiliate) the business combination is to be effected or held by an affiliate or associate of the interested stockholder.
|
These super-majority vote requirements do not apply if the corporation’s common stockholders receive a minimum price, as defined under the Maryland Business Combination Act, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares. The Maryland Business Combination Act permits various exemptions from its provisions, including business combinations that are exempted by our board of directors prior to the time that the interested stockholder becomes an interested stockholder. Our board of directors has exempted from the Maryland Business Combination Act any business combination involving our Advisor or any of its affiliates. Consequently, the five-year prohibition and the super-majority vote requirements will not apply to business combinations between us and our Advisor or any of its affiliates. As a result, our Advisor and any of its affiliates may be able to enter into business combinations with us that may not be in the best interests of our stockholders, without compliance with the super-majority vote requirements and the other provisions of the Maryland Business Combination Act. The Maryland Business Combination Act may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer.
Maryland law limits the ability of a third-party to buy a large stake in us and exercise voting power in electing directors.
The Maryland Control Share Acquisition Act provides that a holder of "control shares" of a Maryland corporation acquired in a "control share acquisition" has no voting rights except to the extent approved by stockholders by a vote of two-thirds of the votes entitled to be cast on the matter. Shares of stock owned by the acquirer, by officers or by employees who are directors of the corporation are excluded from shares entitled to vote on the matter. "Control shares" are voting shares of stock which, if aggregated with all other shares of stock owned by the acquirer or in respect of which the acquirer can exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquirer, directly or indirectly, to exercise or direct the exercise of voting power of shares of stock in electing directors within specified ranges of voting power. Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval. A "control share acquisition" means the acquisition of issued and outstanding control shares. The Maryland Control Share Acquisition Act does not apply (a) to shares acquired in a merger, consolidation or statutory share exchange if the corporation is a party to the transaction, or (b) to acquisitions approved or exempted by the charter or bylaws of the corporation. Our bylaws contain a provision exempting from the Maryland Control Share Acquisition Act any and all acquisitions of our stock by any person. There can be no assurance that this provision will not be amended or eliminated at any time in the future.
Our stockholders’ investment return may be reduced if we are required to register as an investment company under the Investment Company Act.
Neither we nor any of our subsidiaries are registered, and do not intend to register, as an investment company under the Investment Company Act. If we or any of our subsidiaries become obligated to register as an investment company, we would have to comply with a variety of substantive requirements under the Investment Company Act imposing, among other things:
|
•
|
limitations on capital structure;
|
|
•
|
restrictions on specified investments;
|
|
•
|
prohibitions on transactions with affiliates; and
|
|
•
|
compliance with reporting, record keeping, voting, proxy disclosure and other rules and regulations that would significantly change our operations.
|
We intend to continue to conduct our operations directly and through our wholly or majority-owned subsidiaries, so that we and each of our subsidiaries do not fall within the definition of an "investment company" under the Investment Company
21
Act. Under Section 3(a)(1)(A) of the Investment Company Act, a company is deemed to be an "investment company" if it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities. Under Section 3(a)(1)(C) of the Investment Company Act, a company is deemed to be an "investment company" if it is engaged, or proposes to engage, in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire "investment securities" having a value exceeding 40% of the value of its total assets (exclusive of government securities and cash items) on an unconsolidated basis, or the "40% Test."
We intend to continue to conduct our operations so that we and most, if not all, of our wholly and majority-owned subsidiaries will comply with the 40% Test. We will continuously monitor our holdings on an ongoing basis to determine that we and each of our wholly and majority-owned subsidiaries comply with this test. We expect that most, if not all, of our wholly-owned and majority-owned subsidiaries will not be relying on exemptions under either Section 3(c)(1) or 3(c)(7) of the Investment Company Act. Consequently, interests in these subsidiaries (which are expected to constitute most, if not all, of our assets) generally will not constitute "investment securities." Accordingly, we believe that we and most, if not all, of our wholly and majority-owned subsidiaries will not be considered investment companies under Section 3(a)(1)(C) of the Investment Company Act.
Since we are primarily engaged in the business of acquiring real estate, we believe that we and most, if not all, of our wholly and majority-owned subsidiaries will not be considered investment companies under Section 3(a)(1)(A) of the Investment Company Act. If we or any of our wholly or majority-owned subsidiaries would ever inadvertently fall within one of the definitions of "investment company," we intend to rely on the exception provided by Section 3(c)(5)(C) of the Investment Company Act.
Under Section 3(c)(5)(C), the SEC staff generally requires a company to maintain at least 55% of its assets directly in qualifying assets and at least 80% of the entity’s assets in qualifying assets and in a broader category of real estate-related assets to qualify for this exception. Mortgage-related securities may or may not constitute such qualifying assets, depending on the characteristics of the mortgage-related securities, including the rights that we have with respect to the underlying loans. Our ownership of mortgage-related securities, therefore, is limited by provisions of the Investment Company Act and SEC staff interpretations.
The method we use to classify our assets for purposes of the Investment Company Act will be based in large measure upon no-action positions taken by the SEC staff in the past. These no-action positions were issued in accordance with factual situations that may be substantially different from the factual situations we may face, and a number of these no-action positions were issued more than twenty years ago. Accordingly, no assurance can be given that the SEC staff will concur with our classification of our assets. In addition, the SEC staff may, in the future, issue further guidance that may require us to re-classify our assets for purposes of qualifying for an exclusion from regulation under the Investment Company Act. If we are required to re-classify our assets, we may no longer be in compliance with the exclusion from the definition of an "investment company" provided by Section 3(c)(5)(C) of the Investment Company Act.
A change in the value of any of our assets could cause us or one or more of our wholly or majority-owned subsidiaries to fall within the definition of an "investment company" and negatively affect our ability to maintain our exemption from regulation under the Investment Company Act. To avoid being required to register the Company or any of our subsidiaries as an investment company under the Investment Company Act, we may be unable to sell assets we would otherwise want to sell and may need to sell assets we would otherwise wish to retain. In addition, we may have to acquire additional income- or loss-generating assets that we might not otherwise have acquired or may have to forgo opportunities to acquire interests in companies that we would otherwise want to acquire and would be important to our investment strategy.
To the extent that the SEC staff provides more specific guidance regarding any of the matters bearing upon the definition of investment company and the exceptions to that definition, we may be required to adjust our investment strategy accordingly. For example, on August 31, 2011, the SEC issued a concept release requesting comments regarding a number of matters relating to the exemption provided by Section 3(c)(5)(C) of the Investment Company Act, including the nature of assets that qualify for purposes of the exemption and whether mortgage REITs should be regulated in a manner similar to investment companies. Additional guidance from the SEC staff could provide additional flexibility to us, or it could further inhibit our ability to pursue the investment strategy we have chosen.
If we are required to register as an investment company but fail to do so, we will be prohibited from engaging in our business, and criminal and civil actions could be brought against us. In addition, our contracts would be unenforceable unless a court required enforcement, and a court could appoint a receiver to take control of us and liquidate our business.
If our stockholders do not agree with the decisions of our board of directors, our stockholders will only have limited control over changes in our policies and operations and may not be able to change such policies and operations.
Our board of directors determines our major policies, including our policies regarding investments, financing, growth, debt capitalization, REIT qualification and distributions. Our board of directors may amend or revise these and other policies
22
without a vote of the stockholders except to the extent that such policies are set forth in our charter. Under the Maryland General Corporation Law and our charter, our stockholders have a right to vote only on the following:
|
•
|
the election or removal of directors;
|
|
•
|
the amendment of our charter (including a change in our investment objectives), except that our board of directors may amend our charter without stockholder approval to (a) increase or decrease the aggregate number of our shares or the number of shares of any class or series that we have the authority to issue, (b) effect certain reverse stock splits, and (c) change our name or the name or other designation or the par value of any class or series of our stock and the aggregate par value of our stock;
|
|
•
|
our liquidation or dissolution; and
|
|
•
|
certain mergers, reorganizations of our company (including statutory share exchanges), consolidations or sales or other dispositions of all or substantially all our assets, as provided in our charter and under Maryland law.
|
All other matters are subject to the discretion of our board of directors.
Our board of directors may change our investment policies without stockholder approval, which could alter the nature of our stockholders' investments.
Our charter requires that our independent directors review our investment policies at least annually to determine that the policies we are following are in the best interest of the stockholders. These policies may change over time. The methods of implementing our investment objectives and strategies also may vary, as new real estate development trends emerge and new investment techniques are developed. Except to the extent that policies and investment limitations are included in our charter, our investment policies, the methods for their implementation, and our other objectives, policies and procedures may be altered by our board of directors without the approval of our stockholders. As a result, the nature of our stockholders' investment could change without their consent.
Because of our holding company structure, we depend on our operating subsidiary and its subsidiaries for cash flow and we will be structurally subordinated in right of payment to the obligations of such operating subsidiary and its subsidiaries.
We are a holding company with no business operations of our own. Our only significant asset is and will be the general partnership interests of our Operating Partnership. We intend to conduct substantially all of our business operations through our Operating Partnership. Accordingly, our only source of cash to pay our obligations will be distributions from our Operating Partnership and its subsidiaries of their net earnings and cash flows. We cannot give assurance that our Operating Partnership or its subsidiaries will be able to, or be permitted to, make distributions to us that will enable us to make distributions to our stockholders from cash flows from operations. Each of our Operating Partnership’s subsidiaries will be a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from such entities. In addition, because we are a holding company, stockholders’ claims as stockholders will be structurally subordinated to all existing and future liabilities and obligations of our Operating Partnership and its subsidiaries. Therefore, in the event of our bankruptcy, liquidation or reorganization, our assets and those of our Operating Partnership and its subsidiaries will be able to satisfy our stockholders’ claims as stockholders only after all of our and our Operating Partnership’s and its subsidiaries’ liabilities and obligations have been paid in full.
Our stockholders’ interest in us will be diluted if we issue additional shares.
Existing stockholders and potential investors in our Offering do not have preemptive rights to any shares issued by us in the future. Our charter authorizes 600,000,000 shares of stock, of which 500,000,000 shares are classified as common stock and 100,000,000 are classified as preferred stock. Of the 500,000,000 shares of common stock, 175,000,000 shares are designated as Class A shares, 75,000,000 shares are designated as Class I shares, 175,000,000 shares are designated as Class T shares and 75,000,000 shares are designated as Class T2 shares. Other than the differing fees with respect to each class and the payment of a distribution and servicing fee out of cash otherwise distributable to Class T stockholders and Class T2 stockholders, Class A shares, Class I shares, Class T shares and Class T2 shares have identical rights and privileges, such as identical voting rights. The net proceeds from the sale of the four classes of shares will be commingled for investment purposes and all earnings from all of the investments will proportionally accrue to each share regardless of the class. Subject to any limitations set forth under Maryland law, our board of directors may amend our charter from time to time to increase or decrease the aggregate number of authorized shares of stock or the number of shares of any class or series of stock that we have authority to issue, or reclassify any unissued shares into other classes or series of stock without the necessity of obtaining stockholder approval. All such shares may be issued in the discretion of our board of directors except that issuance of preferred stock must also be approved by a majority of our independent directors not otherwise interested in the transaction, who will have access, at our expense, to our legal counsel or to independent legal counsel. Further, we have adopted the Carter Validus Mission Critical REIT II, Inc. 2014 Restricted Share Plan, or the Incentive Plan, pursuant to which we will have the power and authority to grant restricted or deferred stock awards to persons eligible under the Incentive Plan. We have authorized and reserved 300,000 of our Class A
23
shares for issuance under the Incentive Plan and we granted 3,000 restricted shares of Class A common stock to each of our independent directors at the time we satisfied the minimum offering requirement and broke escrow and we granted 3,000 restricted shares of Class A common stock to each of our independent directors when they were re-elected to the board of directors. We will also grant 3,000 shares of Class A common stock in connection with such independent director’s subsequent election or re-election, as applicable. Existing stockholders and investors purchasing shares in our Offering likely will suffer dilution of their equity investment in us, if we:
|
•
|
sell shares in our Offering or sell additional shares in the future, including those issued pursuant to our distribution reinvestment plan;
|
|
•
|
sell securities that are convertible into shares of our common stock;
|
|
•
|
issue shares of our common stock in a private offering of securities to institutional investors;
|
|
•
|
issue restricted share awards to our directors;
|
|
•
|
issue shares to our Advisor or its successors or assigns, in payment of an outstanding fee obligation as set forth under our advisory agreement; or
|
|
•
|
issue shares of our common stock to sellers of properties acquired by us in connection with an exchange of limited partnership interests of our Operating Partnership.
|
In addition, the partnership agreement for our Operating Partnership contains provisions that would allow, under certain circumstances, other entities, including other programs affiliated with our Advisor and its affiliates, to merge into or cause the exchange or conversion of their interest for interests of our Operating Partnership. Because the limited partnership interests of our Operating Partnership may, in the discretion of our board of directors, be exchanged for shares of our common stock, any merger, exchange or conversion between our Operating Partnership and another entity ultimately could result in the issuance of a substantial number of shares of our common stock, thereby diluting the percentage ownership interest of other stockholders. Because of these and other reasons described herein, stockholders should not expect to be able to own a significant percentage of shares.
If we internalize our management functions, the percentage of our outstanding common stock owned by our other stockholders could be reduced, and we could incur other significant costs associated with being self-administered.
In the future, our board of directors may consider internalizing the functions performed for us by our Advisor. The method by which we could internalize these functions could take many forms, including without limitation, acquiring our Advisor. There is no assurance that internalizing our management functions would be beneficial to us and our stockholders. Any internalization transaction could result in significant payments to the owners of our Advisor, including in the form of our stock, which could reduce the percentage ownership of our then existing stockholders and concentrate ownership in the owner of our Advisor. Additionally, we may not realize the perceived benefits, we may not be able to properly integrate a new staff of managers and employees or we may not be able to effectively replicate the services provided previously by our Advisor, Property Manager or their affiliates. Internalization transactions involving the acquisition of advisors or property managers affiliated with entity sponsors have also, in some cases, been the subject of litigation. Even if these claims are without merit, we could be forced to spend significant amounts of money defending claims, which would reduce the amount of funds available for us to invest in properties or other investments and to pay distributions. All of these factors could have a material adverse effect on our results of operations, financial condition and ability to pay distributions to our stockholders.
Payment of fees and expenses to our Advisor and our Property Manager will reduce the cash available for distribution and will increase the risk that our stockholders will not be able to recover the amount of their investment in our shares.
Our Advisor and our Property Manager perform services for us in connection with our Offering, including, among other things, the selection and acquisition of our investments, the management of our assets, dispositions of assets, financing of our assets and certain administrative services. We will pay our Advisor and our Property Manager fees and expense reimbursements for these services, which will reduce the amount of cash available for further investments or distribution to our stockholders.
We may be unable to pay or maintain cash distributions or increase distributions over time.
There are many factors that can affect the availability and timing of cash distributions to stockholders. Until we acquire additional properties or other real estate-related investments, we may not generate enough cash flow from operations from which to pay distributions. The amount of cash available for distributions is affected by many factors, such as our ability to buy properties as offering proceeds become available, rental income from such properties and our operating expense levels, as well as many other variables. Actual cash available for distributions may vary substantially from estimates. We cannot assure our stockholders that we will be able to pay or maintain our current level of distributions or that distributions will increase over time. We also cannot give any assurance that rents from our properties will increase, that the securities we buy will increase in value or provide constant or increased distributions over time, or that future acquisitions of real properties or any investments
24
in securities will increase our cash available for distributions to stockholders. Our actual results may differ significantly from the assumptions used by our board of directors in establishing the distribution rate to stockholders. We may not have sufficient cash from operations to make a distribution required to maintain our REIT status. We may make distributions from the proceeds of our Offering or from borrowings in anticipation of future cash flow. Any such distributions will constitute a return of capital and may reduce the amount of capital we ultimately invest in properties and negatively impact the value of our stockholders’ investment.
Our Dealer Manager is one of our affiliates; therefore, stockholders will not have the benefit of the type of independent review of the Offering or us as customarily performed in underwritten offerings.
Our Dealer Manager is one of our affiliates and will not conduct an independent review of us or the Offering. Accordingly, stockholders will have to rely on his or her own broker-dealer to conduct an independent review of the terms of this Offering. If a stockholder's broker-dealer does not conduct such a review, the stockholder will not have the benefit of an independent review of the terms of this Offering. Further, the due diligence investigation of us by our Dealer Manager cannot be considered to be an independent review and, therefore, may not be as meaningful as a review conducted by an unaffiliated broker-dealer or investment banker. In addition, we do not, and do not expect to, have research analysts reviewing our performance or our securities on an ongoing basis. Therefore, stockholders will not have an independent review of our performance and the value of our common stock relative to publicly traded companies.
General Risks Related to Investments in Real Estate
Our operating results will be affected by economic and regulatory changes that have an adverse impact on the real estate market in general, which may prevent us from being profitable or from realizing growth in the value of our real estate properties.
Our operating results are subject to risks generally incident to the ownership of real estate, including:
|
•
|
changes in general economic or local conditions;
|
|
•
|
changes in supply of or demand for similar or competing properties in an area;
|
|
•
|
changes in interest rates and availability of permanent mortgage funds that may render the sale of a property difficult or unattractive;
|
|
•
|
changes in tax, real estate, environmental and zoning laws; and
|
|
•
|
periods of high interest rates and tight money supply.
|
These and other reasons may prevent us from being profitable or from realizing growth or maintaining the value of our real estate properties.
If a tenant declares bankruptcy, we may be unable to collect balances due under relevant leases, which would reduce our cash flow from operations and the amount available for distributions to our stockholders.
Any of our tenants, or any guarantor of a tenant’s lease obligations, could be subject to a bankruptcy proceeding pursuant to Title 11 of the bankruptcy laws of the United States. Such a bankruptcy filing would bar all efforts by us to collect pre-bankruptcy debts from these entities or their properties, unless we receive an enabling order from the bankruptcy court. Post-bankruptcy debts would be paid currently. If a lease is assumed, all pre-bankruptcy balances owing under it must be paid in full. If a lease is rejected by a tenant in bankruptcy, we would have a general unsecured claim for damages. If a lease is rejected, it is unlikely we would receive any payments from the tenant because our claim is capped at the rent reserved under the lease, without acceleration, for the greater of one year or 15% of the remaining term of the lease, but not greater than three years, plus rent already due but unpaid. This claim could be paid only if funds were available, and then only in the same percentage as that realized on other unsecured claims.
A tenant or lease guarantor bankruptcy could delay efforts to collect past due balances under the relevant leases, and could ultimately preclude full collection of these sums. Such an event could cause a decrease or cessation of rental payments that would mean a reduction in our cash flow and the amount available for distributions to our stockholders. In the event of a bankruptcy, we cannot give assurance that the tenant or its trustee will assume our lease. If a given lease, or guaranty of a lease, is not assumed, our cash flow and the amounts available for distributions to our stockholders may be adversely affected.
Our investments in properties where the underlying tenant has a below investment grade credit rating, as determined by major c
redit rating agencies, or unrated tenants, may have a greater risk of default and therefore may have an adverse impact on our returns on that asset and our operating results.
As of
December 31, 2017
, approximately 15.4% of our tenants had an investment grade credit rating from a major ratings agency, 19.9% of our tenants were rated but did not have an investment grade credit rating from a major ratings agency and
25
64.7% of our tenants are not rated. Approximately 18.1% of our non-rated tenants were affiliates of companies having an investment grade credit rating. Our investments with tenants that do not have an investment grade credit rating from a major ratings agency or were not rated and are not affiliated with companies having an investment grade credit rating may have a greater risk of default and bankruptcy than investments in properties leased exclusively to investment grade tenants. When we invest in properties where the tenant does not have a publicly available credit rating, we use certain credit assessment tools as well as rely on our own estimates of the tenant’s credit rating which includes but not limited to reviewing the tenant’s financial information (i.e., financial ratios, net worth, revenue, cash flows, leverage and liquidity) and monitoring local market conditions. If our lender or a credit rating agency disagrees with our ratings estimates, or our ratings estimates are otherwise inaccurate, we may not be able to obtain our desired level of leverage or our financing costs may exceed those that we projected. This outcome could have an adverse impact on our returns on that asset and hence our operating results.
If a sale-leaseback transaction is re-characterized in a tenant’s bankruptcy proceeding, our financial condition could be adversely affected.
We have entered and may continue to enter into sale-leaseback transactions, whereby we would purchase a property and then lease the same property back to the person from whom we purchased it. In the event of the bankruptcy of a tenant, a transaction structured as a sale-leaseback may be re-characterized as either a financing or a joint venture, either of which outcome could adversely affect our business. If the sale-leaseback were re-characterized as a financing, we might not be considered the owner of the property, and as a result would have the status of a creditor in relation to the tenant. In that event, we would no longer have the right to sell or encumber our ownership interest in the property. Instead, we would have a claim against the tenant for the amounts owed under the lease, with the claim arguably secured by the property. The tenant/debtor might have the ability to propose a plan restructuring the term, interest rate and amortization schedule of its outstanding balance. If confirmed by the bankruptcy court, we could be bound by the new terms, and prevented from foreclosing our lien on the property. If the sale-leaseback were re-characterized as a joint venture, our lessee and we could be treated as co-venturers with regard to the property. As a result, we could be held liable, under some circumstances, for debts incurred by the lessee relating to the property. Either of these outcomes could adversely affect our cash flow and the amount available for distributions to our stockholders.
Properties that have vacancies for a significant period of time could be difficult to sell, which could diminish the return on our stockholders’ investment.
A property may incur vacancies either by the continued default of tenants under their leases or the expiration of tenant leases. If vacancies continue for a long period of time, we may suffer reduced revenues, resulting in less cash to be distributed to stockholders. In addition, because properties’ market values depend principally upon the value of the properties’ leases, the resale value of properties with prolonged vacancies could suffer, which could further reduce our stockholders’ return.
We may obtain only limited warranties when we purchase a property and would have only limited recourse if our due diligence did not identify any issues that lower the value of our property.
The seller of a property often sells such property in its “as is” condition on a “where is” basis and “with all faults,” without any warranties of merchantability or fitness for a particular use or purpose. In addition, purchase agreements may contain only limited warranties, representations and indemnifications that will only survive for a limited period after the closing. The purchase of properties with limited warranties increases the risk that we may lose some or all of our invested capital in the property as well as the loss of rental income from that property.
We may be unable to secure funds for future tenant improvements or capital needs, which could adversely impact our ability to pay cash distributions to our stockholders.
When tenants do not renew their leases or otherwise vacate their space, it is usual that, in order to attract replacement tenants, we will be required to expend substantial funds for tenant improvements and tenant refurbishments to the vacated space. In addition, although we expect that our leases with tenants will require tenants to pay routine property maintenance costs, we will likely be responsible for any major structural repairs, such as repairs to the foundation, exterior walls and rooftops. We will use substantially all of our Offering’s gross proceeds to buy real estate and pay various fees and expenses. Accordingly, if we need additional capital in the future to improve or maintain our properties or for any other reason, we will have to obtain financing from other sources, such as cash flow from operations, borrowings, property sales or future equity offerings. These sources of funding may not be available on attractive terms or at all. If we cannot procure additional funding for capital improvements, our investments may generate lower cash flows or decline in value, or both.
Our inability to sell a property when we desire to do so could adversely impact our ability to pay cash distributions to our stockholders.
The real estate market is affected by many factors, such as general economic conditions, availability of financing, interest rates and other factors, including supply and demand, that are beyond our control. We cannot predict whether we will be able to sell any property for the price or on the terms set by us, or whether any price or other terms offered by a prospective purchaser
26
would be acceptable to us. We cannot predict the length of time needed to find a willing purchaser and to close the sale of a property.
We may be required to expend funds to correct defects or to make improvements before a property can be sold. We cannot give assurance that we will have funds available to correct such defects or to make such improvements. Moreover, in acquiring a property, we may agree to restrictions that prohibit the sale of that property for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that property. These provisions would restrict our ability to sell a property.
We may not be able to sell a property at a price equal to, or greater than, the price for which we purchased such property, which may lead to a decrease in the value of our assets and a reduction in the value of shares held by our stockholders.
Some of our leases will not contain rental increases over time, or the rental increases may be less than the fair market rate at a future point in time. Therefore, the value of the property to a potential purchaser may not increase over time, which may restrict our ability to sell a property, or if we are able to sell such property, may lead to a sale price less than the price that we paid to purchase the property.
We may acquire or finance properties with lock-out provisions, which may prohibit us from selling a property, or may require us to maintain specified debt levels for a period of years on some properties.
A lock-out provision is a provision that prohibits the prepayment of a loan during a specified period of time. Lock-out provisions could materially restrict us from selling or otherwise disposing of or refinancing properties. These provisions would affect our ability to turn our investments into cash and thus affect cash available for distributions to our stockholders. Lock-out provisions may prohibit us from reducing the outstanding indebtedness with respect to any properties, refinancing such indebtedness on a non-recourse basis at maturity, or increasing the amount of indebtedness with respect to such properties. Lock-out provisions could impair our ability to take other actions during the lock-out period that could be in the best interests of our stockholders and, therefore, may have an adverse impact on the value of the shares, relative to the value that would result if the lock-out provisions did not exist. In particular, lock-out provisions could preclude us from participating in major transactions that could result in a disposition of our assets or a change in control even though that disposition or change in control might be in the best interests of our stockholders.
Rising expenses could reduce cash flow and funds available for future acquisitions or distributions to our stockholders.
Our properties and any other properties that we buy in the future will be subject to operating risks common to real estate in general, any or all of which may negatively affect us. If any property is not fully occupied or if rents are being paid in an amount that is insufficient to cover operating expenses, we could be required to expend funds with respect to that property for operating expenses. The properties will be subject to increases in tax rates, utility costs, operating expenses, insurance costs, repairs and maintenance and administrative expenses. While we expect that many of our properties will continue to be leased on a triple net lease basis or require the tenants to pay all or a portion of such expenses, renewals of leases or future leases may not be negotiated on that basis, in which event we may have to pay those costs. If we are unable to lease properties on a triple net lease basis or on a basis requiring the tenants to pay all or some of such expenses, or if tenants fail to pay required tax, utility and other impositions, we could be required to pay those costs, which could adversely affect funds available for future acquisitions or cash available for distributions.
If we suffer losses that are not covered by insurance or that are in excess of insurance coverage, we could lose invested capital and anticipated profits.
We will carry comprehensive general liability coverage and umbrella liability coverage on all our properties with limits of liability which we deem adequate to insure against liability claims and provide for the costs of defense. Similarly, we are insured against the risk of direct physical damage in amounts we estimate to be adequate to reimburse us on a replacement cost basis for costs incurred to repair or rebuild each property, including loss of rental income during the rehabilitation period. Material losses may occur in excess of insurance proceeds with respect to any property, as insurance may not be sufficient to fund the losses. However, there are types of losses, generally of a catastrophic nature, such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution or environmental matters, which are either uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments. Insurance risks associated with potential terrorism acts could sharply increase the premiums we will pay for coverage against property and casualty claims. Additionally, mortgage lenders in some cases have begun to insist that commercial property owners purchase specific coverage against terrorism as a condition for providing mortgage loans. It is uncertain whether such insurance policies will be available, or available at reasonable cost, which could inhibit our ability to finance or refinance our potential properties. In these instances, we may be required to provide other financial support, either through financial assurances or self-insurance, to cover potential losses. We may not have adequate, or any, coverage for such losses. The Terrorism Risk Insurance Act of 2002 is designed for a sharing of terrorism losses between insurance companies and the federal government, and extends the federal terrorism insurance backstop through December 31, 2020, pursuant to the Terrorism Risk Insurance Program Reauthorization
27
Act of 2015. We cannot be certain how this act will impact us or what additional cost to us, if any, could result. If such an event damaged or destroyed one or more of our properties, we could lose both our invested capital and anticipated profits from such property.
Real estate-related taxes may increase and if these increases are not passed on to tenants, our income will be reduced.
Some local real property tax assessors may seek to reassess some of our properties as a result of our acquisition of such properties. From time to time our property taxes may increase as property values or assessment rates change or for other reasons deemed relevant by the assessors. An increase in the assessed valuation of a property for real estate tax purposes will result in an increase in the related real estate taxes on that property. Although some tenant leases may permit us to pass through such tax increases to the tenants for payment, there is no assurance that renewal leases or future leases will be negotiated on the same basis. Increases not passed through to tenants will adversely affect our income, cash available for distributions, and the amount of distributions to our stockholders.
Covenants, conditions and restrictions may restrict our ability to operate our properties.
Some of our properties may be contiguous to other parcels of real property, comprising part of the same commercial center. In connection with such properties, there are significant covenants, conditions and restrictions, or "CC&Rs," restricting the operation of such properties and any improvements on such properties, and related to granting easements on such properties. Moreover, the operation and management of the contiguous properties may impact such properties. Compliance with CC&Rs may adversely affect our operating costs and reduce the amount of funds that we have available to pay distributions.
Our operating results may be negatively affected by potential development and construction delays and result in increased costs and risks.
We may use proceeds from our Offering to acquire and develop properties upon which we will construct improvements. We will be subject to uncertainties associated with re-zoning for development, environmental concerns of governmental entities and/or community groups, and our builder’s ability to build in conformity with plans, specifications, budgeted costs, and timetables. A builder’s performance also may be affected or delayed by conditions beyond the builder’s control. Delays in completion of construction could also give tenants the right to terminate preconstruction leases. We may incur additional risks when we make periodic progress payments or other advances to builders before they complete construction. These and other such factors can result in increased costs of a project or loss of our investment. In addition, we will be subject to normal lease-up risks relating to newly constructed projects. We also must rely on rental income and expense projections and estimates of the fair market value of property upon completion of construction when agreeing upon a price at the time we acquire the property. If our projections are inaccurate, we may pay too much for a property, and our return on our investment could suffer.
We may invest in unimproved real property, subject to the limitations on investments in unimproved real property contained in our charter, which complies with the NASAA REIT Guidelines limitation restricting us from investing more than 10% of our total assets in unimproved real property. For purposes of this paragraph, "unimproved real property" is real property which has not been acquired for the purpose of producing rental or other operating income, has no development or construction in process and on which no construction or development is planned in good faith to commence within one year. Returns from development of unimproved properties are also subject to risks associated with re-zoning the land for development and environmental concerns of governmental entities and/or community groups. Although we intend to limit any investment in unimproved property to property we intend to develop, our stockholders’ investment nevertheless is subject to the risks associated with investments in unimproved real property.
Competition with third parties in acquiring properties and other investments may impede our ability to make future acquisitions or may increase the cost of these acquisitions and reduce our profitability and the return on our stockholders’ investment.
We compete with many other entities engaged in real estate investment activities, including individuals, corporations, bank and insurance company investment accounts, other REITs, real estate limited partnerships, other entities engaged in real estate investment activities and private equity firms, many of which have greater resources than we do. Competition for properties may significantly increase the price we must pay for properties or other assets we seek to acquire and our competitors may succeed in acquiring those properties or assets themselves. In addition, our potential acquisition targets may find our competitors to be more attractive because they may have greater resources, may be willing to pay more for the properties or may have a more compatible operating philosophy. Larger entities may enjoy significant competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies. Further, the number of entities and the amount of funds competing for suitable investments may increase. This competition will result in increased demand for these assets and therefore increased prices paid for them. Because of an increased interest in single-property acquisitions among tax-motivated individual purchasers, we may pay higher prices if we purchase single properties in comparison with
28
portfolio acquisitions. If we pay higher prices for properties and other investments, our profitability will be reduced and our stockholders may experience a lower return on their investment.
We will be subject to additional risks of our joint venture partner or partners when we enter into a joint venture, which could reduce the value of our investment.
We may enter into joint ventures with other real estate groups. The success of a particular joint venture may be limited if our joint venture partner becomes bankrupt or otherwise is unable to perform its obligations in accordance with the terms of the particular joint venture arrangement. The joint venture partner may have economic or business interests or goals that are or may become inconsistent with our business interests or goals. In addition, a dispute with our joint venture partners may result in litigation, which may cause us to incur additional expenses, require additional time and resources from our Advisor and result in liability, each of which could adversely affect our operating results and the value of our stockholders’ investment. In addition, we may assume liabilities related to the joint venture that exceed the percentage of our investment in the joint venture.
Our properties face competition that may affect tenants’ willingness to pay the amount of rent requested by us and the amount of rent paid to us may affect the cash available for distributions and the amount of distributions.
There will be numerous other properties within the market area of each of our properties that will compete with us for tenants. The number of competitive properties could have a material effect on our ability to rent space at our properties and the amount of rents charged. We could be adversely affected if additional competitive properties are built in locations competitive with our properties, causing increased competition for customer traffic and creditworthy tenants. This could result in decreased cash flow from tenants and may require us to make capital improvements to properties that we would not have otherwise made, thus affecting cash available for distributions and the amount available for distributions to our stockholders.
Delays in acquisitions of properties may have an adverse effect on the value of our stockholders’ investment.
There may be a substantial period of time before all of the proceeds of our Offering are invested. Delays we encounter in the selection, acquisition and/or development of properties could adversely affect our stockholders’ returns. When properties are acquired prior to the start of construction or during the early stages of construction, it will typically take several months to complete construction and rent available space. Therefore, our stockholders could suffer delays in the payment of cash distributions attributable to those particular properties.
Costs of complying with governmental laws and regulations, including those relating to environmental matters, may adversely affect our income and the cash available for any distributions.
All real property and the operations conducted on real property are subject to federal, state and local laws and regulations relating to environmental protection and human health and safety. These laws and regulations generally govern wastewater discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of solid and hazardous materials, and the remediation of contamination associated with disposals. Environmental laws and regulations may impose joint and several liability on tenants, owners or operators for the costs to investigate or remediate contaminated properties, regardless of fault or whether the acts causing the contamination were legal. This liability could be substantial. In addition, the presence of hazardous substances, or the failure to properly remediate these substances, may adversely affect our ability to sell, rent or pledge such property as collateral for future borrowings.
Some of these laws and regulations have been amended so as to require compliance with new or more stringent standards as of future dates. Compliance with new or more stringent laws or regulations or stricter interpretation of existing laws may require material expenditures by us. Future laws, ordinances or regulations may impose material environmental liability. Additionally, our tenants’ operations, the existing condition of land when we buy it, operations in the vicinity of our properties, such as the presence of underground storage tanks, or activities of unrelated third parties, may affect our properties. In addition, there are various local, state and federal fire, health, life-safety and similar regulations with which we may be required to comply, and that may subject us to liability in the form of fines or damages for noncompliance. Any material expenditures, fines, or damages we must pay will reduce our ability to make distributions and may reduce the value of our stockholders’ investment.
One particular federal law is The Comprehensive Environmental Response, Compensation, and Liability Act of 1980, or CERCLA, which established a regulatory and remedial program intended to provide for the investigation and clean-up of facilities where, or from which, a release of any hazardous substance into the environment has occurred or is threatened. CERCLA’s primary mechanism for remedying such problems is to impose strict joint and several liability for clean-up of facilities on current owners and operators of the site, former owners and operators of the site at the time of the disposal of the hazardous substances, any person who arranges for the transportation, disposal or treatment of the hazardous substances, and the transporters who select the disposal and treatment facilities, regardless of the care exercised by such persons. CERCLA also imposes liability for the cost of evaluating and remedying any damage to natural resources. The costs of CERCLA investigation and clean-up can be very substantial. CERCLA also authorizes the imposition of a lien in favor of the United States on all real
29
property subject to, or affected by, a remedial action for all costs for which a party is liable. Subject to certain procedural restrictions, CERCLA gives a responsible party the right to bring a contribution action against other responsible parties for their allocable shares of investigative and remedial costs. Our ability to obtain reimbursement from others for their allocable shares of such costs would be limited by our ability to find other responsible parties and prove the extent of their responsibility, their financial resources, and other procedural requirements. Various state laws also impose strict joint and several liability for investigation, clean-up and other damages associated with hazardous substance releases.
State and federal laws in this area are constantly evolving, and we intend to monitor these laws and take commercially reasonable steps to protect ourselves from the impact of these laws, including obtaining environmental assessments of most properties that we acquire; however, we will not obtain an independent third-party environmental assessment for every property we acquire. In addition, any such assessment that we do obtain may not reveal all environmental liabilities or that a prior owner of a property did not create a material environmental condition not known to us. The cost of defending against claims of liability, of compliance with environmental regulatory requirements, of remediating any contaminated property, or of paying personal injury claims would materially adversely affect our business, assets or results of operations and, consequently, amounts available for distribution to our stockholders.
If we sell properties by providing financing to purchasers, defaults by the purchasers would adversely affect our cash flows.
In some instances we may sell our properties by providing financing to purchasers. When we provide financing to purchasers, we will bear the risk that the purchaser may default, which could negatively impact our cash distributions to stockholders. Even in the absence of a purchaser default, the distribution of the proceeds of sales to our stockholders, or their reinvestment in other assets, will be delayed until the promissory notes or other property we may accept upon the sale are actually paid, sold, refinanced or otherwise disposed of. In some cases, we may receive initial down payments in cash and other property in the year of sale in an amount less than the selling price, and subsequent payments will be spread over a number of years. If any purchaser defaults under a financing arrangement with us, it could negatively impact our ability to pay cash distributions to our stockholders.
Our recovery of an investment in a mortgage loan that has defaulted may be limited.
There is no guarantee that the mortgage, loan or deed of trust securing an investment will, following a default, permit us to recover the original investment and interest that would have been received absent a default. The security provided by a mortgage, deed of trust or loan is directly related to the difference between the amount owed and the appraised market value of the property. Although we intend to rely on a current real estate appraisal when we make the investment, the value of the property is affected by factors outside our control, including general fluctuations in the real estate market, rezoning, neighborhood changes, highway relocations and failure by the borrower to maintain the property. In addition, we may incur the costs of litigation in our efforts to enforce our rights under defaulted loans.
Our costs associated with complying with the Americans with Disabilities Act may affect cash available for distributions.
Our properties are subject to the Americans with Disabilities Act of 1990, or the Disabilities Act. Under the Disabilities Act, all places of public accommodation are required to comply with federal requirements related to access and use by disabled persons. The Disabilities Act has separate compliance requirements for "public accommodations" and "commercial facilities" that generally require that buildings and services, including restaurants and retail stores, be made accessible and available to people with disabilities. The Disabilities Act’s requirements could require removal of access barriers and could result in the imposition of injunctive relief, monetary penalties, or, in some cases, an award of damages. We will attempt to acquire properties that comply with the Disabilities Act or place the burden on the seller or other third party, such as a tenant, to ensure compliance with the Disabilities Act. However, we cannot give assurance that we will be able to acquire properties or allocate responsibilities in this manner. If we cannot, our funds used for Disabilities Act compliance may affect cash available for distributions and the amount of distributions to our stockholders.
Risks Associated with Investments in the Healthcare Property Sector
Our real estate investments are currently concentrated in healthcare properties, making us more vulnerable economically than if our investments were diversified.
We are subject to risks inherent in concentrating investments in real estate. These risks resulting from a lack of diversification are even greater as a result of our business strategy to invest to a substantial degree in healthcare properties. A downturn in the commercial real estate industry generally could significantly adversely affect the value of our properties. A downturn in the healthcare industry could negatively affect our lessees’ ability to make lease payments to us and our ability to make distributions to our stockholders. These adverse effects could be more pronounced than if we diversified our investments outside of real estate or if our portfolio did not include a concentration in healthcare properties. Our investments in healthcare properties accounted for
53.8%
of our contractual rental revenue for the year ended
December 31, 2017
.
30
Certain of our properties may not have efficient alternative uses, so the loss of a tenant may cause us to not be able to find a replacement or cause us to spend considerable capital to adapt the property to an alternative use.
Some of the properties we have acquired and seek to acquire are healthcare properties that may only be suitable for similar healthcare-related tenants. If we or our tenants terminate the leases for these properties or our tenants lose their regulatory authority to operate such properties, we may not be able to locate suitable replacement tenants to lease the properties for their specialized uses. Alternatively, we may be required to spend substantial amounts to adapt the properties to other uses. Any loss of revenues or additional capital expenditures required as a result may have a material adverse effect on our business, financial condition and results of operations and our ability to make distributions to our stockholders.
Our healthcare properties and tenants may be unable to compete successfully, which could result in lower rent payments, reduce our cash flows from operations and amount available for distributions to our stockholders.
The healthcare properties we have acquired or seek to acquire in the future may face competition from nearby hospitals and other healthcare properties that provide comparable services.
Some of those competing facilities are owned by governmental agencies and therefore are supported by tax revenues, and others are owned by non-profit corporations and therefore are supported to a large extent by endowments and charitable contributions. Not all of our properties will be affiliated with non-profit corporations and receive such support.
Similarly, our tenants will face competition from other healthcare practices in nearby hospitals and other healthcare properties. Our tenants’ failure to compete successfully with these other practices could adversely affect their ability to make rental payments, which could adversely affect our rental revenues. Further, from time to time and for reasons beyond our control, referral sources, including physicians and managed care organizations, may change their lists of hospitals or physicians that are permitted to participate in the payer program. This could adversely affect our tenants’ ability to make rental payments, which could adversely affect our rental revenues. Any reduction in rental revenues resulting from the inability of our healthcare properties and our tenants to compete successfully may have a material adverse effect on our business, financial condition and results of operations and our ability to make distributions to our stockholders.
Reductions in reimbursement from third party payors, including Medicare and Medicaid, could adversely affect the profitability of our tenants and hinder their ability to make rental payments to us.
Sources of revenue for our tenants may include the federal Medicare program, state Medicaid programs, private insurance carriers and health maintenance organizations, among others. Efforts by such payors to reduce healthcare costs will likely continue, which may result in reductions or slower growth in reimbursement for certain services provided by some of our tenants. In addition, the healthcare billing rules and regulations are complex, and the failure of any of our tenants to comply with various laws and regulations could jeopardize their ability to continue participating in Medicare, Medicaid and other government sponsored payment programs. Moreover, the state and federal governmental healthcare programs are subject to reductions by state and federal legislative actions. The American Taxpayer Relief Act of 2012 prevented the reduction in physician reimbursement of Medicare from being implemented in 2013. The Protecting Access to Medicare Act of 2014
prevented the reduction of 24.4% in the physician fee schedule by replacing the scheduled reduction with a 0.5% increase to the physician fee schedule through December 31, 2014, and a 0% increase for January 1, 2015 through March 31, 2015. The potential 21.0% cut in reimbursement that was to be effective April 1, 2015 was removed by the Medicare Access & CHIP Reauthorization Act of 2015 (MACRA) and replaced with two new methodologies that will focus upon payment based upon quality outcomes. The first model is the Merit-Based Incentive Payment System, or MIPS, which combines the Physician Quality Reporting System, or PQRS, and Meaningful Use program with the Value Based Modifier program to provide for one payment model based upon (i) quality, (ii) resource use, (iii) clinical practice improvement and (iv) advancing care information through the use of certified Electronic Health Record, or EHR, technology. The second model is the Advanced Alternative Payment Models, or APM, which requires the physician to participate in a risk share arrangement for reimbursement related to his or her patients while utilizing a certified health record and reporting on specific quality metrics. There are a number of physicians that will not qualify for the APM payment method. Therefore, this change in reimbursement models may impact our tenants’ payments and create uncertainty in the tenants’ financial condition.
The healthcare industry continues to face various challenges, including increased government and private payor pressure on healthcare providers to control or reduce costs. It is possible that our tenants will continue to experience a shift in payor mix away from fee-for-service payors, resulting in an increase in the percentage of revenues attributable to reimbursement based upon value based principles and quality driven managed care programs, and general industry trends that include pressures to control healthcare costs. The federal government's goal is to move approximately ninety percent (90%) of its reimbursement for providers to be based upon quality outcome models. Pressures to control healthcare costs and a shift away from traditional health insurance reimbursement to payment based upon quality outcomes have increased the uncertainty of payments.
In 2014, state insurance exchanges were implemented, which provide a new mechanism for individuals to obtain insurance. At this time, the number of payers that are participating in the state insurance exchanges varies, and in some regions there are very limited insurance plans available for individuals to choose from when purchasing insurance. In addition, not all
31
healthcare providers will maintain participation agreements with the payers that are participating in the state health insurance exchange. Therefore, it is possible that our tenants may incur a change in their reimbursement if the tenant does not have a participation agreement with the state insurance exchange payers and a large number of individuals elect to purchase insurance from the state insurance exchange. Further, the rates of reimbursement from the state insurance exchange payers to healthcare providers will vary greatly. The rates of reimbursement will be subject to negotiation between the healthcare provider and the payer, which may vary based upon the market, the healthcare provider’s quality metrics, the number of providers participating in the area and the patient population, among other factors. Therefore, it is uncertain whether healthcare providers will incur a decrease in reimbursement from the state insurance exchange, which may impact a tenant’s ability to pay rent.
The insurance plans that participated on the health insurance exchanges created by the Patient Protection and Affordable Care Act of 2010 (“Healthcare Reform Act”) were expecting to receive risk corridor payments to address the high risk claims that it paid through the exchange product. However, the federal government currently owes the insurance companies approximately $8.3 billion under the risk corridor payment program that is currently disputed by the federal government. The federal government is currently defending several lawsuits from the insurance plans that participate on the health insurance exchange. If the insurance companies do not receive the payments, the insurance companies may cease to participate on the insurance exchange which limits insurance options for patients. If patients do not have access to insurance coverage it may adversely impact the tenant’s revenues and the tenant’s ability to pay rent.
In addition, the healthcare legislation passed in 2010 included new payment models with new shared savings programs and demonstration programs that include bundled payment models and payments contingent upon reporting on satisfaction of quality benchmarks. The new payment models will likely change how physicians are paid for services. These changes could have a material adverse effect on the financial condition of some or all of our tenants. The financial impact on our tenants could restrict their ability to make rent payments to us, which would have a material adverse effect on our business, financial condition and results of operations and our ability to pay distributions to stockholders.
Furthermore, beginning in 2016, the Centers for Medicare and Medicaid Services has applied a negative payment adjustment to individual eligible professionals, Comprehensive Primary Care practice sites, and group practices participating in the Physician Quality Reporting System, or PQRS, group practice reporting option (including Accountable Care Organizations) that do not satisfactorily report PQRS in 2014. Program participation during a calendar year will affect payments after two years, such that individuals and groups that receive the 2016 negative payment adjustment will not receive a 2014 PQRS incentive payment. Providers can appeal the determination, but if the provider is not successful, the provider’s reimbursement may be adversely impacted, which could adversely impact a tenant’s ability to make rent payments to us.
Moreover, President Trump signed an Executive Order on January 20, 2017 to “ease the burden of Obamacare”.
On May 4, 2017, members of the House of Representatives approved legislation to repeal portions of the Healthcare Reform Act, which legislation was submitted to the Senate for approval. On July 25, 2017, the Senate rejected a complete repeal and, further, on July 27, 2017, the Senate rejected a repeal on the Healthcare Reform Act’s individual and employer mandates and a temporary repeal on the medical device tax. Furthermore, on October 12, 2017, President Trump signed an Executive Order the purpose of which was to, among other things, (i) cut healthcare cost-sharing reduction subsidies, (ii) allow more small businesses to join together to purchase insurance coverage, (iii) extend short-term coverage policies, and (iv) expand employers’ ability to provide workers cash to buy coverage elsewhere. The Executive Order required the government agencies to draft regulations for consideration related to Associated Health Plans ("AHP"), short term limited duration insurance ("STLDI") and health reimbursement arrangements ("HRA"). At this time the proposed legislation has not been drafted. The Trump Administration also ceased to provide the cost-share subsidies to the insurance companies that offered the silver plan benefits on the Health Information Exchange. The termination of the cost-share subsidies would impact the subsidy payments due in 2017 and will likely adversely impact the insurance companies, causing an increase in the premium payments for the individual beneficiaries in 2018. Nineteen State Attorney Generals filed suit to force the Trump Administration to reinstate the cost shares subsidy payments. On October 25, 2017, a California Judge ruled in favor of the Trump Administration and found that the federal government was not required to immediately reinstate payment for the cost shares subsidy. The injunction sought by the Attorney Generals’ lawsuit was denied.
Subsequently, Maine Community Health Options filed suit against The United States of America in the United States Court of Federal Claims, Case No. 17-2057C (December 28, 2017) seeking damages and payment for the cost-sharing reduction payment. This claim is currently pending.
Therefore, our tenants will likely see an increase in individuals who are self-pay or have a lower health benefit plan due to the increase in the premium payments. Our tenants’ collections and revenues may be adversely impacted by the change in the payor mix of their patients and it may adversely impact the tenants’ ability to make rent payments.
32
There are multiple lawsuits in several judicial districts brought by qualified health plans to recover the prior risk corridor payments that were anticipated to be paid as part of the health insurance exchange program. The multiple lawsuits are moving through the judicial process. Further, there is a current lawsuit,
United States House of Representatives vs. Price
, which alleges that the Executive Branch of the United States of America exceeded its authority in implementing the risk corridor payments under the HealthCare Reform and therefore the payments should not be made. At this time, the case is pending. If the Administration or the court system determines that risk corridor or risk share payments are not required to be paid to the qualified health plans offering insurance coverage on the health insurance exchange program, the insurance companies may cease offering the Health Insurance Exchange product to the current beneficiaries. Therefore, our tenants may have an increase of self-pay patients and collections may decline, adversely impacting the tenants’ ability to pay rent.
On January 11, 2018, the Centers for Medicare and Medicaid Services (“CMS”) issued guidance to support state efforts to improve Medicaid enrollee health outcomes by incentivizing community engagement among able-bodied, working-age Medicaid beneficiaries. The policy excludes individuals eligible for Medicaid due to a disability, elderly beneficiaries, children and pregnant women. CMS received proposals from 10 states seeking requirements for able bodied Medicaid beneficiaries to engage in employment and community engagement initiatives. Kentucky and Indiana are the first states to obtain a waiver for its program and require Medicaid beneficiaries to work or get ready for employment. If the “work requirement” expands to the states Medicaid programs it may decrease the number of patients eligible for Medicaid. The patients that are no longer eligible for Medicaid may become self-pay patients which may adversely impact our tenant’s ability to receive reimbursement. If our tenants’ patient payor mix becomes more self-pay patients, it may impact our tenants’ ability to collect revenues and pay rent.
The healthcare industry is heavily regulated, and new laws or regulations, changes to existing laws or regulations, loss of licensure or failure to obtain licensure could result in the inability of our tenants to make rent payments to us.
The healthcare industry is heavily regulated by federal, state and local governmental bodies. The tenants in our healthcare properties generally will be subject to laws and regulations covering, among other things, licensure, certification for participation in government programs, and relationships with physicians and other referral sources. Changes in these laws and regulations could negatively affect the ability of our tenants to make lease payments to us and our ability to make distributions to our stockholders. Many of our healthcare properties and their tenants may require a license or certificate of need, or CON, to operate. Failure to obtain a license or CON, or loss of a required license or CON, would prevent a facility from operating in the manner intended by the tenant. These events could materially adversely affect our tenants’ ability to make rent payments to us. State and local laws also may regulate expansion, including the addition of new beds or services or acquisition of healthcare equipment, and the construction of healthcare properties, by requiring a CON or other similar approval. State CON laws are not uniform throughout the United States and are subject to change; therefore, this may adversely impact our tenants’ ability to provide services in different states. We cannot predict the impact of state CON laws on our development of facilities or the operations of our tenants. In addition, state CON laws often materially impact the ability of competitors to enter into the marketplace of our facilities. The repeal of CON laws could allow competitors to freely operate in previously closed markets. This could negatively affect our tenants’ abilities to make current payments to us. In limited circumstances, loss of state licensure or certification or closure of a facility could ultimately result in loss of authority to operate the facility and require new CON authorization to re-institute operations. As a result, a portion of the value of the facility may be reduced, which would adversely impact our business, financial condition and results of operations and our ability to make distributions to our stockholders.
Tenants of our healthcare properties are subject to anti-fraud and abuse laws, the violation of which by a tenant may jeopardize the tenant’s ability to make rent payments to us.
There are various federal and state laws prohibiting fraudulent and abusive business practices by healthcare providers who participate in, receive payments from or are in a position to make referrals in connection with government-sponsored healthcare programs, including the Medicare and Medicaid programs. Our lease arrangements with certain tenants may also be subject to these anti-fraud and abuse laws. These laws include the Federal Anti-Kickback Statute, which prohibits, among other things, the offer, payment, solicitation or receipt of any form of remuneration in return for, or to induce, the referral of any item or service reimbursed by Medicare or Medicaid; the Federal Physician Self-Referral Prohibition, which, subject to specific exceptions, restricts physicians from making referrals for specifically designated health services for which payment may be made under Medicare or Medicaid programs to an entity with which the physician, or an immediate family member, has a financial relationship; the False Claims Act, which prohibits any person from knowingly presenting false or fraudulent claims for payment to the federal government, including claims paid by the Medicare and Medicaid programs;
the Civil Monetary Penalties Law, which authorizes the U.S. Department of Health and Human Services to impose monetary penalties or exclusion from participation in state or federal healthcare programs for certain fraudulent acts; the Health Insurance Portability and Accountability Act (“HIPAA”) Fraud Statute which makes it a federal crime to defraud any health benefit plan, including private payers; and Exclusions Law which authorizes U.S. Department of Health and Human Services to exclude someone from participation in state or federal healthcare programs for certain fraudulent acts.
Each of these laws includes criminal and/or civil penalties for violations that range from punitive sanctions, damage assessments, penalties, imprisonment, denial of
33
Medicare and Medicaid payments and/or exclusion from the Medicare and Medicaid programs. Certain laws, such as the False Claims Act, allow for individuals to bring whistleblower actions on behalf of the government for violations thereof. Additionally, states in which the healthcare properties are located may have similar anti-fraud and abuse laws. Investigation by a federal or state governmental body for violation of anti-fraud and abuse laws or imposition of any of these penalties upon one of our tenants could jeopardize that tenant’s ability to operate or to make rent payments, which may have a material adverse effect on our business, financial condition and results of operations and our ability to make distributions to our stockholders.
Adverse trends in healthcare provider operations may negatively affect our lease revenues and our ability to make distributions to our stockholders.
The healthcare industry is currently experiencing changes in the demand for and methods of delivering healthcare services; changes in third party reimbursement policies; significant unused capacity in certain areas, which has created substantial competition for patients among healthcare providers in those areas; continuing pressure by private and governmental payors to reduce payments to providers of services; increased scrutiny of billing, referral and other practices by federal and state authorities; changes in federal and state healthcare program payment models;
increase and expansion of government audits related to compliance with the HIPAA privacy and security rules;
continued consolidation of providers; and increased emphasis on compliance with privacy and security requirements related to personal health information. In addition, the fines and penalties for a breach of the HIPAA privacy and security rules increased in 2013. If a tenant breaches a patient’s protected health information and is fined by the federal government, the tenant’s ability to operate and pay rent may be adversely impacted. These factors may adversely affect the economic performance of some or all of our tenants and, in turn, our lease revenues and our ability to make distributions to our stockholders.
Tenants of our healthcare properties may be subject to significant legal actions that could subject them to increased operating costs and substantial uninsured liabilities, which may affect their ability to pay their rent payments to us.
As is typical in the healthcare industry, certain types of tenants of our healthcare properties may often become subject to claims that their services have resulted in patient injury or other adverse effects. Many of these tenants may have experienced an increasing trend in the frequency and severity of professional liability and general liability insurance claims and litigation asserted against them. The insurance coverage maintained by these tenants may not cover all claims made against them nor continue to be available at a reasonable cost, if at all. In some states, insurance coverage for the risk of punitive damages arising from professional liability and general liability claims and/or litigation may not, in certain cases, be available to these tenants due to state law prohibitions or limitations of availability. As a result, these types of tenants of our healthcare properties operating in these states may be liable for punitive damage awards that are either not covered or are in excess of their insurance policy limits. We also believe that there has been, and will continue to be, an increase in governmental investigations of certain healthcare providers, particularly in the area of Medicare/Medicaid false claims, as well as an increase in enforcement actions resulting from these investigations. Insurance may not be available to cover such losses. Any adverse determination in a legal proceeding or governmental investigation, whether currently asserted or arising in the future, could have a material adverse effect on a tenant’s financial condition. If a tenant is unable to obtain or maintain insurance coverage, if judgments are obtained in excess of the insurance coverage, if a tenant is required to pay uninsured punitive damages, or if a tenant is subject to an uninsurable government enforcement action, the tenant could be exposed to substantial additional liabilities, which may affect the tenant’s ability to pay rent, which in turn could have a material adverse effect on our business, financial condition and results of operations and our ability to make distributions to our stockholders.
Comprehensive healthcare reform legislation, the effects of which are not yet known, could materially and adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders.
On March 23, 2010, the President signed into law the Patient Protection and Affordable Care Act of 2010, or the Patient Protection and Affordable Care Act, and on March 30, 2010, the President signed into law the Health Care and Education Reconciliation Act of 2010, or the Reconciliation Act, which in part modified the Patient Protection and Affordable Care Act. Together, the two acts serve as the primary vehicle for comprehensive healthcare reform in the U.S (collectively, the “Healthcare Reform Act”). The acts are intended to reduce the number of individuals in the U.S. without health insurance and effect significant other changes to the ways in which healthcare is organized, delivered and reimbursed. Included with the legislation is a limitation on physician-owned hospitals from expanding, unless the facility satisfies very narrow federal exceptions to this limitation. Therefore, if our tenants are physicians that own and refer to a hospital, the hospital would be limited in its operations and expansion potential, which may limit the hospital’s services and resulting revenues and may impact the owner’s ability to make rental payments. The legislation will become effective through a phased approach, beginning in 2010 and concluding in 2018. On June 28, 2012, the United States Supreme Court upheld the individual mandate under the healthcare reform legislation, although substantially limiting the legislation’s expansion of Medicaid. However, on December 22, 2017, the Tax Cuts and Jobs Act (the "Tax Act") was signed into law. The Tax Act repeals the individual mandate beginning in 2019. At this time, the effects of healthcare reform and its impact on our properties are not yet known, but could materially and adversely affect our business, financial condition, results of operations and ability to pay distributions to our stockholders.
See the risk factor entitled
"Reductions in reimbursement from third party payors, including Medicare and Medicaid, could
34
adversely affect the profitability of our tenants and hinder their ability to make rental payments to us"
above for information on legislation surrounding healthcare reform.
Risks Associated with Investments in the Data Center Property Sector
Our data center properties depend upon the technology industry and a reduction in the demand for technology-related real estate could adversely impact our ability to find or keep tenants for our data center properties, which would adversely affect our results of operations.
A portion of our portfolio of properties consists of data center properties. A decline in the technology industry or a decrease in the adoption of data center space for corporate enterprises could lead to a decrease in the demand for technology-related real estate, which may have a greater adverse effect on our business and financial condition than if we owned a portfolio with a more diversified tenant base. We are susceptible to adverse developments in the corporate and institutional data center and broader technology industries (such as business layoffs or downsizing, industry slowdowns, relocations of businesses, costs of complying with government regulations or increased regulation and other factors) and the technology-related real estate market (such as oversupply of or reduced demand for space). In addition, the rapid development of new technologies or the adoption of new industry standards could render many of our tenants’ current products and services obsolete or unmarketable and contribute to a downturn in their businesses, thereby increasing the likelihood that they default under their leases, become insolvent or file for bankruptcy.
Our data center properties may not be suitable for lease to certain data center, technology or office tenants without significant expenditures or renovations.
Because many of our data center properties will contain extensive tenant improvements installed at our tenants’ expense, they may be better suited for a specific corporate enterprise data center user or technology industry tenant and could require modification in order for us to re-lease vacant space to another corporate enterprise data center user or technology industry tenant. For the same reason, our properties also may not be suitable for lease to traditional office tenants without significant expenditures or renovations.
Our tenants may choose to develop new data centers or expand their existing data centers, which could result in the loss of one or more key tenants or reduce demand for our newly developed data centers.
Our larger tenants may choose to develop new data centers or expand any existing data centers of their own. In the event that any of our key tenants were to do so, it could result in a loss of business to us or put pressure on our pricing. If we lose a tenant, there is no guarantee that we would be able to replace that tenant at a competitive rate or at all.
Our data center infrastructure may become obsolete or less marketable and we may not be able to upgrade our power, cooling, security or connectivity systems cost-effectively or at all.
The markets for data centers, as well as the industries in which data center tenants operate, are characterized by rapidly changing technology, evolving industry standards, frequent new service introductions, shifting distribution channels and changing tenant demands. The data center infrastructure in some of the data centers that we have acquired or may acquire in the future may become obsolete or less marketable due to demand for new processes and/or technologies, including, without limitation: (i) new processes to deliver power to, or eliminate heat from, computer systems; (ii) demand for additional redundancy capacity; or (iii) new technology that permits lower levels of critical load and heat removal than our data centers are currently designed to provide. In addition, the systems that connect our data centers to the Internet and other external networks may become outdated, including with respect to latency, reliability and diversity of connectivity. When tenants demand new processes or technologies, we may not be able to upgrade our data centers on a cost effective basis, or at all, due to, among other things, increased expenses to us that cannot be passed on to the tenant or insufficient revenue to fund the necessary capital expenditures. The obsolescence of the power and cooling systems in such data centers and/or our inability to upgrade our data centers, including associated connectivity, could have a material negative impact on our business. Furthermore, potential future regulations that apply to industries we serve may require users in those industries to seek specific requirements from their data centers that we are unable to provide. These may include physical security regulations applicable to the defense industry and government contractors and privacy and security requirements applicable to the financial services and health care industries. Such regulations could have a material adverse effect on us. If our competitors offer data center space that our existing or potential data center users perceive to be superior to ours based on numerous factors, including power, security considerations, location or network connectivity, or if they offer rental rates below our or current market rates, we may lose existing or potential tenants, incur costs to improve our properties or be forced to reduce our rental rates.
35
We expect to incur mortgage indebtedness and other borrowing, which could adversely impact the value of our stockholders’ investment if the value of the property securing the debt falls or if we are forced to refinance the debt during adverse economic conditions.
We expect that in most instances, we will continue to acquire real properties by using either existing financing or borrowing new funds. In addition, we may incur mortgage debt and pledge all or some of our real properties as security for that debt to obtain funds to acquire additional real properties. We may borrow if we need funds to satisfy the REIT tax qualification requirement that we distribute at least 90% of our annual REIT taxable income, determined without regard to the dividends-paid deduction and excluding net capital gain, to our stockholders. We also may borrow if we otherwise deem it necessary or advisable to assure that we qualify, or maintain our qualification, as a REIT.
We believe that utilizing borrowing is consistent with our objective of maximizing the return to investors. There is no limitation on the amount we may borrow against any single improved property. Our charter provides that, until such time as shares of our common stock are listed on a national securities exchange or traded in the over-the-counter market, our borrowings may not exceed 300% of our total net assets as of the date of any borrowing (which is the maximum level of indebtedness permitted under the NASAA REIT Guidelines absent a satisfactory showing that a higher level is appropriate), which is generally expected to be approximately 75% of the cost of our investments; however, we may exceed that limit if approved by a majority of our independent directors and disclosed to stockholders in our next quarterly report following such borrowing along with justification for exceeding such limit. This charter limitation, however, does not apply to individual real estate assets or investments. In addition, our board of directors has adopted investment policies that prohibit us from borrowing, following the completion of our Offering, in excess of 50% of the greater of cost (before deducting depreciation or other non-cash reserves) or fair market value of our assets, unless borrowing a greater amount is approved by a majority of our independent directors and disclosed to stockholders in our next quarterly report along with justification for the excess; provided, however, that this policy limitation does not apply to individual real estate assets or investments. At the date of acquisition of each asset, we anticipate that the cost of investment for such asset will be substantially similar to its fair market value, which will enable us to comply with the limitations of the NASAA REIT Guidelines set forth in our charter. However, subsequent events, including changes in the fair market value of our assets, could result in our exceeding these limitations. We expect that from time to time during the period of our Offering, we will seek independent director approval of borrowings in excess of these limitations since we will then be in the process of raising our equity capital to acquire our portfolio. As a result, we expect that our debt levels will be higher until we have invested most of our capital, which may cause us to incur higher interest charges, make higher debt service payments or be subject to restrictive covenants.
If there is a shortfall between the cash flow from a property and the cash flow needed to service mortgage debt on a property, then the amount available for distributions to stockholders may be reduced. In addition, incurring mortgage debt increases the risk of loss since defaults on indebtedness secured by a property may result in lenders initiating foreclosure actions. In that case, we could lose the property securing the loan that is in default, thus reducing the value of our stockholders’ investment. For U.S. federal income tax purposes, a foreclosure of any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but would not receive any cash proceeds. In such event, we may be unable to pay the amount of distributions required in order to maintain our REIT status. We may give full or partial guarantees to lenders of mortgage debt to the entities that own our properties. When we provide a guaranty on behalf of an entity that owns one of our properties, we will be responsible to the lender for satisfaction of the debt if it is not paid by such entity. If any mortgages contain cross-collateralization or cross-default provisions, a default on a single property could affect multiple properties. If any of our properties are foreclosed upon due to a default, our ability to pay cash distributions to our stockholders will be adversely affected which could result in our losing our REIT status and would result in a decrease in the value of our stockholders’ investment.
Changes in the debt markets could have a material adverse impact on our earnings and financial condition.
The domestic and international commercial real estate debt markets are subject to volatility resulting in, from time to time, the tightening of underwriting standards by lenders and credit rating agencies, which results in lenders increasing the cost for debt financing. Should the overall cost of borrowings increase, either by increases in the index rates or by increases in lender spreads, we will need to factor such increases into the economics of future acquisitions. This may result in future acquisitions generating lower overall economic returns and potentially reducing future cash flow available for distribution. If these disruptions in the debt markets persist, our ability to borrow monies to finance the purchase of, or other activities related to, real estate assets will be negatively impacted. If we are unable to borrow monies on terms and conditions that we find acceptable, we likely will have to reduce the number of properties we can purchase, and the return on the properties we do purchase may be lower. In addition, we may find it difficult, costly or impossible to refinance indebtedness which is maturing.
36
In addition, the state of the debt markets could have an impact on the overall amount of capital invested in real estate, which may result in price or value decreases of real estate assets. Although this may benefit us for future acquisitions, it could negatively impact the current value of our existing assets.
High mortgage rates may make it difficult for us to finance or refinance properties, which could reduce the number of properties we can acquire and the amount of cash distributions we can make.
If we place mortgage debt on properties, we run the risk of being unable to refinance the properties when the loans come due, or of being unable to refinance on favorable terms. If interest rates are higher when the properties are refinanced, we may not be able to finance the properties and our income could be reduced. If any of these events occur, our cash flow would be reduced. This, in turn, would reduce cash available for distribution to our stockholders and may hinder our ability to raise more capital by issuing more stock or by borrowing more money.
Lenders may require us to enter into restrictive covenants relating to our operations, which could limit our ability to make distributions to our stockholders.
In connection with providing us financing, certain of our lenders have and may impose restrictions on us that affect our distribution, investment and operating policies and our ability to incur additional debt. Loan documents we have entered into and may continue to enter into may contain covenants that limit our ability to further mortgage the property, discontinue insurance coverage or replace our Advisor. These or other limitations may adversely affect our flexibility and our ability to achieve our investment and operating objectives. Additionally, such restrictions could make it difficult for us to satisfy the requirements necessary to maintain our qualification as a REIT for U.S. federal income tax purposes.
Increases in interest rates could increase the amount of our debt payments and adversely affect our ability to pay distributions to our stockholders.
As of
December 31, 2017
, we had $568.1 million of fixed interest rate principal debt outstanding, of which $347.7 million was fixed through interest rate swaps, and $120.0 million of variable rate principal debt outstanding. As of
December 31, 2017
, our weighted average interest rate was
4.19%
. Increases in interest rates would increase our interest costs, if we obtain additional variable rate debt, which could reduce our cash flows and our ability to pay distributions to stockholders. In addition, if we need to repay existing debt during periods of rising interest rates, we could be required to liquidate one or more of our investments in properties at times that may not permit realization of the maximum return on such investments.
We may invest in collateralized mortgage-backed securities, which may increase our exposure to credit and interest rate risk.
We may invest in collateralized mortgage-backed securities, or CMBS, which may increase our exposure to credit and interest rate risk. We have not adopted, and do not expect to adopt, any formal policies or procedures designed to manage risks associated with our investments in CMBS. In this context, credit risk is the risk that borrowers will default on the mortgages underlying the CMBS. We intend to manage this risk by investing in CMBS guaranteed by U.S. government agencies, such as the Government National Mortgage Association, or GNMA, or U.S. government sponsored enterprises, such as the Federal National Mortgage Association, or FNMA, or the Federal Home Loan Mortgage Corporation, or FHLMC. Interest rate risk occurs as prevailing market interest rates change relative to the current yield on the CMBS. For example, when interest rates fall, borrowers are more likely to prepay their existing mortgages to take advantage of the lower cost of financing. As prepayments occur, principal is returned to the holders of the CMBS sooner than expected, thereby lowering the effective yield on the investment. On the other hand, when interest rates rise, borrowers are more likely to maintain their existing mortgages. As a result, prepayments decrease, thereby extending the average maturity of the mortgages underlying the CMBS. We intend to manage interest rate risk by purchasing CMBS offered in tranches, or with sinking fund features, that are designed to match our investment objectives. If we are unable to manage these risks effectively, our results of operations, financial condition and ability to pay distributions to our stockholders will be adversely affected.
Any real estate debt security that we originate or purchase is subject to the risks of delinquency and foreclosure.
We may originate and purchase real estate debt securities, which are subject to risks of delinquency and foreclosure and risks of loss. Typically, we will not have recourse to the personal assets of our borrowers. The ability of a borrower to repay a real estate debt security secured by an income-producing property depends primarily upon the successful operation of the property, rather than upon the existence of independent income or assets of the borrower. If the net operating income of the property is reduced, the borrower’s ability to repay the real estate debt security may be impaired. A property’s net operating income can be affected by, among other things:
|
•
|
increased costs, added costs imposed by franchisors for improvements or operating changes required, from time to time, under the franchise agreements;
|
|
•
|
property management decisions;
|
37
|
•
|
property location and condition;
|
|
•
|
competition from comparable types of properties;
|
|
•
|
changes in specific industry segments;
|
|
•
|
declines in regional or local real estate values, or occupancy rates; and
|
|
•
|
increases in interest rates, real estate tax rates and other operating expenses.
|
We bear the risks of loss of principal to the extent of any deficiency between the value of the collateral and the principal and accrued interest of the real estate debt security, which could have a material adverse effect on our cash flow from operations and limit amounts available for distribution to our stockholders. In the event of the bankruptcy of a real estate debt security borrower, the real estate debt security to that borrower will be deemed to be collateralized only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by the bankruptcy court), and the lien securing the real estate debt security will be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under state law. Foreclosure of a real estate debt security can be an expensive and lengthy process that could have a substantial negative effect on our anticipated return on the foreclosed real estate debt security. We also may be forced to foreclose on certain properties, be unable to sell these properties and be forced to incur substantial expenses to improve operations at the property.
U.S. Federal Income Tax Risks
Failure to maintain our qualification as a REIT would adversely affect our operations and our ability to make distributions.
In order for us to maintain our qualification as a REIT, we must satisfy certain requirements set forth in the Code and Treasury Regulations and various factual matters and circumstances that are not entirely within our control. We intend to structure our activities in a manner designed to satisfy all of these requirements. However, if certain of our operations were to be recharacterized by the Internal Revenue Service, or IRS, such recharacterization could jeopardize our ability to satisfy all of the requirements for qualification as a REIT.
If we fail to maintain our qualification as a REIT for any taxable year and we do not qualify for certain statutory relief provisions, we will be subject to U.S. federal income tax on our taxable income at corporate rates. In addition, we would generally be disqualified from treatment as a REIT for the four taxable years following the year of losing our REIT status. Losing our REIT status would reduce our net earnings available for investment or distribution to stockholders because of the additional tax liability. In addition, distributions to stockholders would no longer qualify for the dividends-paid deduction, and we would no longer be required to make distributions. If this occurs, we might be required to borrow funds or liquidate some investments in order to pay the applicable tax. Our failure to qualify as a REIT would adversely affect the return of a stockholder's investment.
To maintain our qualification as a REIT, we must meet annual distribution requirements, which may result in us distributing amounts that may otherwise be used for our operations and which could result in our inability to acquire appropriate assets.
To maintain the favorable tax treatment afforded to REITs under the Code, we generally will be required each year to distribute to our stockholders at least 90% of our REIT taxable income determined without regard to the dividends-paid deduction and excluding net capital gain. To the extent that we do not distribute all of our net capital gains or distribute at least 90%, but less than 100%, of our REIT taxable income, as adjusted, we will have to pay tax on those amounts at regular ordinary and capital gains corporate tax rates. Furthermore, if we fail to distribute during each calendar year at least the sum of (a) 85% of our ordinary income for that year, (b) 95% of our capital gain net income for that year, and (c) any undistributed taxable income from prior periods, we would have to pay a 4% nondeductible excise tax on the excess of the required distribution over the sum of (a) the amounts that we actually distributed and (b) the amounts we retained and upon which we paid income tax at the corporate level. These requirements could cause us to distribute amounts that otherwise would be spent on investments in real estate assets, and it is possible that we might be required to borrow funds, possibly at unfavorable rates, or sell assets to fund these distributions. In addition, we could pay part of these required distributions in shares of our common stock, which would result in shareholders having tax liabilities from such distributions in excess of the cash they receive. The treatment of such taxable share distributions is not clear, and it is possible the taxable share distribution will not count towards our distribution requirement, in which case adverse consequences could apply. Although we intend to continue to make distributions sufficient to meet the annual distribution requirements and to avoid U.S. federal income and excise taxes, it is possible that we might not always be able to do so.
38
Our stockholders may have current tax liability on distributions they elect to reinvest in our common stock but would not receive cash from such distributions, and therefore our stockholders would need to use funds from another source to pay such tax liability.
If our stockholders participate in our distribution reinvestment plan, they will be deemed to have received, and for U.S. federal income tax purposes will be taxed on, the amount reinvested in common stock to the extent the amount reinvested was not a tax-free return of capital. As a result, unless stockholders are a tax-exempt entity, they may have to use funds from other sources to pay their tax liability on distributions reinvested in our shares.
Certain of our business activities are potentially subject to the prohibited transaction tax, which could reduce the return on our stockholders’ investment.
Our ability to dispose of a property during the first few years following its acquisition is restricted to a substantial extent as a result of our REIT status. Whether property is inventory or otherwise held primarily for sale to customers in the ordinary course of a trade or business depends on the particular facts and circumstances surrounding each property. Properties we own, directly or through any subsidiary entity, including our Operating Partnership, but generally excluding our taxable REIT subsidiaries, may, depending on how we conduct our operations, be treated as inventory or property held primarily for sale to customers in the ordinary course of a trade or business. Under applicable provisions of the Code regarding prohibited transactions by REITs, we would be subject to a 100% tax on any gain recognized on the sale or other disposition of any property (other than foreclosure property) that we own, directly or through any subsidiary entity, including our Operating Partnership, but generally excluding our taxable REIT subsidiaries, that is deemed to be inventory or property held primarily for sale to customers in the ordinary course of trade or business. Any taxes we pay would reduce our cash available for distribution to our stockholders. Our concern over paying the prohibited transactions tax may cause us to forego disposition opportunities that would otherwise be advantageous if we were not a REIT.
In certain circumstances, we may be subject to U.S. federal, state and local income taxes as a REIT, which would reduce our cash available for distribution to our stockholders.
Even if we maintain our qualification as a REIT, we may be subject to U.S. federal, state and local income taxes. For example, net income from the sale of properties that are "dealer" properties sold by a REIT (a "prohibited transaction" under the Code) will be subject to a 100% excise tax. We may not be able to make sufficient distributions to avoid excise taxes applicable to REITs. We also may decide to retain net capital gain we earn from the sale or other disposition of our property and pay income tax directly on such income. In that event, our stockholders would be treated as if they earned that income and paid the tax on it directly. However, stockholders that are tax-exempt, such as charities or qualified pension plans, would have no benefit from their deemed payment of such tax liability unless they file U.S. federal income tax returns and thereon seek a refund of such tax. Further, a 100% excise tax would be imposed on certain transactions between us and any potential taxable REIT subsidiaries that are not conducted on an arm’s-length basis. We also may be subject to state and local taxes on our income or property, either directly or at the level of our Operating Partnership or at the level of the other companies through which we indirectly own our assets. Any taxes we pay would reduce our cash available for distribution to our stockholders.
The use of taxable REIT subsidiaries, which may be required for REIT qualification purposes, would increase our overall tax liability and thereby reduce our cash available for distribution to our stockholders.
Some of our assets may need to be owned by, or operations may need to be conducted through, one or more taxable REIT subsidiaries. Any of our taxable REIT subsidiaries would be subject to U.S. federal, state and local income tax on its taxable income. The after-tax net income of our taxable REIT subsidiaries would be available for distribution to us. Further, we would incur a 100% excise tax on transactions with our taxable REIT subsidiaries that are not conducted on an arm’s-length basis. For example, to the extent that the rent paid by one of our taxable REIT subsidiaries exceeds an arm’s-length rental amount, such amount would be potentially subject to a 100% excise tax. While we intend that all transactions between us and our taxable REIT subsidiaries would be conducted on an arm’s-length basis, and therefore, any amounts paid by our taxable REIT subsidiaries to us would not be subject to the excise tax, no assurance can be given that no excise tax would arise from such transactions.
Complying with REIT requirements may force us to forgo and/or liquidate otherwise attractive investment opportunities.
To maintain our qualification as a REIT, we must ensure that we meet the REIT gross income tests annually and that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified real estate assets, including certain mortgage loans and certain kinds of mortgage-related securities. The remainder of our investment in securities (other than government securities, taxable REIT subsidiaries and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets can consist of the securities (other than government securities, taxable REIT subsidiaries, and qualified real estate assets) of any one issuer. For taxable years beginning after
December 31, 2017
, no more than 20% of the value of our total assets can be
39
represented by securities of one or more taxable REIT subsidiaries. If we fail to comply with these requirements at the end of any calendar quarter other than our first REIT calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate from our portfolio or not make otherwise attractive investments in order to maintain our qualification as a REIT. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.
If we fail to invest a sufficient amount of the net proceeds from selling our common stock in real estate assets within one year from the receipt of the proceeds, we could fail to qualify as a REIT.
Temporary investment of the net proceeds from sales of our common stock in short-term securities and income from such investment generally will allow us to satisfy various REIT income and asset requirements, but only during the one-year period beginning on the date we receive the net proceeds. If we are unable to invest a sufficient amount of the net proceeds from sales of our common stock in qualifying real estate assets within such one-year period, we could fail to satisfy one or more of the gross income or asset tests and/or we could be limited to investing all or a portion of any remaining funds in cash or cash equivalents. If we fail to satisfy any such income or asset test, unless we are entitled to relief under certain provisions of the Internal Revenue Code, we could fail to qualify as a REIT.
Recharacterization of sale-leaseback transactions may cause us to lose our REIT status, which would subject us to U.S. federal income tax at corporate rates, which would reduce the amounts available for distribution to our stockholders and threaten our ability to remain qualified as a REIT.
We have and may continue to purchase properties and lease them back to the sellers of such properties. While we will use our best efforts to structure any such sale-leaseback transaction such that the lease will be characterized as a true lease, thereby allowing us to be treated as the owner of the property for U.S. federal income tax purposes, the IRS could challenge such characterization. In the event that any such sale-leaseback is challenged and recharacterized as a financing transaction or loan for U.S. federal income tax purposes, deductions for depreciation and cost recovery relating to such property would be disallowed. If a sale-leaseback transaction were so recharacterized, we might fail to satisfy the REIT qualification asset tests or income tests and, consequently, lose our REIT status effective with the year of recharacterization. Alternatively, the amount of our REIT taxable income could be recalculated, which also might cause us to fail to meet the annual distribution requirement for a taxable year in the event we cannot make a sufficient deficiency dividend.
If our leases are not considered as true leases for U.S. federal income tax purposes, we would fail to qualify as a REIT.
To qualify as a REIT, we must satisfy two gross income tests, under which specified percentages of our gross income must be derived from certain sources, such as “rents from real property.” In order for rent paid to us to qualify as “rents from real property” for purposes of the REIT gross income tests, the leases must be respected as true leases for U.S. federal income tax purposes and not be treated as service contracts, joint ventures, or some other type of arrangement. If our leases are not respected as true leases for U.S. federal income tax purposes, we would fail to qualify as a REIT, which would materially adversely impact the value of an investment in our securities and in our ability to pay dividends to our stockholders.
The lease of our properties to a TRS is subject to special requirements.
Under the provisions of the REIT Investment Diversification and Empowerment Act of 2007 (“RIDEA”), we may lease certain “qualified health care properties” to a TRS (or a limited liability company of which a TRS is a member). The TRS in turn would contract with a third party operator to manage the health care operations at these properties. The rents paid by a TRS in this structure would be treated as qualifying rents from real property for purposes of the REIT requirements only if (i) they are paid pursuant to an arm’s-length lease of a qualified health care property and (ii) the operator qualifies as an “eligible independent contractor” with respect to the property. An operator will qualify as an eligible independent contractor if it meets certain ownership tests with respect to us, and if, at the time the operator enters into the property management agreement, the operator is actively engaged in the trade or business of operating qualified health care properties for any person who is not a related person to us or the TRS. If any of the above conditions were not satisfied, then the rents would not be considered income from a qualifying source for purposes of the REIT rules, which could cause us to incur penalty taxes or to fail to qualify as a REIT.
Legislative or regulatory action could adversely affect the returns to our investors.
In recent years, numerous legislative, judicial and administrative changes have been made in the provisions of U.S. federal income tax laws applicable to investments similar to an investment in shares of our common stock. Additional changes to the tax laws are likely to continue to occur, and we cannot assure you that any such changes will not adversely affect our taxation and our ability to continue to qualify as a REIT or the taxation of a stockholder. Any such changes could have an adverse effect on an investment in our shares or on the market value or the resale potential of our assets. Our stockholders are urged to consult with their tax advisor with respect to the impact of recent legislation on their investment in our shares and the
40
status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our shares.
Although REITs generally receive better tax treatment than entities taxed as regular corporations, it is possible that future legislation would result in a REIT having fewer tax advantages, and it could become more advantageous for a company that invests in real estate to elect to be treated for U.S. federal income tax purposes as a regular corporation. As a result, our charter provides our board of directors with the power, under certain circumstances, to revoke or otherwise terminate our REIT election and cause us to be taxed as a regular corporation, without the vote of our stockholders. Our board of directors has fiduciary duties to us and our stockholders and could only cause such changes in our tax treatment if it determines in good faith that such changes are in the best interests of our stockholders.
In addition, on December 22, 2017, the Tax Cuts and Jobs Act was signed into law. The Tax Cuts and Jobs Act makes significant changes to the U.S. federal income tax rules for taxation of individuals and businesses, generally effective for taxable years beginning after December 31, 2017. In addition to reducing corporate and individual tax rates, the Tax Cuts and Jobs Act eliminates or restricts various deductions. Most of the changes applicable to individuals are temporary and apply only to taxable years beginning after December 31, 2017 and before January 1, 2026. The Tax Cuts and Jobs Act makes numerous changes to the tax rules that do not affect the REIT qualification rules directly, but may otherwise affect us or our stockholders.
While the changes in the Tax Cuts and Jobs Act generally appear to be favorable with respect to REITs, the extensive changes to non-REIT provisions in the Internal Revenue Code may have unanticipated effects on us or our stockholders. Moreover, Congressional leaders have recognized that the process of adopting extensive tax legislation in a short amount of time without hearings and substantial time for review is likely to have led to drafting errors, issues needing clarification and unintended consequences that will have to be revisited in subsequent tax legislation. At this point, it is not clear if or when Congress will address these issues or when the IRS will issue administrative guidance on the changes made in the Tax Cuts and Jobs Act.
We urge you to consult with your own tax advisor with respect to the status of the Tax Cuts and Jobs Act and other legislative, regulatory or administrative developments and proposals and their potential effect on an investment in shares of our common stock.
Dividends payable by REITs generally do not qualify for reduced tax rates under current law.
The maximum U.S. federal income tax rate for certain qualified dividends payable to U.S. stockholders that are individuals, trusts and estates generally is 20%. Dividends payable by REITs, however, are generally not eligible for the reduced rates and therefore may be subject to a higher maximum U.S. federal income tax rate on ordinary income when paid to such stockholders. The more favorable rates applicable to regular corporate dividends under current law could cause investors who are individuals, trusts and estates or are otherwise sensitive to these lower rates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the stock of REITs, including our common stock.
If our Operating Partnership fails to maintain its status as a partnership, its income may be subject to taxation, which would reduce the cash available for distribution to our stockholders.
We intend to maintain the status of our Operating Partnership as a partnership for U.S. federal income tax purposes. However, if the IRS were to successfully challenge the status of our Operating Partnership as a partnership or disregarded entity for such purposes, it would be taxable as a corporation. In such event, this would reduce the amount of distributions that our Operating Partnership could make to us. This would also result in our losing REIT status, and becoming subject to a corporate level tax on our own income. This would substantially reduce our cash available to pay distributions and the yield on our stockholders’ investment. In addition, if any of the partnerships or limited liability companies through which our Operating Partnership owns its properties, in whole or in part, loses its characterization as a partnership and is otherwise not disregarded for U.S. federal income tax purposes, it would be subject to taxation as a corporation, thereby reducing distributions to our Operating Partnership. Such a recharacterization of an underlying property owner could also threaten our ability to maintain REIT status.
Foreign purchasers of our common stock may be subject to FIRPTA tax upon the sale of their shares or upon the payment of a capital gain dividend, which would reduce any gains they would otherwise have on their investment in our shares.
A foreign person disposing of a U.S. real property interest, including shares of a U.S. corporation whose assets consist principally of U.S. real property interests, is generally subject to the Foreign Investment in Real Property Tax Act of 1980, as amended, or FIRPTA, on the gain recognized on the disposition.
However, certain foreign pension plans and certain foreign publicly traded entities are exempt from FIRPTA withholding. Further, such FIRPTA tax does not apply to the disposition of stock in a REIT if the REIT is “domestically controlled.”
A REIT is "domestically controlled" if less than 50% of the REIT’s stock, by value, has been owned directly or indirectly by persons who are not qualifying U.S. persons during a continuous five-year period ending on the date of disposition or, if shorter, during the entire period of the REIT’s existence. We cannot assure
41
our stockholders that we will qualify as a "domestically controlled" REIT. If we were to fail to so qualify, any gain realized by foreign investors on a sale of our shares would be subject to FIRPTA tax, unless our shares were traded on an established securities market and the foreign investor did not at any time during a specified testing period directly or indirectly own more than 10% of the value of our outstanding common stock.
A foreign investor also may be subject to FIRPTA tax upon the payment of any capital gain dividend by us, which dividend is attributable to gain from sales or exchanges of U.S. real property interests. We encourage our stockholders to consult their own tax advisor to determine the tax consequences applicable to them if they are a foreign investor.
Employee Benefit Plan, IRA, and Other Tax-Exempt Investor Risks
We, and our stockholders that are employee benefit plans, IRAs, annuities described in Sections 403(a) or (b) of the Internal Revenue Code, Archer MSAs, health savings accounts, or Coverdell education savings accounts (referred to generally as Benefit Plans and IRAs) will be subject to risks relating specifically to our having such Benefit Plan and IRA stockholders, which risks are discussed below.
If a stockholder fails to meet the fiduciary and other standards under ERISA or the Internal Revenue Code as a result of an investment in shares of our common stock, such stockholder could be subject to civil penalties (and criminal penalties, if the failure is willful).
There are special considerations that apply to Benefit Plans or IRAs investing in shares of our common stock. If a stockholder is investing the assets of a Benefit Plan or IRA in us, he or she should consider:
|
•
|
whether the investment is consistent with the applicable provisions of ERISA and the Internal Revenue Code, or any other applicable governing authority in the case of a government plan;
|
|
•
|
whether the stockholder's investment is made in accordance with the documents and instruments governing his or her Benefit Plan or IRA, including any investment policy;
|
|
•
|
whether the stockholder's investment satisfies the prudence, diversification and other requirements of Sections 404(a)(1)(B) and 404(a)(1)(C) of ERISA;
|
|
•
|
whether the stockholder's investment will impair the liquidity needs to satisfy minimum and other distribution requirements of the Benefit Plan or IRA and tax withholding requirements that may be applicable;
|
|
•
|
whether the stockholder's investment will constitute a prohibited transaction under Section 406 of ERISA or Section 4975 of the Internal Revenue Code;
|
|
•
|
whether the stockholder's investment will produce or result in “unrelated business taxable income” or UBTI, as defined in Sections 511 through 514 of the Internal Revenue Code, to the Benefit Plan or IRA; and
|
|
•
|
the stockholder's need to value the assets of the Benefit Plan or IRA annually in accordance with ERISA and the Internal Revenue Code.
|
In addition to considering their fiduciary responsibilities under ERISA and the prohibited transaction rules of ERISA and the Internal Revenue Code, a Benefit Plan or IRA purchasing shares of our common stock should consider the effect of the plan asset regulations of the U.S. Department of Labor. To avoid our assets from being considered plan assets under those regulations, our charter prohibits “benefit plan investors” from owning 25.0% or more of the shares of our common stock prior to the time that the common stock qualifies as a class of publicly-offered securities, within the meaning of the ERISA plan asset regulations. However, we cannot assure our stockholders that those provisions in our charter will be effective in limiting benefit plan investor ownership to less than the 25.0% limit. For example, the limit could be unintentionally exceeded if a benefit plan investor misrepresents its status as a benefit plan. Even if our assets are not considered to be plan assets, a prohibited transaction could occur if we or any of our affiliates is a fiduciary (within the meaning of ERISA) with respect to a Benefit Plan or IRA purchasing shares of our common stock, and, therefore, in the event any such persons are fiduciaries (within the meaning of ERISA) of a stockholder's Benefit Plan or IRA, such stockholder should not purchase shares of our common stock unless an administrative or statutory exemption applies to his or her purchase.
The U.S. Department of Labor has issued a final regulation revising the definition of “fiduciary” and the scope of “investment advice” under ERISA, which may have a negative impact on our ability to raise capital.
On April 8, 2016, the U.S. Department of Labor issued a final regulation that substantially expands the range of activities that would be considered to be fiduciary investment advice under ERISA and the Internal Revenue Code, which may make it more difficult to qualify for a prohibited transaction exemption. This new regulation could have negative implications on our ability to raise capital from potential investors, including those investing through IRAs or other arrangements. Prior to the issuance of the new regulation, ERISA and the Internal Revenue Code broadly defined fiduciaries to include persons who give
42
investment advice for a fee, regardless of whether that fee is paid directly by the customer or by a third party. However, prior law required that advice must be given on a “regular basis” before a fiduciary standard would apply, and that a mutual agreement or understanding between the customer and the adviser that the advice would serve as a primary basis for the investment decision would also be required. Under the new regulation, a person is a fiduciary if the person receives compensation for providing advice (a “recommendation” or “communication that would reasonably be viewed as a suggestion that the recipient engage in or refrain from taking a particular course of action”) with the understanding it is based on the particular needs of the person being advised or that it is directed to a specific plan sponsor, plan participant, or IRA owner. Such decisions can include, but are not limited to, what assets to purchase or sell and (unlike under prior law) whether to rollover from an employment-based plan to an IRA. The fiduciary can be a broker, registered investment adviser or other type of adviser, some of which are subject to federal securities laws and some of which are not. The final regulation and the related exemptions were expected to become applicable for investment transactions on and after April 10, 2017. However, on February 3, 2017, the President asked for additional review of this regulation. In response, on March 2, 2017, the U.S. Department of Labor published a notice seeking public comments on, among other things, a proposal to adopt a 60-day delay of the April 10 applicability date of the final regulation. On April 7, 2017, the U.S. Department of Labor published a final rule extending the applicability date of the final regulation to June 9, 2017. However, certain requirements and exemptions under the regulation are implemented through a phased-in approach, and on November 27, 2017, the U.S. Department of Labor further delayed the implementation of certain requirements and exemptions. Therefore, certain requirements and exemptions will not take effect until July 1, 2019. On March 15, 2018, the U.S. Court of Appeals for the Fifth Circuit vacated the fiduciary rule in its entirety, including the expanded definition of "investment advice fiduciary" and the associated exemptions. Accordingly, the final regulation does not apply in the Fifth Circuit, which includes Texas, Louisiana and Mississippi. It is unclear what impact this ruling will have on the final regulation - the U.S. Department of Labor could, among other things, seek review by the U.S. Supreme Court or further revise or withdraw the final regulation.
The final regulation and the accompanying exemptions are complex and may be subject to further revision or withdrawal. Plan fiduciaries and the beneficial owners of IRAs are urged to consult with their own advisors regarding the impact of the final regulation on purchasing and holding shares of common stock in the Company. The final regulation could have negative implications on our ability to raise capital from potential investors, including those investing through IRAs.
If stockholders invest in our shares through an IRA or other retirement plan, they may be limited in their ability to withdraw required minimum distributions.
If stockholders establish a plan or account through which to invest in our common stock, federal law may require stockholders to withdraw required minimum distributions from such plan in the future. Our stock will be highly illiquid, and our share repurchase program only offers limited liquidity. If stockholders require liquidity, they may generally sell their shares, but such sale may be at a price less than the price at which the stockholder initially purchased his or her shares of our common stock. If a stockholder fails to withdraw required minimum distributions from his or her plan or account, the stockholder may be subject to certain taxes and tax penalties.
Specific rules apply to foreign, governmental and church plans.
As a general rule, certain employee benefit plans, including foreign pension plans, governmental plans established or maintained in the United States (as defined in Section 3(32) of ERISA), and certain church plans (as defined in Section 3(33) of ERISA), are not subject to ERISA’s requirements and are not “benefit plan investors” within the meaning of the plan asset regulations of The U.S. Department of Labor. Any such plan that is qualified and exempt from taxation under Sections 401(a) and 501(a) of the Internal Revenue Code may nonetheless be subject to the prohibited transaction rules set forth in Section 503 of the Internal Revenue Code and, under certain circumstances in the case of church plans, Section 4975 of the Internal Revenue Code. Also, some foreign plans and governmental plans may be subject to foreign, state, or local laws which are, to a material extent, similar to the provisions of ERISA or Section 4975 of the Internal Revenue Code. Each fiduciary of a plan subject to any such similar law should make its own determination as to the need for and the availability of any exemption relief.
Item 1B. Unresolved Staff Comments.
None.
43
Item 2. Properties.
Our principal executive offices are located at 4890 West Kennedy Blvd., Suite 650, Tampa, Florida 33609. We do not have an address separate from our Advisor or our Sponsor.
As of
December 31, 2017
, we owned a portfolio of
53
real estate investments, consisting of
70
properties, located in
37
MSAs and one µSA, comprising of approximately
5,190,000
rentable square feet of commercial space. As of
December 31, 2017
, 40 of our real estate investments were single-tenant commercial properties and 13 of our real estate investments were multi-tenant commercial properties. As of
December 31, 2017
,
97.7%
of our rentable square feet was leased, with a weighted average remaining lease term of
10.34
years.
Property Statistics
The following table shows the property statistics of our real estate portfolio as of
December 31, 2017
:
|
Real Estate Investments
|
MSA/µSA
|
Segment
|
Number of Properties
|
Date Acquired
|
Year Constructed
|
Year Renovated
|
Physical Occupancy
|
Gross Leased Area (Sq Ft)
|
Encumbrances, $ (in thousands)
(8)
|
|||||||||
|
Cy Fair Surgical Center
|
Houston-The Woodlands-Sugar Land, TX
|
Healthcare
|
1
|
07/31/2014
|
1993
|
N/A
|
100%
|
13,645
|
(1)
|
|||||||||
|
Mercy Healthcare Facility
|
Cincinnati, OH-KY-IN
|
Healthcare
|
1
|
10/29/2014
|
2001
|
N/A
|
100%
|
14,868
|
(1)
|
|||||||||
|
Winston-Salem, NC IMF
|
Winston-Salem, NC
|
Healthcare
|
1
|
12/17/2014
|
2004
|
N/A
|
100%
|
22,200
|
(1)
|
|||||||||
|
New England Sinai Medical Center
(2)
|
Boston-Cambridge-
Newton, MA-NH |
Healthcare
|
1
|
12/23/2014
|
1967/1973
|
1997
|
100%
|
180,744
|
(1)
|
|||||||||
|
Baylor Surgical Hospital at Fort Worth
|
Dallas-Fort Worth-Arlington, TX
|
Healthcare
|
1
|
12/31/2014
|
2014
|
N/A
|
100%
|
83,464
|
(1)
|
|||||||||
|
Baylor Surgical Hospital Integrated Medical Facility
|
Dallas-Fort Worth-Arlington, TX
|
Healthcare
|
1
|
12/31/2014
|
2014
|
N/A
|
87.31%
|
7,219
|
(1)
|
|||||||||
|
Winter Haven Healthcare Facility
|
Lakeland-Winter Haven, FL
|
Healthcare
|
1
|
01/27/2015
|
2009
|
N/A
|
100%
|
7,560
|
—
|
|||||||||
|
Heartland Rehabilitation Hospital
|
Kansas City, MO-KS
|
Healthcare
|
1
|
02/17/2015
|
2014
|
N/A
|
100%
|
54,568
|
(1)
|
|||||||||
|
Indianapolis Data Center
|
Indianapolis-Carmel-Anderson, IN
|
Data Center
|
1
|
04/01/2015
|
2000
|
2014
|
100%
|
43,724
|
(1)
|
|||||||||
|
Clarion IMF
|
Pittsburgh, PA
|
Healthcare
|
1
|
06/01/2015
|
2012
|
N/A
|
100%
|
33,000
|
(1)
|
|||||||||
|
Post Acute Webster Rehabilitation Hospital
|
Houston-The Woodlands-Sugar Land, TX
|
Healthcare
|
1
|
06/05/2015
|
2015
|
N/A
|
100%
|
53,514
|
(1)
|
|||||||||
|
Eagan Data Center
|
St. Cloud, MN
|
Data Center
|
1
|
06/29/2015
|
1998
|
2015
|
100%
|
87,402
|
(1)
|
|||||||||
|
Houston Surgical Hospital and LTACH
|
Houston-The Woodlands-Sugar Land, TX
|
Healthcare
|
1
|
06/30/2015
|
1950
|
2005/2008
|
100%
|
102,369
|
(1)
|
|||||||||
|
Kentucky Maine Ohio IMF Portfolio
|
(3)
|
Healthcare
|
5
|
07/22/2015
|
(3)
|
(3)
|
100%
|
293,628
|
(1)
|
|||||||||
|
Reading Surgical Hospital
|
Philadelphia-Camden-Wilmington, PA-NJ-DE-MD
|
Healthcare
|
1
|
07/24/2015
|
2007
|
N/A
|
100%
|
33,217
|
(1)
|
|||||||||
|
Post Acute Warm Springs Specialty Hospital of Luling
|
Austin-Round Rock, TX
|
Healthcare
|
1
|
07/30/2015
|
2002
|
N/A
|
100%
|
40,901
|
(1)
|
|||||||||
|
Minnetonka Data Center
|
Minneapolis-St. Paul-Bloomington, MN-WI
|
Data Center
|
1
|
08/28/2015
|
1985
|
N/A
|
100%
|
135,240
|
(1)
|
|||||||||
|
Nebraska Healthcare Facility
|
Omaha-Council Bluffs, NE-IA
|
Healthcare
|
1
|
10/14/2015
|
2014
|
N/A
|
100%
|
40,402
|
(1)
|
|||||||||
|
Heritage Park Portfolio
|
Sherman-Denison, TX
|
Healthcare
|
2
|
11/20/2015
|
(4)
|
(4)
|
100%
|
65,631
|
(1)
|
|||||||||
|
Baylor Surgery Center at Fort Worth
|
Dallas-Fort Worth-Arlington, TX
|
Healthcare
|
1
|
12/23/2015
|
1998
|
2007/2015
|
100%
|
36,800
|
(1)
|
|||||||||
|
HPI Portfolio
|
Oklahoma City, OK
|
Healthcare
|
9
|
(5)
|
(5)
|
(5)
|
100%
|
335,686
|
47,500 (5)
|
|||||||||
|
Waco Data Center
|
Waco, TX
|
Data Center
|
1
|
12/30/2015
|
1956
|
2009
|
100%
|
43,596
|
(1)
|
|||||||||
|
Alpharetta Data Center III
|
Atlanta-Sandy Springs-Roswell, GA
|
Data Center
|
1
|
02/02/2016
|
1999
|
N/A
|
100%
|
77,322
|
—
|
|||||||||
|
Flint Data Center
|
Flint, MI
|
Data Center
|
1
|
02/02/2016
|
1987
|
N/A
|
100%
|
32,500
|
(1)
|
|||||||||
|
Vibra Rehabilitation Hospital
|
Riverside-San Bernardino-Ontario, CA
|
Healthcare
|
1
|
03/01/2016
|
(6)
|
N/A
|
—%
|
—
|
—
|
|||||||||
|
Tennessee Data Center
|
Nashville-Davidson-Murfreesboro-Franklin, TN
|
Data Center
|
1
|
03/31/2016
|
2015
|
N/A
|
100%
|
71,726
|
(1)
|
|||||||||
|
Post Acute Las Vegas Rehabilitation Hospital
|
Las Vegas-Henderson-Paradise, NV
|
Healthcare
|
1
|
06/24/2016
|
2017
|
N/A
|
100%
|
56,220
|
—
|
|||||||||
|
Somerset Data Center
|
New York-Newark-Jersey City, NY-NJ-PA
|
Data Center
|
1
|
06/29/2016
|
1973
|
2006
|
100%
|
36,118
|
(1)
|
|||||||||
|
Integris Lakeside Women's Hospital
|
Oklahoma City, OK
|
Healthcare
|
1
|
06/30/2016
|
1997
|
2008
|
100%
|
62,857
|
(1)
|
|||||||||
|
AT&T Hawthorne Data Center
|
Los Angeles-Long Beach-Anaheim, CA
|
Data Center
|
1
|
09/27/2016
|
1963
|
1983/2001
|
100%
|
288,000
|
39,749
|
|||||||||
|
McLean Data Center Portfolio
|
Washington-Arlington-Alexandria, DC-VA-MD-WV
|
Data Center
|
2
|
10/17/2016
|
(7)
|
(7)
|
97.31%
|
127,796
|
51,000
|
|||||||||
|
Select Medical Rehabilitation Facility
|
Philadelphia-Camden-Wilmington, PA-NJ-DE-MD
|
Healthcare
|
1
|
11/01/2016
|
1995
|
N/A
|
100%
|
89,139
|
31,790
|
|||||||||
|
Andover Data Center II
|
Boston-Cambridge-Newton, MA-NH
|
Data Center
|
1
|
11/08/2016
|
2000
|
N/A
|
100%
|
153,000
|
(1)
|
|||||||||
44
|
Real Estate Investments
|
MSA/µSA
|
Segment
|
Number of Properties
|
Date Acquired
|
Year Constructed
|
Year Renovated
|
Physical Occupancy
|
Gross Leased Area (Sq Ft)
|
Encumbrances, $ (in thousands)
(8)
|
|||||||||
|
Grand Rapids Healthcare Facility
|
Grand Rapids-Wyoming, MI
|
Healthcare
|
1
|
12/07/2016
|
2008
|
N/A
|
92.68%
|
98,992
|
30,450
|
|||||||||
|
Corpus Christi Surgery Center
|
Corpus Christi, TX
|
Healthcare
|
1
|
12/22/2016
|
1992
|
N/A
|
100%
|
25,102
|
—
|
|||||||||
|
Chicago Data Center II
|
Chicago-Naperville-Elgin, IL-IN-WI
|
Data Center
|
1
|
12/28/2016
|
1987
|
2016
|
100%
|
115,352
|
(1)
|
|||||||||
|
Blythewood Data Center
|
Columbia, SC
|
Data Center
|
1
|
12/29/2016
|
1983
|
N/A
|
100%
|
64,637
|
(1)
|
|||||||||
|
Tempe Data Center
|
Phoenix-Mesa-Scottsdale, AZ
|
Data Center
|
1
|
01/26/2017
|
1977
|
1983/2008/2011
|
100%
|
44,244
|
(1)
|
|||||||||
|
Aurora Healthcare Facility
|
Chicago-Naperville-Elgin, IL-IN-WI
|
Healthcare
|
1
|
03/30/2017
|
2002
|
N/A
|
100%
|
24,722
|
(1)
|
|||||||||
|
Norwalk Data Center
|
Bridgeport-Stamford-Norwalk, CT
|
Data Center
|
1
|
03/30/2017
|
2013
|
N/A
|
100%
|
167,691
|
34,200
|
|||||||||
|
Texas Rehabilitation Hospital Portfolio
|
(9)
|
Healthcare
|
4
|
(9)
|
(9)
|
(9)
|
100%
|
214,468
|
50,400
|
|||||||||
|
Charlotte Data Center II
|
Charlotte-Concord-Gastonia, NC-SC
|
Data Center
|
1
|
05/15/2017
|
1989
|
2016
|
100%
|
52,924
|
(1)
|
|||||||||
|
250 Williams Atlanta Data Center
|
Atlanta-Sandy Springs-Roswell, GA
|
Data Center
|
1
|
06/15/2017
|
1989
|
2007
|
90.45%
|
900,590
|
116,200
|
|||||||||
|
Sunnyvale Data Center
|
San Jose-Sunnyvale-Santa Clara, CA
|
Data Center
|
1
|
06/28/2017
|
1992
|
1998
|
100%
|
76,573
|
(1)
|
|||||||||
|
Cincinnati Data Center
|
Cincinnati, OH-KY-IN
|
Data Center
|
1
|
06/30/2017
|
1985
|
2001
|
100%
|
69,826
|
(1)
|
|||||||||
|
Silverdale Healthcare Facility
|
Bremerton-Silverdale, WA
|
Healthcare
|
1
|
08/25/2017
|
2005
|
N/A
|
100%
|
26,127
|
(1)
|
|||||||||
|
Silverdale Healthcare Facility II
|
Bremerton-Silverdale, WA
|
Healthcare
|
1
|
09/20/2017
|
2007
|
N/A
|
100%
|
19,184
|
(1)
|
|||||||||
|
King of Prussia Data Center
|
Philadelphia-Camden-Wilmington, PA-NJ-DE-MD
|
Data Center
|
1
|
09/28/2017
|
1960
|
1997
|
100%
|
50,000
|
12,503
|
|||||||||
|
Tempe Data Center II
|
Phoenix-Mesa-Scottsdale, AZ
|
Data Center
|
1
|
09/29/2017
|
1998
|
N/A
|
100%
|
58,560
|
(1)
|
|||||||||
|
Houston Data Center
|
Houston-The Woodlands-Sugar Land, TX
|
Data Center
|
1
|
11/16/2017
|
2013
|
N/A
|
100%
|
103,200
|
48,607
|
|||||||||
|
Saginaw Healthcare Facility
|
Saginaw, MI
|
Healthcare
|
1
|
12/21/2017
|
2002
|
N/A
|
100%
|
87,843
|
(1)
|
|||||||||
|
Elgin Data Center
|
Chicago-Naperville-Elgin, IL-IN-WI
|
Data Center
|
1
|
12/22/2017
|
2000
|
N/A
|
84.45%
|
55,523
|
5,736
|
|||||||||
|
Oklahoma City Data Center
|
Oklahoma City, OK
|
Data Center
|
1
|
12/27/2017
|
2008/2016
|
N/A
|
100%
|
92,456
|
—
|
|||||||||
|
70
|
5,072,070
|
$468,135
|
||||||||||||||||
|
(1)
|
Property collateralized under the KeyBank Credit Facility. As of
December 31, 2017
, 48 commercial real estate properties were collateralized under the KeyBank Credit Facility and we had an outstanding principal balance of $220,000,000.
|
|
(2)
|
The New England Sinai Medical Center consists of two buildings.
|
|
(3)
|
The Kentucky Maine Ohio IMF Portfolio consists of the following five properties:
|
|
Property Description
|
MSA/µSA
|
Year Constructed
|
Year Renovated
|
|||
|
KMO IMF - Cincinnati I
|
Cincinnati, OH-KY-IN
|
1959
|
1970 & 2013
|
|||
|
KMO IMF - Cincinnati II
|
Cincinnati, OH-KY-IN
|
2014
|
N/A
|
|||
|
KMO IMF - Florence
|
Cincinnati, OH-KY-IN
|
2014
|
N/A
|
|||
|
KMO IMF - Augusta
|
Augusta-Waterville, ME (µSA)
|
2010
|
N/A
|
|||
|
KMO IMF - Oakland
|
Augusta-Waterville, ME (µSA)
|
2003
|
N/A
|
|||
|
(4)
|
The Heritage Park Portfolio consists of the following two properties:
|
|
Property Description
|
Year Constructed
|
Year Renovated
|
||
|
Heritage Park - Sherman I
|
2005
|
2010
|
||
|
Heritage Park - Sherman II
|
2005
|
N/A
|
||
45
|
(5)
|
The HPI Portfolio consists of the following nine properties:
|
|
Property Description
|
Date Acquired
|
Year Constructed
|
Year Renovated
|
Encumbrances (in thousands)
|
||||
|
HPI - Oklahoma City I
|
12/29/2015
|
1985
|
1998 & 2003
|
22,500
|
||||
|
HPI - Oklahoma City II
|
12/29/2015
|
1994
|
1999
|
(1)
|
||||
|
HPI - Edmond
|
01/20/2016
|
2002
|
N/A
|
(1)
|
||||
|
HPI - Oklahoma City III
|
01/27/2016
|
2007
|
N/A
|
(1)
|
||||
|
HPI - Oklahoma City IV
|
01/27/2016
|
2006
|
N/A
|
(1)
|
||||
|
HPI - Newcastle
|
02/03/2016
|
1995
|
1999
|
(1)
|
||||
|
HPI - Oklahoma City V
|
02/11/2016
|
2008
|
N/A
|
(1)
|
||||
|
HPI - Oklahoma City VI
|
03/07/2016
|
2007
|
N/A
|
(1)
|
||||
|
HPI - Oklahoma City VII
|
06/22/2016
|
2016
|
N/A
|
25,000
|
||||
|
(6)
|
As of December 31, 2017, the Vibra Rehabilitation Hospital was under construction.
|
|
(7)
|
The McLean Data Center Portfolio consists of the following two properties:
|
|
Property Description
|
Year Constructed
|
Year Renovated
|
||
|
McLean I
|
1966
|
1998
|
||
|
McLean II
|
1991
|
1998
|
||
|
(8)
|
Represents the initial loan amount for each property.
|
|
(9)
|
The Texas Rehabilitation Hospital Portfolio consists of the following four properties:
|
|
Property Description
|
MSA/µSA
|
Date Acquired
|
Year Constructed
|
Year Renovated
|
||||
|
Texas Rehab - Austin
|
Austin-Round Rock, TX
|
03/31/2017
|
2012
|
N/A
|
||||
|
Texas Rehab - Allen
|
Dallas-Fort Worth-Arlington, TX
|
03/31/2017
|
2007
|
N/A
|
||||
|
Texas Rehab - Beaumont
|
Beaumont-Port Arthur, TX
|
03/31/2017
|
1991
|
N/A
|
||||
|
Texas Rehab - San Antonio
|
San Antonio-New Braunfels, TX
|
06/29/2017
|
1985/1992
|
N/A
|
||||
We believe the properties are adequately covered by insurance and are suitable for their respective intended purposes. Real estate assets, other than land, are depreciated on a straight-line basis over each asset's useful life.
46
Leases
Although there are variations in the specific terms of the leases in our portfolio, the following is a summary of the general structure of our leases. Generally, the leases of our properties provide for initial terms ranging from 10 to 20 years. As of
December 31, 2017
, the weighted average remaining lease term of our properties was
10.34
years. The properties generally are leased under net leases pursuant to which the tenant bears responsibility for substantially all property costs and expenses associated with ongoing maintenance and operation, including utilities, property taxes and insurance. The leases at each individual property provide for annual rental payments (payable in monthly installments) for an average of $1,073,000 per year. Certain leases provide for fixed increases in rent. Generally, the property leases provide the tenant with one or more multi-year renewal options, subject to generally the same terms and conditions as the initial lease term.
The following table shows lease expirations of our real properties based on annualized contractual base rent as of
December 31, 2017
and for each of the next ten years ending December 31 and thereafter, as follows:
|
Year of Lease
Expiration |
Total Number
of Leases |
Gross
Leased Area (Sq Ft) |
Annualized Contractual
Base Rent (in thousands) (1) |
Percentage of
Annualized Contractual Base Rent |
|||||||||
|
2018
|
6
|
|
27,323
|
|
$
|
406
|
|
0.34
|
%
|
||||
|
2019
|
8
|
|
113,141
|
|
1,773
|
|
1.49
|
%
|
|||||
|
2020
|
5
|
|
35,707
|
|
840
|
|
0.70
|
%
|
|||||
|
2021
|
1
|
|
220,599
|
|
4,097
|
|
3.44
|
%
|
|||||
|
2022
|
7
|
|
326,385
|
|
6,334
|
|
5.31
|
%
|
|||||
|
2023
|
8
|
|
206,455
|
|
4,287
|
|
3.60
|
%
|
|||||
|
2024
|
8
|
|
298,351
|
|
7,120
|
|
5.97
|
%
|
|||||
|
2025
|
6
|
|
269,738
|
|
5,083
|
|
4.27
|
%
|
|||||
|
2026
|
12
|
|
538,168
|
|
11,148
|
|
9.35
|
%
|
|||||
|
2027
|
—
|
|
—
|
|
—
|
|
—
|
%
|
|||||
|
Thereafter
|
53
|
|
3,036,203
|
|
78,088
|
|
65.53
|
%
|
|||||
|
114
|
|
5,072,070
|
|
$
|
119,176
|
|
100.00
|
%
|
|||||
|
(1)
|
Annualized contractual base rent is based on contractual base rent from leases in effect as of
December 31, 2017
.
|
Indebtedness
For a discussion of our indebtedness, see
Note 8—"Notes Payable"
and
Note 9—"Credit Facility"
to the
consolidated
financial statements that are a part of this
Annual Report on Form 10-K
.
Item 3. Legal Proceedings.
We are not aware of any material pending legal proceedings to which we are a party or to which our properties are the subject.
Item 4. Mine Safety Disclosures.
Not applicable.
47
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
As of March 16, 2018, we had approximately
127.5 million
shares of common stock outstanding, held by a total of
27,031
stockholders of record. The number of stockholders is based on the records of DST Systems, Inc., who serves as our register and transfer agent. There is no established trading market for our common stock. Therefore, there is a risk that a stockholder may not be able to sell our stock at a time or price acceptable to the stockholder, or at all. Unless and until our shares are listed on a national securities exchange, we do not expect that a public market for the shares will develop. As of
December 31, 2017
, we offered Class A shares, Class I shares and Class T shares of common stock, in any combination, with a dollar value up to the maximum primary offering amount. Through September 30, 2017, the offering price for the shares in the primary offering was $10.078 per Class A share, $9.162 per Class I share and $9.649 per Class T share, and the offering price for shares sold pursuant to our DRIP was $9.07 per Class A share, $9.07 per Class I share and $9.07 per Class T share. Commencing on October 1, 2017, the offering price for the shares in the primary offering was $10.200 per Class A share, $9.273 per Class I share and $9.766 per Class T share, and the offering price for shares sold pursuant to our DRIP Offering was $9.18 per Class A share, $9.18 per Class I share and $9.18 per Class T share, which is equal to the most recent estimated per share net asset value of each of our Class A common stock, Class I common stock and Class T common stock, as determined by our board of directors on September 28, 2017, or the Estimated Per Share NAV. Pursuant to the terms of our charter, certain restrictions are imposed on the ownership and transfer of shares.
To assist the FINRA members and their associated persons that participated in our public offering of common stock, pursuant to NASD Conduct Rule 2340, we disclose in each annual report distributed to stockholders a per share estimated value of the shares, the method by which it was developed, and the date of the data used to develop the estimated value. In addition, our Advisor will prepare annual statements of estimated share values to assist fiduciaries of retirement plans subject to the annual reporting requirements of ERISA in the preparation of their reports relating to an investment in our shares. For these purposes, the Estimated Per Share NAV of our common shares was $9.18 as of
December 31, 2017
.
The Estimated Per Share NAV was approved by our board of directors, at the recommendation of the Audit Committee, on September 28, 2017. The Estimated Per Share NAV of each of our Class A, Class I and Class T common stock is based on the estimated value of our assets less the estimated value of our liabilities divided by the number of shares outstanding on a diluted basis, calculated as of June 30, 2017.
48
The Estimated Per Share NAV was determined after consultation with the Advisor and Robert A. Stanger & Co, Inc., an independent third-party valuation firm, the engagement of which was approved by the Audit Committee. The Audit Committee, pursuant to authority delegated by our board of directors, was responsible for the oversight of the valuation process, including the review and approval of the valuation process and methodology used to determine our Estimated Per Share NAV, the consistency of the valuation and appraisal methodologies with real estate industry standards and practices and the reasonableness of the assumptions used in the valuations and appraisals. The valuation was performed in accordance with the provisions of Practice Guideline 2013-01,
Valuations of Publicly Registered Non-Listed REITs
, issued by the Investment Program Association, or the IPA, in April 2013, in addition to SEC guidance. FINRA rules provide no guidance on the methodology an issuer must use to determine its estimated value per share. As with any valuation methodology, our independent valuation firm's methodology is based upon a number of estimates and assumptions that may not be accurate or complete. Different parties with different assumptions and estimates could derive a different estimated value per share, and these differences could be significant. The Estimated Per Share NAV is not audited and does not represent the fair value of our assets or liabilities according to accounting principles generally accepted in the United States of America, or GAAP. Accordingly, with respect to the estimated value per share, we can give no assurance that:
|
•
|
a stockholder would be able to resell his or her shares at the Estimated Per Share NAV;
|
|
•
|
stockholder would ultimately realize distributions per share equal to the Estimated Per Share NAV upon liquidation of our assets and settlement of our liabilities or a sale of the company;
|
|
•
|
our shares of common stock would trade at the Estimated Per Share NAV on a national securities exchange;
|
|
•
|
an independent third-party appraiser or other third-party valuation firm would agree with the Estimated Per Share NAV; or
|
|
•
|
the methodology used to estimate our value per share would be acceptable to FINRA or for compliance with ERISA reporting requirements.
|
Further, the value of our shares will fluctuate over time in response to developments related to individual assets in the portfolio and the management of those assets and in response to the real estate and finance markets. We expect to engage an independent valuation firm to update the Estimated Per Share NAV at least annually.
For a full description of the methodologies used to value our assets and liabilities in connection with the calculation of the Estimated Per Share NAV, see our Current Report on Form 8-K filed with the SEC on September 28, 2017.
Share Repurchase Program
Prior to the time, if any, that our shares are listed on a national securities exchange, our share repurchase program, as described below, may provide eligible stockholders with limited, interim liquidity by enabling them to sell shares back to us, subject to restrictions and applicable law. A stockholder must have beneficially held its Class A shares, Class I shares, Class T shares or Class T2 shares, as applicable, for at least one year prior to offering them for sale to us through our share repurchase program, unless the Class A shares, Class I shares, Class T shares or Class T2 shares, as applicable, are being repurchased in connection with a stockholder’s death, Qualifying Disability, or certain other exigent circumstances.
The Third Amended and Restated Share Repurchase Program became effective on February 20, 2018, the date that Post-Effective Amendment No. 1 to the Follow-On Registration Statement was declared effective by the SEC. The purpose of the Third Amended and Restated Share Repurchase Program was to incorporate Class T2 shares. Pursuant to the Third Amended and Restated Share Repurchase Program, the purchase price for shares repurchased under our share repurchase program is 100.0% of the most recent estimated value of the Class A common stock, Class I common stock, Class T common stock, or Class T2 common stock, as applicable (in each case, as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to our common stock). Our board of directors reserves the right, in its sole discretion, at any time and from time to time, to waive the one-year holding period requirement in the event of the death or Qualifying Disability of a stockholder, other involuntary exigent circumstances such as bankruptcy, or a mandatory distribution requirement under a stockholder’s IRA.
At any time the repurchase price is determined by any method other than the net asset value of the Class A shares, Class I shares, Class T shares, or Class T2 shares, as applicable, if we have sold property and have made one or more special distributions to our stockholders of all or a portion of the net proceeds from such sales, the per share repurchase price will be reduced by the net sale proceeds per share distributed to investors prior to the repurchase date. Our board of directors will, in its sole discretion, determine which distributions, if any, constitute a special distribution. While our board of directors does not have specific criteria for determining special distributions, we expect that special distributions will only occur upon the sale of a property and the subsequent distribution of the net sale proceeds.
49
Repurchases of shares of our common stock, when requested, are at our sole discretion and generally will be made monthly. Each stockholder whose repurchase request is granted will receive the repurchase amount within ten days after the end of the month in which we grant the repurchase request. Subject to certain limitations described in this Annual Report, we will also repurchase shares upon the request of the estate, heir or beneficiary of a deceased stockholder. We will limit the number of shares repurchased pursuant to our share repurchase program as follows: during any calendar year, we will not repurchase in excess of 5.0% of the number of shares of common stock outstanding on December 31
st
of the previous calendar year. As a result, some or all of a stockholders’ shares may not be repurchased.
Our sponsor, advisor, directors and their respective affiliates are prohibited from receiving a fee in connection with the share repurchase program. Affiliates of our advisors are eligible to have their shares repurchased on the same terms as other stockholders.
Funding for the share repurchase program will come exclusively from proceeds we receive from the sale of shares under our distribution reinvestment plan during the prior calendar year and other operating funds, if any, as our board of directors, in its sole discretion, may reserve for this purpose. We cannot guarantee that the funds set aside for the share repurchase program will be sufficient to accommodate all requests made each month. However, a stockholder may withdraw its request at any time or ask that we honor the request when funds are available.
If funds available for our share repurchase program are not sufficient to accommodate all requests, shares will be repurchased as follows: (i) first, pro rata as to repurchases upon the death or Qualifying Disability of a stockholder; (ii) next, pro rata as to repurchases to stockholders who demonstrate, in the discretion of our board of directors, another involuntary exigent circumstance, such as bankruptcy; (iii) next, pro rata as to repurchases to stockholders subject to a mandatory distribution requirement under such stockholder’s IRA; and (iv) finally, pro rata as to all other repurchase requests.
A stockholder or his or her estate, heir or beneficiary may present to us fewer than all of the shares then-owned for repurchase. Repurchase requests made (i) on behalf of a deceased stockholder or a stockholder with a Qualifying Disability; (ii) by a stockholder due to another involuntary exigent circumstance, such as bankruptcy, or (iii) by a stockholder, due to a mandatory distribution under such stockholder’s IRA, shall be made within 360 days of such event.
A stockholder who wishes to have shares repurchased must mail or deliver to us a written request on a form provided by us and executed by the stockholder, its trustee or authorized agent, which we must receive at least five business days prior to the end of the month in which the stockholder is requesting a repurchase of his or her shares. An estate, heir or beneficiary that wishes to have shares repurchased following the death of a stockholder must mail or deliver to us a written request on a form provided by us, including evidence acceptable to our board of directors of the death of the stockholder, and executed by the executor or executrix of the estate, the heir or beneficiary, or their trustee or authorized agent.
Unrepurchased shares may be passed to an estate, heir or beneficiary following the death of a stockholder. If the shares are to be repurchased under any conditions outlined herein, we will forward the documents necessary to effect the repurchase, including any signature guaranty we may require. Our share repurchase program provides stockholders only a limited ability to repurchase shares for cash until a secondary market develops for our shares, at which time the program would terminate. No such market presently exists, and we cannot assure stockholders that any market for their shares will ever develop.
In order for a disability to entitle a stockholder to the special repurchase terms described above, (a Qualifying Disability),(1) the stockholder would have to receive a determination of disability based upon a physical or mental condition or impairment arising after the date the stockholder acquired the shares to be repurchased, and (2) such determination of disability would have to be made by the governmental agency responsible for reviewing the disability retirement benefits that the stockholder could be eligible to receive (the applicable governmental agency). The applicable governmental agencies would be limited to the following: (i) if the stockholder paid Social Security taxes and, therefore, could be eligible to receive Social Security disability benefits, then the applicable governmental agency would be the Social Security Administration or the agency charged with responsibility for administering Social Security disability benefits at that time if other than the Social Security Administration; (ii) if the stockholder did not pay Social Security benefits and, therefore, could not be eligible to receive Social Security disability benefits, but the stockholder could be eligible to receive disability benefits under the Civil Service Retirement System (“CSRS”), then the applicable governmental agency would be the U.S. Office of Personnel Management or the agency charged with responsibility for administering CSRS benefits at that time if other than the Office of Personnel Management; or (iii) if the stockholder did not pay Social Security taxes and, therefore, could not be eligible to receive Social Security benefits but suffered a disability that resulted in the stockholder’s discharge from military service under conditions that were other than dishonorable and, therefore, could be eligible to receive military disability benefits, then the applicable governmental agency would be the Department of Veterans Affairs or the agency charged with the responsibility for administering military disability benefits at that time if other than the Department of Veterans Affairs. Disability determinations by governmental agencies for purposes other than those listed above, including but not limited to worker’s compensation insurance, administration or enforcement of the Rehabilitation Act or Americans with Disabilities Act, or waiver of insurance premiums would not entitle a stockholder to the special repurchase terms described above. Repurchase requests
50
following an award by the applicable governmental agency of disability benefits would have to be accompanied by: (1) the investor’s initial application for disability benefits and (2) a Social Security Administration Notice of Award, a U.S. Office of Personnel Management determination of disability under CSRS, a Veteran’s Administration record of disability-related discharge or such other documentation issued by the applicable governmental agency that we would deem acceptable and would demonstrate an award of the disability benefits.
We understand that the following disabilities do not entitle a worker to Social Security disability benefits:
|
•
|
disabilities occurring after the legal retirement age; and
|
|
•
|
disabilities that do not render a worker incapable of performing substantial gainful activity.
|
Therefore, such disabilities would not qualify for the special repurchase terms, except in the limited circumstances when the investor would be awarded disability benefits by the other applicable governmental agencies described above.
Shares we purchase under our share repurchase program will have the status of authorized but unissued shares. Shares we acquire through the share repurchase program will not be reissued unless they are first registered with the SEC under the Securities Act and under appropriate state securities laws or otherwise issued in compliance with such laws.
Our board of directors, in its sole discretion, may amend, suspend, reduce, terminate or otherwise change our share repurchase program upon 30 days’ prior notice to our stockholders for any reason it deems appropriate. Because we only repurchase shares on a monthly basis, depending upon when during the month our board of directors makes this determination, it is possible that a stockholder would not have any additional opportunities to have his or her shares repurchased under the prior terms of the program, or at all, upon receipt of the notice. We will notify our stockholders of such developments (1) in a Current Report on Form 8- K, (2) in an annual or quarterly report, or (3) by means of a separate mailing to stockholders. During this Offering, we would also include this information in a prospectus supplement to the registration statement, as then required under federal securities laws.
During the year ended
December 31, 2017
, we received valid repurchase requests relating to
1,880,820
Class A shares, Class T shares and Class I shares of common stock (1,793,424 Class A shares, 81,939 Class T shares and 5,457 Class I shares), which were redeemed in full for an aggregate of approximately
$17,159,000
(an average of
$9.12
per share) under our share repurchase program. During the year ended
December 31, 2016
, we received valid repurchase requests relating to 333,194 Class A shares, which were redeemed in full for an aggregate of approximately $3,114,000 (an average of $9.35 per share) under our share repurchase program. Neither shares of Class T common stock, nor shares of Class I common stock were requested to be, or were repurchased during the year ended
December 31, 2016
.
During the
three months
ended
December 31, 2017
, we fulfilled the following repurchase requests pursuant to our share repurchase program:
|
Period
|
Total Number of
Shares Repurchased |
Average
Price Paid per Share |
Total Numbers of Shares
Purchased as Part of Publicly Announced Plans and Programs |
Approximate Dollar Value
of Shares Available that may yet be Repurchased under the Program |
||||||||||
|
10/01/2017 - 10/31/2017
|
429,484
|
|
$
|
9.18
|
|
429,484
|
|
$
|
—
|
|
||||
|
11/01/2017 - 11/30/2017
|
211,438
|
|
$
|
9.18
|
|
211,438
|
|
$
|
—
|
|
||||
|
12/01/2017 - 12/31/2017
|
273,288
|
|
$
|
9.18
|
|
273,288
|
|
$
|
—
|
|
||||
|
Total
|
914,210
|
|
914,210
|
|
||||||||||
During the
three months
ended
December 31, 2017
, we repurchased approximately
$8,392,000
of Class A shares, Class T shares and Class I shares of common stock, which represented all repurchase requests received in good order and eligible for repurchase through the
December 31, 2017
repurchase date.
Stockholders
As of
March 16, 2018
, we had approximately
81,988,000
shares of Class A common stock,
8,146,000
shares of Class I common stock,
37,365,000
shares of Class T common stock and no shares of Class T2 common stock outstanding held by
27,031
stockholders of record.
Distributions
We are taxed and qualify as a REIT for federal income tax purposes. As a REIT, we make distributions each taxable year equal to at least 90% of our REIT taxable income (computed without regard to the dividends paid deduction and excluding capital gains). One of our primary goals is to continue to pay monthly distributions to our stockholders. For the
year
ended
51
December 31, 2017
, we paid aggregate distributions of $
61.3 million
to Class A, Class I and Class T stockholders (
$29.0 million
in cash and
$32.3 million
reinvested in shares of our common stock pursuant to the DRIP). For the
year
ended
December 31, 2016
, we paid aggregate distributions of $40.6 million to Class A and Class T stockholders ($17.7 million in cash and $22.9 million reinvested in shares of our common stock pursuant to the DRIP).
Use of Public Offering Proceeds
We commenced our Initial Offering, consisting of $2,250,000,000 of shares in our primary offering and up to $100,000,000 of shares pursuant to our DRIP on May 29, 2014. We ceased offering shares of common stock pursuant to our Initial Offering on November 24, 2017. On October 13, 2017, we registered 10,893,246 shares of common stock under the DRIP pursuant to the DRIP Registration Statement for a price per share of $9.18 per Class A share, Class I share and Class T share for a proposed maximum offering price of $100,000,000 in shares of common stock. On December 6, 2017, we filed a post-effective amendment to our DRIP Registration Statement to register 10,893,246 shares of Class A common stock, Class I common stock, Class T common stock and Class T2 common stock at $9.18 per share. On November 27, 2017, our follow-on offering of up to $1,000,000,000 in shares of common stock was declared effective by the SEC. Shares of common stock in our Offering are being publicly offered on a "best efforts" basis. During the year ended
December 31, 2017
, we were offering three classes of shares of common stock, Class A shares, Class I shares and Class T shares, in any combination with a dollar value up to the maximum offering amount. Through September 30, 2017, the offering price for the shares in the primary offering was $10.078 per Class A share, $9.162 per Class I share and $9.649 per Class T share and the purchase price for shares in our DRIP was $9.07 per Class A share, $9.07 per Class I share and $9.07 per Class T share. As a result of our board of directors' determination of the Estimated Per Share NAV, our board of directors approved the revised primary offering prices of $10.200 per Class A share, $9.273 per Class I share and $9.766 per Class T share and revised DRIP offering prices of $9.18 per Class A share, $9.18 per Class I share and $9.18 per Class T share, effective October 1, 2017.
As of
December 31, 2017
, we had issued approximately
126.6 million
shares of our Class A, Class I and Class T common stock in our Offerings for gross proceeds of approximately
$1,237.6 million
, of which we paid
$91.9 million
in selling commissions and dealer manager fees, approximately
$23.4 million
in organization and offering costs and approximately $32.8 million in acquisition fees to our Advisor or its affiliates. We have excluded the distribution and servicing fee from the above information, as we pay the distribution and servicing fee from cash flows provided by operations or, if our cash flow from operations is not sufficient to pay the distribution and servicing fee, from borrowings in anticipation of future cash flow.
With the net offering proceeds and associated borrowings, we acquired
$1.6 billion
in real estate investments as of
December 31, 2017
. In addition, we invested
$42.0 million
in expenditures for capital improvements related to certain real estate investments.
As of
December 31, 2017
, approximately
$0.2 million
remained payable to our Dealer Manager and our Advisor or its affiliates for costs related to our Offerings, excluding distribution and servicing fees.
52
Item 6. Selected Financial Data.
The following should be read in conjunction with Item 1A. “Risk Factors” and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K and our
consolidated
financial statements and the notes thereto. Our historical results are not necessarily indicative of results for any future period.
The selected financial data presented below was derived from our
consolidated
financial statements (amounts in thousands, except share and per share data):
|
As of and for the Year Ended
December 31, |
As of and for the Period from January 11, 2013 (Date of Inception) to December 31,
|
|||||||||||||||||||
|
Selected Financial Data
|
2017
|
2016
|
2015
|
2014
|
2013
|
|||||||||||||||
|
Balance Sheet Data:
|
||||||||||||||||||||
|
Total real estate, net
|
$
|
1,505,405
|
|
$
|
897,000
|
|
$
|
410,514
|
|
$
|
82,615
|
|
$
|
—
|
|
|||||
|
Cash and cash equivalents
|
$
|
74,803
|
|
$
|
50,446
|
|
$
|
31,262
|
|
$
|
3,894
|
|
$
|
200
|
|
|||||
|
Acquired intangible assets, net
|
$
|
150,554
|
|
$
|
98,053
|
|
$
|
54,633
|
|
$
|
6,442
|
|
$
|
—
|
|
|||||
|
Total assets
|
$
|
1,777,944
|
|
$
|
1,070,038
|
|
$
|
506,627
|
|
$
|
97,866
|
|
$
|
200
|
|
|||||
|
Notes payable, net
|
$
|
463,742
|
|
$
|
151,045
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|||||
|
Credit facility, net
|
$
|
219,399
|
|
$
|
219,124
|
|
$
|
89,897
|
|
$
|
37,500
|
|
$
|
—
|
|
|||||
|
Total liabilities
|
$
|
787,393
|
|
$
|
401,610
|
|
$
|
106,291
|
|
$
|
40,761
|
|
$
|
—
|
|
|||||
|
Total equity
|
$
|
990,551
|
|
$
|
668,428
|
|
$
|
400,336
|
|
$
|
57,105
|
|
$
|
200
|
|
|||||
|
Operating Data:
|
||||||||||||||||||||
|
Total revenue
|
$
|
125,095
|
|
$
|
56,431
|
|
$
|
21,286
|
|
$
|
337
|
|
$
|
—
|
|
|||||
|
Rental and parking expenses
|
$
|
26,096
|
|
$
|
8,164
|
|
$
|
2,836
|
|
$
|
51
|
|
$
|
—
|
|
|||||
|
Acquisition related expenses
|
$
|
—
|
|
$
|
5,339
|
|
$
|
10,250
|
|
$
|
1,820
|
|
$
|
—
|
|
|||||
|
Depreciation and amortization
|
$
|
41,133
|
|
$
|
19,211
|
|
$
|
7,053
|
|
$
|
185
|
|
$
|
—
|
|
|||||
|
Income (loss) from operations
|
$
|
43,834
|
|
$
|
15,687
|
|
$
|
(2,881
|
)
|
$
|
(2,142
|
)
|
$
|
—
|
|
|||||
|
Net income (loss) attributable to common stockholders
|
$
|
21,279
|
|
$
|
11,297
|
|
$
|
(4,767
|
)
|
$
|
(2,294
|
)
|
$
|
—
|
|
|||||
|
Funds from operations attributable to common stockholders
(1)
|
$
|
62,412
|
|
$
|
30,508
|
|
$
|
2,286
|
|
$
|
(2,109
|
)
|
$
|
—
|
|
|||||
|
Modified funds from operations attributable to common stockholders
(1)
|
$
|
49,941
|
|
$
|
28,940
|
|
$
|
10,015
|
|
$
|
(296
|
)
|
$
|
—
|
|
|||||
|
Per Share Data:
|
||||||||||||||||||||
|
Net income (loss) per common share attributable to common stockholders:
|
||||||||||||||||||||
|
Basic
|
$
|
0.21
|
|
$
|
0.17
|
|
$
|
(0.17
|
)
|
$
|
(1.86
|
)
|
$
|
—
|
|
|||||
|
Diluted
|
$
|
0.21
|
|
$
|
0.17
|
|
$
|
(0.17
|
)
|
$
|
(1.86
|
)
|
$
|
—
|
|
|||||
|
Distributions declared for common stock
|
$
|
63,488
|
|
$
|
42,336
|
|
$
|
18,245
|
|
$
|
755
|
|
$
|
—
|
|
|||||
|
Distributions declared per common share
|
$
|
0.62
|
|
$
|
0.63
|
|
$
|
0.64
|
|
$
|
0.61
|
|
$
|
—
|
|
|||||
|
Weighted average number of common shares outstanding:
|
||||||||||||||||||||
|
Basic
|
101,714,148
|
|
66,991,294
|
|
28,658,495
|
|
1,233,715
|
|
—
|
|
||||||||||
|
Diluted
|
101,731,944
|
|
67,007,124
|
|
28,658,495
|
|
1,233,715
|
|
—
|
|
||||||||||
|
Cash Flow Data:
|
||||||||||||||||||||
|
Net cash provided by (used in) operating activities
|
$
|
51,827
|
|
$
|
24,975
|
|
$
|
3,290
|
|
$
|
(1,705
|
)
|
$
|
—
|
|
|||||
|
Net cash used in investing activities
|
$
|
(636,693
|
)
|
$
|
(543,547
|
)
|
$
|
(375,528
|
)
|
$
|
(92,513
|
)
|
$
|
—
|
|
|||||
|
Net cash provided by financing activities
|
$
|
613,704
|
|
$
|
542,292
|
|
$
|
398,811
|
|
$
|
97,712
|
|
$
|
200
|
|
|||||
|
(1)
|
Refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Funds from Operations and Modified Funds from Operations” for a discussion of our funds from operations and modified
|
53
funds from operations and for a reconciliation on these non-GAAP financial measures to net income (loss) attributable to common stockholders.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with Item 6. “Selected Financial Data” and our
consolidated
financial statements and the notes thereto and the other financial information appearing elsewhere in this
Annual Report on Form 10-K
. This discussion contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of various factors, including those discussed below and elsewhere in this report, particularly under “Risk Factors” and “Forward-Looking Statements.” All forward-looking statements in this document are based on information available to us as of the date hereof, and we assume no obligation to update any such forward-looking statements.
Overview
We were formed on January 11, 2013 under the laws of Maryland to acquire and operate a diversified portfolio of income-producing commercial real estate with a focus on data centers and healthcare properties, preferably with long-term net leases to creditworthy tenants, as well as to make real estate-related investments that relate to such property types.
We commenced our initial public offering of $2,350,000,000 of shares of our common stock, or our Initial Offering, consisting of $2,250,000,000 of shares in our primary offering and up to $100,000,000 of shares pursuant to our distribution reinvestment plan, or DRIP, on May 29, 2014. We ceased offering shares of common stock pursuant to our Initial Offering on November 24, 2017. At the completion of our Initial Offering, we had accepted investors subscriptions for and issued approximately
125,095,000
shares of Class A, Class I and Class T common stock, including shares of common stock issued pursuant to our DRIP resulting in gross proceeds of
$1,223,803,000
, before selling commissions and dealer manager fees of approximately
$91,503,000
.
On November 27, 2017, our follow-on offering, or our Offering, of up to $1,000,000,000 in shares of Class A common stock, Class I common stock, and Class T common stock pursuant to a registration statement on Form S-11, or the Follow-On Registration Statement, was declared effective by the SEC.
On September 28, 2017, our board of directors, at the recommendation of the audit committee, which is comprised solely of independent directors, unanimously approved and established an Estimated Per Share NAV of $9.18 as of June 30, 2017 of each of our Class A common stock, Class I common stock and Class T common stock for purposes of assisting broker-dealers participating in the Initial Offering and the Offering in meeting their customer account statement reporting obligations under National Association of Securities Dealers Conduct Rule 2340. As a result of our board of directors' determination of the Estimated Per Share NAV, our board of directors approved the revised primary offering prices of $10.200 per Class A share, $9.273 per Class I share, and $9.766 per Class T share, effective October 1, 2017.
Further, our board of directors approved $9.18 as the per share purchase price of Class A shares, Class I shares and Class T shares pursuant to the DRIP, effective October 1, 2017. The Estimated Per Share NAV is not subject to audit by our independent registered public accounting firm. We intend to publish an updated estimated NAV per share on at least an annual basis.
On October 13, 2017, we registered 10,893,246 shares of common stock under the DRIP pursuant to a registration statement on Form S-3, or the DRIP Registration Statement, for a price per share of $9.18 per Class A share, Class I share and Class T share for a proposed maximum offering price of $100,000,000 in shares of common stock, or the DRIP Offering. The DRIP Registration Statement was automatically effective with the SEC upon filing and we commenced offering shares of common stock pursuant to the DRIP Registration Statement on December 1, 2017. On December 6, 2017, we filed a post-effective amendment to our DRIP Registration Statement to register shares of Class T2 common stock at $9.18 per share.
On June 2, 2017, we filed Articles Supplementary to the Second Articles of Amendment and Restatement with the State Department of Assessments and Taxation of Maryland reclassifying a portion of our Class A common stock, Class I common stock and Class T common stock as Class T2 common stock. On December 6, 2017, we filed Post-Effective Amendment No. 1 to our Registration Statement on Form S-11 to register Class T2 shares of common stock, which was declared effective by the SEC on February 20, 2018.
We ceased offering shares of Class T common stock in our Offering on March 14, 2018. As of March 15, 2018, we are offering, in any combination with a dollar value up to the maximum offering amount, shares of Class A common stock at a price of $10.200 per share, shares of Class I common stock at a price of $9.273 per share, and shares of Class T2 common stock at a price of $9.714 per share. The offering prices are based on the most recent estimated per share net asset value, or Estimated Per Share NAV, of $9.18 of each of our Class A common stock, Class I common stock and Class T common stock, and any
54
applicable per share upfront selling commissions and dealer manager fees. We refer to the "Offering", "Initial Offering" and "DRIP Offering" collectively as the "Offerings".
Substantially all of our operations are conducted through our Operating Partnership. We are externally advised by our Advisor, which is our affiliate, pursuant to an advisory agreement between us and our Advisor. Our Advisor supervises and manages our day-to-day operations and selects the properties and real estate-related investments we acquire, subject to the oversight and approval of our board of directors. Our Advisor also provides marketing, sales and client services related to real estate on our behalf. Our Advisor engages affiliated entities to provide various services to us. Our Advisor is managed by, and is a subsidiary of, our sponsor, Carter Validus REIT Management Company II, LLC, or our Sponsor. We have no paid employees and we rely on our Advisor to provide substantially all of our services.
Carter Validus Real Estate Management Services II, LLC, or our Property Manager, a wholly-owned subsidiary of our Sponsor, serves as our property manager. Our Advisor and our Property Manager received, and will continue to receive, fees during the acquisition and operational stages and our Advisor may be eligible to receive fees during the liquidation stage of the Company. SC Distributors, LLC, an affiliate of the Advisor, or the Dealer Manager, serves as the dealer manager of the Initial Offering. The Dealer Manager has received, and will continue to receive, fees for services related to our Initial Offering and Offering.
We currently operate through two reportable segments – commercial real estate investments in data centers and healthcare. As of
December 31, 2017
, we had purchased
53
real estate investments, consisting of
70
properties, comprising approximately
5,190,000
of gross rental square feet for an aggregate purchase price of approximately
$1,611,055,000
.
Critical Accounting Policies
Our critical accounting policies are more fully described in
Note 2—"Summary of Significant Accounting Policies,"
or Note 2, of the
consolidated
financial statements that are part of this
Annual Report on Form 10-K
. As disclosed in Note 2, the preparation of
consolidated
financial statements in conformity with GAAP requires management to make estimates and assumptions about future events that affect the amounts reported in the
consolidated
financial statements and accompanying notes. Actual results could differ significantly from those estimates. We believe that the following discussion addresses the most critical accounting policies, which are those that are most important to the portrayal of the Company’s financial condition and results of operations and require management’s most difficult, subjective and complex judgments.
Investment in Real Estate
Real estate costs related to the acquisition, development, construction and improvement of properties are capitalized. Repair and maintenance costs are expensed as incurred and significant replacements and betterments are capitalized. Repair and maintenance costs include all costs that do not extend the useful life of the real estate asset. We consider the period of future benefit of an asset in determining the appropriate useful life. Real estate assets, other than land, are depreciated or amortized on a straight-line basis over each asset’s useful life. We anticipate the estimated useful lives of our assets by class as follows:
|
Buildings and improvements
|
15 – 40 years
|
|
|
Tenant improvements
|
Shorter of lease term or expected useful life
|
|
|
Furniture, fixtures, and equipment
|
3 – 10 years
|
|
We continually monitor events and changes in circumstances that could indicate that the carrying amounts of our real estate and related intangible assets may not be recoverable. When indicators of potential impairment suggest that the carrying value of real estate and related intangible assets may not be recoverable, we assess the recoverability of the assets by estimating whether we will recover the carrying value of such assets through their undiscounted future cash flows and eventual disposition. If, based on this analysis, we do not believe that we will be able to recover the carrying value of the asset, we record an impairment loss to the extent that the carrying value exceeds the estimated fair value of the asset. No impairment indicators have been identified and no impairment losses were recorded during the year ended
December 31, 2017
.
When developing estimates of expected future cash flows, we make certain assumptions regarding future market rental income amounts subsequent to the expiration of current lease arrangements, property operating expenses, terminal capitalization and discount rates, the number of months it takes to re-lease the property, required tenant improvements and the number of years the property will be held for investment. The use of alternative assumptions in the future cash flow analysis could result in a different determination of the property’s future cash flows and a different conclusion regarding the existence of an impairment, the extent of such loss, if any, as well as the carrying value of the real estate and related assets.
55
Purchase Price Allocation
Upon the acquisition of real properties, we evaluate whether the acquisition is a business combination or an asset acquisition. For both business combinations and asset acquisitions we allocate the purchase price of properties to acquired tangible assets, consisting of land, buildings and improvements, and acquired intangible assets and liabilities, consisting of the value of above-market and below-market leases and the value of in-place leases. For asset acquisitions, we capitalize transaction costs and allocate the purchase price using a relative fair value method allocating all accumulated costs. For business combinations, we expense transaction costs associated as incurred and allocates the purchase price based on the estimated fair value of each separately identifiable asset and liability.
The fair values of the tangible assets of an acquired property (which includes land, buildings and improvements) are determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land and buildings and improvements based on our determination of the relative fair value of these assets. Management determines the as-if-vacant fair value of a property using methods similar to those used by independent appraisers. Factors considered by management in performing these analyses include an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases, including leasing commissions and other related costs. In estimating carrying costs, management includes real estate taxes, insurance, and other operating expenses during the expected lease-up periods based on current market conditions.
The fair values of above-market and below-market in-place lease values are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts paid pursuant to the in-place leases and (ii) an estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease including any fixed rate bargain renewal periods, with respect to a below-market lease. The above-market and below-market lease values are capitalized as intangible lease assets or liabilities. Above-market lease values are amortized as an adjustment of rental income over the remaining terms of the respective leases. Below-market leases are amortized as an adjustment of rental income over the remaining terms of the respective leases, including any fixed rate bargain renewal periods. If a lease were to be terminated prior to its stated expiration, all unamortized amounts of above-market and below-market in-place lease values related to that lease would be recorded as an adjustment to rental income.
The fair values of in-place leases include an estimate of direct costs associated with obtaining a new tenant and opportunity costs associated with lost rentals that are avoided by acquiring an in-place lease. Direct costs associated with obtaining a new tenant include commissions, tenant improvements, and other direct costs and are estimated based on management’s consideration of current market costs to execute a similar lease. The value of opportunity costs is calculated using the contractual amounts to be paid pursuant to the in-place leases over a market absorption period for a similar lease. The in-place lease intangibles are amortized to expense over the remaining terms of the respective leases. If a lease were to be terminated prior to its stated expiration, all unamortized amounts of in-place lease assets relating to that lease would be expensed.
Revenue Recognition, Tenant Receivables and Allowance for Uncollectible Accounts
We recognize revenue in accordance with Accounting Standards Codification, or ASC, 605,
Revenue Recognition
, or ASC 605. ASC 605 requires that all four of the following basic criteria be met before revenue is realized or realizable and earned: (1) there is persuasive evidence that an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the seller’s price to the buyer is fixed and determinable; and (4) collectability is reasonably assured.
In accordance with ASC 840,
Leases
, minimum rental revenue is recognized on a straight-line basis over the term of the related lease (including rent holidays). Differences between rental income recognized and amounts contractually due under the lease agreements are credited or charged to deferred rent receivable or deferred rent liability, as applicable. Tenant reimbursement revenue, which is comprised of additional amounts recoverable from tenants for common area maintenance expenses and certain other recoverable expenses, is recognized as revenue in the period in which the related expenses are incurred. Tenant reimbursements are recognized and presented in accordance with ASC Subtopic 605-45,
Revenue Recognition—Principal Agent Consideration,
or ASC 605-45. ASC 605-45 requires that these reimbursements be recorded on a gross basis when we are the primary obligor with respect to purchasing goods and services from third-party suppliers, and thus, we have discretion in selecting the supplier and have credit risk.
Tenant receivables and unbilled deferred rent receivables are carried net of the allowances for uncollectible current tenant receivables and unbilled deferred rent. An allowance will be maintained for estimated losses resulting from the inability of certain tenants to meet the contractual obligations under their lease agreements. We also maintain an allowance for deferred rent receivables arising from the straight-lining of rents. Our determination of the adequacy of these allowances is based primarily upon evaluations of historical loss experience, the tenant’s financial condition, security deposits, letters of credit, lease guarantees and current economic conditions and other relevant factors. No allowances for uncollectible tenant receivables were recorded as of
December 31, 2017
,
2016
and
2015
.
56
Income Taxes
We elected to be taxed, and currently qualify, as a REIT for federal income tax purposes under Sections 856 through 860 of the Internal Revenue Code, commencing with the taxable year ended December 31, 2014. As a REIT, we are required, among other things, to distribute at least 90% of our REIT taxable income (computed without regard to the dividends paid deduction and excluding capital gains) to our stockholders. In addition, we generally will not be subject to federal corporate income tax to the extent we distribute our taxable income to our stockholders. REITs are subject to a number of other organizational and operational requirements. Even if we maintain our qualification for taxation as a REIT, we, or our subsidiaries, may be subject to certain state and local taxes on our income and property, and federal income and excise taxes on our undistributed income.
Real Estate Investments in
2017
and Subsequent
|
•
|
During the year ended
December 31, 2017
, we, through our wholly-owned subsidiaries, acquired 16 real estate investments, consisting of
19
properties, for an aggregate purchase price of $610,923,000 and comprising approximately 2,149,000 gross rental square feet of commercial space.
|
|
•
|
Subsequent to
December 31, 2017
and through
March 16, 2018
, we, through our wholly-owned subsidiaries, acquired two real estate properties for an aggregate purchase price of $50,960,000 and comprising approximately 133,000 gross rental square feet of commercial space.
|
For a further discussion of our
2017
acquisitions, see
Note 3—"Real Estate Investments"
and for a further discussion on acquisitions in
2018
, see
Note 21—"Subsequent Events"
to the
consolidated
financial statements that are a part of this
Annual Report on Form 10-K
.
Factors that May Influence Results of Operations
We are not aware of any material trends or uncertainties, other than national economic conditions affecting real estate generally and those risks listed in Part I. Item 1A. "Risk Factors," of this
Annual Report on Form 10-K
, that may reasonably be expected to have a material impact, favorable or unfavorable, on revenues or income from the acquisition, management and operation of our properties.
Rental Income
The amount of rental income generated by our properties depends principally on our ability to maintain the occupancy rates of leased space and to lease available space at the then-existing rental rates. Negative trends in one or more of these factors could adversely affect our rental income in future periods. As of
December 31, 2017
, our properties were
97.7%
leased.
Results of Operations
Our results of operations are influenced by the timing of acquisitions and the operating performance of our real estate properties. The following table shows the property statistics of our real estate properties as of
December 31, 2017
,
2016
and
2015
:
|
|
December 31,
|
|||||||
|
|
2017
|
2016
|
2015
|
|||||
|
Number of commercial operating real estate properties
(1)
|
69
|
|
49
|
|
28
|
|
||
|
Leased rentable square feet
|
5,072,000
|
|
2,972,000
|
|
1,519,000
|
|
||
|
Weighted average percentage of rentable square feet leased
|
97.7
|
%
|
99.6
|
%
|
99.7
|
%
|
||
|
(1)
|
As of
December 31, 2017
, we owned
70
real estate properties, one of which was under construction. As of
December 31, 2016
, we owned 51 real estate properties, two of which were under construction.
|
57
The following table summarizes our real estate activity for the
years
ended
December 31, 2017
,
2016
and
2015
:
|
|
Year Ended December 31,
|
||||||||||
|
|
2017
|
2016
|
2015
|
||||||||
|
Commercial operating real estate properties acquired
|
19
|
|
21
|
|
(1)
|
22
|
|
||||
|
Commercial real estate properties placed into service
|
1
|
|
—
|
|
—
|
|
|||||
|
Approximate aggregate purchase price of acquired real estate properties
|
$
|
610,923,000
|
|
$
|
523,082,000
|
|
(1)
|
$
|
374,164,000
|
|
|
|
Approximate aggregate cost of properties placed into service
|
$
|
3,252,000
|
|
$
|
—
|
|
$
|
—
|
|
||
|
Leased rentable square feet
|
2,100,000
|
|
1,443,000
|
|
1,207,000
|
|
|||||
|
(1)
|
During the
year
ended
December 31, 2016
, we acquired 23 real estate properties, two of which were under construction. The properties under construction were purchased for $13,601,000.
|
The following discussion is based on our
consolidated
financial statements for the
years
December 31, 2017
,
2016
and
2015
.
This section describes and compares our results of operations for the
years
ended
December 31, 2017
,
2016
and
2015
. We generate almost all of our net operating income from property operations. In order to evaluate our overall portfolio, management analyzes the net operating income of same store properties. We define "same store properties" as operating properties that were owned and operated for the entirety of both calendar periods being compared and exclude properties under development.
By evaluating the property net operating income of our same store properties, management is able to monitor the operations of our existing properties for comparable periods to measure the performance of our current portfolio and determine the effects of our new acquisitions on net income (loss).
Year Ended
December 31, 2017
Compared to Year Ended
December 31, 2016
Changes in our revenues are summarized in the following table (amounts in thousands):
|
Year Ended December 31,
|
|||||||||||
|
2017
|
2016
|
Change
|
|||||||||
|
Same store rental and parking revenue
|
$
|
37,488
|
|
$
|
37,445
|
|
$
|
43
|
|
||
|
Non-same store rental and parking revenue
|
68,422
|
|
12,251
|
|
56,171
|
|
|||||
|
Same store tenant reimbursement revenue
|
5,599
|
|
5,149
|
|
450
|
|
|||||
|
Non-same store tenant reimbursement revenue
|
13,448
|
|
1,583
|
|
11,865
|
|
|||||
|
Other operating income
|
138
|
|
3
|
|
135
|
|
|||||
|
Total revenue
|
$
|
125,095
|
|
$
|
56,431
|
|
$
|
68,664
|
|
||
|
•
|
There was an increase in contractual rental revenue resulting from average annual rent escalations of 2.10% at our same store properties, which was offset entirely by straight-line rental revenue.
|
|
•
|
Non-same store rental and parking revenue, and tenant reimbursement revenue increased due to the acquisition of 40 operating properties and placing in service one development property since January 1, 2016.
|
|
•
|
Same store tenant reimbursement revenue increased primarily due to an increase in real estate tax and common area maintenance reimbursements at certain same store properties.
|
|
•
|
Other operating income increased primarily due to miscellaneous fee income earned at one property.
|
58
Changes in our expenses are summarized in the following table (amounts in thousands):
|
Year Ended December 31,
|
|||||||||||
|
2017
|
2016
|
Change
|
|||||||||
|
Same store rental and parking expenses
|
$
|
6,719
|
|
$
|
6,175
|
|
$
|
544
|
|
||
|
Non-same store rental and parking expenses
|
19,377
|
|
1,989
|
|
17,388
|
|
|||||
|
General and administrative expenses
|
4,069
|
|
3,105
|
|
964
|
|
|||||
|
Acquisition related expenses
|
—
|
|
5,339
|
|
(5,339
|
)
|
|||||
|
Asset management fees
|
9,963
|
|
4,925
|
|
5,038
|
|
|||||
|
Depreciation and amortization
|
41,133
|
|
19,211
|
|
21,922
|
|
|||||
|
Total expenses
|
$
|
81,261
|
|
$
|
40,744
|
|
$
|
40,517
|
|
||
|
•
|
Same store rental and parking expenses, certain of which are subject to reimbursement by our tenants, increased primarily due to an increase in real estate taxes and other operating expenses at certain same store properties.
|
|
•
|
Non-same store rental and parking expenses, certain of which are subject to reimbursement by our tenants, increased primarily due to the acquisition of 40 operating properties and placing in service one development property since January 1, 2016.
|
|
•
|
General and administrative expenses increased due to an increase in professional fees, personnel and reporting costs in connection with our Company's growth.
|
|
•
|
Acquisition related expenses decreased due to a decrease in real estate properties determined to be business combinations due to the adoption of ASU 2017-01,
Business Combinations.
Acquisition fees and expenses associated with transactions determined to be business combinations are expensed as incurred. During the
year
ended
December 31, 2017
, we did not acquire any real estate properties determined to be business combinations as compared to
12
real estate properties determined to be business combinations for an aggregate purchase price of
$207.4 million
during the
year
ended
December 31, 2016
.
|
|
•
|
Asset management fees increased due to an increase in the weighted average of our investments.
|
|
•
|
Depreciation and amortization increased due to an increase in the weighted average depreciable basis of operating real estate investments.
|
Changes in interest expense, net are summarized in the following table (amounts in thousands):
|
Year Ended December 31,
|
|||||||||||
|
2017
|
2016
|
Change
|
|||||||||
|
Interest expense, net:
|
|||||||||||
|
Interest on notes payable
|
$
|
(14,092
|
)
|
$
|
(466
|
)
|
$
|
(13,626
|
)
|
||
|
Interest on secured credit facility
|
(8,183
|
)
|
(3,504
|
)
|
(4,679
|
)
|
|||||
|
Amortization of deferred financing costs
|
(2,612
|
)
|
(1,061
|
)
|
(1,551
|
)
|
|||||
|
Cash deposits interest
|
195
|
|
117
|
|
78
|
|
|||||
|
Capitalized interest
|
2,137
|
|
524
|
|
1,613
|
|
|||||
|
Total interest expense, net
|
(22,555
|
)
|
(4,390
|
)
|
(18,165
|
)
|
|||||
|
•
|
Interest on notes payable increased due to an increase in the outstanding principal balance on notes payable to
$468.1 million
as of
December 31, 2017
, as compared to $153.0 million as of
December 31, 2016
.
|
|
•
|
Interest on secured credit facility increased due to an increase in the weighted average outstanding principal balance on the secured credit facility, coupled with an increase in interest rates.
|
|
•
|
Capitalized interest increased due to an increase in the average accumulated expenditures on development properties to $39.5 million for the
year
ended
December 31, 2017
, as compared to $11.2 million during the
year
ended
December 31, 2016
.
|
Year Ended
December 31, 2016
Compared to Year Ended
December 31, 2015
59
Changes in our revenues are summarized in the following table (amounts in thousands):
|
Year Ended December 31,
|
|||||||||||
|
2016
|
2015
|
Change
|
|||||||||
|
Same store rental and parking revenue
|
$
|
7,533
|
|
$
|
7,530
|
|
$
|
3
|
|
||
|
Non-same store rental and parking revenue
|
42,158
|
|
11,453
|
|
30,705
|
|
|||||
|
Same store tenant reimbursement revenue
|
312
|
|
312
|
|
—
|
|
|||||
|
Non-same store tenant reimbursement revenue
|
6,420
|
|
1,974
|
|
4,446
|
|
|||||
|
Other operating income
|
8
|
|
17
|
|
(9
|
)
|
|||||
|
Total revenue
|
$
|
56,431
|
|
$
|
21,286
|
|
$
|
35,145
|
|
||
|
•
|
In addition, there was an increase in contractual rental revenue resulting from average annual rent escalations of 1.97% at our same store properties, which was offset by straight-line rental revenue.
|
|
•
|
Non-same store rental and parking revenue, and tenant reimbursement revenue increased $30.7 million due to the acquisition of 43 operating properties since January 1, 2015.
|
Changes in our expenses are summarized in the following table (amounts in thousands):
|
Year Ended December 31,
|
|||||||||||
|
2016
|
2015
|
Change
|
|||||||||
|
Same store rental expenses
|
$
|
473
|
|
$
|
492
|
|
$
|
(19
|
)
|
||
|
Non-same store rental and parking expenses
|
7,691
|
|
2,344
|
|
5,347
|
|
|||||
|
General and administrative expenses
|
3,105
|
|
2,133
|
|
972
|
|
|||||
|
Acquisition related expenses
|
5,339
|
|
10,250
|
|
(4,911
|
)
|
|||||
|
Asset management fees
|
4,925
|
|
1,895
|
|
3,030
|
|
|||||
|
Depreciation and amortization
|
19,211
|
|
7,053
|
|
12,158
|
|
|||||
|
Total expenses
|
$
|
40,744
|
|
$
|
24,167
|
|
$
|
16,577
|
|
||
|
•
|
Non-same store rental and parking expenses, certain of which are subject to reimbursement by our tenants, increased primarily due to the acquisition of 43 operating properties since January 1, 2015.
|
|
•
|
General and administrative expenses increased primarily due to an increase in professional and legal fees, an increase in personnel costs and an increase in other administrative costs, in connection with our Company's growth.
|
|
•
|
Acquisition related expenses decreased due to a decrease in real estate properties determined to be business combinations due to the adoption of ASU 2017-01,
Business Combinations.
Acquisition fees and expenses associated with transactions determined to be business combinations are expensed as incurred. During the
year
ended
December 31, 2016
, we acquired
12
real estate properties determined to be business combinations for an aggregate purchase price of
$207.4 million
as compared to 21 real estate properties determined to be business combinations for an aggregate purchase price of $366.4 million during the
year
ended
December 31, 2015
.
|
|
•
|
Asset management fees increased due to an increase in the weighted average of our investments.
|
|
•
|
Depreciation and amortization increased due to an increase in the weighted average depreciable basis of operating real estate investments.
|
60
Changes in interest expense, net are summarized in the following table (amounts in thousands):
|
Year Ended December 31,
|
|||||||||||
|
2016
|
2015
|
Change
|
|||||||||
|
Interest expense, net:
|
|||||||||||
|
Interest on notes payable
|
$
|
(466
|
)
|
$
|
—
|
|
$
|
(466
|
)
|
||
|
Interest on secured credit facility
|
(3,504
|
)
|
(1,231
|
)
|
(2,273
|
)
|
|||||
|
Amortization of deferred financing costs
|
(1,061
|
)
|
(721
|
)
|
(340
|
)
|
|||||
|
Cash deposits interest
|
117
|
|
66
|
|
51
|
|
|||||
|
Capitalized interest
|
524
|
|
—
|
|
524
|
|
|||||
|
Total interest expense, net
|
$
|
(4,390
|
)
|
$
|
(1,886
|
)
|
$
|
(2,504
|
)
|
||
|
•
|
Interest on notes payable increased due to an increase in the outstanding principal balance on notes payable to $153.0 million as of
December 31, 2016
, as compared to $0 as of
December 31, 2015
.
|
|
•
|
Interest on secured credit facility increased due to an increase in the weighted average outstanding principal balance on the secured credit facility.
|
|
•
|
Capitalized interest increased due to an increase in the average accumulated expenditures on development properties to $11.2 million for the year ended
December 31, 2016
, as compared to having no development properties during the year ended
December 31, 2015
.
|
Organization and Offering Costs
We reimburse our Advisor or its affiliates for organization and offering costs it incurs on our behalf, but only to the extent the reimbursement would not cause the selling commissions, dealer manager fees, distribution and servicing fees and other organization and offering costs incurred by us to exceed 15% of gross offering proceeds from the Initial Offering and the Offering as of the date of the reimbursement. Other offering costs associated with the Initial Offering (other than selling commissions, dealer manager fees and distribution and servicing fees) were approximately 2.0% of the gross offering proceeds. We expect that other offering costs associated with the Offering (other than selling commissions, dealer manager fees and distribution and servicing fees) will be approximately 1.5% of the gross offering proceeds. Since inception, our Advisor and its affiliates incurred other organization and offering costs on our behalf of approximately
$17,669,000
as of
December 31, 2017
. As of
December 31, 2017
, we reimbursed our Advisor or its affiliates approximately $17,049,000 in other offering costs. In addition, we paid our Advisor or its affiliates $453,000 in other offering costs related to subscription agreements. As of
December 31, 2017
, we accrued approximately
$167,000
of other offering costs to our Advisor and its affiliates. As of
December 31, 2017
, we incurred approximately
$91,898,000
in selling commissions and dealer manager fees and
$15,830,000
in distribution and servicing fees to our Dealer Manager. As of
December 31, 2017
, we incurred other offering costs (other than selling commissions, dealer manager fees and distribution and servicing fees) of approximately
$23,357,000
.
When incurred, organization costs are expensed and offering costs, including selling commissions, dealer manager fees, distribution and servicing fees and other offering costs are charged to stockholders’ equity. For a further discussion of other organization and offering costs, see
Note 10—"Related-Party Transactions and Arrangements"
to the
consolidated
financial statements that are a part of this
Annual Report on Form 10-K
.
Distributions to Stockholders
We have paid, and may continue to pay, distributions from sources other than from our cash flows from operations. For the
year
ended
December 31, 2017
, our cash flows provided by operations of approximately
$51.8 million
was a shortfall of approximately
$9.5 million
, or
15.5%
, of our distributions (total distributions were approximately
$61.3 million
, of which
$29.0 million
was cash and
$32.3 million
was reinvested in shares of our common stock pursuant to our DRIP) during such period and such shortfall was paid from proceeds from our DRIP Offering. For the year ended
December 31, 2016
, our cash flows provided by operations of approximately
$25.0 million
was a shortfall of approximately
$15.6 million
, or 38.4%, of our distributions (total distributions were approximately
$40.6 million
, of which
$17.7 million
was cash and
$22.9 million
was reinvested in shares of our common stock pursuant to our DRIP) during such period and such shortfall was paid from proceeds from our Initial Offering. Until we acquire additional properties or other real estate-related investments, we may not generate sufficient cash flows from operations to pay distributions. Our inability to acquire additional properties or other real estate-related investments may result in a lower return on investment than a stockholder may expect.
We do not have any limits on the sources of funding distribution payments to our stockholders. We may pay distributions from any source, such as from borrowings, the sale of assets, the sale of additional securities, advances from our advisor, our
61
advisor’s deferral, suspension and/or waiver of its fees and expense reimbursements and offering proceeds and have no limits on the amounts we may pay from such sources. Funding distributions from borrowings could restrict the amount we can borrow for investments, which may affect our profitability. Funding distributions with the sale of assets may affect our ability to generate cash flows. Funding distributions from the sale of additional securities could dilute a stockholder's interest in us if we sell shares of our common stock to third party investors. Funding distributions from the proceeds of our Offering will result in us having less funds available for acquiring properties or real estate-related investments. Our inability to acquire additional properties or real estate-related investments may have a negative effect on our ability to generate sufficient cash flow from operations to pay distributions. As a result, the return investors may realize on their investment may be reduced and investors who invest in us before we generate significant cash flow may realize a lower rate of return than later investors. Payment of distributions from any of the mentioned sources could restrict our ability to generate sufficient cash flow from operations, affect our profitability and/or affect the distributions payable upon a liquidity event, any or all of which may have an adverse effect on an investment in us.
For federal income tax purposes, distributions to common stockholders are characterized as ordinary dividends, capital gain distributions, or nontaxable distributions. To the extent that we make a distribution in excess of our current or accumulated earnings and profits, the distribution will be a nontaxable return of capital, reducing the tax basis in each U.S. stockholder’s shares. Further, the amount of distributions in excess of a U.S. stockholder’s tax basis in such shares will be taxable as a gain realized from the sale of those shares.
The following table shows the character of distributions we paid on a percentage basis during the
years
ended
December 31, 2017
,
2016
and
2015
:
|
|
Year Ended December 31,
|
|||||||
|
Character of Class A Distributions:
|
2017
|
2016
|
2015
|
|||||
|
Ordinary dividends
|
36.49
|
%
|
34.23
|
%
|
33.81
|
%
|
||
|
Nontaxable distributions
|
63.51
|
%
|
65.77
|
%
|
66.19
|
%
|
||
|
Total
|
100.00
|
%
|
100.00
|
%
|
100.00
|
%
|
||
|
|
Year Ended December 31,
|
|||||||
|
Character of Class I Distributions:
|
2017
|
2016
|
2015
|
|||||
|
Ordinary dividends
|
36.49
|
%
|
—
|
%
|
—
|
%
|
||
|
Nontaxable distributions
|
63.51
|
%
|
—
|
%
|
—
|
%
|
||
|
Total
|
100.00
|
%
|
—
|
%
|
—
|
%
|
||
|
|
Year Ended December 31,
|
|||||||
|
Character of Class T Distributions:
|
2017
|
2016
|
2015
|
|||||
|
Ordinary dividends
|
25.93
|
%
|
23.07
|
%
|
—
|
%
|
||
|
Nontaxable distributions
|
74.07
|
%
|
76.93
|
%
|
—
|
%
|
||
|
Total
|
100.00
|
%
|
100.00
|
%
|
—
|
%
|
||
Share Repurchase Program
We have approved a share repurchase program that allows for repurchases of shares of our common stock when certain criteria are met.
The share repurchase program provides that all repurchases during any calendar year, including those redeemable upon death or a Qualifying Disability of a stockholder, are limited to 5% of the number of shares of our common stock outstanding on December 31
st
of the previous calendar year and to those that can be funded with reinvestments pursuant to our DRIP Offering during the prior calendar year and other operating funds, if any, as the board of directors, in its sole discretion, may reserve for this purpose.
Repurchases of shares of the Company’s common stock are at the sole discretion of our board of directors. In addition, our board of directors, in its sole discretion, may amend, suspend, reduce, terminate or otherwise change the share repurchase program upon 30 days’ prior notice to our stockholders for any reason it deems appropriate. During the
year
ended
December 31, 2017
, we received valid repurchase requests related to approximately
1,880,820
Class A shares, Class T shares and Class I shares of common stock (1,793,424 Class A shares, 81,939 Class T shares and 5,457 Class I shares), all of which were repurchased in full for an aggregate purchase price of approximately
$17,159,000
(an average of
$9.12
per share).
62
Inflation
We are exposed to inflation risk as income from long-term leases is the primary source of our cash flows from operations. There are provisions in certain of our leases with tenants that are intended to protect us from, and mitigate the risk of, the impact of inflation. These provisions include scheduled increases in contractual base rent receipts, reimbursement billings for operating expenses, pass-through charges and real estate tax and insurance reimbursements. However, due to the long-term nature of our leases, among other factors, the leases may not reset frequently enough to adequately offset the effects of inflation.
Liquidity and Capital Resources
Our principal demands for funds are for acquisitions of real estate and real estate-related investments, to pay operating expenses and interest on our current and future indebtedness and to pay distributions to our stockholders. Our sources of funds are primarily the net proceeds of our Offering, funds equal to amounts reinvested in the DRIP, operating cash flows, the secured credit facility and other borrowings. In addition, we require resources to make certain payments to our Advisor and our Dealer Manager, which, during our Offering, include payments to our Advisor and its affiliates for reimbursement of other organization and offering expenses and other costs incurred on our behalf, and payments to our Dealer Manager and its affiliates for selling commissions, dealer manager fees, distribution and servicing fees, and offering expenses.
Generally, cash needs for items other than acquisitions of real estate and real estate-related investments are met from operations, borrowings, and the net proceeds of our Offering. However, there may be a delay between the sale of shares of our common stock and our investments in real estate, which could result in a delay in the benefits to our stockholders, if any, of returns generated from our investment operations.
Our Advisor evaluates potential additional investments and engages in negotiations with real estate sellers, developers, brokers, investment managers, lenders and others on our behalf. Until we invest all of the proceeds of our Offering in properties and real estate-related investments, we may invest in short-term, highly liquid or other authorized investments. Such short-term investments will not earn significant returns, and we cannot predict how long it will take to fully invest the proceeds in properties and real estate-related investments. The number of properties we acquire and other investments we make will depend upon the number of shares sold in our Offering and the resulting amount of net proceeds available for investment.
When we acquire a property, our Advisor prepares a capital plan that contemplates the estimated capital needs of that investment. In addition to operating expenses, capital needs may also include costs of refurbishment, tenant improvements or other major capital expenditures. The capital plan also sets forth the anticipated sources of the necessary capital, which may include a line of credit or other loans established with respect to the investment, operating cash generated by the investment, additional equity investments from us or joint venture partners or, when necessary, capital reserves. Any capital reserves would be established from the net proceeds of our Offering, proceeds from sales of other investments, operating cash generated by other investments or other cash on hand. In some cases, a lender may require us to establish capital reserves for a particular investment. The capital plan for each investment will be adjusted through ongoing, regular reviews of our portfolio or as necessary to respond to unanticipated additional capital needs.
Short-term Liquidity and Capital Resources
On a short-term basis, our principal demands for funds will be for the acquisition of real estate and real estate-related notes and investments and payments of tenant improvements, acquisition related costs, operating expenses, distributions to and repurchases from stockholders, and interest and principal payments on current and future debt financings. We expect to meet our short-term liquidity requirements through net cash flows provided by operations, net proceeds from our Offering, borrowings on the secured credit facility, as well as secured and unsecured borrowings from banks and other lenders to finance our expected future acquisitions.
Long-term Liquidity and Capital Resources
On a long-term basis, our principal demands for funds will be for the acquisition of real estate and real estate-related notes and investments and payments of tenant improvements, acquisition related costs, operating expenses, distributions to and repurchases from stockholders, and interest and principal payments on current and future indebtedness. We expect to meet our long-term liquidity requirements through proceeds from cash flow from operations, borrowings on the secured credit facility, proceeds from secured or unsecured borrowings from banks or other lenders, proceeds from our Offering and funds equal to amounts reinvested in the DRIP.
We expect that substantially all cash flows from operations will be used to pay distributions to our stockholders after certain capital expenditures; however, we have used, and may continue to use other sources to fund distributions, as necessary, such as, proceeds from our Offering, borrowings on the secured credit facility and/or future borrowings on unencumbered assets. To the extent cash flows from operations are lower due to fewer properties being acquired or lower-than-expected
63
returns on the properties held, distributions paid to stockholders may be lower. We expect that substantially all net cash flows from our Offering or debt financings will be used to fund acquisitions, certain capital expenditures identified at acquisition, repayments of outstanding debt or distributions to our stockholders in excess of cash flows from operations.
Capital Expenditures
We will require approximately
$21.6 million
in expenditures for capital improvements over the next 12 months. We cannot provide assurances, however, that actual expenditures will not exceed these estimated expenditure levels. As of
December 31, 2017
, we had $9.1 million of restricted cash in escrow reserve accounts for such capital expenditures. In addition, as of
December 31, 2017
, we had approximately
$74.8 million
in cash and cash equivalents. For the
year
ended
December 31, 2017
, we had capital expenditures of
$32.5 million
that primarily related to two healthcare real estate investments.
Credit Facility
As of
December 31, 2017
, the maximum commitments available under the secured credit facility were $425,000,000, consisting of a $325,000,000 revolving line of credit, with a maturity date of December 22, 2018, subject to our Operating Partnership's right to two, 12-month extension periods, and a $100,000,000 term loan, with a maturity date of December 22, 2019, subject to our Operating Partnership's right to one, 12-month extension period.
The proceeds of loans made under the secured credit facility may be used to finance the acquisition of real estate investments, for tenant improvements and leasing commissions with respect to real estate, for repayment of indebtedness, for capital expenditures with respect to real estate and for general corporate and working capital purposes. The secured credit facility can be increased to $550,000,000, subject to certain conditions. See
Note 9—"Credit Facility"
to the
consolidated
financial statements that are part of this
Annual Report on Form 10-K
.
The annual interest rate payable under the secured credit facility is, at our Operating Partnership’s option, either: (a) the London Interbank Offered Rate, or the LIBOR, plus an applicable margin ranging from 2.00% to 2.65%, which is determined based on the overall leverage of our Operating Partnership or (b) a base rate which means, for any day, a fluctuating rate per annum equal to the prime rate for such day plus an applicable margin ranging from 1.00% to 1.65% which is determined based on the overall leverage of our Operating Partnership. In addition to interest, our Operating Partnership is required to pay a fee on the unused portion of the lenders’ commitments under the secured credit facility at a per annum rate equal to 0.30% if the average daily amount outstanding under the secured credit facility is less than 50% of the lenders’ commitments or 0.20% if the average daily amount outstanding under the secured credit facility is greater than 50% of the lenders’ commitments, and the unused fee is payable quarterly in arrears. As of
December 31, 2017
, the weighted average interest rate was 3.71%.
The actual amount of credit available under the secured credit facility is a function of certain loan-to-cost, loan-to-value and debt service coverage ratios contained in the secured credit facility agreement. The amount of credit available under the secured credit facility will be a maximum principal amount of the value of the assets that are included in the pool availability. The obligations of our Operating Partnership with respect to the secured credit facility agreement are guaranteed by us, including but not limited to, the payment of any outstanding indebtedness under the secured credit facility agreement, and all terms, conditions and covenants of the secured credit facility agreement.
The secured credit facility agreement contains various affirmative and negative covenants that are customary for credit facilities and transactions of this type, including limitations on the incurrence of debt by our Operating Partnership and its subsidiaries that own properties that serve as collateral for our secured credit facility, limitations on the nature of our Operating Partnership's business, and limitations on distributions by us, our Operating Partnership and its subsidiaries. The secured credit facility agreement imposes the following financial covenants, which are specifically defined in the secured credit facility agreement, on our Operating Partnership: (a) maximum ratio of indebtedness to gross asset value; (b) minimum ratio of adjusted consolidated earnings before interest, taxes, depreciation and amortization to consolidated fixed charges; (c) minimum tangible net worth; (d) minimum liquidity thresholds; (e) minimum quarterly equity raise; (f) minimum weighted average remaining lease term of properties in the collateral pool; and (g) minimum number of properties in the collateral pool. In addition, the secured credit facility agreement includes events of default that are customary for credit facilities and transactions of this type. We were in compliance with all financial covenant requirements at
December 31, 2017
.
As of
December 31, 2017
, we had a total pool availability under the secured credit facility of
$397,842,000
and an aggregate outstanding principal balance of
$220,000,000
. As of
December 31, 2017
,
$177,842,000
remained available to be drawn on the secured credit facility.
Financing
We anticipate that our aggregate borrowings, both secured and unsecured, will not exceed the greater of 50.0% of the combined cost or fair market value of our real estate and real estate-related investments following completion of our Offering. For these purposes, the fair market value of each asset is equal to the purchase price paid for the asset or, if the asset was
64
appraised subsequent to the date of purchase, then the fair market value will be equal to the value reported in the most recent independent appraisal of the asset. Our policies do not limit the amount we may borrow with respect to any individual investment. As of
December 31, 2017
, our borrowings were 39.4% of the fair market value of our real estate investments.
Under our charter, we have a limitation on borrowing that precludes us from borrowing in excess of 300.0% of our net assets, without the approval of a majority of our independent directors. Net assets for purposes of this calculation are defined to be our total assets (other than intangibles) valued at cost prior to deducting depreciation, amortization, bad debt and other non-cash reserves, less total liabilities. Generally, the preceding calculation is expected to approximate 75.0% of the aggregate cost of our real estate and real estate-related investments before depreciation, amortization, bad debt and other similar non-cash reserves. In addition, we may incur mortgage debt and pledge some or all of our properties as security for that debt to obtain funds to acquire additional real properties or for working capital. We may also borrow funds to satisfy the REIT tax qualification requirement that we distribute at least 90.0% of our annual REIT taxable income to our stockholders. Furthermore, we may borrow if we otherwise deem it necessary or advisable to ensure that we maintain our qualification as a REIT for federal income tax purposes. As of
December 31, 2017
, our leverage did not exceed 300.0% of the value of our net assets.
Notes Payable
For a discussion of our notes payable, see
Note 8—"Notes Payable"
to the
consolidated
financial statements that are a part of this
Annual Report on Form 10-K
.
Cash Flows
Year Ended
December 31, 2017
Compared to Year Ended
December 31, 2016
|
Year Ended
December 31, |
|||||||||||
|
(in thousands)
|
2017
|
2016
|
Change
|
||||||||
|
Net cash provided by operating activities
|
$
|
51,827
|
|
$
|
24,975
|
|
$
|
26,852
|
|
||
|
Net cash used in investing activities
|
$
|
636,693
|
|
$
|
543,547
|
|
$
|
93,146
|
|
||
|
Net cash provided by financing activities
|
$
|
613,704
|
|
$
|
542,292
|
|
$
|
71,412
|
|
||
Operating Activities
|
•
|
Net cash provided by operating activities increased primarily due to the acquisition of our new operating properties, partially offset by increased operating expenses.
|
Investing Activities
|
•
|
Net cash used in investing activities increased primarily due to an increase in investments in real estate of
$68.9 million
and an increase in capital expenditures of
$24.2 million
.
|
Financing Activities
|
•
|
Net cash provided by financing activities increased primarily due to an increase in proceeds from notes payable of
$156.5 million
, an increase in proceeds from issuance of common stock of $71.2 million and a decrease in payment of deferred financing costs of $0.5 million
, offset by an increase in payments on the secured credit facility of $130.0 million, an increase in repurchases of our common stock of $14.0 million, an increase in distributions to our stockholders of
$11.3 million
and an increase in offering costs related to the issuance of common stock of $1.5 million.
|
Year Ended
December 31, 2016
Compared to Year Ended
December 31, 2015
|
Year Ended
December 31, |
|||||||||||
|
(in thousands)
|
2016
|
2015
|
Change
|
||||||||
|
Net cash provided by operating activities
|
$
|
24,975
|
|
$
|
3,290
|
|
$
|
21,685
|
|
||
|
Net cash used in investing activities
|
$
|
543,547
|
|
$
|
375,528
|
|
$
|
168,019
|
|
||
|
Net cash provided by financing activities
|
$
|
542,292
|
|
$
|
398,811
|
|
$
|
143,481
|
|
||
Operating Activities
|
•
|
Net cash provided by operating activities increased primarily due the acquisition of our new operating properties, partially offset by increased operating expenses.
|
65
Investing Activities
|
•
|
Net cash used in investing activities increased primarily due to an increase in investments in real estate of
$161.3 million
and an increase in capital expenditures of
$7.0 million
, offset by a decrease in real estate deposits, net, of
$0.2 million
.
|
Financing Activities
|
•
|
Net cash provided by financing activities increased primarily due to an increase in proceeds from notes payable of
$153.0 million, a net increase in proceeds from the secured credit facility of
$77.5 million
and a decrease in offering
costs related to the issuance of common stock of
$16.0 million
, offset by a decrease in proceeds from the issuance of com
mon stock of
$86.6 million
, an increase in
distributions to our stockholders of
$11.3 million
, an increase in repurchases of our common stock of
$2.8 million
and an increase in deferred financing costs of $2.4 million.
|
Distributions
The amount of distributions payable to our stockholders is determined by our board of directors and is dependent on a number of factors, including our funds available for distribution, financial condition, capital expenditure requirements and the annual distribution requirements needed to maintain our status as a REIT under the Code. Our board of directors must authorize each distribution and may, in the future, authorize lower amounts of distributions or not authorize additional distributions and, therefore, distribution payments are not guaranteed. Our Advisor may also defer, suspend and/or waive fees and expense reimbursements if we have not generated sufficient cash flow from our operations and other sources to fund distributions. Additionally, our organizational documents permit us to pay distributions from unlimited amounts of any source, and we may use sources other than operating cash flows to fund distributions, including proceeds from our Offerings, which may reduce the amount of capital we ultimately invest in properties or other permitted investments.
We have funded distributions with operating cash flows from our properties, proceeds raised in our Offerings. To the extent that we do not have taxable income, distributions paid will be considered a return of capital to stockholders. The following table shows distributions paid during the
years
ended
December 31, 2017
and
2016
(amounts in thousands):
|
For the Year Ended December 31,
|
|||||||||||
|
2017
|
2016
|
||||||||||
|
Distributions paid in cash - common stockholders
|
$
|
28,994
|
|
$
|
17,659
|
|
|||||
|
Distributions reinvested
|
32,264
|
|
22,889
|
|
|||||||
|
Total distributions
|
$
|
61,258
|
|
$
|
40,548
|
|
|||||
|
Source of distributions:
|
|||||||||||
|
Cash flows provided by operations
(1)
|
$
|
28,994
|
|
47%
|
$
|
17,659
|
|
44%
|
|||
|
Offering proceeds from issuance of common stock pursuant to the DRIP
(1)
|
32,264
|
|
53%
|
22,889
|
|
56%
|
|||||
|
Total sources
|
$
|
61,258
|
|
100%
|
$
|
40,548
|
|
100%
|
|||
|
(1)
|
Percentages were calculated by dividing the respective source amount by the total sources of distributions.
|
Total distributions declared but not paid on Class A shares, Class I shares and Class T shares as of
December 31, 2017
were approximately
$6.6 million
for common stockholders. These distributions were paid on January 2, 2018.
For the
year
ended
December 31, 2017
, we declared and paid distributions of approximately
$61.3 million
to Class A stockholders, Class I stockholders and Class T stockholders, including shares issued pursuant to the DRIP, as compared to FFO (as defined below) for the
year
ended
December 31, 2017
of approximately
$62.4 million
, which covered 100% of our distributions paid during such period. The payment of distributions from sources other than FFO may reduce the amount of proceeds available for investment and operations or cause us to incur additional interest expense as a result of borrowed funds.
For a discussion of distributions paid subsequent to
December 31, 2017
, see
Note 21—"Subsequent Events"
to the
consolidated
financial statements included in this
Annual Report on Form 10-K
.
Commitments and Contingencies
For a discussion of our commitments and contingencies, see
Note 18—"Commitments and Contingencies"
to the
consolidated
financial statements that are a part of this
Annual Report on Form 10-K
.
66
Debt Service Requirements
One of our principal liquidity needs is the payment of principal and interest on outstanding indebtedness. As of
December 31, 2017
, we had
$468.1 million
in notes payable outstanding principal and
$220.0 million
outstanding principal under the secured credit facility. We are required by the terms of certain loan documents to meet certain covenants, such as financial ratios and reporting requirements. As of
December 31, 2017
, we were in compliance with all such covenants and requirements on our mortgage loans payable and the secured credit facility.
In addition, during the year ended
December 31, 2017
, we entered into eight derivative instruments for the purpose of managing or hedging our interest rate risk. As of
December 31, 2017
, the aggregate notional amount under our derivative instruments was
$347.7 million
. We have agreements with each derivative counterparty that contain cross-default provisions, whereby if we default on certain of our unsecured indebtedness, then we could also be declared in default on our derivative obligations, resulting in an acceleration of payment thereunder. As of
December 31, 2017
, we were in compliance with all such cross-default provisions.
Contractual Obligations
As of
December 31, 2017
, we had approximately
$688.1 million
of principal debt outstanding, of which
$468.1 million
related to notes payable and
$220.0 million
related to the secured credit facility. See
Note 8—"Notes Payable"
and
Note 9—"Credit Facility"
to the consolidated financial statements that are a part of this
Annual Report on Form 10-K
for certain terms of the debt outstanding.
Our contractual obligations as of
December 31, 2017
were as follows (amounts in thousands):
|
|
Less than
1 Year |
1-3 Years
|
3-5 Years
|
More than
5 Years |
Total
|
||||||||||||||
|
Principal payments—fixed rate debt
|
$
|
99
|
|
$
|
1,901
|
|
$
|
77,312
|
|
$
|
141,124
|
|
$
|
220,436
|
|
||||
|
Interest payments—fixed rate debt
|
9,530
|
|
19,047
|
|
15,591
|
|
22,469
|
|
66,637
|
|
|||||||||
|
Principal payments—variable rate debt fixed through interest rate swap
(1)
|
314
|
|
104,606
|
|
242,779
|
|
—
|
|
347,699
|
|
|||||||||
|
Interest payments—variable rate debt fixed through interest rate swap
(2)
|
15,128
|
|
25,713
|
|
15,913
|
|
—
|
|
56,754
|
|
|||||||||
|
Principal payments—variable rate debt
|
120,000
|
|
—
|
|
—
|
|
—
|
|
120,000
|
|
|||||||||
|
Interest payments—variable rate debt
(3)
|
4,445
|
|
—
|
|
—
|
|
—
|
|
4,445
|
|
|||||||||
|
Capital expenditures
|
21,572
|
|
—
|
|
—
|
|
—
|
|
21,572
|
|
|||||||||
|
Ground lease payments
|
545
|
|
1,089
|
|
1,089
|
|
5,206
|
|
7,929
|
|
|||||||||
|
Total
|
$
|
171,633
|
|
$
|
152,356
|
|
$
|
352,684
|
|
$
|
168,799
|
|
$
|
845,472
|
|
||||
|
(1)
|
As of
December 31, 2017
, we had
$347.7 million
outstanding principal on notes payable and borrowings under the secured credit facility that were fixed through the use of interest rate swap agreements.
|
|
(2)
|
We used the fixed rates under our interest rate swap agreements as of
December 31, 2017
to calculate the debt payment obligations in future periods.
|
|
(3)
|
We used LIBOR plus the applicable margin under our variable rate debt agreement as of
December 31, 2017
to calculate the debt payment obligations in future periods.
|
Off-Balance Sheet Arrangements
As of
December 31, 2017
, we had no off-balance sheet arrangements.
Related-Party Transactions and Arrangements
We have entered into agreements with our Advisor and its affiliates whereby we agree to pay certain fees to, or reimburse certain expenses of, our Advisor or its affiliates for acquisition fees and expenses, organization and offering expenses, asset and property management fees and reimbursement of operating costs. Refer to
Note 10—"Related-Party Transactions and Arrangements"
to our
consolidated
financial statements that are a part of this
Annual Report on Form 10-K
for a detailed discussion of the various related-party transactions and agreements.
67
Funds from Operations and Modified Funds from Operations
One of our objectives is to provide cash distributions to our stockholders from cash generated by our operations. The purchase of real estate assets and real estate-related investments, and the corresponding expenses associated with that process, is a key operational feature of our business plan in order to generate cash from operations. Due to certain unique operating characteristics of real estate companies, the National Association of Real Estate Investment Trusts, or NAREIT, an industry trade group, has promulgated a measure known as funds from operations, or FFO, which we believe is an appropriate supplemental measure to reflect the operating performance of a REIT. The use of FFO is recommended by the REIT industry as a supplemental performance measure. FFO is not equivalent to our net income (loss) as determined under GAAP.
We define FFO, consistent with NAREIT’s definition, as net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from sales of property and asset impairment write-downs, plus depreciation and amortization of real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect FFO on the same basis.
We, along with others in the real estate industry, consider FFO to be an appropriate supplemental measure of a REIT’s operating performance because it is based on a net income (loss) analysis of property portfolio performance that excludes non-cash items such as depreciation and amortization and asset impairment write-downs, which we believe provides a more complete understanding of our performance to investors and to our management, and when compared year over year, reflects the impact on our operations from trends in occupancy.
Historical accounting convention (in accordance with GAAP) for real estate assets requires companies to report their investment in real estate at its carrying value, which consists of capitalizing the cost of acquisitions, development, construction, improvements and significant replacements, less depreciation and amortization and asset impairment write-downs, if any, which is not necessarily equivalent to the fair market value of their investment in real estate assets.
The historical accounting convention requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time, which could be the case if such assets are not adequately maintained or repaired and renovated as required by relevant circumstances and/or as requested or required by lessees for operational purposes in order to maintain the value disclosed. We believe that, since the fair value of real estate assets historically rises and falls with market conditions including, but not limited to, inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation could be less informative.
In addition, we believe it is appropriate to disregard asset impairment write-downs as they are a non-cash adjustment to recognize losses on prospective sales of real estate assets. Since losses from sales of real estate assets are excluded from FFO, we believe it is appropriate that asset impairment write-downs in advancement of realization of losses should be excluded. Impairment write-downs are based on negative market fluctuations and underlying assessments of general market conditions, which are independent of our operating performance, including, but not limited to, a significant adverse change in the financial condition of our tenants, changes in supply and demand for similar or competing properties, changes in tax, real estate, environmental and zoning law, which can change over time. When indicators of potential impairment suggest that the carrying value of real estate and related assets may not be recoverable, we assess the recoverability by estimating whether we will recover the carrying value of the asset through undiscounted future cash flows and eventual disposition (including, but not limited to, net rental and lease revenues, net proceeds on the sale of property and any other ancillary cash flows at a property or group level under GAAP). If based on this analysis, we do not believe that we will be able to recover the carrying value of the real estate asset, we will record an impairment write-down to the extent that the carrying value exceeds the estimated fair value of the real estate asset. Testing for indicators of impairment is a continuous process and is analyzed on a quarterly basis. Investors should note, however, that determinations of whether impairment charges have been incurred are based partly on anticipated operating performance, because estimated undiscounted future cash flows from a property, including estimated future net rental and lease revenues, net proceeds on the sale of the property, and certain other ancillary cash flows, are taken into account in determining whether an impairment charge has been incurred. While impairment charges are excluded from the calculation of FFO as described above, investors are cautioned that due to the fact that impairments are based on estimated future undiscounted cash flows and that we intend to have a relatively limited term of our operations, it could be difficult to recover any impairment charges through the eventual sale of the property. No impairment losses have been recorded to date.
In developing estimates of expected future cash flow, we make certain assumptions regarding future market rental income amounts subsequent to the expiration of current lease arrangements, property operating expenses, terminal capitalization and discount rates, the expected number of months it takes to re-lease the property, required tenant improvements and the number of years the property will be held for investment. The use of alternative assumptions in the future cash flow analysis could result in a different determination of the property’s future cash flows and a different conclusion regarding the existence of an asset impairment, the extent of such loss, if any, as well as the carrying value of the real estate asset.
68
Publicly registered, non-listed REITs, such as us, typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operations. While other start up entities may also experience significant acquisition activity during their initial years, we believe that publicly registered, non-listed REITs are unique in that they have a limited life with targeted exit strategies within a relatively limited time frame after the acquisition activity ceases. We will use the proceeds raised in our offering to acquire real estate assets and real estate-related investments, and we intend to begin the process of achieving a liquidity event (i.e., listing of our shares of common stock on a national securities exchange, a merger or sale, the sale of all or substantially all of our assets, or another similar transaction) within five to seven years after the completion of our offering stage, which is generally comparable to other publicly registered, non-listed REITs. Thus, we do not intend to continuously purchase real estate assets and intend to have a limited life. Due to these factors and other unique features of publicly registered, non-listed REITS, the Investment Program Association, or the IPA, an industry trade group, has standardized a measure known as modified funds from operations, or MFFO, which we believe to be another appropriate supplemental measure to reflect the operating performance of a publicly registered, non-listed REIT. MFFO is a metric used by management to evaluate sustainable performance and dividend policy. MFFO is not equivalent to our net income (loss) as determined under GAAP.
We define MFFO, a non-GAAP measure, consistent with the IPA’s definition: FFO further adjusted for the following items included in the determination of GAAP net income (loss); acquisition fees and expenses; amounts related to straight-line rental income and amortization of above and below market intangible lease assets and liabilities; accretion of discounts and amortization of premiums on debt investments; mark-to-market adjustments included in net income (loss); nonrecurring gains or losses included in net income (loss) from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, adjustments related to contingent purchase price obligations where such adjustments have been included in the derivation of GAAP net income (loss), and after adjustments for a consolidated and unconsolidated partnership and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. Our MFFO calculation complies with the IPA’s Practice Guideline, described above. In calculating MFFO, we exclude paid and accrued acquisition fees and expenses that are reported in our consolidated statements of comprehensive income (loss), amortization of above and below-market leases, amounts related to straight-line rents (which are adjusted in order to reflect such payments from a GAAP accrual basis to closer to an expected to be received cash basis of disclosing the rent and lease payment) and ineffectiveness of interest rate swaps. The other adjustments included in the IPA’s guidelines are not applicable to us.
Since MFFO excludes acquisition fees and expenses, it should not be construed as a historic performance measure. Acquisition fees and expenses are paid in cash by us, and we have not set aside or put into escrow any specific amount of proceeds from our offerings to be used to fund acquisition fees and expenses. Acquisition fees and expenses include payments to our Advisor or its affiliates and third parties. Such fees and expenses will not be reimbursed by our Advisor or its affiliates and third parties, and therefore if there are no further proceeds from the sale of shares of our common stock to fund future acquisition fees and expenses, such fees and expenses will need to be paid from either additional debt, operational earnings or cash flows, net proceeds from the sale of properties, or from ancillary cash flows. As a result, the amount of proceeds available for investment and operations would be reduced, or we may incur additional interest expense as a result of borrowed funds. Nevertheless, our Advisor or its affiliates will not accrue any claim on our assets if acquisition fees and expenses are not paid from the proceeds of our offerings. Under GAAP, acquisition fees and expenses related to the acquisition of properties determined to be business combinations are expensed as incurred, including investment transactions that are no longer under consideration, and are included in acquisition related expenses in the accompanying
consolidated
statements of comprehensive income (loss) and acquisition fees and expenses associated with transactions determined to be an asset acquisition are capitalized.
All paid and accrued acquisition fees and expenses have negative effects on returns to investors, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of other properties are generated to cover the purchase price of the real estate asset, these fees and expenses and other costs related to such property. In addition, MFFO may not be an indicator of our operating performance, especially during periods in which properties are being acquired.
In addition, certain contemplated non-cash fair value and other non-cash adjustments are considered operating non-cash adjustments to net income (loss) in determining cash flows from operations in accordance with GAAP.
We use MFFO and the adjustments used to calculate it in order to evaluate our performance against other publicly registered, non-listed REITs, which intend to have limited lives with short and defined acquisition periods and targeted exit strategies shortly thereafter. As noted above, MFFO may not be a useful measure of the impact of long-term operating performance if we do not continue to operate in this manner. We believe that our use of MFFO and the adjustments used to calculate it allow us to present our performance in a manner that reflects certain characteristics that are unique to publicly registered, non-listed REITs, such as their limited life, limited and defined acquisition period and targeted exit strategy, and
69
hence the use of such measures may be useful to investors. For example, acquisition fees and expenses are intended to be funded from the proceeds of our offering and other financing sources and not from operations. By excluding acquisition fees and expenses, the use of MFFO provides information consistent with management’s analysis of the operating performance of its real estate assets. Additionally, fair value adjustments, which are based on the impact of current market fluctuations and underlying assessments of general market conditions, but can also result from operational factors such as rental and occupancy rates, may not be directly related or attributable to our current operating performance. By excluding such charges that may reflect anticipated and unrealized gains or losses, we believe MFFO provides useful supplemental information.
Presentation of this information is intended to assist management and investors in comparing the operating performance of different REITs, although it should be noted that not all REITs calculate FFO and MFFO the same way, so comparisons with other REITs may not be meaningful. Furthermore, FFO and MFFO are not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) as an indication of our performance, as an indication of our liquidity, or indicative of funds available for our cash needs, including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with other measurements as an indication of our performance. MFFO has limitations as a performance measure. However, it may be useful in assisting management and investors in assessing the sustainability of operating performance in future operating periods, and in particular, after the offering and acquisition stages are complete and net asset value is disclosed. MFFO is not a useful measure in evaluating net asset value since impairment write-downs are taken into account in determining net asset value but not in determining MFFO.
FFO and MFFO, as described above, should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income (loss) or in its applicability in evaluating our operational performance. The method used to evaluate the value and performance of real estate under GAAP should be construed as a more relevant measure of operating performance and considered more prominently than the non-GAAP FFO and MFFO measures and the adjustments to GAAP in calculating FFO and MFFO. MFFO has not been scrutinized to the level of other similar non-GAAP performance measures by the SEC or any other regulatory body.
The following is a reconciliation of net income (loss) attributable to common stockholders, which is the most directly comparable GAAP financial measure, to FFO and MFFO for the
years
ended
December 31, 2017
,
2016
and
2015
(amounts in thousands, except share data and per share amounts):
|
|
For the Year Ended
December 31, |
||||||||||
|
2017
|
2016
|
2015
|
|||||||||
|
Net income (loss) attributable to common stockholders
|
$
|
21,279
|
|
$
|
11,297
|
|
$
|
(4,767
|
)
|
||
|
Adjustments:
|
|||||||||||
|
Depreciation and amortization
|
41,133
|
|
19,211
|
|
7,053
|
|
|||||
|
FFO attributable to common stockholders
|
$
|
62,412
|
|
$
|
30,508
|
|
$
|
2,286
|
|
||
|
Adjustments:
|
|||||||||||
|
Acquisition related expenses
(1)
|
$
|
—
|
|
$
|
5,339
|
|
$
|
10,250
|
|
||
|
Amortization of intangible assets and liabilities
(2)
|
(1,817
|
)
|
(500
|
)
|
(72
|
)
|
|||||
|
Straight-line rents
(3)
|
(10,596
|
)
|
(6,263
|
)
|
(2,449
|
)
|
|||||
|
Ineffectiveness of interest rate swaps
|
(58
|
)
|
(144
|
)
|
—
|
|
|||||
|
MFFO attributable to common stockholders
|
$
|
49,941
|
|
$
|
28,940
|
|
$
|
10,015
|
|
||
|
Weighted average common shares outstanding - basic
|
101,714,148
|
|
66,991,294
|
|
28,658,495
|
|
|||||
|
Weighted average common shares outstanding - diluted
|
101,731,944
|
|
67,007,124
|
|
28,658,495
|
|
|||||
|
Weighted average common shares outstanding - diluted for FFO
|
101,731,944
|
|
67,007,124
|
|
28,669,183
|
|
|||||
|
Net income (loss) per common share - basic
|
$
|
0.21
|
|
$
|
0.17
|
|
$
|
(0.17
|
)
|
||
|
Net income (loss) per common share - diluted
|
$
|
0.21
|
|
$
|
0.17
|
|
$
|
(0.17
|
)
|
||
|
FFO per common share - basic
|
$
|
0.61
|
|
$
|
0.46
|
|
$
|
0.08
|
|
||
|
FFO per common share - diluted
|
$
|
0.61
|
|
$
|
0.46
|
|
$
|
0.08
|
|
||
|
(1)
|
In evaluating investments in real estate assets, management differentiates the costs to acquire the investment from the operations derived from the investment. Such information would be comparable only for publicly registered, non-listed REITs that have completed their acquisitions activities and have other similar operating characteristics. By
|
70
excluding expensed acquisition related expenses, management believes MFFO provides useful supplemental information that is comparable for each type of real estate investment and is consistent with management’s analysis of the investing and operating performance of our properties. Acquisition fees and expenses include payments in cash to our Advisor and third parties. Acquisition fees and expenses incurred in a business combination, under GAAP, are considered operating expenses and as expenses are included in the determination of net income (loss), which is a performance measure under GAAP. All paid and accrued acquisition fees and expenses will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to the property.
|
(2)
|
Under GAAP, certain intangibles are accounted for at cost and reviewed at least annually for impairment, and certain intangibles are assumed to diminish predictably in value over time and are amortized, similar to depreciation and amortization of real estate-related assets that are excluded from FFO. However, because real estate values and market lease rates historically rise or fall with market conditions, management believes that by excluding charges related to amortization of these intangibles, MFFO provides useful supplemental information on the performance of the real estate.
|
|
(3)
|
Under GAAP, rental revenue is recognized on a straight-line basis over the terms of the related lease (including rent holidays if applicable). This may result in income recognition that is significantly different than the underlying contract terms. By adjusting for the change in deferred rent receivables, MFFO may provide useful supplemental information on the realized economic impact of lease terms, providing insight on the expected contractual cash flows of such lease terms, and aligns with our analysis of operating performance.
|
The following is a reconciliation of net loss attributable to common stockholders, which is the most directly comparable GAAP financial measure, to FFO and MFFO for the following quarterly periods (amounts in thousands, except share data and per share amounts):
|
|
Quarter Ended
|
||||||||||||||
|
December 31, 2017
|
September 30, 2017
|
June 30, 2017
|
March 31, 2017
|
||||||||||||
|
Net income attributable to common stockholders
|
$
|
6,408
|
|
$
|
5,439
|
|
$
|
4,641
|
|
$
|
4,791
|
|
|||
|
Adjustments:
|
|||||||||||||||
|
Depreciation and amortization
|
12,646
|
|
11,852
|
|
9,025
|
|
7,610
|
|
|||||||
|
FFO attributable to common stockholders
|
$
|
19,054
|
|
$
|
17,291
|
|
$
|
13,666
|
|
$
|
12,401
|
|
|||
|
Adjustments:
|
|||||||||||||||
|
Amortization of intangible assets and liabilities
(1)
|
(854
|
)
|
(616
|
)
|
(222
|
)
|
(125
|
)
|
|||||||
|
Straight-line rents
(2)
|
(2,910
|
)
|
(2,844
|
)
|
(2,610
|
)
|
(2,232
|
)
|
|||||||
|
Ineffectiveness of interest rate swaps
|
(42
|
)
|
(14
|
)
|
(10
|
)
|
8
|
|
|||||||
|
MFFO attributable to common stockholders
|
$
|
15,248
|
|
$
|
13,817
|
|
$
|
10,824
|
|
$
|
10,052
|
|
|||
|
Weighted average common shares outstanding - basic
|
119,651,271
|
|
105,388,118
|
|
94,910,818
|
|
86,482,927
|
|
|||||||
|
Weighted average common shares outstanding - diluted
|
119,666,234
|
|
105,405,297
|
|
94,925,665
|
|
86,499,543
|
|
|||||||
|
Net income per common share - basic
|
$
|
0.05
|
|
$
|
0.05
|
|
$
|
0.05
|
|
$
|
0.06
|
|
|||
|
Net income per common share - diluted
|
$
|
0.05
|
|
$
|
0.05
|
|
$
|
0.05
|
|
$
|
0.06
|
|
|||
|
FFO per common share - basic
|
$
|
0.17
|
|
$
|
0.16
|
|
$
|
0.14
|
|
$
|
0.14
|
|
|||
|
FFO per common share - diluted
|
$
|
0.17
|
|
$
|
0.16
|
|
$
|
0.14
|
|
$
|
0.14
|
|
|||
|
(1)
|
Under GAAP, certain intangibles are accounted for at cost and reviewed at least annually for impairment, and certain intangibles are assumed to diminish predictably in value over time and are amortized, similar to depreciation and amortization of real estate-related assets that are excluded from FFO. However, because real estate values and market lease rates historically rise or fall with market conditions, management believes that by excluding charges related to amortization of these intangibles, MFFO provides useful supplemental information on the performance of the real estate.
|
|
(2)
|
Under GAAP, rental revenue is recognized on a straight-line basis over the terms of the related lease (including rent holidays if applicable). This may result in income recognition that is significantly different than the underlying
|
71
contract terms. By adjusting for the change in deferred rent receivables, MFFO may provide useful supplemental information on the realized economic impact of lease terms, providing insight on the expected contractual cash flows of such lease terms, and aligns with our analysis of operating performance.
Subsequent Events
For a discussion of subsequent events, see
Note 21—"Subsequent Events"
to the
consolidated
financial statements that are a part of this
Annual Report on Form 10-K
.
Impact of Recent Accounting Pronouncements
Refer to Note 2—“Summary of Significant Accounting Policies” to the
consolidated
financial statements that are a part of this
Annual Report on Form 10-K
for further explanation.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. In pursuing our business plan, the primary market risk to which we are exposed is interest rate risk.
We have obtained variable rate debt financing to fund certain property acquisitions, and we are exposed to changes in the one-month LIBOR. Our objectives in managing interest rate risk seek to limit the impact of interest rate changes on operations and cash flows, and to lower overall borrowing costs. To achieve these objectives, we will borrow primarily at interest rates with the lowest margins available and, in some cases, with the ability to convert variable interest rates to fixed rates.
We have entered, and may continue to enter, into derivative financial instruments, such as interest rate swaps, in order to mitigate our interest rate risk on a given variable rate financial instrument. To the extent we do, we are exposed to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us. When the fair value of a derivative contract is negative, we owe the counterparty and, therefore, it does not possess credit risk. Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates. We manage the market risk associated with interest rate contracts by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken. We have not entered, and do not intend to enter, into derivative or interest rate transactions for speculative purposes. We may also enter into rate-lock arrangements to lock interest rates on future borrowings.
In addition to changes in interest rates, the value of our future investments will be subject to fluctuations based on changes in local and regional economic conditions and changes in the creditworthiness of tenants, which may affect our ability to refinance our debt, if necessary.
The following table summarizes our principal debt outstanding as of
December 31, 2017
(amounts in thousands):
|
December 31, 2017
|
|||
|
Notes payable:
|
|||
|
Fixed rate notes payable
|
$
|
220,436
|
|
|
Variable rate notes payable fixed through interest rate swaps
|
247,699
|
|
|
|
Variable rate notes payable
|
—
|
|
|
|
Total notes payable
|
468,135
|
|
|
|
Secured credit facility:
|
|||
|
Variable rate secured credit facility fixed through interest rate swaps
|
100,000
|
|
|
|
Variable rate secured credit facility
|
120,000
|
|
|
|
Total secured credit facility
|
220,000
|
|
|
|
Total principal debt outstanding
(1)
|
$
|
688,135
|
|
|
(1)
|
As of
December 31, 2017
, the weighted average interest rate on our total debt outstanding was
4.19%
.
|
As of
December 31, 2017
,
$120.0 million
of the
$688.1 million
total principal debt outstanding was subject to variable interest rates with a weighted average interest rate of 3.70% per annum. As of
December 31, 2017
, an increase of 50 basis points in the market rates of interest would have resulted in a change in interest expense of approximately $0.6 million per year.
72
As of
December 31, 2017
, we had 13 interest rate swap agreements outstanding, which mature on various dates from
December 2020
to
November 2022
. As of
December 31, 2017
, the aggregate settlement asset value was $3.8 million. The settlement value of these interest rate swap agreements are dependent upon existing market interest rates and swap spreads. As of
December 31, 2017
, an increase of 50 basis points in the market rates of interest would have resulted in a settlement asset value of the interest rate swaps of $10.0 million.
We do not have any foreign operations and thus we are not exposed to foreign currency fluctuations.
Item 8. Financial Statements and Supplementary Data.
See the index at Part IV, Item 15. Exhibits and Financial Statement Schedules.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
(a)
Evaluation of disclosure controls and procedures.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports pursuant to the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms, and that such information is accumulated and communicated to us, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and we necessarily were required to apply our judgment in evaluating whether the benefits of the controls and procedures that we adopt outweigh their costs.
As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, we conducted an evaluation as of
December 31, 2017
under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures, as of
December 31, 2017
, were effective at a reasonable assurance level.
(b)
Management’s Report on Internal Control over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Because of its inherent limitations, internal control is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. Under the supervision, and with the participation, of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in
Internal Control-Integrated Framework
issued in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission, or the Original Framework. Based on our evaluation under the Original Framework, our management concluded that our internal control over financial reporting was effective as of
December 31, 2017
.
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to the permanent deferral adopted by the Securities and Exchange Commission that permits the Company to provide only management’s report in this annual report.
(c)
Changes in internal control over financial reporting.
There have been no changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the
three months
ended
December 31, 2017
, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
73
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this Item will be presented in our definitive proxy statement for our
2018
annual meeting of stockholders, which is expected to be filed with the SEC within 120 days after
December 31, 2017
, and is incorporated herein by reference.
Item 11. Executive Compensation.
The information required by this Item will be presented in our definitive proxy statement for our 2018 annual meeting of stockholders, which is expected to be filed with the SEC within 120 days after
December 31, 2017
, and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item will be presented in our definitive proxy statement for our 2018 annual meeting of stockholders, which is expected to be filed with the SEC within 120 days after
December 31, 2017
, and is incorporated herein by reference.
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item will be presented in our definitive proxy statement for our 2018 annual meeting of stockholders, which is expected to be filed with the SEC within 120 days after
December 31, 2017
, and is incorporated herein by reference.
Item 14.
Principal Accounting Fees and Services.
The information required by this Item will be presented in our definitive proxy statement for our 2018 annual meeting of stockholders, which is expected to be filed with the SEC within 120 days after
December 31, 2017
, and is incorporated herein by reference.
74
PART IV
Item 15.
Exhibits and Financial Statement Schedules.
The following documents are filed as part of this Annual Report:
(a)(1)
Consolidated Financial Statements:
The index of the consolidated financial statements contained herein is set forth on page F-1 hereof.
(a)(2)
Financial Statement Schedules:
The financial statement schedules are listed in the index of the consolidated financial statements on page F-1 hereof.
No additional financial statement schedules are presented since the required information is not present or not present in amounts sufficient to require submission of the schedule or because the information required is enclosed in the Consolidated Financial Statements and notes thereto.
(a)(3)
Exhibits:
(b)
Exhibits:
See Item 15(a)(3) above.
(c)
Financial Statement Schedules:
See Item 15(a)(2) above.
75
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF CARTER VALIDUS MISSION CRITICAL REIT II, INC.
|
|
|
Page
|
|
Consolidated Financial Statements
|
||
|
|
||
|
Financial Statement Schedules
|
||
F-1
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Carter Validus Mission Critical REIT II, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Carter Validus Mission Critical REIT II, Inc. (and subsidiaries) (the Company) as of December 31, 2017 and 2016, the related consolidated statements of comprehensive income (loss), stockholders’ 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 schedule III (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2014.
/s/ KPMG LLP
Tampa, Florida
March 21, 2018
Certified Public Accountants
F-2
CARTER VALIDUS MISSION CRITICAL REIT II, INC.
(in thousands, except share data)
|
December 31, 2017
|
December 31, 2016
|
||||||
|
ASSETS
|
|||||||
|
Real estate:
|
|||||||
|
Land
|
$
|
223,277
|
|
$
|
154,385
|
|
|
|
Buildings and improvements, less accumulated depreciation of $45,789 and $18,521, respectively
|
1,250,794
|
|
722,492
|
|
|||
|
Construction in progress
|
31,334
|
|
20,123
|
|
|||
|
Total real estate, net
|
1,505,405
|
|
897,000
|
|
|||
|
Cash and cash equivalents
|
74,803
|
|
50,446
|
|
|||
|
Acquired intangible assets, less accumulated amortization of $22,162 and $7,995, respectively
|
150,554
|
|
98,053
|
|
|||
|
Other assets, net
|
47,182
|
|
24,539
|
|
|||
|
Total assets
|
$
|
1,777,944
|
|
$
|
1,070,038
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|||||||
|
Liabilities:
|
|||||||
|
Notes payable, net of deferred financing costs of $4,393 and $1,945, respectively
|
$
|
463,742
|
|
$
|
151,045
|
|
|
|
Credit facility, net of deferred financing costs of $601 and $876, respectively
|
219,399
|
|
219,124
|
|
|||
|
Accounts payable due to affiliates
|
15,249
|
|
7,384
|
|
|||
|
Accounts payable and other liabilities
|
27,709
|
|
17,184
|
|
|||
|
Intangible lease liabilities, less accumulated amortization of $2,760 and $634, respectively
|
61,294
|
|
6,873
|
|
|||
|
Total liabilities
|
787,393
|
|
401,610
|
|
|||
|
Stockholders’ equity:
|
|||||||
|
Preferred stock, $0.01 par value per share, 100,000,000 shares authorized; none issued and outstanding
|
—
|
|
—
|
|
|||
|
Common stock, $0.01 par value per share, 500,000,000 shares authorized; 126,559,834 and 83,109,025 shares issued, respectively; 124,327,777 and 82,744,288 shares outstanding, respectively
|
1,243
|
|
827
|
|
|||
|
Additional paid-in capital
|
1,084,905
|
|
723,859
|
|
|||
|
Accumulated distributions in excess of earnings
|
(99,309
|
)
|
(57,100
|
)
|
|||
|
Accumulated other comprehensive income
|
3,710
|
|
840
|
|
|||
|
Total stockholders’ equity
|
990,549
|
|
668,426
|
|
|||
|
Noncontrolling interests
|
2
|
|
2
|
|
|||
|
Total equity
|
990,551
|
|
668,428
|
|
|||
|
Total liabilities and stockholders’ equity
|
$
|
1,777,944
|
|
$
|
1,070,038
|
|
|
The accompanying notes are an integral part of these
consolidated
financial statements.
F-3
CARTER VALIDUS MISSION CRITICAL REIT II, INC.
(in thousands, except share data and per share amounts)
|
|
For the Year Ended
December 31, |
||||||||||
|
2017
|
2016
|
2015
|
|||||||||
|
Revenue:
|
|||||||||||
|
Rental and parking revenue
|
$
|
106,048
|
|
$
|
49,699
|
|
$
|
19,000
|
|
||
|
Tenant reimbursement revenue
|
19,047
|
|
6,732
|
|
2,286
|
|
|||||
|
Total revenue
|
125,095
|
|
56,431
|
|
21,286
|
|
|||||
|
Expenses:
|
|||||||||||
|
Rental and parking expenses
|
26,096
|
|
8,164
|
|
2,836
|
|
|||||
|
General and administrative expenses
|
4,069
|
|
3,105
|
|
2,133
|
|
|||||
|
Acquisition related expenses
|
—
|
|
5,339
|
|
10,250
|
|
|||||
|
Asset management fees
|
9,963
|
|
4,925
|
|
1,895
|
|
|||||
|
Depreciation and amortization
|
41,133
|
|
19,211
|
|
7,053
|
|
|||||
|
Total expenses
|
81,261
|
|
40,744
|
|
24,167
|
|
|||||
|
Income (loss) from operations
|
43,834
|
|
15,687
|
|
(2,881
|
)
|
|||||
|
Interest expense, net
|
22,555
|
|
4,390
|
|
1,886
|
|
|||||
|
Net income (loss) attributable to common stockholders
|
$
|
21,279
|
|
$
|
11,297
|
|
$
|
(4,767
|
)
|
||
|
Other comprehensive income:
|
|||||||||||
|
Unrealized income on interest rate swaps, net
|
$
|
2,870
|
|
$
|
840
|
|
$
|
—
|
|
||
|
Other comprehensive income attributable to common stockholders
|
2,870
|
|
840
|
|
—
|
|
|||||
|
Comprehensive income (loss) attributable to common stockholders
|
$
|
24,149
|
|
$
|
12,137
|
|
$
|
(4,767
|
)
|
||
|
Weighted average number of common shares outstanding:
|
|||||||||||
|
Basic
|
101,714,148
|
|
66,991,294
|
|
28,658,495
|
|
|||||
|
Diluted
|
101,731,944
|
|
67,007,124
|
|
28,658,495
|
|
|||||
|
Net income (loss) per common share attributable to common stockholders:
|
|||||||||||
|
Basic
|
$
|
0.21
|
|
$
|
0.17
|
|
$
|
(0.17
|
)
|
||
|
Diluted
|
$
|
0.21
|
|
$
|
0.17
|
|
$
|
(0.17
|
)
|
||
The accompanying notes are an integral part of these
consolidated
financial statements.
F-4
CARTER VALIDUS MISSION CRITICAL REIT II, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except for share data)
|
Common Stock
|
||||||||||||||||||||||||||||||
|
No. of
Shares |
Par
Value |
Additional
Paid-in Capital |
Accumulated Distributions in Excess of Earnings
|
Accumulated Other Comprehensive Income
|
Total
Stockholders’ Equity |
Noncontrolling
Interests |
Total
Equity |
|||||||||||||||||||||||
|
Balance, December 31, 2014
|
7,110,501
|
|
$
|
71
|
|
$
|
60,081
|
|
$
|
(3,049
|
)
|
$
|
—
|
|
$
|
57,103
|
|
$
|
2
|
|
$
|
57,105
|
|
|||||||
|
Issuance of common stock
|
40,361,130
|
|
404
|
|
401,007
|
|
—
|
|
—
|
|
401,411
|
|
—
|
|
401,411
|
|
||||||||||||||
|
Issuance of common stock under the distribution reinvestment plan
|
1,014,853
|
|
10
|
|
9,633
|
|
—
|
|
—
|
|
9,643
|
|
—
|
|
9,643
|
|
||||||||||||||
|
Vesting of restricted common stock
|
2,250
|
|
—
|
|
34
|
|
—
|
|
—
|
|
34
|
|
—
|
|
34
|
|
||||||||||||||
|
Commissions on sale of common stock and related dealer manager fees
|
—
|
|
—
|
|
(38,163
|
)
|
—
|
|
—
|
|
(38,163
|
)
|
—
|
|
(38,163
|
)
|
||||||||||||||
|
Other offering costs
|
—
|
|
—
|
|
(6,371
|
)
|
—
|
|
—
|
|
(6,371
|
)
|
—
|
|
(6,371
|
)
|
||||||||||||||
|
Repurchase of common stock
|
(31,543
|
)
|
—
|
|
(311
|
)
|
—
|
|
—
|
|
(311
|
)
|
—
|
|
(311
|
)
|
||||||||||||||
|
Distributions declared to common stockholders
|
—
|
|
—
|
|
—
|
|
(18,245
|
)
|
—
|
|
(18,245
|
)
|
—
|
|
(18,245
|
)
|
||||||||||||||
|
Net loss
|
—
|
|
—
|
|
—
|
|
(4,767
|
)
|
—
|
|
(4,767
|
)
|
—
|
|
(4,767
|
)
|
||||||||||||||
|
Balance, December 31, 2015
|
48,457,191
|
|
$
|
485
|
|
$
|
425,910
|
|
$
|
(26,061
|
)
|
$
|
—
|
|
$
|
400,334
|
|
$
|
2
|
|
$
|
400,336
|
|
|||||||
|
Issuance of common stock
|
32,201,892
|
|
321
|
|
314,515
|
|
—
|
|
—
|
|
314,836
|
|
—
|
|
314,836
|
|
||||||||||||||
|
Issuance of common stock under the distribution reinvestment plan
|
2,413,899
|
|
24
|
|
22,865
|
|
—
|
|
—
|
|
22,889
|
|
—
|
|
22,889
|
|
||||||||||||||
|
Vesting of restricted common stock
|
4,500
|
|
—
|
|
58
|
|
—
|
|
—
|
|
58
|
|
—
|
|
58
|
|
||||||||||||||
|
Commissions on sale of common stock and related dealer manager fees
|
—
|
|
—
|
|
(24,546
|
)
|
—
|
|
—
|
|
(24,546
|
)
|
—
|
|
(24,546
|
)
|
||||||||||||||
|
Distribution and servicing fees
|
—
|
|
—
|
|
(6,213
|
)
|
—
|
|
—
|
|
(6,213
|
)
|
—
|
|
(6,213
|
)
|
||||||||||||||
|
Other offering costs
|
—
|
|
—
|
|
(5,619
|
)
|
—
|
|
—
|
|
(5,619
|
)
|
—
|
|
(5,619
|
)
|
||||||||||||||
|
Repurchase of common stock
|
(333,194
|
)
|
(3
|
)
|
(3,111
|
)
|
—
|
|
—
|
|
(3,114
|
)
|
—
|
|
(3,114
|
)
|
||||||||||||||
|
Distributions declared to common stockholders
|
—
|
|
—
|
|
—
|
|
(42,336
|
)
|
—
|
|
(42,336
|
)
|
—
|
|
(42,336
|
)
|
||||||||||||||
|
Other comprehensive income
|
—
|
|
—
|
|
—
|
|
—
|
|
840
|
|
840
|
|
—
|
|
840
|
|
||||||||||||||
|
Net income
|
—
|
|
—
|
|
—
|
|
11,297
|
|
—
|
|
11,297
|
|
—
|
|
11,297
|
|
||||||||||||||
|
Balance, December 31, 2016
|
82,744,288
|
|
$
|
827
|
|
$
|
723,859
|
|
$
|
(57,100
|
)
|
$
|
840
|
|
$
|
668,426
|
|
$
|
2
|
|
$
|
668,428
|
|
|||||||
|
Issuance of common stock
|
39,920,746
|
|
399
|
|
385,692
|
|
—
|
|
—
|
|
386,091
|
|
—
|
|
386,091
|
|
||||||||||||||
|
Issuance of common stock under the distribution reinvestment plan
|
3,536,813
|
|
35
|
|
32,229
|
|
—
|
|
—
|
|
32,264
|
|
—
|
|
32,264
|
|
||||||||||||||
|
Vesting of restricted common stock
|
6,750
|
|
—
|
|
76
|
|
—
|
|
—
|
|
76
|
|
—
|
|
76
|
|
||||||||||||||
|
Commissions on sale of common stock and related dealer manager fees
|
—
|
|
—
|
|
(22,713
|
)
|
—
|
|
—
|
|
(22,713
|
)
|
—
|
|
(22,713
|
)
|
||||||||||||||
|
Distribution and servicing fees
|
—
|
|
—
|
|
(9,617
|
)
|
—
|
|
—
|
|
(9,617
|
)
|
—
|
|
(9,617
|
)
|
||||||||||||||
|
Other offering costs
|
—
|
|
—
|
|
(7,480
|
)
|
—
|
|
—
|
|
(7,480
|
)
|
—
|
|
(7,480
|
)
|
||||||||||||||
|
Repurchase of common stock
|
(1,880,820
|
)
|
(18
|
)
|
(17,141
|
)
|
—
|
|
—
|
|
(17,159
|
)
|
—
|
|
(17,159
|
)
|
||||||||||||||
|
Distributions declared to common stockholders
|
—
|
|
—
|
|
—
|
|
(63,488
|
)
|
—
|
|
(63,488
|
)
|
—
|
|
(63,488
|
)
|
||||||||||||||
|
Other comprehensive income
|
—
|
|
—
|
|
—
|
|
—
|
|
2,870
|
|
2,870
|
|
—
|
|
2,870
|
|
||||||||||||||
|
Net income
|
—
|
|
—
|
|
—
|
|
21,279
|
|
—
|
|
21,279
|
|
—
|
|
21,279
|
|
||||||||||||||
|
Balance, December 31, 2017
|
124,327,777
|
|
$
|
1,243
|
|
$
|
1,084,905
|
|
$
|
(99,309
|
)
|
$
|
3,710
|
|
$
|
990,549
|
|
$
|
2
|
|
$
|
990,551
|
|
|||||||
The accompanying notes are an integral part of these
consolidated
financial statements.
F-5
CARTER VALIDUS MISSION CRITICAL REIT II, INC.
(in thousands)
|
|
For the Year Ended
December 31, |
||||||||||
|
|
2017
|
2016
|
2015
|
||||||||
|
Cash flows from operating activities:
|
|||||||||||
|
Net income (loss)
|
$
|
21,279
|
|
$
|
11,297
|
|
$
|
(4,767
|
)
|
||
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
|
|||||||||||
|
Depreciation and amortization
|
41,133
|
|
19,211
|
|
7,053
|
|
|||||
|
Amortization of deferred financing costs
|
2,612
|
|
1,061
|
|
721
|
|
|||||
|
Amortization of above-market leases
|
309
|
|
36
|
|
26
|
|
|||||
|
Amortization of intangible lease liabilities
|
(2,126
|
)
|
(536
|
)
|
(98
|
)
|
|||||
|
Straight-line rent
|
(10,596
|
)
|
(6,263
|
)
|
(2,449
|
)
|
|||||
|
Stock-based compensation
|
76
|
|
58
|
|
34
|
|
|||||
|
Ineffectiveness of interest rate swaps
|
(58
|
)
|
(144
|
)
|
—
|
|
|||||
|
Changes in operating assets and liabilities:
|
|||||||||||
|
Accounts payable and other liabilities
|
5,385
|
|
1,307
|
|
4,915
|
|
|||||
|
Accounts payable due to affiliates
|
645
|
|
531
|
|
389
|
|
|||||
|
Other assets
|
(6,832
|
)
|
(1,583
|
)
|
(2,534
|
)
|
|||||
|
Net cash provided by operating activities
|
51,827
|
|
24,975
|
|
3,290
|
|
|||||
|
Cash flows from investing activities:
|
|||||||||||
|
Investment in real estate
|
(604,372
|
)
|
(535,447
|
)
|
(374,164
|
)
|
|||||
|
Acquisition costs capitalized subsequent
|
(44
|
)
|
—
|
|
—
|
|
|||||
|
Capital expenditures
|
(32,467
|
)
|
(8,253
|
)
|
(1,289
|
)
|
|||||
|
Real estate deposits, net
|
190
|
|
153
|
|
(75
|
)
|
|||||
|
Net cash used in investing activities
|
(636,693
|
)
|
(543,547
|
)
|
(375,528
|
)
|
|||||
|
Cash flows from financing activities:
|
|||||||||||
|
Proceeds from issuance of common stock
|
386,091
|
|
314,836
|
|
401,411
|
|
|||||
|
Proceeds from notes payable
|
309,452
|
|
152,990
|
|
—
|
|
|||||
|
Payments on notes payable
|
(43
|
)
|
—
|
|
—
|
|
|||||
|
Proceeds from credit facility
|
240,000
|
|
240,000
|
|
92,000
|
|
|||||
|
Payments on credit facility
|
(240,000
|
)
|
(110,000
|
)
|
(39,500
|
)
|
|||||
|
Payments of deferred financing costs
|
(3,564
|
)
|
(4,133
|
)
|
(1,799
|
)
|
|||||
|
Repurchases of common stock
|
(17,159
|
)
|
(3,114
|
)
|
(311
|
)
|
|||||
|
Offering costs on issuance of common stock
|
(32,079
|
)
|
(30,628
|
)
|
(46,611
|
)
|
|||||
|
Distributions to stockholders
|
(28,994
|
)
|
(17,659
|
)
|
(6,379
|
)
|
|||||
|
Net cash provided by financing activities
|
613,704
|
|
542,292
|
|
398,811
|
|
|||||
|
Net change in cash, cash equivalents and restricted cash
|
28,838
|
|
23,720
|
|
26,573
|
|
|||||
|
Cash, cash equivalents and restricted cash - Beginning of year
|
56,909
|
|
33,189
|
|
6,616
|
|
|||||
|
Cash, cash equivalents and restricted cash - End of year
|
$
|
85,747
|
|
$
|
56,909
|
|
$
|
33,189
|
|
||
|
Supplemental cash flow disclosure:
|
|||||||||||
|
Interest paid, net of interest capitalized of $2,137, $524 and $0, respectively
|
$
|
20,867
|
|
$
|
3,341
|
|
$
|
1,055
|
|
||
|
Supplemental disclosure of non-cash transactions:
|
|||||||||||
|
Common stock issued through distribution reinvestment plan
|
$
|
32,264
|
|
$
|
22,889
|
|
$
|
9,643
|
|
||
|
Distribution and servicing fees accrued during the period
|
$
|
7,626
|
|
$
|
5,750
|
|
$
|
—
|
|
||
|
Liabilities assumed at acquisition
|
$
|
6,551
|
|
$
|
1,236
|
|
$
|
—
|
|
||
|
Accrued capital expenditures
|
$
|
2,643
|
|
$
|
4,221
|
|
$
|
—
|
|
||
The accompanying notes are an integral part of these
consolidated
financial statements.
F-6
CARTER VALIDUS MISSION CRITICAL REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
Note 1—
Organization and Business Operations
Carter Validus Mission Critical REIT II, Inc., or the Company, is a Maryland corporation that was formed on January 11, 2013. The Company elected to be taxed as a real estate investment trust, or a REIT, under the Internal Revenue Code of 1986, as amended, for federal income tax purposes, on September 11, 2015. Substantially all of the Company’s business is conducted through Carter Validus Operating Partnership II, LP, a Delaware limited partnership, or the Operating Partnership, formed on January 10, 2013. The Company is the sole general partner of the Operating Partnership and Carter Validus Advisors II, LLC, or the Advisor, is the special limited partner of the Operating Partnership.
The Company commenced the initial public offering of
$2,350,000,000
in shares of common stock, or the maximum offering amount, consisting of up to
$2,250,000,000
in shares in its primary offering and up to
$100,000,000
in shares of common stock to be made available pursuant to the Company’s distribution reinvestment plan, or the DRIP, on a “best efforts” basis, or the Initial Offering, pursuant to a registration statement on Form S-11, or the Registration Statement, filed with the Securities and Exchange Commission, or the SEC, under the Securities Act of 1933, as amended, or the Securities Act, which was declared effective on May 29, 2014. The Company ceased offering shares of common stock pursuant to the Initial Offering on November 24, 2017. At the completion of the Initial Offering, the Company had accepted investors' subscriptions for and issued approximately
125,095,000
shares of Class A, Class I and Class T common stock, including shares of common stock issues pursuant to the DRIP, resulting in gross proceeds of
$1,223,803,000
.
On November 27, 2017, the Company commenced its follow-on offering of up to
$1,000,000,000
in shares of common stock, or the Offering, and collectively with the Initial Offering and the DRIP Offering, the Offerings. Shares of common stock in the Offering are being publicly offered on a "best efforts" basis pursuant to a registration statement on Form S-11, or the Registration Statement, filed with the SEC under the Securities Act.
On October 13, 2017, the Company registered
10,893,246
of shares of common stock under the DRIP pursuant to a registration statement on Form S-3, or the DRIP Registration Statement, for a price of
$9.18
per Class A share, Class I share and Class T share for a proposed maximum offering price of
$100,000,000
in shares of common stock, or the DRIP Offering. The DRIP Registration Statement became automatically effective with the SEC upon filing and the Company commenced offering shares of common stock pursuant to the DRIP Registration Statement on December 1, 2017. On December 6, 2017, the Company filed a post-effective amendment to the DRIP Registration Statement to register
10,893,246
shares of Class A common stock, Class I common stock, Class T common stock and Class T2 common stock at
$9.18
per share.
On June 2, 2017, the Company filed Articles Supplementary to the Second Articles of Amendment and Restatement with the State Department of Assessments and Taxation of Maryland reclassifying a portion of its Class A shares, Class I shares and Class T shares as Class T2 shares. On December 6, 2017, the Company filed Post-Effective Amendment No. 1 to the Registration Statement on Form S-11 to register Class T2 shares of common stock, which was declared effective by the SEC on November 27, 2017.
As of March 14, 2018, the Company ceased offering shares of Class T common stock in the Offering. Commencing March 15, 2018, the Company was offering, in any combination with a dollar value up to the maximum offering amount, Class A shares of common stock at a price of
$10.200
per share, Class I shares of common stock at a price of
$9.273
per share, and Class T2 shares of common stock at a price of
$9.714
per share. The offering prices are based on the most recent estimated per share net asset value of each of the Class A common stock, Class I common stock and Class T common stock, and any applicable per share upfront selling commissions and dealer manager fees.
As of December 31, 2017, the Company had issued approximately
126,560,000
shares of Class A, Class I and Class T common stock in the Offerings, resulting in receipt of gross proceeds of approximately
$1,237,638,000
, before share repurchases of
$20,584,000
, selling commissions and dealer manager fees of approximately
$91,898,000
and other offering costs of approximately
$23,357,000
.
Substantially all of the Company’s business is managed by the Advisor. Carter Validus Real Estate Management Services II, LLC, or the Property Manager, an affiliate of the Advisor, serves as the Company’s property manager. The Advisor and the Property Manager have received, and will continue to receive, fees for services related to the acquisition and operational stages. The Advisor will also be eligible to receive fees during the liquidation stage. SC Distributors, LLC, an affiliate of the Advisor, or the Dealer Manager, serves as the dealer manager of the Offering. The Dealer Manager has received, and will continue to receive, fees for services related to the Offering.
F-7
The Company was formed to invest primarily in quality income-producing commercial real estate, with a focus on data centers and healthcare properties, preferably with long-term net leases to creditworthy tenants, as well as to make other real estate-related investments that relate to such property types, which may include equity or debt interests, including securities, in other real estate entities. The Company also may originate or invest in real estate-related notes receivable. The Company expects real estate-related notes receivable originations and investments to be focused on first mortgage loans, but also may include real estate-related bridge loans, mezzanine loans and securitized notes receivable. As of
December 31, 2017
, the Company owned
53
real estate investments, consisting of
70
properties.
Except as the context otherwise requires, “we,” “our,” “us,” and the “Company” refer to Carter Validus Mission Critical REIT II, Inc., the Operating Partnership and all wholly-owned subsidiaries.
Note 2—
Summary of Significant Accounting Policies
The summary of significant accounting policies presented below is designed to assist in understanding the Company’s
consolidated
financial statements. Such
consolidated
financial statements and the accompanying notes thereto are the representation of management. These accounting policies conform to accounting principles generally accepted in the United States of America, or GAAP, in all material respects, and have been consistently applied in preparing the
consolidated
financial statements.
Principles of Consolidation and Basis of Presentation
The accompanying
consolidated
financial statements include the accounts of the Company, the Operating Partnership, and all wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the
consolidated
financial statements and accompanying notes in conformity with GAAP requires the Company to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These estimates are made and evaluated on an ongoing basis using information that is currently available as well as various other assumptions believed to be reasonable under the circumstances. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents may include cash and short-term investments. Short-term investments are stated at cost, which approximates fair value.
Restricted Cash
Restricted cash consists of restricted cash held in escrow and restricted bank deposits. Restricted cash held in escrow includes cash held in escrow accounts for capital improvements for certain properties as well as cash held by lenders in escrow accounts for tenant and capital improvements, repairs and maintenance and other lender reserves for certain properties, in accordance with the respective lender’s loan agreement. Restricted cash held in escrow is reported in other assets, net in the accompanying
consolidated balance sheets
. Restricted bank deposits consist of tenant receipts for certain properties which are required to be deposited into lender-controlled accounts in accordance with the respective lender's loan agreement. Restricted bank deposits are reported in other assets, net in the accompanying
consolidated balance sheets
. See
Note 6—"Other Assets, Net"
.
On April 1, 2017, the Company adopted Accounting Standards Update, or ASU, 2016-18,
Restricted Cash
, or ASU 2016-18. ASU 2016-18 requires that a statement of cash flows explain the change during a reporting period in the total of cash, cash equivalents and restricted cash. This ASU states that transfers between cash, cash equivalents and restricted cash are not part of the Company’s operating, investing and financing activities. Therefore, restricted cash should be included with cash and cash equivalents when reconciling the beginning of period and end of period total amounts shown on the statement of cash flows. As required, the Company retrospectively applied the guidance in ASU 2016-18 to the prior periods presented, which resulted in a decrease of
$2,491,000
in net cash used in investing activities and an increase of
$2,040,000
in net cash provided by financing activities for the year ended December 31, 2016 and an increase of
$995,000
in net cash used in investing activities for the year ended December 31, 2015 on the
consolidated statements of cash flows
.
F-8
The following table presents a reconciliation of the beginning of year and end of year cash, cash equivalents and restricted cash reported within the
consolidated balance sheets
to the totals shown in the
consolidated statements of cash flows
:
|
For the Year Ended
December 31, |
||||||||||||
|
Beginning of year:
|
2017
|
2016
|
2015
|
|||||||||
|
Cash and cash equivalents
|
50,446
|
|
31,262
|
|
3,694
|
|
||||||
|
Restricted cash
|
6,463
|
|
1,927
|
|
2,922
|
|
||||||
|
Cash, cash equivalents and restricted cash
|
$
|
56,909
|
|
$
|
33,189
|
|
$
|
6,616
|
|
|||
|
End of year:
|
||||||||||||
|
Cash and cash equivalents
|
74,803
|
|
50,446
|
|
31,262
|
|
||||||
|
Restricted cash
|
10,944
|
|
6,463
|
|
1,927
|
|
||||||
|
Cash, cash equivalents and restricted cash
|
$
|
85,747
|
|
$
|
56,909
|
|
$
|
33,189
|
|
|||
Deferred Financing Costs
Deferred financing costs are loan fees, legal fees and other third-party costs associated with obtaining financing. These costs are amortized over the terms of the respective financing agreements using the effective interest method. Unamortized deferred financing costs are generally expensed when the associated debt is refinanced or repaid before maturity unless specific rules are met that would allow for the carryover of such costs to the refinanced debt. Costs incurred in seeking financing transactions that do not close are expensed in the period in which it is determined that the financing will not close. Deferred financing costs are recorded as a reduction of the related debt on the accompanying consolidated balance sheets.
Investment in Real Estate
Real estate costs related to the acquisition, development, construction and improvement of properties are capitalized. Repair and maintenance costs are expensed as incurred and significant replacements and betterments are capitalized. Repair and maintenance costs include all costs that do not extend the useful life of the real estate asset. The Company considers the period of future benefit of an asset in determining the appropriate useful life. Real estate assets, other than land, are depreciated or amortized on a straight-line basis over each asset’s useful life. The Company anticipates the estimated useful lives of its assets by class as follows:
|
Buildings and improvements
|
15 – 40 years
|
|
|
Tenant improvements
|
Shorter of lease term or expected useful life
|
|
|
Furniture, fixtures, and equipment
|
3 – 10 years
|
|
Allocation of Purchase Price of Real Estate
Upon the acquisition of real properties, the Company evaluates whether the acquisition is a business combination or an asset acquisition. For both business combinations and asset acquisitions we allocate the purchase price of properties to acquired tangible assets, consisting of land, buildings and improvements, and acquired intangible assets and liabilities, consisting of the value of above-market and below-market leases and the value of in-place leases. For asset acquisitions, the Company capitalizes transaction costs and allocates the purchase price using a relative fair value method allocating all accumulated costs. For business combinations, the Company expenses transaction costs associated as incurred and allocates the purchase price based on the estimated fair value of each separately identifiable asset and liability.
The fair values of the tangible assets of an acquired property (which includes land, buildings and improvements) are determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land and buildings and improvements based on management’s determination of the relative fair value of these assets. Management determines the as-if-vacant fair value of a property using methods similar to those used by independent appraisers. Factors considered by management in performing these analyses include an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases, including leasing commissions and other related costs. In estimating carrying costs, management includes real estate taxes, insurance, and other operating expenses during the expected lease-up periods based on current market conditions.
The fair values of above-market and below-market in-place lease values are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) an estimate of fair market lease rates for the corresponding in-place leases,
F-9
measured over a period equal to the remaining non-cancelable term of the lease including any fixed rate bargain renewal periods, with respect to a below-market lease. The above-market and below-market lease values are capitalized as intangible lease assets or liabilities. Above-market lease values are amortized as an adjustment of rental income over the remaining terms of the respective leases. Below-market leases are amortized as an adjustment of rental income over the remaining terms of the respective leases, including any fixed rate bargain renewal periods. If a lease were to be terminated prior to its stated expiration, all unamortized amounts of above-market and below-market in-place lease values related to that lease would be recorded as an adjustment to rental income.
The fair values of in-place leases include an estimate of direct costs associated with obtaining a new tenant and opportunity costs associated with lost rentals that are avoided by acquiring an in-place lease. Direct costs associated with obtaining a new tenant include commissions, tenant improvements, and other direct costs and are estimated based on management’s consideration of current market costs to execute a similar lease. The value of opportunity costs is calculated using the contractual amounts to be paid pursuant to the in-place leases over a market absorption period for a similar lease. These lease intangibles are amortized to expense over the remaining terms of the respective leases. If a lease were to be terminated prior to its stated expiration, all unamortized amounts of in-place lease assets relating to that lease would be expensed.
Acquisition Fees and Expenses
Acquisition fees and expenses associated with the acquisition of properties determined to be business combinations are expensed as incurred, including investment transactions that are no longer under consideration, and are included in acquisition related expenses in the accompanying
consolidated statements of comprehensive income (loss)
. Acquisition fees and expenses associated with transactions determined to be an asset acquisition are capitalized in real estate, net in the accompanying consolidated balance sheets.
Impairment of Long Lived Assets
The Company continually monitors events and changes in circumstances that could indicate that the carrying amounts of its real estate and related intangible assets may not be recoverable. When indicators of potential impairment suggest that the carrying value of real estate and related intangible assets may not be recoverable, the Company assesses the recoverability of the assets by estimating whether the Company will recover the carrying value of the asset through its undiscounted future cash flows and its eventual disposition. If, based on this analysis, the Company does not believe that it will be able to recover the carrying value of the asset, the Company will record an impairment loss to the extent that the carrying value exceeds the estimated fair value of the asset.
No
impairment loss has been recorded to date.
When developing estimates of expected future cash flows, the Company makes certain assumptions regarding future market rental income amounts subsequent to the expiration of current lease arrangements, property operating expenses, terminal capitalization and discount rates, the number of months it takes to re-lease the property, required tenant improvements and the number of years the property will be held for investment. The use of alternative assumptions in the future cash flow analysis could result in a different determination of the property’s future cash flows and a different conclusion regarding the existence of an impairment, the extent of such loss, if any, as well as the carrying value of the real estate and related assets.
Fair Value
ASC 820,
Fair Value Measurements and Disclosures
, or ASC 820, defines fair value, establishes a framework for measuring fair value in accordance with GAAP and expands disclosures about fair value measurements. ASC 820 emphasizes that fair value is intended to be a market-based measurement, as opposed to a transaction-specific measurement.
Fair value is defined by ASC 820 as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Depending on the nature of the asset or liability, various techniques and assumptions can be used to estimate the fair value. Assets and liabilities are measured using inputs from three levels of the fair value hierarchy, as follows:
Level 1—Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. An active market is defined as a market in which transactions for the assets or liabilities occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2—Inputs other than quoted prices for similar assets and liabilities in active markets that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data correlation or other means (market corroborated inputs).
Level 3—Unobservable inputs, only used to the extent that observable inputs are not available, reflect the Company’s assumptions about the pricing of an asset or liability.
F-10
The following describes the methods the Company used to estimate the fair value of the Company’s financial assets and liabilities:
Cash and cash equivalents, restricted cash, tenant receivables, property escrow deposits, prepaid and other assets, accounts payable and accrued liabilities
—The Company considered the carrying values of these financial instruments, assets and liabilities, to approximate fair value because of the short period of time between origination of the instruments and their expected realization.
Notes payable—Fixed Rate
—The fair value is estimated by discounting the expected cash flows on notes payable at current rates at which management believes similar loans would be made considering the terms and conditions of the loan and prevailing market interest rates.
Notes payable—Variable Rate
—The carrying value of variable rate notes payable approximates fair value because the interest rates adjust with current market conditions.
Secured credit facility—Fixed Rate
—The fair value is estimated by discounting the expected cash flows on the fixed rate secured credit facility at current rates at which management believes similar borrowings would be made considering the terms and conditions of the borrowings and prevailing market interest rates.
Secured credit facility—Variable Rate
—The carrying value of the variable rate secured credit facility approximates fair value as the interest is calculated at the London Interbank Offered Rate, plus an applicable margin. The interest rate resets to market on a monthly basis. The fair value of the Company's variable rate secured credit facility is estimated based on the interest rates currently offered to the Company by financial institutions.
Derivative instruments
—The Company’s derivative instruments consist of interest rate swaps. These swaps are carried at fair value to comply with the provisions of ASC 820. The fair value of these instruments is determined using interest rate market pricing models. The Company incorporated credit valuation adjustments to appropriately reflect the Company’s nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. Considerable judgment is necessary to develop estimated fair values of financial assets and liabilities. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize, or be liable for on disposition of the financial assets and liabilities.
Revenue Recognition, Tenant Receivables and Allowance for Uncollectible Accounts
The Company recognizes revenue in accordance with Accounting Standards Codification, or ASC, 605,
Revenue Recognition
, or ASC 605. ASC 605 requires that all four of the following basic criteria be met before revenue is realized or realizable and earned: (1) there is persuasive evidence that an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the seller’s price to the buyer is fixed and determinable; and (4) collectability is reasonably assured.
In accordance with ASC 840,
Leases
, minimum rental revenue is recognized on a straight-line basis over the term of the related lease (including rent holidays). Differences between rental income recognized and amounts contractually due under the lease agreements are credited or charged to deferred rent receivable or deferred rent liability, as applicable. Tenant reimbursement revenue, which is comprised of additional amounts recoverable from tenants for common area maintenance expenses and certain other recoverable expenses, is recognized as revenue in the period in which the related expenses are incurred. Tenant reimbursements are recognized and presented in accordance with ASC Subtopic 605-45,
Revenue Recognition—Principal Agent Consideration,
or ASC 605-45. ASC 605-45 requires that these reimbursements be recorded on a gross basis when the Company is the primary obligor with respect to purchasing goods and services from third-party suppliers, and thus, the Company has discretion in selecting the supplier and has credit risk.
Tenant receivables and unbilled deferred rent receivables are carried net of the allowances for uncollectible current tenant receivables and unbilled deferred rent. An allowance will be maintained for estimated losses resulting from the inability of certain tenants to meet the contractual obligations under their lease agreements. The Company also maintains an allowance for deferred rent receivables arising from the straight-lining of rents. The Company’s determination of the adequacy of these allowances is based primarily upon evaluations of historical loss experience, the tenant’s financial condition, security deposits, letters of credit, lease guarantees and current economic conditions and other relevant factors. As of
December 31, 2017
, the Company did
no
t have an allowance for uncollectible tenant receivables.
Earnings Per Share
The Company calculates basic earnings per share by dividing net income (loss) attributable to common stockholders for the period by the weighted average shares of its common stock outstanding for that period. Diluted earnings per share are computed based on the weighted average number of shares outstanding and all potentially dilutive securities. Shares of non-vested restricted common stock give rise to potentially dilutive shares of common stock. For the
years
ended
December 31, 2017
and
2016
, diluted earnings per share reflected the effect of
18,000
and
16,000
shares, respectively, of non-vested shares of restricted common stock that were outstanding as of such period. For the
year
ended
December 31, 2015
, there were
15,750
F-11
shares of non-vested restricted common stock outstanding, but such shares were excluded from the computation of diluted earnings per share because such shares were anti-dilutive during this period.
Reportable Segments
Accounting Standards Codification, or ASC, 280,
Segment Reporting
, establishes standards for reporting financial and descriptive information about an enterprise’s reportable segments. As of
December 31, 2017
and
2016
, the Company operated through
two
reportable business segments—commercial real estate investments in data centers and healthcare. With the continued expansion of the Company’s portfolio, segregation of the Company’s operations into
two
reporting segments is useful in assessing the performance of the Company’s business in the same way that management reviews performance and makes operating decisions. See
Note 11—"Segment Reporting"
for further discussion on the reportable segments of the Company.
Derivative Instruments and Hedging Activities
As required by ASC 815,
Derivatives and Hedging
, or ASC 815, the Company records all derivative instruments as assets and liabilities in the statement of financial position at fair value. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation. For derivative instruments not designated as hedging instruments, the income or loss is recognized in the
consolidated statements of comprehensive income (loss)
during the current period.
The Company is exposed to variability in expected future cash flows that are attributable to interest rate changes in the normal course of business. The Company’s primary strategy in entering into derivative contracts is to add stability to future cash flows by managing its exposure to interest rate movements. The Company utilizes derivative instruments, including interest rate swaps, to effectively convert some its variable rate debt to fixed rate debt. The Company does not enter into derivative instruments for speculative purposes.
In accordance with ASC 815, the Company designates interest rate swap contracts as cash flow hedges of floating-rate borrowings. For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the income or loss on the derivative instrument is reported as a component of other comprehensive income (loss) in the
consolidated statements of comprehensive income (loss)
and reclassified into earnings in the same line item associated with the forecasted transaction and the same period during which the hedged transaction affects earnings. The ineffective portion of the income or loss on the derivative instrument is recognized in the
consolidated statements of comprehensive income (loss)
during the current period.
In accordance with the fair value measurement guidance ASU 2011-04,
Fair Value Measurement
, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.
Concentration of Credit Risk and Significant Leases
As of
December 31, 2017
, the Company had cash on deposit, including restricted cash, in certain financial institutions that had deposits in excess of current federally insured levels; however, the Company has not experienced any losses in such accounts. The Company limits its cash investments to financial institutions with high credit standing; therefore, the Company believes it is not exposed to any significant credit risk on its cash deposits. To date, the Company has experienced no loss or lack of access to cash in its accounts.
As of
December 31, 2017
, the Company owned real estate investments in
37
MSAs,
two
of which accounted for 10.0% or more of contractual rental revenue. Real estate investments located in the
Atlanta-Sandy Springs-Roswell, Georgia MSA and the Oklahoma City, Oklahoma MSA
accounted for
12.1%
and
10.0%
, respectively, of contractual rental revenue for the
year
ended
December 31, 2017
.
As of
December 31, 2017
, the Company had
no
exposure to tenant concentration that accounted for 10.0% or more of contractual rental revenue for the
year
ended
December 31, 2017
.
Stockholders’ Equity
The Company’s charter authorizes the issuance of up to
600,000,000
shares of stock, consisting of
175,000,000
shares of Class A common stock,
75,000,000
shares of Class I common stock,
175,000,000
shares of Class T common stock and
75,000,000
shares of Class T2 common stock,
$0.01
par value per share, and
100,000,000
shares of preferred stock,
$0.01
par value per share. As of December 31, 2017, the Company was not offering Class T2 shares. Other than the different fees with respect to each class and the payment of a distribution and servicing fee out of amounts otherwise distributable to Class T stockholders, Class A shares, Class I and Class T shares have identical rights and privileges, such as identical voting rights. The
F-12
net proceeds from the sale of the
three
classes of shares will be commingled for investment purposes and all earnings from all of the investments will proportionally accrue to each share regardless of the class.
As of
December 31, 2017
, the Company had
126,559,834
shares of Class A, Class I and Class T common stock issued and
124,327,777
shares of Class A, Class I and Class T common stock outstanding, and no shares of preferred stock issued and outstanding. As of
December 31, 2016
, the Company had
83,109,025
shares of Class A and Class T common stock issued and
82,744,288
shares of Class A and Class T common stock outstanding, and no shares of preferred stock issued and outstanding. The charter authorizes the Company’s board of directors, without stockholder approval, to designate and issue
one
or more classes or series of preferred stock and to set or change the voting, conversion or other rights, preferences, restrictions, limitations as to dividends or other distributions and qualification or terms or conditions of repurchase of each class of stock so issued.
Share Repurchase Program
The Company’s share repurchase program allows for repurchases of shares of the Company’s common stock when certain criteria are met. The share repurchase program provides that all repurchases during any calendar year, including those redeemable upon death or a Qualifying Disability of a stockholder, are limited to those that can be funded with equivalent proceeds raised from the DRIP Offering during the prior calendar year and other operating funds, if any, as the board of directors, in its sole discretion, may reserve for this purpose.
Repurchases of shares of the Company’s common stock are at the sole discretion of the Company’s board of directors. The Company will limit the number of shares repurchased pursuant to the share repurchase program as follows: during any calendar year, the Company will not repurchase in excess of
5.0%
of the number of shares of common stock outstanding on December 31
st
of the previous calendar year. In addition, the Company’s board of directors, in its sole discretion, may amend, suspend, reduce, terminate or otherwise change the share repurchase program upon
30
days' prior notice to the Company’s stockholders for any reason it deems appropriate.
During the
year
ended
December 31, 2017
, the Company received valid repurchase requests related to
1,880,820
Class A shares, Class T shares and Class I shares of common stock (
1,793,424
Class A shares,
81,939
Class T shares and
5,457
Class I shares), or
2.27%
of shares outstanding as of
December 31, 2016
, all of which were redeemed in full for an aggregate purchase price of approximately
$17,159,000
(an average of
$9.12
per share).
During the year ended
December 31, 2016
, the Company received valid repurchase requests related to
333,194
Class A shares of common stock,
or
0.69%
of shares outstanding as of
December 31, 2015
,
all of which were redeemed in full for an aggregate purchase price of approximately
$3,114,000
(an average of
$9.35
per share). No shares of Class T common stock were requested to be, or were, repurchased during the year ended
December 31, 2016
. No shares of Class I common stock were requested to be, or were, repurchased during the year ended
December 31, 2016
.
Distribution Policy and Distributions Payable
In order to maintain its status as a REIT, the Company is required to make distributions each taxable year equal to at least 90% of its REIT taxable income, computed without regard to the dividends paid deduction and excluding capital gains. To the extent funds are available, the Company intends to continue to pay regular distributions to stockholders. Distributions are paid to stockholders of record as of the applicable record dates. As of
December 31, 2017
, the Company paid aggregate distributions, since inception, of approximately
$118,258,000
(
$53,192,000
in cash and
$65,066,000
of which were reinvested in shares of common stock pursuant to the DRIP). Distributions are payable to stockholders from legally available funds therefor. The Company declared distributions per share of common stock in the amounts of
$0.62
and
$0.63
for the years ended
December 31, 2017
and
2016
, respectively. As of
December 31, 2017
, the Company had distributions payable of approximately
$6,566,000
. Of these distributions payable, approximately
$3,164,000
was paid in cash and approximately
$3,402,000
was reinvested in shares of common stock pursuant to the DRIP on January 2, 2018.
Distributions to stockholders are determined by the board of directors of the Company and are dependent upon a number of factors relating to the Company, including funds available for the payment of distributions, financial condition, the timing of property acquisitions, capital expenditure requirements, and annual distribution requirements in order to maintain the Company’s status as a REIT under the Code.
Income Taxes
The Company currently qualifies and is taxed as a REIT under Sections 856 through 860 of the Code. Accordingly, it will generally not be subject to corporate U.S. federal or state income tax to the extent that it makes qualifying distributions to stockholders, and provided it satisfies, on a continuing basis, through actual investment and operating results, the REIT requirements, including certain asset, income, distribution and stock ownership tests. If the Company fails to qualify as a REIT, and does not qualify for certain statutory relief provisions, it will be subject to U.S. federal, state and local income taxes and may be precluded from qualifying as a REIT for the subsequent four taxable years following the year in which it lost its REIT qualification, unless the Internal Revenue Service grants the Company relief under certain statutory provisions. Accordingly,
F-13
failure to qualify as a REIT could have a material adverse impact on the results of operations and amounts available for distribution to stockholders.
The dividends paid deduction of a REIT for qualifying dividends paid to its stockholders is computed using the Company’s taxable income as opposed to net income reported in the
consolidated
financial statements. Taxable income, generally, will differ from net income reported in the
consolidated
financial statements because the determination of taxable income is based on tax provisions and not financial accounting principles.
The Company has concluded that there was
no
impact related to uncertain tax provisions from results of operations of the Company for the years ended
December 31, 2017
,
2016
and
2015
. The United States of America is the jurisdiction for the Company, and the earliest tax year subject to examination will be
2015
.
Recently Issued Accounting Pronouncements
On May 28, 2014, the Financial Accounting Standards Board, or the FASB, issued ASU 2014-09,
Revenue from Contracts with Customers
, or ASU 2014-09. The objective of ASU 2014-09 is to clarify the principles for recognizing revenue and to develop a common revenue standard for GAAP. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle, which may require more judgment and estimates within the revenue recognition process than are required under existing GAAP. The Company has preliminarily determined the revenue stream that could be most significantly impacted by this ASU relates to parking revenue. The Company determined that the revenue recognition from parking revenue will be generally consistent with current recognition methods, and therefore will not have material changes to the consolidated financial statements as a result of adoption. For the year ended December 31, 2017, parking revenue was less than 10% of consolidated revenue. In August 2015, the FASB issued ASU 2015-14,
Revenue from Contracts with Customers (Topic 606) Deferral of the Effective Date
, or ASU 2015-14. ASU 2015-14 defers the effective date of ASU 2014-09 by one year to fiscal years and interim periods beginning after December 15, 2017. Early adoption is permitted as of the original effective date, which was annual reporting periods beginning after December 15, 2016, and the interim periods within that year. On March 17, 2016, the FASB issued ASU 2016-08,
Revenue from Contracts with Customers (Principal versus Agent Considerations),
or ASU 2016-08, which improves the implementation guidance on principal versus agent considerations. ASU 2016-08 clarifies that an entity is a principal when it controls the specified good or service before that good or service is transferred to the customer, and is an agent when it does not control the specified good or service before it is transferred to the customer. The effective date of this update is the same as the effective date of ASU 2015-14.
As the majority of the Company's revenue is derived from real estate lease contracts, as discussed in relation to ASU 2016-02,
Leases
, the Company does not expect that the adoption of ASU 2014-09 or related amendments and modifications will have a material impact on the consolidated financial statements. Recoveries from tenants to be impacted by ASU 2014-09 will not be addressed until the Company's adoption of ASU 2016-02,
Leases,
considering its revisions to accounting for common area maintenance described below. The Company also continues to evaluate the scope of revenue-related disclosures it expects to provide pursuant to the new requirements.
The standard permits the use of either a retrospective or cumulative effect transition method and permits the use of certain practical expedients. The Company currently anticipates using the modified retrospective method, however, this determination is subject to change.
The Company will adopt the standard on its effective date beginning with the first quarter of 2018.
On February 25, 2016, the FASB issued ASU 2016-02
, Leases
, or ASU 2016-02. ASU 2016-02 establishes the principles to increase the transparency about the assets and liabilities arising from leases. ASU 2016-02 results in a more faithful representation of the rights and obligations arising from leases by requiring lessees to recognize the lease assets and lease liabilities that arise from leases in the statement of financial position and to disclose qualitative and quantitative information about lease transactions and aligns lessor accounting and sale leaseback transactions guidance more closely to comparable guidance in Topic 606,
Revenue from Contracts
with Customers
, and Topic 610,
Other Income
. Under ASU 2016-02, a lessee is required to record a right of use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. The Company is a lessee on a limited number of ground leases, which will result in the recognition of a right of use asset and lease liability upon the adoption of ASU 2016-02. Lessor accounting remains largely unchanged, apart from the narrower scope of initial direct costs that can be capitalized. The new standard will result in certain costs, such as legal costs related to lease negotiations, being expensed rather than capitalized. In addition, ASU 2016-02 requires lessors to identify the lease and non-lease components, such as the reimbursement of common area maintenance, contained within each lease. The non-lease components would have to be evaluated under the revenue recognition guidance of ASU 2014-09. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted.
In January 2018, the FASB proposed an amendment to ASU 2016-02 to simplify the guidance by allowing lessors to elect a practical expedient to allow lessors to not separate non-lease components from a lease, which would provide the Company with the option of not bifurcating certain common area maintenance recoveries as a non-lease component. The Company will evaluate the impact of this amendment to the ASU when it is final.
F-14
On June 16, 2016, the FASB issued ASU 2016-13,
Financial Instruments-Credit Losses,
or ASU 2016-13. ASU 2016-13 requires more timely recording of credit losses on loans and other financial instruments that are not accounted for at fair value through net income, including loans held for investment, held-to-maturity debt securities, trade and other receivables, net investment in leases and other such commitments. ASU 2016-13 requires that financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The amendments in ASU 2016-13 require the Company to measure all expected credit losses based upon historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of the financial assets and eliminates the “incurred loss” methodology in current GAAP. ASU 2016-13 is effective for fiscal years, and interim periods within, beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within, beginning after December 15, 2018. The Company is in the process of evaluating the impact ASU 2016-13 will have on the Company’s
consolidated
financial statements. The Company believes that certain financial statements' accounts will be impacted by the adoption of ASU 2016-13, including allowances for doubtful accounts with respect to accounts receivable and straight-line rents receivable.
On August 26, 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows
, or ASU 2016-15. ASU 2016-15 is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. ASU 2016-15 addresses eight classification issues related to the statement of cash flows: 1) debt prepayment or debt extinguishment costs; 2) settlement of zero-coupon bonds; 3) contingent consideration payments made after a business combination; 4) proceeds from the settlement of insurance claims; 5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; 6) distributions received from equity method investees; 7) beneficial interests in securitization transactions; and 8) separately identifiable cash flows and application of the predominance principle. ASU 2016-15 is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. Entities should apply this ASU using a retrospective transition method to each period presented. The Company adopted ASU 2016-15 effective October 1, 2017. The adoption of ASU 2016-15 had no impact on the Company's consolidated statements of cash flows.
On February 23, 2017, the FASB issued ASU 2017-05, Clarifying the Scope
of
Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets,
or ASU 2017-05. ASU 2017-05 clarifies the scope of asset derecognition guidance and accounting for partial sales of nonfinancial assets. Partial sales of nonfinancial assets are common in the real estate industry and include transactions in which the seller retains an equity interest in the entity that owns the assets or has an equity interest in the buyer. ASU 2017-05 is effective for fiscal years beginning after December 15, 2017, including interim reporting periods within those fiscal years. Early adoption is permitted. The Company is in process of
evaluating
the impact ASU 2017-05 will have on the Company’s consolidated financial statements.
T
he Company does not expect that the adoption of ASU 2017-05 will have a material impact on the
consolidated
financial statements.
On August 28, 2017, the FASB issued ASU 2017-12,
Targeted Improvements to Accounting for Hedging Activities
, or ASU 2017-12. The objectives of ASU 2017-12 are to (i) improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting for hedging relationships with those risk management activities and (ii) reduce the complexity of and simplify the application of hedge accounting by preparers. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018, and interim periods therein. Early adoption is permitted. The Company is in process of evaluating the impact of ASU 2017-12 will have on the Company’s consolidated financial statements.
F-15
Note 3—
Real Estate Investments
During the
year
ended
December 31, 2017
, the Company purchased
19
real estate properties, all of which were determined to be asset acquisitions.
The following table summarizes the consideration transferred for the properties acquired during the
year
ended
December 31, 2017
:
|
Property Description
|
Date Acquired
|
Ownership Percentage
|
Purchase Price (amounts in thousands)
|
|||||
|
Tempe Data Center
|
01/26/2017
|
100%
|
$
|
16,224
|
|
|||
|
Norwalk Data Center
|
03/30/2017
|
100%
|
58,835
|
|
||||
|
Aurora Healthcare Facility
|
03/30/2017
|
100%
|
11,531
|
|
||||
|
Texas Rehab - Austin
|
03/31/2017
|
100%
|
36,945
|
|
||||
|
Texas Rehab - Allen
|
03/31/2017
|
100%
|
23,691
|
|
||||
|
Texas Rehab - Beaumont
|
03/31/2017
|
100%
|
9,649
|
|
||||
|
Charlotte Data Center II
|
05/15/2017
|
100%
|
16,646
|
|
||||
|
250 Williams Atlanta Data Center
|
06/15/2017
|
100%
|
168,588
|
|
||||
|
Sunnyvale Data Center
|
06/28/2017
|
100%
|
38,105
|
|
||||
|
Texas Rehab - San Antonio
|
06/29/2017
|
100%
|
14,853
|
|
||||
|
Cincinnati Data Center
|
06/30/2017
|
100%
|
10,503
|
|
||||
|
Silverdale Healthcare Facility
|
08/25/2017
|
100%
|
9,856
|
|
||||
|
Silverdale Healthcare Facility II
|
09/20/2017
|
100%
|
7,144
|
|
||||
|
King of Prussia Data Center
|
09/28/2017
|
100%
|
19,885
|
|
||||
|
Tempe Data Center II
|
09/29/2017
|
100%
|
15,568
|
|
||||
|
Houston Data Center
|
11/16/2017
|
100%
|
76,388
|
|
||||
|
Saginaw Healthcare Facility
|
12/21/2017
|
100%
|
18,462
|
|
||||
|
Elgin Data Center
|
12/22/2017
|
100%
|
2,771
|
|
||||
|
Oklahoma City Data Center
|
12/27/2017
|
100%
|
48,728
|
|
||||
|
Total
|
$
|
604,372
|
|
|||||
The following table summarizes management's allocation of the acquisitions during the
year
ended
December 31, 2017
, (amounts in thousands):
|
Total
|
|||||
|
Land
|
$
|
68,535
|
|
||
|
Buildings and improvements
|
533,011
|
|
|||
|
In-place leases
|
64,476
|
|
|||
|
Above market leases
|
1,448
|
|
|||
|
Total assets acquired
|
667,470
|
|
|||
|
Below market leases
|
(56,547
|
)
|
|||
|
Liabilities assumed at acquisition
|
(6,551
|
)
|
(1)
|
||
|
Total liabilities acquired
|
(63,098
|
)
|
|||
|
Net assets acquired
|
$
|
604,372
|
|
||
|
(1)
|
Of this amount, the Company assumed a note payable collateralized by a real estate asset in the principal amount of
$5,736,000
at the acquisition date and tenant improvements on
two
properties in the amount of
$815,000
.
|
Acquisition fees and costs associated with transactions determined to be asset acquisitions are capitalized. The Company capitalized acquisition fees and costs of approximately
$15,674,000
and
$9,982,000
related to properties acquired during the years ended
December 31, 2017
and
2016
, respectively. The total amount of all acquisition fees and costs is limited to
6.0%
of the contract purchase price of a property. The contract purchase price is the amount actually paid or allocated in respect of the
F-16
purchase, development, construction or improvement of a property exclusive of acquisition fees and costs. For the
years
ended
December 31, 2017
and
2016
, acquisition fees and costs did not exceed
6.0%
of the contract purchase price of the Company's acquisitions during such periods.
Note 4—
Acquired Intangible Assets, Net
Acquired intangible assets, net consisted of the following as of
December 31, 2017
and
2016
(amounts in thousands, except weighted average life amounts):
|
|
December 31, 2017
|
December 31, 2016
|
|||||
|
In-place leases, net of accumulated amortization of $21,776 and $7,918, respectively (with a weighted average remaining life of 11.0 years and 12.8 years, respectively)
|
$
|
148,594
|
|
$
|
97,232
|
|
|
|
Above-market leases, net of accumulated amortization of $358 and $58, respectively (with a weighted average remaining life of 2.8 years and 7.4 years, respectively)
|
1,344
|
|
196
|
|
|||
|
Ground lease interest, net of accumulated amortization of $28 and $19, respectively (with a weighted average remaining life of 65.8 years and 66.8 years, respectively)
|
616
|
|
625
|
|
|||
|
$
|
150,554
|
|
$
|
98,053
|
|
||
The aggregate weighted average remaining life of the acquired intangible assets was
11.2 years
and
13.1 years
as of
December 31, 2017
and
December 31, 2016
, respectively.
Amortization of the acquired intangible assets for the years ended
December 31, 2017
,
2016
and
2015
was
$14,167,000
,
$5,987,000
and
$1,950,000
, respectively. Amortization of the above-market leases is recorded as an adjustment to rental and parking revenue, amortization expense for the in-place leases is included in depreciation and amortization and amortization expense for the ground lease interest is included in rental and parking expenses in the accompanying
consolidated statements of comprehensive income (loss)
.
Estimated amortization expense on the acquired intangible assets as of
December 31, 2017
and for each of the next five years ending December 31 and thereafter, are as follows (amounts in thousands):
|
Year
|
Amount
|
|||
|
2018
|
$
|
18,547
|
|
|
|
2019
|
17,933
|
|
||
|
2020
|
15,861
|
|
||
|
2021
|
15,064
|
|
||
|
2022
|
12,658
|
|
||
|
Thereafter
|
70,491
|
|
||
|
$
|
150,554
|
|
||
F-17
Note 5—
Intangible Lease Liabilities, Net
Intangible lease liabilities, net, consisted of the following as of
December 31, 2017
and
December 31, 2016
(amounts in thousands, except weighted average life amounts):
|
December 31, 2017
|
December 31, 2016
|
||||||
|
Below-market leases, net of accumulated amortization of $2,760 and $634, respectively (with a weighted average remaining life of 18.7 years and 13.6 years, respectively)
|
$
|
61,294
|
|
$
|
6,873
|
|
|
|
|
$
|
61,294
|
|
$
|
6,873
|
|
|
Amortization of below-market leases for the years ended
December 31, 2017
,
2016
and
2015
was
$2,126,000
,
$536,000
and
$98,000
, respectively. Amortization of below-market leases is recorded as an adjustment to rental and parking revenue in the accompanying consolidated statements of comprehensive income (loss).
Estimated amortization of the below-market leases as of
December 31, 2017
and for each of the next five years ending December 31 and thereafter, are as follows (amounts in thousands):
|
Year
|
Amount
|
|||
|
2018
|
$
|
4,883
|
|
|
|
2019
|
4,883
|
|
||
|
2020
|
4,827
|
|
||
|
2021
|
4,799
|
|
||
|
2022
|
3,708
|
|
||
|
Thereafter
|
38,194
|
|
||
|
$
|
61,294
|
|
||
Note 6—
Other Assets, Net
Other assets, net consisted of the following as of
December 31, 2017
and
2016
(amounts in thousands):
|
|
December 31, 2017
|
December 31, 2016
|
|||||
|
Deferred financing costs, related to the revolver portion of the secured credit facility, net of accumulated amortization of
$3,426
and $1,789, respectively
|
$
|
1,850
|
|
$
|
3,071
|
|
|
|
Real estate escrow deposits
|
100
|
|
290
|
|
|||
|
Restricted cash
|
10,944
|
|
6,463
|
|
|||
|
Tenant receivables
|
4,916
|
|
3,126
|
|
|||
|
Straight-line rent receivable
|
19,321
|
|
8,725
|
|
|||
|
Prepaid and other assets
|
6,117
|
|
1,082
|
|
|||
|
Derivative assets
|
3,934
|
|
1,782
|
|
|||
|
$
|
47,182
|
|
$
|
24,539
|
|
||
Amortization of deferred financing costs related to the revolver portion of the secured credit facility for the years ended
December 31, 2017
,
2016
and
2015
was
$1,637,000
,
$987,000
and
$719,000
, respectively, which was recorded as interest expense in the accompanying consolidated statements of comprehensive income (loss).
F-18
Note 7—
Accounts Payable and Other Liabilities
Accounts payable and other liabilities, as of
December 31, 2017
and
December 31, 2016
, were comprised of the following (amounts in thousands):
|
|
December 31, 2017
|
December 31, 2016
|
|||||
|
Accounts payable and accrued expenses
|
$
|
13,220
|
|
$
|
7,657
|
|
|
|
Accrued interest expense
|
2,410
|
|
945
|
|
|||
|
Accrued property taxes
|
1,532
|
|
1,164
|
|
|||
|
Distributions payable to stockholders
|
6,566
|
|
4,336
|
|
|||
|
Tenant deposits
|
682
|
|
1,551
|
|
|||
|
Deferred rental income
|
3,277
|
|
733
|
|
|||
|
Derivative liabilities
|
22
|
|
798
|
|
|||
|
$
|
27,709
|
|
$
|
17,184
|
|
||
Note 8—
Notes Payable
The Company had
$468,135,000
principal outstanding in notes payable collateralized by real estate assets as of
December 31, 2017
. As of
December 31, 2017
, the notes payable weighted average interest rate was
4.42%
.
The following table summarizes the notes payable balances as of
December 31, 2017
and
2016
(amounts in thousands):
|
Interest Rates
(1)
|
|||||||||||||||||
|
Notes payable:
|
December 31, 2017
|
December 31, 2016
|
Range
|
Weighted
Average |
Maturity Date
|
||||||||||||
|
Fixed rate notes payable
|
$
|
220,436
|
|
$
|
51,000
|
|
4.0%
|
-
|
4.8%
|
4.3%
|
12/11/2021
|
-
|
07/01/2027
|
||||
|
Variable rate notes payable fixed through interest rate swaps
|
247,699
|
|
71,540
|
|
3.7%
|
-
|
5.1%
|
4.6%
|
10/28/2021
|
-
|
11/16/2022
|
||||||
|
Variable rate notes payable
|
—
|
|
30,450
|
|
|
|
|
||||||||||
|
Total notes payable, principal amount outstanding
|
$
|
468,135
|
|
$
|
152,990
|
|
|||||||||||
|
Unamortized deferred financing costs related to notes payable
|
(4,393
|
)
|
(1,945
|
)
|
|||||||||||||
|
Total notes payable, net of deferred financing costs
|
$
|
463,742
|
|
$
|
151,045
|
|
|||||||||||
|
(1)
|
Range of interest rates and weighted average interest rates are as of
December 31, 2017
.
|
Significant debt activity during the
year
ended
December 31, 2017
, excluding scheduled principal payments, includes:
|
•
|
During the
year
ended
December 31, 2017
, the Company entered into
seven
notes payable collateralized by real estate assets in the principal amount of
$309,452,000
at initiation of the respective loans and assumed a note payable collateralized by a real estate asset in the principal amount of
$5,736,000
at the acquisition date.
|
|
•
|
During the year ended
December 31, 2017
, the Company entered into
four
interest rate swap agreements of variable rate notes payable in the aggregate amount of
$145,752,000
.
|
The principal payments due on the notes payable as of
December 31, 2017
and for each of the next five years ending December 31 and thereafter, are as follows (amounts in thousands):
|
Year
|
Total Amount
|
|||
|
2018
|
$
|
413
|
|
|
|
2019
|
1,971
|
|
||
|
2020
|
4,536
|
|
||
|
2021
|
155,119
|
|
||
|
2022
|
164,972
|
|
||
|
Thereafter
|
141,124
|
|
||
|
$
|
468,135
|
|
||
F-19
Note 9—
Credit Facility
The Company's outstanding secured credit facility as of
December 31, 2017
and
December 31, 2016
consisted of the following (amounts in thousands):
|
December 31, 2017
|
December 31, 2016
|
|||||||
|
Secured credit facility:
|
||||||||
|
Revolving line of credit
|
$
|
120,000
|
|
$
|
120,000
|
|
||
|
Term loan
|
100,000
|
|
100,000
|
|
||||
|
Total secured credit facility, principal amount outstanding
|
220,000
|
|
220,000
|
|
||||
|
Unamortized deferred financing costs related to the term loan secured credit facility
|
(601
|
)
|
(876
|
)
|
||||
|
Total secured credit facility, net of deferred financing costs
|
$
|
219,399
|
|
$
|
219,124
|
|
||
Significant activities regarding the secured credit facility during the
year
ended
December 31, 2017
include:
|
•
|
During the year ended
December 31, 2017
, the Company drew
$240,000,000
and repaid
$240,000,000
on its secured credit facility.
|
|
•
|
During the year ended
December 31, 2017
, the Company increased the borrowing base availability under the secured credit facility by
$116,431,000
by adding
12
properties to the aggregate pool availability and removed a property from the collateralized pool, which decreased the aggregate pool availability by
$18,645,000
. This resulted in the net increase of the borrowing base availability of
$97,786,000
.
|
|
•
|
During the year ended
December 31, 2017
, the Company entered into
four
interest rate swap agreements to effectively fix the London Interbank Offered Rate, or LIBOR, on
$75,000,000
of the term loan of the secured credit facility.
|
|
•
|
As of
December 31, 2017
, the Company had an aggregate pool availability under the secured credit facility of
$397,842,000
and an aggregate outstanding principal balance of
$220,000,000
. As of
December 31, 2017
,
$177,842,000
remained to be drawn on the secured credit facility.
|
The principal payments due on the secured credit facility as of
December 31, 2017
and for each of the next five years ending December 31 and thereafter, are as follows (amounts in thousands):
|
Year
|
Amount
|
|||
|
2018
|
$
|
120,000
|
|
|
|
2019
|
100,000
|
|
||
|
$
|
220,000
|
|
||
The proceeds of loans made under the secured credit facility may be used to finance the acquisitions of real estate investments, for tenant improvements and leasing commissions with respect to real estate, for repayment of indebtedness, for capital expenditures with respect to real estate, and for general corporate and working capital purposes. As of
December 31, 2017
, the maximum commitments available under the secured credit facility were
$425,000,000
, consisting of a
$325,000,000
revolving line of credit, with a maturity date of
December 22, 2018
, subject to the Company's right to
two
,
12
-month extension periods, and a
$100,000,000
term loan, with a maturity date of
December 22, 2019
, subject to the Company's right to
one
,
12
-month extension period. The secured credit facility can be increased to
$550,000,000
, subject to certain conditions.
The annual interest rate payable under the secured credit facility was, at the Operating Partnership's option, either: (a) LIBOR, plus an applicable margin ranging from
2.00%
to
2.65%
, which is determined based on the overall leverage of the Operating Partnership or (b) a base rate, which means, for any day, a fluctuating rate per annum equal to the prime rate for such day plus an applicable margin ranging from
1.00%
to
1.65%
, which is determined based on the overall leverage of the Operating Partnership. In addition to interest, the Operating Partnership is required to pay a fee on the unused portion of the lenders’ commitments under the secured credit facility at a per annum rate equal to
0.30%
if the average daily amount outstanding under the secured credit facility is less than
50%
of the lenders’ commitments or
0.20%
if the average daily amount outstanding under the secured credit facility is greater than
50%
of the lenders’ commitments, and the unused fee is payable quarterly in arrears. As of
December 31, 2017
, the interest rate on the variable rate portion of the credit facility was
3.70%
and the interest rate on the variable rate fixed through interest rate swap on the credit facility was
3.71%
.
The actual amount of credit available under the secured credit facility is a function of certain loan-to-cost, loan-to-value and debt service coverage ratios contained in the secured credit facility agreement. The amount of credit available under the secured credit facility will be a maximum principal amount of the value of the assets that are included in the pool availability. The obligations of the Operating Partnership with respect to the secured credit facility agreement are guaranteed by the
F-20
Company, including but not limited to, the payment of any outstanding indebtedness under the secured credit facility agreement and all terms, conditions and covenants of the secured credit facility agreement, as further discussed below.
The secured credit facility agreement contains various affirmative and negative covenants that are customary for credit facilities and transactions of this type, including limitations on the incurrence of debt by the Operating Partnership and its subsidiaries that own properties that serve as collateral for the secured credit facility, limitations on the nature of the Operating Partnership’s business, and limitations on distributions by the Company, the Operating Partnership and its subsidiaries. The secured credit facility agreement imposes the following financial covenants, which are specifically defined in the secured credit facility agreement, on the Operating Partnership: (a) maximum ratio of indebtedness to gross asset value; (b) minimum ratio of adjusted consolidated earnings before interest, taxes, depreciation and amortization to consolidated fixed charges; (c) minimum tangible net worth; (d) minimum liquidity thresholds; (e) minimum quarterly equity raise; (f) minimum weighted average remaining lease term of properties in the collateral pool; and (g) minimum number of properties in the collateral pool. The Company was in compliance with all financial covenant requirements at
December 31, 2017
.
Note 10—
Related-Party Transactions and Arrangements
The Company reimburses the Advisor and its affiliates for organization and offering expenses it incurs on the Company’s behalf, but only to the extent the reimbursement would not cause the selling commissions, dealer manager fees, distribution and servicing fees and other organization and offering expenses to exceed
15.0%
of the gross proceeds of the Initial Offering and the Offering. Organization and offering expenses associated with the Initial Offering (other than selling commissions, dealer manager fees and distribution and servicing fees) were approximately
2.0%
of the gross proceeds. The Company expects that organization and offering expenses associated with the Offering (other than selling commissions, dealer manager fees and distribution and servicing fees) will be approximately
1.5%
of the gross proceeds. As of
December 31, 2017
, since inception, the Advisor and its affiliates incurred approximately
$17,669,000
on the Company’s behalf in offering costs, the majority of which was incurred by the Dealer Manager. Of this amount, approximately
$167,000
of other organization and offering costs remained accrued as of
December 31, 2017
. As of December 31, 2017, since inception, the Advisor paid approximately
$453,000
to an affiliate of the Dealer Manager in other offering costs on the Company's behalf. Other organization expenses are expensed as incurred and offering costs are charged to stockholders’ equity as incurred.
The Company pays to the Advisor
2.0%
of the contract purchase price of each property or asset acquired. For the
years
ended
December 31, 2017
,
2016
and
2015
, the Company incurred approximately
$11,936,000
,
$11,515,000
and
$7,486,000
, respectively, in acquisition fees to the Advisor or its affiliates. In addition, the Company reimburses the Advisor for acquisition expenses incurred in connection with the selection and acquisition of properties or real estate-related investments (including expenses relating to potential investments that the Company does not close), such as legal fees and expenses, costs of real estate due diligence, appraisals, non-refundable option payments on properties not acquired, travel and communications expenses, accounting fees and expenses and title insurance premiums, whether or not the property was acquired. The Company expects these expenses will be approximately
0.75%
of the purchase price of each property or real estate-related investment.
The Company pays to the Advisor an asset management fee calculated on a monthly basis in an amount equal to 1/12t
h
of
0.75%
of gross assets (including amounts borrowed), which is payable monthly in arrears. For the
years
ended
December 31, 2017
,
2016
and
2015
, the Company incurred approximately
$9,963,000
,
$4,925,000
and
$1,895,000
, respectively, in asset management fees.
In connection with the rental, leasing, operation and management of the Company’s properties, the Company pays the Property Manager and its affiliates aggregate fees equal to
3.0%
of gross revenues from the properties managed, or property management fees. The Company will reimburse the Property Manager and its affiliates for property-level expenses that any of them pay or incur on the Company’s behalf, including salaries, bonuses and benefits of persons employed by the Property Manager and its affiliates except for the salaries, bonuses and benefits of persons who also serve as one of its executive officers. The Property Manager and its affiliates may subcontract the performance of their duties to third parties and pay all or a portion of the property management fee to the third parties with whom they contract for these services. If the Company contracts directly with third parties for such services, it will pay them customary market fees and may pay the Property Manager an oversight fee equal to
1.0%
of the gross revenues of the properties managed. In no event will the Company pay the Property Manager or any affiliate both a property management fee and an oversight fee with respect to any particular property.
The Company also will pay the Property Manager a separate fee for the one-time initial rent-up, leasing-up of newly constructed properties or re-leasing to existing tenants.
For the
years
ended
December 31, 2017
,
2016
and
2015
, the Company incurred approximately
$3,249,000
,
$1,473,000
and
$538,000
, respectively, in property management fees to the Property Manager, which are recorded in rental and parking expenses in the accompanying consolidated statements of comprehensive income (loss).
For the years ended
December 31, 2017
,
2016
and
2015
the Company incurred
$907,000
,
$0
and
$0
, respectively, in leasing commissions to the Property Manager. Leasing commission fees are capitalized in other assets, net in the accompanying consolidated balance sheets.
F-21
For acting as general contractor and/or construction manager to supervise or coordinate projects or to provide major repairs or rehabilitation on our properties, the Company may pay the Property Manager up to
5.0%
of the cost of the projects, repairs and/or rehabilitation, as applicable, or construction management fees. For the
years
ended
December 31, 2017
,
2016
and
2015
, the Company incurred approximately
$719,000
,
$754,000
and
$0
, respectively, in construction management fees to the Property Manager. Construction management fees are capitalized in real estate, net in the accompanying consolidated balance sheets.
The Company reimburses the Advisor for all expenses it paid or incurred in connection with the services provided to the Company, subject to certain limitations. Expenses in excess of the operating expenses in the four immediately preceding quarters that exceeds the greater of (a)
2.0%
of average invested assets or (b)
25%
of net income, subject to certain adjustments, will not be reimbursed unless the independent directors determine such excess expenses are justified. The Company will not reimburse the Advisor for personnel costs in connection with services for which the Advisor receives an acquisition fee or a disposition fee. For the
years
ended
December 31, 2017
,
2016
and
2015
, the Advisor allocated approximately
$1,543,000
,
$1,257,000
and
$830,000
, respectively, in operating expenses to the Company, which are recorded in general and administrative expenses in the accompanying consolidated statements of comprehensive income (loss).
On May 15, 2017, the Advisor employed Gael Ragone, who is the daughter of John E. Carter, our chief executive officer and chairman of our board of directors, as Vice President of Product Management of Carter Validus Advisors II, LLC. The Company directly reimburses the Advisor any amounts of Ms. Ragone's salary that are allocated to the Company. For the
year
ended
December 31, 2017
, the Advisor allocated approximately
$98,000
, which is included in general and administrative expenses in the Company's consolidated statements of comprehensive income (loss).
The Company will pay its Advisor, or its affiliates, if it provides a substantial amount of services (as determined by a majority of the Company’s independent directors) in connection with the sale of properties, a disposition fee, equal to up to the lesser of
1.0%
of the contract sales price and one-half of the total brokerage commission paid if a third party broker is also involved, without exceeding the lesser of
6.0%
of the contract sales price or a reasonable, customary and competitive real estate commission. As of
December 31, 2017
, the Company has not incurred any disposition fees to the Advisor or its affiliates.
Upon the sale of the Company, the Advisor will receive
15%
of the remaining net sale proceeds after return of capital contributions plus payment to investors of a
6.0%
annual cumulative, non-compounded return on the capital contributed by investors, or the subordinated participation in net sale proceeds. As of
December 31, 2017
, the Company has not incurred any subordinated participation in net sale proceeds to the Advisor or its affiliates.
Upon the listing of the Company’s shares on a national securities exchange, the Advisor will receive
15.0%
of the amount by which the sum of the Company’s adjusted market value plus distributions exceeds the sum of the aggregate capital contributed by investors plus an amount equal to a
6.0%
annual cumulative, non-compounded return to investors, or the subordinated incentive listing fee. As of
December 31, 2017
, the Company has not incurred any subordinated incentive listing fees to the Advisor or its affiliates.
Upon termination or non-renewal of the advisory agreement, with or without cause, the Advisor will be entitled to receive subordinated termination fees from the Operating Partnership equal to
15%
of the amount by which the sum of the Company’s adjusted market value plus distributions exceeds the sum of the aggregate capital contributed by investors plus an amount equal to an annual
6.0%
cumulative, non-compounded return to investors. In addition, the Advisor may elect to defer its right to receive a subordinated termination fee upon termination until either shares of the Company’s common stock are listed and traded on a national securities exchange or another liquidity event occurs. As of
December 31, 2017
, the Company has not incurred any subordinated termination fees to the Advisor or its affiliates.
The Company pays the Dealer Manager selling commissions of up to
7.0%
of the gross offering proceeds per Class A share and up to
3.0%
of gross offering proceeds per Class T share. All selling commissions are expected to be re-allowed to participating broker-dealers. The Company does not pay selling commissions with respect to Class I shares and shares of any class sold pursuant to the DRIP. In addition, the Company pays the Dealer Manager a dealer manager fee of up to
3.0%
of gross offering proceeds from the sale of Class A and Class T shares.
The Dealer Manager may receive up to
2.0%
of the gross offering proceeds from the sale of Class I shares as a dealer manager fee, of which
1.0%
will be funded by our Advisor without reimbursement from us. The
1.0%
of the dealer manager fee paid from offering proceeds will be waived in the event an investor purchases Class I shares through a registered investment advisor that is not affiliated with a broker dealer.
The dealer manager fee may be partially re-allowed to participating broker-dealers. No dealer manager fees will be paid in connection with purchases of shares of any class made pursuant to the DRIP. For the
years
ended
December 31, 2017
,
2016
and
2015
, the Company incurred approximately
$22,713,000
,
$24,546,000
and
$38,163,000
, respectively, for selling commissions and dealer manager fees in connection with the Offerings to the Dealer Manager.
The Company pays the Dealer Manager a distribution and servicing fee with respect to its Class T shares that are sold in the primary offering of the Offerings that accrues daily in an amount equal to 1/365th of 1.0% of the most recent offering price per Class T share sold in the primary offering on a continuous basis from year to year; provided, however, that upon the
F-22
termination of the primary offering of the Offerings, the distribution and servicing fee will accrue daily in an amount equal to 1/365th of 1.0% of the most recent estimated NAV per Class T share on a continuous basis from year to year. The Dealer Manager will reallow all of the distribution and servicing fees with respect to Class T shares sold in the Offerings to participating broker-dealers; provided, however, effective June 1, 2017, a participating broker-dealer may give written notice to the Dealer Manager that it waives all or a portion of the reallowance of the distribution and servicing fee, which waiver shall be irrevocable and will not retroactively apply to Class T shares that were previously sold through such participating broker-dealer. Termination of such payment will commence on the earliest to occur of the following: (i) a listing of the Class T shares on a national securities exchange, (ii) following the completion of the Offerings, the date on which total underwriting compensation in the Offerings equals (a)
10%
of the gross proceeds from our Offerings less (b) the total amount of distribution and servicing fees waived by participating broker-dealers; (iii) the date on which there are no longer any Class T shares outstanding; (iv) December 31, 2021, which is the fourth anniversary of the last day of the fiscal quarter in which the Company's primary offering of the Initial Offering terminates; or (v) the date on which the holder of such Class T share or its agent notifies the Company or its agent that he or she is represented by a new participating broker-dealer; provided that the Company will continue paying the distribution and servicing fee, which shall be re-allowed to the new participating broker-dealer; if the new participating broker-dealer enters into a participating broker-dealer agreement with the Dealer Manager or otherwise agrees to provide the services set forth in the dealer manager agreement.
The distribution and servicing fee is paid monthly in arrears. The distribution and servicing fee will not be payable with respect to Class T shares issued under the DRIP or in connection with Class A shares and Class I shares. For the
years
ended
December 31, 2017
,
2016
and
2015
, the Company incurred approximately
$9,617,000
,
$6,213,000
and
$0
, respectively, in distribution and servicing fees to the Dealer Manager in connection with the Offerings.
Accounts Payable Due to Affiliates
The following amounts were due to affiliates as of
December 31, 2017
and
December 31, 2016
(amounts in thousands):
|
Entity
|
Fee
|
December 31, 2017
|
December 31, 2016
|
|||||||
|
Carter Validus Advisors II, LLC and its affiliates
|
Asset management fees
|
$
|
1,017
|
|
$
|
627
|
|
|||
|
Carter Validus Real Estate Management Services II, LLC
|
Property management fees
|
463
|
|
252
|
|
|||||
|
Carter Validus Real Estate Management Services II, LLC
|
Construction management fees
|
39
|
|
323
|
|
|||||
|
Carter Validus Advisors II, LLC and its affiliates
|
General and administrative costs
|
182
|
|
138
|
|
|||||
|
Carter Validus Advisors II, LLC and its affiliates
|
Offering costs
|
167
|
|
289
|
|
|||||
|
SC Distributors, LLC
|
Distribution and servicing fees
|
13,376
|
|
5,750
|
|
|||||
|
Carter Validus Advisors II, LLC and its affiliates
|
Acquisition expenses and fees
|
5
|
|
5
|
|
|||||
|
|
$
|
15,249
|
|
$
|
7,384
|
|
||||
Note 11—
Segment Reporting
Management reviews the performance of individual properties and aggregates individual properties based on operating criteria into
two
reportable segments—commercial real estate investments in data centers and healthcare, and makes operating decisions based on these
two
reportable segments. The Company’s commercial real estate investments in data centers and healthcare are based on certain underwriting assumptions and operating criteria, which are different for data centers and healthcare. There were
no
intersegment sales or transfers during the years ended
December 31, 2017
,
2016
and
2015
.
The Company evaluates performance based on net operating income of the individual properties in each segment. Net operating income, a non-GAAP financial measure, is defined as total revenues, less rental and parking expenses, which excludes depreciation and amortization, general and administrative expenses, acquisition related expenses, asset management fees and interest expense, net. The Company believes that segment net operating income serves as a useful supplement to net income (loss) because it allows investors and management to measure unlevered property-level operating results and to compare operating results to the operating results of other real estate companies between periods on a consistent basis. Segment net operating income should not be considered as an alternative to net income (loss) determined in accordance with GAAP as an indicator of financial performance, and accordingly, the Company believes that in order to facilitate a clear understanding of the consolidated historical operating results, segment net operating income should be examined in conjunction with net income (loss) as presented in the accompanying
consolidated
financial statements and data included elsewhere in this
Annual Report on Form 10-K
.
F-23
General and administrative expenses, acquisition related expenses, asset management fees, depreciation and amortization and interest expense, net are not allocated to individual segments for purposes of assessing segment performance.
Non-segment assets primarily consist of corporate assets, including cash and cash equivalents, real estate and escrow deposits, deferred financing costs attributable to the revolving line of credit portion of the Company's secured credit facility and other assets not attributable to individual properties.
Summary information for the reportable segments during the
years
ended
December 31, 2017
,
2016
and
2015
, is as follows (amounts in thousands):
|
Data Centers
|
Healthcare
|
For the Year Ended
December 31, 2017 |
|||||||||
|
Revenue:
|
|||||||||||
|
Rental, parking and tenant reimbursement revenue
|
$
|
62,377
|
|
$
|
62,718
|
|
$
|
125,095
|
|
||
|
Expenses:
|
|||||||||||
|
Rental and parking expenses
|
(17,571
|
)
|
(8,525
|
)
|
(26,096
|
)
|
|||||
|
Segment net operating income
|
$
|
44,806
|
|
$
|
54,193
|
|
98,999
|
|
|||
|
Expenses:
|
|||||||||||
|
General and administrative expenses
|
(4,069
|
)
|
|||||||||
|
Asset management fees
|
(9,963
|
)
|
|||||||||
|
Depreciation and amortization
|
(41,133
|
)
|
|||||||||
|
Income from operations
|
43,834
|
|
|||||||||
|
Interest expense, net
|
(22,555
|
)
|
|||||||||
|
Net income attributable to common stockholders
|
$
|
21,279
|
|
||||||||
|
Data Centers
|
Healthcare
|
For the Year Ended
December 31, 2016 |
|||||||||
|
Revenue:
|
|||||||||||
|
Rental, parking and tenant reimbursement revenue
|
$
|
12,929
|
|
$
|
43,502
|
|
$
|
56,431
|
|
||
|
Expenses:
|
|||||||||||
|
Rental and parking expenses
|
(2,509
|
)
|
(5,655
|
)
|
(8,164
|
)
|
|||||
|
Segment net operating income
|
$
|
10,420
|
|
$
|
37,847
|
|
48,267
|
|
|||
|
|
|||||||||||
|
Expenses:
|
|||||||||||
|
General and administrative expenses
|
(3,105
|
)
|
|||||||||
|
Acquisition related expenses
|
(5,339
|
)
|
|||||||||
|
Asset management fees
|
(4,925
|
)
|
|||||||||
|
Depreciation and amortization
|
(19,211
|
)
|
|||||||||
|
Income from operations
|
15,687
|
|
|||||||||
|
Interest expense, net
|
(4,390
|
)
|
|||||||||
|
Net income attributable to common stockholders
|
$
|
11,297
|
|
||||||||
F-24
|
Data Centers
|
Healthcare
|
For the Year Ended
December 31, 2015 |
|||||||||
|
Revenue:
|
|||||||||||
|
Rental, parking and tenant reimbursement revenue
|
$
|
1,618
|
|
$
|
19,668
|
|
$
|
21,286
|
|
||
|
Expenses:
|
|||||||||||
|
Rental and parking expenses
|
(301
|
)
|
(2,535
|
)
|
(2,836
|
)
|
|||||
|
Segment net operating income
|
$
|
1,317
|
|
$
|
17,133
|
|
18,450
|
|
|||
|
Expenses:
|
|||||||||||
|
General and administrative expenses
|
(2,133
|
)
|
|||||||||
|
Acquisition related expenses
|
(10,250
|
)
|
|||||||||
|
Asset management fees
|
(1,895
|
)
|
|||||||||
|
Depreciation and amortization
|
(7,053
|
)
|
|||||||||
|
Loss from operations
|
(2,881
|
)
|
|||||||||
|
Interest expense, net
|
(1,886
|
)
|
|||||||||
|
Net loss attributable to common stockholders
|
$
|
(4,767
|
)
|
||||||||
Assets by each reportable segment as of
December 31, 2017
and
December 31, 2016
are as follows (amounts in thousands):
|
December 31, 2017
|
December 31, 2016
|
||||||
|
Assets by segment:
|
|||||||
|
Data centers
|
$
|
909,477
|
|
$
|
362,969
|
|
|
|
Healthcare
|
813,742
|
|
653,416
|
|
|||
|
All other
|
54,725
|
|
53,653
|
|
|||
|
Total assets
|
$
|
1,777,944
|
|
$
|
1,070,038
|
|
|
Capital additions and acquisitions by reportable segments for the
years
ended
December 31, 2017
,
2016
and
2015
are as follows (amounts in thousands):
|
For the Year Ended
December 31, |
|||||||||||
|
2017
|
2016
|
2015
|
|||||||||
|
Capital additions and acquisitions by segment:
|
|||||||||||
|
Data centers
|
$
|
472,438
|
|
$
|
314,030
|
|
$
|
43,815
|
|
||
|
Healthcare
|
164,445
|
|
229,670
|
|
331,853
|
|
|||||
|
Total capital additions and acquisitions
|
$
|
636,883
|
|
$
|
543,700
|
|
$
|
375,668
|
|
||
F-25
Note 12—
Future Minimum Rent
Rental Income
The Company’s real estate assets are leased to tenants under operating leases with varying terms. The leases frequently have provisions to extend the terms of the lease agreements. The Company retains substantially all of the risks and benefits of ownership of the real estate assets leased to tenants.
The future minimum rent to be received from the Company’s investment in real estate assets under non-cancelable operating leases, including optional renewal periods for which exercise is reasonably assured, as of
December 31, 2017
and for each of the next five years ending December 31 and thereafter, are as follows (amounts in thousands):
|
Year
|
Amount
|
|||
|
2018
|
$
|
121,222
|
|
|
|
2019
|
123,235
|
|
||
|
2020
|
122,834
|
|
||
|
2021
|
124,652
|
|
||
|
2022
|
119,775
|
|
||
|
Thereafter
|
986,532
|
|
||
|
$
|
1,598,250
|
|
||
Rental Expense
The Company has ground lease obligations that generally require fixed annual rental payments and may also include escalation clauses and renewal options.
The future minimum rent obligations under non-cancelable ground leases as of
December 31, 2017
and for each of the next five years ended December 31 and thereafter, are as follows (amounts in thousands):
|
Year
|
Amount
|
|||
|
2018
|
$
|
38
|
|
|
|
2019
|
38
|
|
||
|
2020
|
38
|
|
||
|
2021
|
37
|
|
||
|
2022
|
37
|
|
||
|
Thereafter
|
2,444
|
|
||
|
$
|
2,632
|
|
||
Note 13—
Fair Value
Notes payable—Fixed Rate
—The estimated fair value of notes payable
—
fixed rate measured using observable inputs from similar liabilities (Level 2) was approximately
$211,011,000
and
$49,930,000
as of
December 31, 2017
and
December 31, 2016
, respectively, as compared to the outstanding principal of
$220,436,000
and
$51,000,000
as of
December 31, 2017
and
December 31, 2016
, respectively. The estimated fair value of notes payable
—
variable rate fixed through interest rate swap agreements (Level 2) was approximately
$243,812,000
and
$69,247,000
as of
December 31, 2017
and
December 31, 2016
, respectively, as compared to the outstanding principal of
$247,699,000
and
$71,540,000
as of
December 31, 2017
and
December 31, 2016
, respectively.
Notes payable—Variable
—The outstanding principal of the notes payable
—
variable was
$0
and
$30,450,000
as of
December 31, 2017
and
December 31, 2016
, respectively, which approximated its fair value. The fair value of the Company's variable rate notes payable is estimated based on the interest rates currently offered to the Company by financial institutions.
Secured credit facility
—The outstanding principal of the secured credit facility—variable was
$120,000,000
and
$195,000,000
, which approximated its fair value as of
December 31, 2017
and
December 31, 2016
, respectively. The fair value of the Company's variable rate secured credit facility is estimated based on the interest rates currently offered to the Company by financial institutions. The estimated fair value of the secured credit facility—variable rate fixed through interest rate swap agreements (Level 2) was approximately
$98,593,000
and
$24,195,000
as of
December 31, 2017
and
December 31, 2016
, respectively, as compared to the outstanding principal of
$100,000,000
and
$25,000,000
as of
December 31, 2017
and
December 31, 2016
, respectively.
F-26
Derivative instruments
—Considerable judgment is necessary to develop estimated fair values of financial instruments. Accordingly, the estimates presented herein are not necessarily indicative of the amount the Company could realize, or be liable for, on disposition of the financial instruments. The Company has determined that the majority of the inputs used to value its interest rate swaps fall within Level 2 of the fair value hierarchy. The credit valuation adjustments associated with these instruments utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by the Company and the respective counterparty. However, as of
December 31, 2017
, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions, and has determined that the credit valuation adjustments are not significant to the overall valuation of its interest rate swaps. As a result, the Company determined that its interest rate swaps valuation is classified in Level 2 of the fair value hierarchy.
The following table shows the fair value of the Company’s financial assets and liabilities that are required to be measured at fair value on a recurring basis as of
December 31, 2017
and
December 31, 2016
(amounts in thousands):
|
|
December 31, 2017
|
||||||||||||||
|
|
Fair Value Hierarchy
|
|
|||||||||||||
|
|
Quoted Prices in Active
Markets for Identical Assets (Level 1) |
Significant Other
Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Total Fair
Value |
|||||||||||
|
Assets:
|
|||||||||||||||
|
Derivative assets
|
$
|
—
|
|
$
|
3,934
|
|
$
|
—
|
|
$
|
3,934
|
|
|||
|
Total assets at fair value
|
$
|
—
|
|
$
|
3,934
|
|
$
|
—
|
|
$
|
3,934
|
|
|||
|
Liabilities:
|
|||||||||||||||
|
Derivative liabilities
|
$
|
—
|
|
$
|
22
|
|
$
|
—
|
|
$
|
22
|
|
|||
|
Total liabilities at fair value
|
$
|
—
|
|
$
|
22
|
|
$
|
—
|
|
$
|
22
|
|
|||
|
|
December 31, 2016
|
||||||||||||||
|
|
Fair Value Hierarchy
|
|
|||||||||||||
|
|
Quoted Prices in Active
Markets for Identical Assets (Level 1) |
Significant Other
Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Total Fair
Value |
|||||||||||
|
Assets:
|
|||||||||||||||
|
Derivative assets
|
$
|
—
|
|
$
|
1,782
|
|
$
|
—
|
|
$
|
1,782
|
|
|||
|
Total assets at fair value
|
$
|
—
|
|
$
|
1,782
|
|
$
|
—
|
|
$
|
1,782
|
|
|||
|
Liabilities:
|
|||||||||||||||
|
Derivative liabilities
|
$
|
—
|
|
$
|
798
|
|
$
|
—
|
|
$
|
798
|
|
|||
|
Total liabilities at fair value
|
$
|
—
|
|
$
|
798
|
|
$
|
—
|
|
$
|
798
|
|
|||
Note 14—
Derivative Instruments and Hedging Activities
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish these objectives, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable rate amounts from a counterparty in exchange for the Company making fixed rate payments over the life of the agreements without exchange of the underlying notional amount.
The effective portion of changes in the fair value of derivatives designated, and that qualify, as cash flow hedges is recorded in accumulated other comprehensive income in the accompanying
consolidated statements of stockholders' equity
and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.
During the
years
ended
December 31, 2017
and
2016
, the Company's derivative instruments were used to hedge the variable cash flows associated with variable rate debt. The ineffective portion of changes in fair value of the derivatives are recognized directly in earnings. During the
years
ended
December 31, 2017
and
2016
, the Company recognized income of
$58,000
and
$144,000
, respectively, due to ineffectiveness of its hedges of interest rate risk, which was recorded in interest expense, net in the accompanying
consolidated statements of comprehensive income (loss)
.
Amounts reported in accumulated other comprehensive income related to the derivative will be reclassified to interest expense, net as interest payments are made on the Company’s variable rate debt. During the next twelve months, the Company
F-27
estimates that an additional
$70,000
will be reclassified from accumulated other comprehensive income as a decrease to interest expense, net.
See
Note 13—"Fair Value"
for a further discussion of the fair value of the Company’s derivative instruments.
The following table summarizes the notional amount and fair value of the Company’s derivative instruments (amounts in thousands):
|
Derivatives
Designated as Hedging Instruments |
Balance
Sheet Location |
Effective
Dates |
Maturity
Dates |
December 31, 2017
|
December 31, 2016
|
|||||||||||||||||||||||||
|
Outstanding
Notional Amount |
Fair Value of
|
Outstanding
Notional Amount |
Fair Value of
|
|||||||||||||||||||||||||||
|
Asset
|
(Liability)
|
Asset
|
(Liability)
|
|||||||||||||||||||||||||||
|
Interest rate swaps
|
Other assets, net/Accounts
payable and other liabilities |
07/01/2016 to
11/16/2017 |
12/22/2020 to
11/16/2022 |
$
|
347,699
|
|
$
|
3,934
|
|
$
|
(22
|
)
|
$
|
96,540
|
|
$
|
1,782
|
|
$
|
(798
|
)
|
|||||||||
The notional amount under the agreements is an indication of the extent of the Company’s involvement in the instruments at the time, but does not represent exposure to credit, interest rate or market risks.
Accounting for changes in the fair value of a derivative instrument depends on the intended use and designation of the derivative instrument. The Company designated the interest rate swaps as cash flow hedges to hedge the variability of the anticipated cash flows on its variable rate secured credit facility and notes payable. The change in fair value of the effective portion of the derivative instruments that are designated as hedges is recorded in other comprehensive income (loss), or OCI, in the accompanying
consolidated statements of comprehensive income (loss)
.
The table below summarizes the amount of income recognized on the interest rate derivatives designated as cash flow hedges for the
years
ended
December 31, 2017
and
2016
(amounts in thousands):
|
Derivatives in Cash Flow Hedging Relationships
|
Amount of Gain Recognized
in OCI on Derivative (Effective Portion) |
Location of (Loss)
Reclassified From Accumulated Other Comprehensive Income to Net Income (Effective Portion) |
Amount of (Loss)
Reclassified From Accumulated Other Comprehensive Income to Net Income (Effective Portion) |
|||||||
|
For the Year Ended December 31, 2017
|
||||||||||
|
Interest rate swaps
|
$
|
1,484
|
|
Interest expense, net
|
$
|
(1,386
|
)
|
|||
|
Total
|
$
|
1,484
|
|
$
|
(1,386
|
)
|
||||
|
For the Year Ended December 31, 2016
|
||||||||||
|
Interest rate swaps
|
$
|
744
|
|
Interest expense, net
|
$
|
(96
|
)
|
|||
|
Total
|
$
|
744
|
|
$
|
(96
|
)
|
||||
The Company did not have derivative instruments as of December 31, 2015.
Credit Risk-Related Contingent Features
T
he Company has agreements with each of its derivative counterparties that contain a provision where if the Company either defaults or is capable of being declared in default on any of its indebtedness, then the Company could also be declared in default on its derivative obligations. The Company records credit risk valuation adjustments on its interest rate swaps based on the respective credit quality of the Company and the counterparty. The Company believes it mitigates its credit risk by entering into agreements with creditworthy counterparties.
As of
December 31, 2017
, the fair value of derivatives in a net liability position, including accrued interest but excluding any adjustment for nonperformance risk related to the agreement, was
$46,000
. As of
December 31, 2017
, there were no termination events or events of default related to the interest rate swaps.
F-28
Tabular Disclosure Offsetting Derivatives
The Company has elected not to offset derivative positions in its
consolidated
financial statements. The following tables present the effect on the Company’s financial position had the Company made the election to offset its derivative positions as of
December 31, 2017
and
2016
(amounts in thousands):
|
Offsetting of Derivative Assets
|
|
|
|
|
||||||||||||||||||||
|
|
|
|
|
Gross Amounts Not Offset in the Balance Sheet
|
|
|||||||||||||||||||
|
|
Gross
Amounts of Recognized Assets |
Gross Amounts
Offset in the Balance Sheet |
Net Amounts of
Assets Presented in the Balance Sheet |
Financial Instruments
Collateral |
Cash Collateral
|
Net
Amount |
||||||||||||||||||
|
December 31, 2017
|
$
|
3,934
|
|
$
|
—
|
|
$
|
3,934
|
|
$
|
—
|
|
$
|
—
|
|
$
|
3,934
|
|
||||||
|
December 31, 2016
|
$
|
1,782
|
|
$
|
—
|
|
$
|
1,782
|
|
$
|
—
|
|
$
|
—
|
|
$
|
1,782
|
|
||||||
|
Offsetting of Derivative Liabilities
|
|
|
|
|
||||||||||||||||||||
|
|
|
|
|
Gross Amounts Not Offset in the Balance Sheet
|
|
|||||||||||||||||||
|
|
Gross
Amounts of Recognized Liabilities |
Gross Amounts
Offset in the Balance Sheet |
Net Amounts of
Liabilities Presented in the Balance Sheet |
Financial Instruments
Collateral |
Cash Collateral
|
Net
Amount |
||||||||||||||||||
|
December 31, 2017
|
$
|
22
|
|
$
|
—
|
|
$
|
22
|
|
$
|
—
|
|
$
|
—
|
|
$
|
22
|
|
||||||
|
December 31, 2016
|
$
|
798
|
|
$
|
—
|
|
$
|
798
|
|
$
|
—
|
|
$
|
—
|
|
$
|
798
|
|
||||||
The Company did
no
t have any financial instruments hedged through interest rate swaps as of
December 31, 2015
.
The Company reports derivatives in the accompanying
consolidated balance sheets
as other assets, net and accounts payable and other liabilities.
Note 15—
Accumulated Other Comprehensive Income
The following table presents a rollforward of amounts recognized in accumulated other comprehensive income by component for the year ended
December 31, 2017
and
2016
(amounts in thousands):
|
Unrealized Income on Derivative
Instruments |
Accumulated Other
Comprehensive Income |
|||||||
|
Balance as of December 31, 2015
|
$
|
—
|
|
$
|
—
|
|
||
|
Other comprehensive income before reclassification
|
744
|
|
744
|
|
||||
|
Amount of loss reclassified from accumulated other comprehensive income to net income (effective portion)
|
96
|
|
96
|
|
||||
|
Other comprehensive income
|
840
|
|
840
|
|
||||
|
Balance as of December 31, 2016
|
$
|
840
|
|
$
|
840
|
|
||
|
Other comprehensive income before reclassification
|
1,484
|
|
1,484
|
|
||||
|
Amount of loss reclassified from accumulated other comprehensive income to net income (effective portion)
|
1,386
|
|
1,386
|
|
||||
|
Other comprehensive income
|
2,870
|
|
2,870
|
|
||||
|
Balance as of December 31, 2017
|
$
|
3,710
|
|
$
|
3,710
|
|
||
F-29
The following table presents reclassifications out of accumulated other comprehensive income for the
years
ended
December 31, 2017
and
2016
(amounts in thousands):
|
Details about Accumulated Other
Comprehensive Income Components |
Amounts Reclassified from
Accumulated Other Comprehensive Income to Net Income |
Affected Line Items in the Consolidated Statements of Comprehensive Income (Loss)
|
||||||||
|
For the Year Ended
December 31, |
||||||||||
|
2017
|
2016
|
|||||||||
|
Interest rate swap contracts
|
$
|
1,386
|
|
$
|
96
|
|
Interest expense, net
|
|||
Note 16—
Stock-based Compensation
On May 6, 2014, the Company adopted the Carter Validus Mission Critical REIT II, Inc. 2014 Restricted Share Plan, or the Incentive Plan, pursuant to which the Company has the power and authority to grant restricted or deferred stock awards to persons eligible under the Incentive Plan. The Company authorized and reserved
300,000
shares of its Class A shares for issuance under the Incentive Plan, subject to certain adjustments. Subject to certain limited exceptions, restricted stock may not be sold, assigned, transferred, pledged, hypothecated or otherwise disposed of and is subject to forfeiture within the vesting period. Restricted stock awards generally vest ratably over
four
years. The Company uses the straight-line method to recognize expenses for service awards with graded vesting. Restricted stock awards are entitled to receive dividends during the vesting period. In addition to the ratable amortization of fair value over the vesting period, dividends paid on unvested shares of restricted stock which are not expected to vest are charged to compensation expense in the period paid.
On August 18, 2017, the Company granted
3,000
restricted shares of Class A common stock to each of its independent directors, which were awarded in connection with their re-election to the Company’s board of directors. The fair value of each share of restricted common stock was estimated at the date of grant at
$9.07
per share. The restricted stock awards vest over a period of
four
years. The awards are amortized using the straight-line method over
four
years.
As of
December 31, 2017
and
2016
, there was
$173,000
and
$167,000
, respectively, of total unrecognized compensation expense related to nonvested shares of the Company’s restricted Class A common stock. This expense is expected to be recognized over a remaining weighted average period of
1.60 years
. This expected expense does not include the impact of any future stock-based compensation awards.
As of
December 31, 2017
and
2016
, the fair value of the nonvested shares of restricted Class A common stock was
$206,550
and
$183,668
, respectively. A summary of the status of the nonvested shares of restricted Class A common stock as of
December 31, 2016
and the changes for the year ended
December 31, 2017
is presented below:
|
Restricted Stock
|
Shares
|
||
|
December 31, 2016
|
20,250
|
|
|
|
Vested
|
(6,750
|
)
|
|
|
Granted
|
9,000
|
|
|
|
December 31, 2017
|
22,500
|
|
|
Stock-based compensation expense for the years ended
December 31, 2017
,
2016
and
2015
was
$76,000
,
$58,000
and
$34,000
, respectively, which is reported in general and administrative costs in the accompanying
consolidated statements of comprehensive income (loss)
.
F-30
Note 17—
Income Taxes
As a REIT, the Company generally will not be subject to U.S. federal income tax on taxable income that it distributes to the stockholders. For U.S. federal income tax purposes, distributions to stockholders are characterized as either ordinary dividends, capital gain distributions, or nontaxable distributions. Nontaxable distributions will reduce U.S. stockholders’ respective bases in their shares. The following table shows the character of distributions the Company paid on a percentage basis during the years ended
December 31, 2017
,
2016
and
2015
:
|
|
For the Year Ended December 31,
|
|||||||
|
Character of Class A Distributions:
|
2017
|
2016
|
2015
|
|||||
|
Ordinary dividends
|
36.49
|
%
|
34.23
|
%
|
33.81
|
%
|
||
|
Nontaxable distributions
|
63.51
|
%
|
65.77
|
%
|
66.19
|
%
|
||
|
Total
|
100.00
|
%
|
100.00
|
%
|
100.00
|
%
|
||
|
For the Year Ended December 31,
|
||||||||
|
Character of Class I Distributions:
|
2017
|
2016
|
2015
|
|||||
|
Ordinary dividends
|
36.49
|
%
|
—
|
%
|
—
|
%
|
||
|
Nontaxable distributions
|
63.51
|
%
|
—
|
%
|
—
|
%
|
||
|
Total
|
100.00
|
%
|
—
|
%
|
—
|
%
|
||
|
|
For the Year Ended December 31,
|
|||||||
|
Character of Class T Distributions:
|
2017
|
2016
|
2015
|
|||||
|
Ordinary dividends
|
25.93
|
%
|
23.07
|
%
|
—
|
%
|
||
|
Nontaxable distributions
|
74.07
|
%
|
76.93
|
%
|
—
|
%
|
||
|
Total
|
100.00
|
%
|
100.00
|
%
|
—
|
%
|
||
The Company is subject to certain state and local income taxes on income, property or net worth in some jurisdictions, and in certain circumstances may also be subject to federal excise tax on undistributed income. Texas, Tennessee and Massachusetts are the major state and local tax jurisdictions for the Company.
The Company applies the rules under ASC 740-10,
Accounting for Uncertainty in Income Taxes
, for uncertain tax positions using a “more likely than not” recognition threshold for tax positions. Pursuant to these rules, the financial statement effects of a tax position are initially recognized when it is more likely than not, based on the technical merits of the tax position, that such a position will be sustained upon examination by the relevant tax authorities. If the tax benefit meets the “more likely than not” threshold, the measurement of the tax benefit will be based on the Company's estimate of the ultimate tax benefit to be sustained if audited by the taxing authority. The Company concluded there was
no
impact related to uncertain tax positions from the results of the operations of the Company for the years ended
December 31, 2017
,
2016
and
2015
. The earliest tax year subject to examination is
2015
.
The Company’s policy is to recognize accrued interest related to unrecognized tax benefits as a component of interest expense and penalties related to unrecognized tax benefits as a component of general and administrative expenses. From inception through
December 31, 2017
, the Company has not recognized any interest expense or penalties related to unrecognized tax benefits.
Note 18—
Commitments and Contingencies
Litigation
In the ordinary course of business, the Company may become subject to litigation or claims. As of
December 31, 2017
, there were, and currently there are,
no
material pending legal proceedings to which the Company is a party.
Note 19—
Economic Dependency
The Company is dependent on the Advisor and its affiliates for certain services that are essential to the Company, including the sale of the Company’s shares of common and preferred stock available for issuance; the identification, evaluation, negotiation, purchase and disposition of real estate investments and other investments; the management of the daily operations of the Company’s real estate portfolio; and other general and administrative responsibilities. In the event that the Advisor and its affiliates are unable to provide the respective services, the Company will be required to obtain such services from other sources.
F-31
Note 20—
Selected Quarterly Financial Data (Unaudited)
Presented in the following table is a summary of the unaudited quarterly financial information for the years ended
December 31, 2017
and
2016
. The Company believes that all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts stated below to present fairly, and in accordance with GAAP, the selected quarterly information (amounts in thousands, except shares and per share data):
|
2017
|
|||||||||||||||
|
Fourth
Quarter |
Third
Quarter |
Second
Quarter |
First
Quarter |
||||||||||||
|
Total revenue
|
$
|
37,266
|
|
$
|
36,205
|
|
$
|
27,602
|
|
$
|
24,022
|
|
|||
|
Total expenses
|
(23,926
|
)
|
(23,980
|
)
|
(17,888
|
)
|
(15,467
|
)
|
|||||||
|
Income from operations
|
13,340
|
|
12,225
|
|
9,714
|
|
8,555
|
|
|||||||
|
Interest expense, net
|
(6,932
|
)
|
(6,786
|
)
|
(5,073
|
)
|
(3,764
|
)
|
|||||||
|
Net income attributable to common stockholders
|
$
|
6,408
|
|
$
|
5,439
|
|
$
|
4,641
|
|
$
|
4,791
|
|
|||
|
Net income per common share attributable to common stockholders:
|
|||||||||||||||
|
Basic
|
$
|
0.05
|
|
$
|
0.05
|
|
$
|
0.05
|
|
$
|
0.06
|
|
|||
|
Diluted
|
$
|
0.05
|
|
$
|
0.05
|
|
$
|
0.05
|
|
$
|
0.06
|
|
|||
|
Weighted average number of common shares outstanding:
|
|||||||||||||||
|
Basic
|
119,651,271
|
|
105,388,118
|
|
94,910,818
|
|
86,482,927
|
|
|||||||
|
Diluted
|
119,666,234
|
|
105,405,297
|
|
94,925,665
|
|
86,499,543
|
|
|||||||
|
2016
|
|||||||||||||||
|
Fourth
Quarter |
Third
Quarter |
Second
Quarter |
First
Quarter |
||||||||||||
|
Total revenue
|
$
|
19,210
|
|
$
|
13,594
|
|
$
|
12,203
|
|
$
|
11,424
|
|
|||
|
Total expenses
|
(11,711
|
)
|
(10,460
|
)
|
(9,638
|
)
|
(8,935
|
)
|
|||||||
|
Income from operations
|
7,499
|
|
3,134
|
|
2,565
|
|
2,489
|
|
|||||||
|
Interest expense, net
|
(2,153
|
)
|
(626
|
)
|
(732
|
)
|
(879
|
)
|
|||||||
|
Net income attributable to common stockholders
|
$
|
5,346
|
|
$
|
2,508
|
|
$
|
1,833
|
|
$
|
1,610
|
|
|||
|
Net income per common share attributable to common stockholders:
|
|||||||||||||||
|
Basic
|
$
|
0.07
|
|
$
|
0.03
|
|
$
|
0.03
|
|
$
|
0.03
|
|
|||
|
Diluted
|
$
|
0.07
|
|
$
|
0.03
|
|
$
|
0.03
|
|
$
|
0.03
|
|
|||
|
Weighted average number of common shares outstanding:
|
|||||||||||||||
|
Basic
|
78,728,400
|
|
71,852,230
|
|
63,514,780
|
|
53,666,785
|
|
|||||||
|
Diluted
|
78,742,067
|
|
71,866,949
|
|
63,530,999
|
|
53,679,723
|
|
|||||||
Note 21—
Subsequent Events
Distributions to Stockholders Paid
On January 2, 2018, the Company paid aggregate distributions of approximately
$4,503,000
to Class A stockholders (
$2,272,000
in cash and
$2,231,000
in shares of the Company’s Class A common stock pursuant to the DRIP), which related to distributions declared for each day in the period from December 1, 2017 through December 31, 2017. On February 1, 2018, the Company paid aggregate distributions of approximately
$4,523,000
to Class A stockholders (
$2,291,000
in cash and
$2,232,000
in shares of the Company’s Class A common stock pursuant to the DRIP), which related to distributions declared for each day in the period from January 1, 2018 through January 31, 2018. On March 1, 2018, the Company paid aggregate distributions of approximately
$4,103,000
to Class A stockholders (
$2,084,000
in cash and
$2,019,000
in shares of the Company’s Class A common stock pursuant to the DRIP), which related to distributions declared for each day in the period from February 1, 2018 through February 28, 2018.
F-32
On January 2, 2018, the Company paid aggregate distributions of approximately
$364,000
to Class I stockholders (
$193,000
in cash and
$171,000
in shares of the Company’s Class I common stock pursuant to the DRIP), which related to distributions declared for each day in the period from December 1, 2017 through December 31, 2017. On February 1, 2018, the Company paid aggregate distributions of approximately
$392,000
to Class I stockholders (
$211,000
in cash and
$181,000
in shares of the Company’s Class I common stock pursuant to the DRIP), which related to distributions declared for each day in the period from January 1, 2018 through January 31, 2018. On March 1, 2018, the Company paid aggregate distributions of approximately
$384,000
to Class I stockholders (
$210,000
in cash and
$174,000
in shares of the Company’s Class I common stock pursuant to the DRIP), which related to distributions declared for each day in the period from February 1, 2018 through February 28, 2018.
On January 2, 2018, the Company paid aggregate distributions of approximately
$1,699,000
to Class T stockholders (
$699,000
in cash and
$1,000,000
in shares of the Company's Class T common stock pursuant to the DRIP), which related to distributions declared for each day in the period from December 1, 2017 through December 31, 2017. On February 1, 2018, the Company paid aggregate distributions of approximately
$1,717,000
to Class T stockholders (
$717,000
in cash and
$1,000,000
in shares of the Company's Class T common stock pursuant to the DRIP), which related to distributions declared for each day in the period from January 1, 2018 through January 31, 2018. On March 1, 2018, the Company paid aggregate distributions of approximately
$1,568,000
to Class T stockholders (
$655,000
in cash and
$913,000
in shares of the Company's Class T common stock pursuant to the DRIP), which related to distributions declared for each day in the period from February 1, 2018 through February 28, 2018.
Distributions Declared
Class A Shares
On January 31, 2018, the board of directors of the Company approved and declared a daily distribution to the Company’s Class A stockholders of record as of the close of business on each day of the period commencing on March 1, 2018 and ending on May 31, 2018. The distribution will be calculated based on
365
days in the calendar year and will be equal to
$0.001788493
per share of Class A common stock, which will be equal to an annualized distribution rate of
6.40%
, assuming a purchase price of
$10.200
per share of Class A common stock. The distributions declared for each record date in March 2018, April 2018 and May 2018 will be paid in April 2018, May 2018 and June 2018, respectively. The distributions will be payable to stockholders from legally available funds therefor.
Class I Shares
On January 31, 2018, the board of directors of the Company approved and declared a daily distribution to the Company’s Class I stockholders of record as of the close of business on each day of the period commencing on March 1, 2018 and ending on and ending May 31, 2018. The distribution will be calculated based on
365
days in the calendar year and will be equal to
$0.001788493
per share of Class I common stock, which will be equal to an annualized distribution rate of
7.04%
, assuming a purchase price of
$9.273
per share. The distributions declared for each record date in March 2018, April 2018 and May 2018 will be paid in April 2018, May 2018 and June 2018, respectively. The distributions will be payable to stockholders from legally available funds therefor.
Class T Shares
On January 31, 2018, the board of directors of the Company approved and declared a daily distribution to the Company’s Class T stockholders of record as of the close of business on each day of the period commencing on March 1, 2018 and ending May 31, 2018. The distribution will be calculated based on
365 days
in the calendar year and will be equal to
$0.001519750
per share of Class T common stock, which will be equal to an annualized distribution rate of
5.68%
, assuming a purchase price of
$9.766
per share. The distributions declared for each record date in March 2018, April 2018 and May 2018 will be paid in April 2018, May 2018 and June 2018, respectively. The distributions will be payable to stockholders from legally available funds therefor.
Class T2 Shares
On January 31, 2018, the board of directors of the Company approved and declared a daily distribution to the Company’s Class T2 stockholders of record as of the close of business on each day of the period commencing on the day following the date on which the first Class T2 Share is purchased and ending May 31, 2018. The distribution will be calculated based on
365 days
in the calendar year and will be equal to
$0.001522356
per share of Class T2 common stock, which will be equal to an annualized distribution rate of
5.72%
, assuming a purchase price of
$9.714
per share. The distributions declared for each record date in March 2018, April 2018 and May 2018 will be paid in April 2018, May 2018 and June 2018, respectively. The distributions will be payable to stockholders from legally available funds therefor.
F-33
Amendments to Dealer Manager Agreement
On February 21, 2018, the Company entered into the Eighth Amendment to the Amended and Restated Dealer Manager Agreement, by and among the Company, Advisor, and Dealer Manager in order to incorporate the terms of Class T2 shares into the Dealer Manager Agreement, including terms related to fees associated with the sale of Class T2 shares. On March 12, 2018, the Company entered into the Ninth Amendment to the Amended and Restated Dealer Manager Agreement, by and among the Company, Advisor and Dealer Manager to clarify the selling commissions payable in connection with Class T2 shares.
Third Amendment to Operating Partnership Agreement
On February 21, 2018, the Company entered into the Third Amendment to the Amended and Restated Agreement of Limited Partnership of Carter Validus Operating Partnership II, LP with the Operating Partnership and Advisor in order to add Class T2 OP Units as a result of the Company’s addition of Class T2 shares in the Offering.
Status of the Offering
As of
March 16, 2018
, the Company had accepted investors’ subscriptions for and issued approximately
84,975,000
shares of Class A common stock,
8,152,000
shares of Class I common stock,
37,521,000
shares of Class T common stock and
no
shares of Class T2 common stock in the Offerings, resulting in receipt of gross proceeds of approximately
$841,384,000
,
$74,555,000
,
$360,650,000
and
$0
, respectively. As of
March 16, 2018
, the Company had approximately
$960,271,000
in Class A shares, Class I shares and Class T2 shares of common stock remaining in the Offering and approximately
$86,872,000
in Class A shares, Class I shares, Class T shares and Class T2 shares of common stock remaining in the DRIP Offering.
Acquisitions
The following table summarizes properties acquired subsequent to
December 31, 2017
and through March 21, 2018:
|
Property
|
Date Acquired
|
Purchase Price
(3)
|
Ownership
|
|||
|
Rancho Cordova Data Center I
(1)
|
03/14/2018
|
$36,800,000
|
100%
|
|||
|
Rancho Cordova Data Center II
(2)
|
03/14/2018
|
$14,160,000
|
100%
|
|||
|
(1)
|
The property is leased to a single tenant.
|
|
(2)
|
The property is leased to two tenants.
|
|
(3)
|
The property acquisition was funded using net proceeds from the Initial Offering and the Offering and the secured credit facility.
|
F-34
CARTER VALIDUS MISSION CRITICAL REIT II, INC.
SCHEDULE III
REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION
December 31, 2017
(in thousands)
|
Initial Cost
|
Cost
Capitalized Subsequent to Acquisition |
Gross Amount
Carried at December 31, 2017 (b) |
||||||||||||||||||||||||||||||||||||
|
Property Description
|
Location
|
Encumbrances
|
Land
|
Buildings and
Improvements |
Land
|
Buildings and
Improvements |
Total
|
Accumulated
Depreciation (c) |
Year
Constructed |
Date
Acquired |
||||||||||||||||||||||||||||
|
Cy Fair Surgical Center
|
Houston, TX
|
$
|
—
|
|
(a)
|
$
|
762
|
|
$
|
2,970
|
|
$
|
106
|
|
$
|
762
|
|
$
|
3,076
|
|
$
|
3,838
|
|
$
|
346
|
|
1993
|
07/31/2014
|
||||||||||
|
Mercy Healthcare Facility
|
Cincinnati, OH
|
—
|
|
(a)
|
356
|
|
3,167
|
|
40
|
|
356
|
|
3,207
|
|
3,563
|
|
307
|
|
2001
|
10/29/2014
|
||||||||||||||||||
|
Winston-Salem, NC IMF
|
Winston-Salem, NC
|
—
|
|
(a)
|
684
|
|
4,903
|
|
—
|
|
684
|
|
4,903
|
|
5,587
|
|
444
|
|
2004
|
12/17/2014
|
||||||||||||||||||
|
New England Sinai Medical Center
|
Stoughton, MA
|
—
|
|
(a)
|
4,049
|
|
19,991
|
|
1,870
|
|
4,049
|
|
21,861
|
|
25,910
|
|
1,700
|
|
1967/1973
|
(d)
|
12/23/2014
|
|||||||||||||||||
|
Baylor Surgical Hospital at Fort Worth
|
Fort Worth, TX
|
—
|
|
(a)
|
8,297
|
|
35,615
|
|
—
|
|
8,297
|
|
35,615
|
|
43,912
|
|
2,840
|
|
2014
|
12/31/2014
|
||||||||||||||||||
|
Baylor Surgical Hospital Integrated Medical Facility
|
Fort Worth, TX
|
—
|
|
(a)
|
367
|
|
1,587
|
|
164
|
|
367
|
|
1,751
|
|
2,118
|
|
236
|
|
2014
|
12/31/2014
|
||||||||||||||||||
|
Winter Haven Healthcare Facility
|
Winter Haven, FL
|
—
|
|
—
|
|
2,805
|
|
—
|
|
—
|
|
2,805
|
|
2,805
|
|
230
|
|
2009
|
01/27/2015
|
|||||||||||||||||||
|
Heartland Rehabilitation Hospital
|
Overland Park, KS
|
—
|
|
(a)
|
1,558
|
|
20,549
|
|
—
|
|
1,558
|
|
20,549
|
|
22,107
|
|
1,553
|
|
2014
|
02/17/2015
|
||||||||||||||||||
|
Indianapolis Data Center
|
Indianapolis, IN
|
—
|
|
(a)
|
524
|
|
6,422
|
|
37
|
|
524
|
|
6,459
|
|
6,983
|
|
444
|
|
2000
|
(e)
|
04/01/2015
|
|||||||||||||||||
|
Clarion IMF
|
Clarion, PA
|
—
|
|
(a)
|
462
|
|
5,377
|
|
—
|
|
462
|
|
5,377
|
|
5,839
|
|
462
|
|
2012
|
06/01/2015
|
||||||||||||||||||
|
Post Acute Webster Rehabilitation Hospital
|
Webster, TX
|
—
|
|
(a)
|
1,858
|
|
20,140
|
|
—
|
|
1,858
|
|
20,140
|
|
21,998
|
|
1,342
|
|
2015
|
06/05/2015
|
||||||||||||||||||
|
Eagan Data Center
|
Eagan, MN
|
—
|
|
(a)
|
768
|
|
5,037
|
|
—
|
|
768
|
|
5,037
|
|
5,805
|
|
395
|
|
1998
|
(f)
|
06/29/2015
|
|||||||||||||||||
|
Houston Surgical Hospital and LTACH
|
Houston, TX
|
—
|
|
(a)
|
8,329
|
|
36,297
|
|
—
|
|
8,329
|
|
36,297
|
|
44,626
|
|
2,582
|
|
1950
|
(g)
|
06/30/2015
|
|||||||||||||||||
|
KMO IMF - Cincinnati I
|
Cincinnati, OH
|
—
|
|
(a)
|
1,812
|
|
24,382
|
|
—
|
|
1,812
|
|
24,382
|
|
26,194
|
|
1,769
|
|
1959
|
(h)
|
07/22/2015
|
|||||||||||||||||
|
KMO IMF - Cincinnati II
|
Cincinnati, OH
|
—
|
|
(a)
|
446
|
|
10,239
|
|
4
|
|
446
|
|
10,243
|
|
10,689
|
|
669
|
|
2014
|
07/22/2015
|
||||||||||||||||||
|
KMO IMF - Florence
|
Florence, KY
|
—
|
|
(a)
|
650
|
|
9,919
|
|
1
|
|
650
|
|
9,920
|
|
10,570
|
|
646
|
|
2014
|
07/22/2015
|
||||||||||||||||||
|
KMO IMF - Augusta
|
Augusta, ME
|
—
|
|
(a)
|
556
|
|
14,401
|
|
—
|
|
556
|
|
14,401
|
|
14,957
|
|
1,001
|
|
2010
|
07/22/2015
|
||||||||||||||||||
|
KMO IMF - Oakland
|
Oakland, ME
|
—
|
|
(a)
|
229
|
|
5,416
|
|
—
|
|
229
|
|
5,416
|
|
5,645
|
|
407
|
|
2003
|
07/22/2015
|
||||||||||||||||||
|
Reading Surgical Hospital
|
Wyomissing, PA
|
—
|
|
(a)
|
1,504
|
|
20,193
|
|
—
|
|
1,504
|
|
20,193
|
|
21,697
|
|
1,341
|
|
2007
|
07/24/2015
|
||||||||||||||||||
|
Post Acute Warm Springs Specialty Hospital of Luling
|
Luling, TX
|
—
|
|
(a)
|
824
|
|
7,530
|
|
—
|
|
824
|
|
7,530
|
|
8,354
|
|
497
|
|
2002
|
07/30/2015
|
||||||||||||||||||
|
Minnetonka Data Center
|
Minnetonka, MN
|
—
|
|
(a)
|
2,085
|
|
15,099
|
|
25
|
|
2,085
|
|
15,124
|
|
17,209
|
|
1,261
|
|
1985
|
08/28/2015
|
||||||||||||||||||
|
Nebraska Healthcare Facility
|
Omaha, NE
|
—
|
|
(a)
|
1,259
|
|
9,796
|
|
—
|
|
1,259
|
|
9,796
|
|
11,055
|
|
568
|
|
2014
|
10/14/2015
|
||||||||||||||||||
|
Heritage Park - Sherman I
|
Sherman, TX
|
—
|
|
(a)
|
1,679
|
|
23,926
|
|
—
|
|
1,679
|
|
23,926
|
|
25,605
|
|
1,321
|
|
2005
|
(i)
|
11/20/2015
|
|||||||||||||||||
|
Heritage Park - Sherman II
|
Sherman, TX
|
—
|
|
(a)
|
214
|
|
3,209
|
|
—
|
|
214
|
|
3,209
|
|
3,423
|
|
179
|
|
2005
|
11/20/2015
|
||||||||||||||||||
|
Baylor Surgery Center at Fort Worth
|
Fort Worth, TX
|
—
|
|
(a)
|
3,120
|
|
9,312
|
|
—
|
|
3,120
|
|
9,312
|
|
12,432
|
|
500
|
|
1998
|
(j)
|
12/23/2015
|
|||||||||||||||||
|
HPI - Oklahoma City I
|
Oklahoma City, OK
|
22,500
|
|
4,626
|
|
30,509
|
|
—
|
|
4,626
|
|
30,509
|
|
35,135
|
|
1,691
|
|
1985
|
(k)
|
12/29/2015
|
||||||||||||||||||
|
HPI - Oklahoma City II
|
Oklahoma City, OK
|
—
|
|
(a)
|
991
|
|
8,366
|
|
—
|
|
991
|
|
8,366
|
|
9,357
|
|
493
|
|
1994
|
(l)
|
12/29/2015
|
|||||||||||||||||
|
Waco Data Center
|
Waco, TX
|
—
|
|
(a)
|
873
|
|
8,233
|
|
—
|
|
873
|
|
8,233
|
|
9,106
|
|
425
|
|
1956
|
(m)
|
12/30/2015
|
|||||||||||||||||
|
HPI - Edmond
|
Edmond, OK
|
—
|
|
(a)
|
796
|
|
3,199
|
|
—
|
|
796
|
|
3,199
|
|
3,995
|
|
184
|
|
2002
|
01/20/2016
|
||||||||||||||||||
|
HPI - Oklahoma City III
|
Oklahoma City, OK
|
—
|
|
(a)
|
368
|
|
2,344
|
|
—
|
|
368
|
|
2,344
|
|
2,712
|
|
135
|
|
2007
|
01/27/2016
|
||||||||||||||||||
S-1
|
Initial Cost
|
Cost
Capitalized Subsequent to Acquisition |
Gross Amount
Carried at December 31, 2017 (b) |
||||||||||||||||||||||||||||||||||||
|
Property Description
|
Location
|
Encumbrances
|
Land
|
Buildings and
Improvements |
Land
|
Buildings and
Improvements |
Total
|
Accumulated
Depreciation (c) |
Year
Constructed |
Date
Acquired |
||||||||||||||||||||||||||||
|
HPI - Oklahoma City IV
|
Oklahoma City, OK
|
—
|
|
(a)
|
452
|
|
1,081
|
|
—
|
|
452
|
|
1,081
|
|
1,533
|
|
64
|
|
2006
|
01/27/2016
|
||||||||||||||||||
|
Alpharetta Data Center III
|
Alpharetta, GA
|
—
|
|
3,395
|
|
11,081
|
|
25
|
|
3,395
|
|
11,106
|
|
14,501
|
|
576
|
|
1999
|
02/02/2016
|
|||||||||||||||||||
|
Flint Data Center
|
Flint, MI
|
—
|
|
(a)
|
111
|
|
7,001
|
|
—
|
|
111
|
|
7,001
|
|
7,112
|
|
356
|
|
1987
|
02/02/2016
|
||||||||||||||||||
|
HPI - Newcastle
|
Newcastle, OK
|
—
|
|
(a)
|
412
|
|
1,173
|
|
—
|
|
412
|
|
1,173
|
|
1,585
|
|
67
|
|
1995
|
(n)
|
02/03/2016
|
|||||||||||||||||
|
HPI - Oklahoma City V
|
Oklahoma City, OK
|
—
|
|
(a)
|
541
|
|
12,445
|
|
—
|
|
541
|
|
12,445
|
|
12,986
|
|
688
|
|
2008
|
02/11/2016
|
||||||||||||||||||
|
Vibra Rehabilitation Hospital
|
Rancho Mirage, CA
|
—
|
|
2,724
|
|
7,626
|
|
23,707
|
|
2,724
|
|
31,333
|
|
34,057
|
|
(o)
|
|
(o)
|
03/01/2016
|
|||||||||||||||||||
|
HPI - Oklahoma City VI
|
Oklahoma City, OK
|
—
|
|
(a)
|
896
|
|
3,684
|
|
—
|
|
896
|
|
3,684
|
|
4,580
|
|
201
|
|
2007
|
03/07/2016
|
||||||||||||||||||
|
Tennessee Data Center
|
Franklin, TN
|
—
|
|
(a)
|
6,624
|
|
10,971
|
|
149
|
|
6,624
|
|
11,120
|
|
17,744
|
|
525
|
|
2015
|
03/31/2016
|
||||||||||||||||||
|
HPI - Oklahoma City VII
|
Oklahoma City, OK
|
25,000
|
|
3,203
|
|
32,380
|
|
—
|
|
3,203
|
|
32,380
|
|
35,583
|
|
1,310
|
|
2016
|
06/22/2016
|
|||||||||||||||||||
|
Post Acute Las Vegas Rehabilitation Hospital
|
Las Vegas, NV
|
—
|
|
2,614
|
|
639
|
|
22,529
|
|
2,894
|
|
22,888
|
|
25,782
|
|
25
|
|
2017
|
(p)
|
06/24/2016
|
||||||||||||||||||
|
Somerset Data Center
|
Somerset, NJ
|
—
|
|
(a)
|
906
|
|
10,466
|
|
—
|
|
906
|
|
10,466
|
|
11,372
|
|
466
|
|
1973
|
(q)
|
06/29/2016
|
|||||||||||||||||
|
Integris Lakeside Women's Hospital
|
Oklahoma City, OK
|
—
|
|
(a)
|
2,002
|
|
15,384
|
|
—
|
|
2,002
|
|
15,384
|
|
17,386
|
|
614
|
|
1997
|
(r)
|
06/30/2016
|
|||||||||||||||||
|
AT&T Hawthorne Data Center
|
Hawthorne, CA
|
39,749
|
|
16,498
|
|
57,312
|
|
—
|
|
16,498
|
|
57,312
|
|
73,810
|
|
1,882
|
|
1963
|
(s)
|
09/27/2016
|
||||||||||||||||||
|
McLean I
|
McLean, VA
|
23,460
|
|
31,554
|
|
4,930
|
|
7
|
|
31,554
|
|
4,937
|
|
36,491
|
|
165
|
|
1966
|
(t)
|
10/17/2016
|
||||||||||||||||||
|
McLean II
|
McLean, VA
|
27,540
|
|
20,392
|
|
22,727
|
|
6
|
|
20,392
|
|
22,733
|
|
43,125
|
|
706
|
|
1991
|
(u)
|
10/17/2016
|
||||||||||||||||||
|
Select Medical Rehabilitation Facility
|
Marlton, NJ
|
31,790
|
|
—
|
|
57,154
|
|
5
|
|
—
|
|
57,159
|
|
57,159
|
|
1,608
|
|
1995
|
11/01/2016
|
|||||||||||||||||||
|
Andover Data Center II
|
Andover, MA
|
—
|
|
(a)
|
6,566
|
|
28,072
|
|
1
|
|
6,566
|
|
28,073
|
|
34,639
|
|
897
|
|
2000
|
11/08/2016
|
||||||||||||||||||
|
Grand Rapids Healthcare Facility
|
Grand Rapids, MI
|
30,450
|
|
2,533
|
|
39,487
|
|
43
|
|
2,533
|
|
39,530
|
|
42,063
|
|
1,345
|
|
2008
|
12/07/2016
|
|||||||||||||||||||
|
Corpus Christi Surgery Center
|
Corpus Christi, TX
|
—
|
|
975
|
|
4,963
|
|
58
|
|
1,002
|
|
4,994
|
|
5,996
|
|
141
|
|
1992
|
12/22/2016
|
|||||||||||||||||||
|
Chicago Data Center II
|
Downers Grove, IL
|
—
|
|
(a)
|
1,329
|
|
29,940
|
|
(545
|
)
|
1,358
|
|
29,366
|
|
30,724
|
|
779
|
|
1987
|
(v)
|
12/28/2016
|
|||||||||||||||||
|
Blythewood Data Center
|
Blythewood, SC
|
—
|
|
(a)
|
612
|
|
17,714
|
|
(234
|
)
|
634
|
|
17,458
|
|
18,092
|
|
463
|
|
1983
|
12/29/2016
|
||||||||||||||||||
|
Tempe Data Center
|
Tempe, AZ
|
—
|
|
(a)
|
2,997
|
|
11,991
|
|
—
|
|
2,997
|
|
11,991
|
|
14,988
|
|
294
|
|
1977
|
(w)
|
01/26/2017
|
|||||||||||||||||
|
Aurora Healthcare Facility
|
Aurora, IL
|
—
|
|
(a)
|
973
|
|
9,632
|
|
—
|
|
973
|
|
9,632
|
|
10,605
|
|
206
|
|
2002
|
03/30/2017
|
||||||||||||||||||
|
Norwalk Data Center
|
Norwalk, CT
|
34,200
|
|
10,125
|
|
43,360
|
|
—
|
|
10,125
|
|
43,360
|
|
53,485
|
|
878
|
|
2013
|
03/30/2017
|
|||||||||||||||||||
|
Texas Rehab - Austin
|
Austin, TX
|
20,881
|
|
1,368
|
|
32,039
|
|
—
|
|
1,368
|
|
32,039
|
|
33,407
|
|
683
|
|
2012
|
03/31/2017
|
|||||||||||||||||||
|
Texas Rehab - Allen
|
Allen, TX
|
13,150
|
|
857
|
|
20,582
|
|
—
|
|
857
|
|
20,582
|
|
21,439
|
|
439
|
|
2007
|
03/31/2017
|
|||||||||||||||||||
|
Texas Rehab - Beaumont
|
Beaumont, TX
|
5,869
|
|
946
|
|
8,372
|
|
—
|
|
946
|
|
8,372
|
|
9,318
|
|
179
|
|
1991
|
03/31/2017
|
|||||||||||||||||||
|
Texas Rehab - San Antonio
|
San Antonio, TX
|
10,500
|
|
1,813
|
|
11,706
|
|
—
|
|
1,813
|
|
11,706
|
|
13,519
|
|
173
|
|
1985/1992
|
06/29/2017
|
|||||||||||||||||||
|
Charlotte Data Center II
|
Charlotte, NC
|
—
|
|
(a)
|
372
|
|
17,131
|
|
—
|
|
372
|
|
17,131
|
|
17,503
|
|
272
|
|
1989
|
(x)
|
05/15/2017
|
|||||||||||||||||
|
250 Williams Atlanta Data Center
|
Atlanta, GA
|
116,200
|
|
19,159
|
|
129,778
|
|
102
|
|
19,159
|
|
129,880
|
|
149,039
|
|
2,549
|
|
1989
|
(y)
|
06/15/2017
|
||||||||||||||||||
|
Sunnyvale Data Center
|
Sunnyvale, CA
|
—
|
|
(a)
|
10,013
|
|
24,709
|
|
—
|
|
10,013
|
|
24,709
|
|
34,722
|
|
344
|
|
1992
|
(z)
|
06/28/2017
|
|||||||||||||||||
|
Cincinnati Data Center
|
Cincinnati, OH
|
—
|
|
(a)
|
1,556
|
|
8,966
|
|
—
|
|
1,556
|
|
8,966
|
|
10,522
|
|
136
|
|
1985
|
(aa)
|
06/30/2017
|
|||||||||||||||||
|
Silverdale Healthcare Facility
|
Silverdale, WA
|
—
|
|
(a)
|
1,530
|
|
7,506
|
|
—
|
|
1,530
|
|
7,506
|
|
9,036
|
|
85
|
|
2005
|
08/25/2017
|
||||||||||||||||||
|
Silverdale Healthcare Facility II
|
Silverdale, WA
|
—
|
|
(a)
|
1,542
|
|
4,981
|
|
—
|
|
1,542
|
|
4,981
|
|
6,523
|
|
49
|
|
2007
|
09/20/2017
|
||||||||||||||||||
|
King of Prussia Data Center
|
King of Prussia, PA
|
12,503
|
|
1,015
|
|
17,413
|
|
—
|
|
1,015
|
|
17,413
|
|
18,428
|
|
131
|
|
1960
|
(ab)
|
09/28/2017
|
||||||||||||||||||
|
Tempe Data Center II
|
Tempe, AZ
|
—
|
|
(a)
|
—
|
|
15,803
|
|
—
|
|
—
|
|
15,803
|
|
15,803
|
|
122
|
|
1998
|
09/29/2017
|
||||||||||||||||||
|
Houston Data Center
|
Houston, TX
|
48,607
|
|
10,082
|
|
101,051
|
|
—
|
|
10,082
|
|
101,051
|
|
111,133
|
|
321
|
|
2013
|
11/16/2017
|
|||||||||||||||||||
|
Saginaw Healthcare Facility
|
Saginaw, MI
|
—
|
|
(a)
|
1,251
|
|
15,878
|
|
—
|
|
1,251
|
|
15,878
|
|
17,129
|
|
24
|
|
2002
|
12/21/2017
|
||||||||||||||||||
S-2
|
Initial Cost
|
Cost
Capitalized Subsequent to Acquisition |
Gross Amount
Carried at December 31, 2017 (b) |
||||||||||||||||||||||||||||||||||||
|
Property Description
|
Location
|
Encumbrances
|
Land
|
Buildings and
Improvements |
Land
|
Buildings and
Improvements |
Total
|
Accumulated
Depreciation (c) |
Year
Constructed |
Date
Acquired |
||||||||||||||||||||||||||||
|
Elgin Data Center
|
Elgin, IL
|
5,736
|
|
1,067
|
|
7,861
|
|
—
|
|
1,067
|
|
7,861
|
|
8,928
|
|
10
|
|
2000
|
12/22/2017
|
|||||||||||||||||||
|
Oklahoma City Data Center
|
Oklahoma City, OK
|
—
|
|
1,868
|
|
44,253
|
|
—
|
|
1,868
|
|
44,253
|
|
46,121
|
|
48
|
|
2008/2016
|
12/27/2017
|
|||||||||||||||||||
|
$
|
468,135
|
|
$
|
222,919
|
|
$
|
1,280,175
|
|
$
|
48,100
|
|
$
|
223,277
|
|
$
|
1,327,917
|
|
$
|
1,551,194
|
|
$
|
45,789
|
|
|||||||||||||||
|
(a)
|
Property collateralized under the secured credit facility. As of
December 31, 2017
,
48
commercial properties were collateralized under the secured credit facility and the Company had
$220,000,000
aggregate principal amount outstanding thereunder.
|
|
(b)
|
The aggregated cost for federal income tax purposes is approximately
$1,409,721,000
(unaudited).
|
|
(c)
|
The Company’s assets are depreciated or amortized using the straight-line method over the useful lives of the assets by class. Generally, buildings and improvements are depreciated over
15
-
40
years.
|
|
(d)
|
The New England Sinai Medical Center consists of
two
buildings and was renovated beginning in
1997
.
|
|
(e)
|
The Indianapolis Data Center was renovated in
2014
.
|
|
(f)
|
The Eagan Data Center was renovated in
2015
.
|
|
(g)
|
The Houston Surgical Hospital and LTACH was renovated in
2005
and
2008
.
|
|
(h)
|
The KMO IMF - Cincinnati I was renovated in
1970
and
2013
.
|
|
(i)
|
The Heritage Park - Sherman I was renovated in
2010
.
|
|
(j)
|
The Baylor Surgery Center at Fort Worth was renovated in
2007
and
2015
.
|
|
(k)
|
The HPI - Oklahoma City I was renovated in
1998
and
2003
.
|
|
(l)
|
The HPI - Oklahoma City II was renovated in
1999
.
|
|
(m)
|
The Waco Data Center was renovated in
2009
.
|
|
(n)
|
The HPI - Newcastle was renovated in
1999
.
|
|
(o)
|
As of
December 31, 2017
, the Vibra Rehabilitation Hospital was under construction; therefore, depreciation is not applicable.
|
|
(p)
|
The Post Acute Las Vegas Rehabilitation Hospital was redeveloped into a healthcare facility in
2017
.
|
|
(q)
|
The Somerset Data Center was renovated in
2006
.
|
|
(r)
|
The Integris Lakeside Women's Hospital was renovated in
2008
.
|
|
(s)
|
The AT&T Hawthorne Data Center was renovated in
1983
and
2001
.
|
|
(t)
|
The McLean I was renovated in
1998
.
|
|
(u)
|
The McLean II was renovated in
1998
.
|
|
(v)
|
The Chicago Data Center II was renovated in
2016
.
|
|
(w)
|
The Tempe Data Center was renovated in
1983
,
2008
and
2011
.
|
|
(x)
|
The Charlotte Data Center II was renovated in
2016
.
|
|
(y)
|
250 Williams Atlanta Data Center was renovated in
2007
.
|
|
(z)
|
The Sunnyvale Data Center was renovated in
1998
.
|
S-3
|
(aa)
|
The Cincinnati Data Center was renovated in
2001
.
|
|
(ab)
|
The King of Prussia Data Center was renovated in
1997
.
|
S-4
CARTER VALIDUS MISSION CRITICAL REIT II, INC.
SCHEDULE III
REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION
(CONTINUED)
December 31, 2017
(in thousands)
|
2017
|
2016
|
2015
|
|||||||||
|
Real Estate
|
|||||||||||
|
Balance at beginning of year
|
$
|
915,521
|
|
$
|
415,776
|
|
$
|
82,748
|
|
||
|
Additions:
|
|||||||||||
|
Acquisitions
|
601,546
|
|
487,276
|
|
331,524
|
|
|||||
|
Improvements
|
34,127
|
|
12,469
|
|
1,504
|
|
|||||
|
Balance at end of year
|
$
|
1,551,194
|
|
$
|
915,521
|
|
$
|
415,776
|
|
||
|
Accumulated Depreciation
|
|||||||||||
|
Balance at beginning of year
|
$
|
(18,521
|
)
|
$
|
(5,262
|
)
|
$
|
(133
|
)
|
||
|
Depreciation
|
(27,268
|
)
|
(13,259
|
)
|
(5,129
|
)
|
|||||
|
Balance at end of year
|
$
|
(45,789
|
)
|
$
|
(18,521
|
)
|
$
|
(5,262
|
)
|
||
S-5
EXHIBIT INDEX
Pursuant to Item 601(a)(2) of Regulation S-K, this Exhibit Index immediately precedes the exhibits.
The following exhibits are included, or incorporated by reference, in this
Annual Report on Form 10-K
for the
year
ended
December 31, 2017
(and are numbered in accordance with Item 601 of Regulation S-K).
|
Exhibit
No:
|
|
|
|
3.1
|
|
|
|
3.2
|
|
|
|
3.3
|
||
|
3.4
|
||
|
3.5
|
||
|
4.1
|
|
|
|
4.2
|
|
|
|
4.3
|
|
|
|
4.4
|
|
|
|
4.5
|
||
|
4.6
|
|
|
|
10.1
|
||
|
10.2
|
||
|
10.3
|
||
|
10.4
|
||
|
10.5
|
||
|
10.6
|
||
|
10.7
|
||
|
10.8
|
||
|
10.9
|
||
|
10.10
|
||
|
10.11
|
||
|
10.12
|
||
|
10.13
|
||
|
10.14
|
||
|
10.15
|
||
|
10.16
|
||
|
10.17
|
||
|
10.18
|
||
|
10.19
|
||
|
10.20
|
||
|
10.21
|
||
|
10.22
|
||
|
10.23
|
||
|
10.24
|
||
|
10.25
|
||
|
10.26
|
||
|
10.27
|
||
|
10.28
|
||
|
10.29
|
||
|
10.30
|
||
|
10.31
|
||
|
10.32
|
||
|
10.33
|
||
|
10.34
|
||
|
10.35
|
||
|
10.36
|
||
|
10.37
|
||
|
10.38
|
||
|
10.39
|
||
|
10.40
|
||
|
10.41
|
||
|
10.42
|
||
|
10.43
|
||
|
10.44
|
||
|
10.45
|
||
|
10.46
|
||
|
10.47
|
||
|
10.48
|
||
|
10.49
|
||
|
10.50
|
||
|
10.51
|
||
|
10.52
|
||
|
10.53
|
||
|
10.54
|
||
|
10.55
|
||
|
10.56
|
||
|
10.57
|
||
|
10.58
|
||
|
10.59
|
||
|
10.60
|
||
|
10.61
|
||
|
10.62
|
||
|
10.63
|
||
|
10.64
|
||
|
10.65
|
||
|
10.66
|
||
|
10.67
|
||
|
10.68
|
||
|
10.69
|
||
|
10.70
|
||
|
10.71
|
||
|
10.72
|
||
|
10.73
|
||
|
10.74
|
||
|
10.75
|
||
|
10.76
|
||
|
10.77
|
||
|
10.78
|
||
|
10.79
|
||
|
10.80
|
||
|
10.81
|
||
|
10.82
|
||
|
10.83
|
||
|
10.84
|
||
|
10.85
|
||
|
10.86
|
||
|
10.87
|
||
|
10.88
|
||
|
10.89
|
||
|
10.90
|
||
|
10.91
|
||
|
10.92
|
||
|
10.93
|
||
|
10.94
|
||
|
10.95
|
||
|
10.96
|
||
|
10.97
|
||
|
10.98
|
||
|
10.99
|
||
|
10.100
|
||
|
10.101
|
||
|
10.102
|
||
|
10.103
|
||
|
10.104
|
||
|
10.105
|
||
|
10.106
|
||
|
10.107
|
||
|
10.108
|
||
|
10.109
|
||
|
10.110
|
||
|
10.111
|
||
|
10.112
|
||
|
21.1
|
||
|
23.1*
|
||
|
31.1*
|
||
|
31.2*
|
||
|
32.1**
|
||
|
32.2**
|
||
|
99.1*
|
||
|
101.INS*
|
XBRL Instance Document
|
|
|
101.SCH*
|
XBRL Taxonomy Extension Schema Document
|
|
|
101.CAL*
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
|
101.DEF*
|
XBRL Taxonomy Extension Definition Linkbase Document
|
|
|
101.LAB*
|
XBRL Taxonomy Extension Label Linkbase Document
|
|
|
101.PRE*
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
|
|
*
|
Filed herewith.
|
|
**
|
Furnished herewith in accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is not deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act, except to the extent that the registrant specifically incorporates it by reference.
|
Item 16.
Form 10-K Summary.
The Company has elected not to provide summary information.
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.
|
CARTER VALIDUS MISSION CRITICAL REIT II, INC.
|
|||
|
(Registrant)
|
|||
|
Date: March 21, 2018
|
By:
|
/s/ J
OHN
E. C
ARTER
|
|
|
John E. Carter
|
|||
|
Chief Executive Officer
|
|||
|
(Principal Executive Officer)
|
|||
|
Date: March 21, 2018
|
By:
|
/s/ T
ODD
M. S
AKOW
|
|
|
Todd M. Sakow
|
|||
|
Chief Financial Officer
|
|||
|
(Principal Financial Officer and Principal Accounting Officer)
|
|||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
Name
|
Capacity
|
Date
|
||
|
/s/ JOHN E. CARTER
|
Chief Executive Officer and
|
March 21, 2018
|
||
|
John E. Carter
|
Chairman of Board of Directors
|
|||
|
(Principal Executive Officer)
|
||||
|
/s/ TODD M. SAKOW
|
Chief Financial Officer
|
March 21, 2018
|
||
|
Todd M. Sakow
|
(Principal Financial Officer and
|
|||
|
Principal Accounting Officer)
|
||||
|
/s/ ROBERT M. WINSLOW
|
Director
|
March 21, 2018
|
||
|
Robert M. Winslow
|
||||
|
/s/ JONATHAN KUCHIN
|
Director
|
March 21, 2018
|
||
|
Jonathan Kuchin
|
||||
|
/s/ RANDALL GREENE
|
Director
|
March 21, 2018
|
||
|
Randall Greene
|
||||
|
/s/ RONALD RAYEVICH
|
Director
|
March 21, 2018
|
||
|
Ronald Rayevich
|
||||
TABLE OF CONTENTS
Part 1. Financial InformationNote 1 Organization and Business OperationsNote 2 Summary Of Significant Accounting PoliciesNote 6 "other Assets, Net"Note 11 "segment Reporting"Note 3 Real Estate InvestmentsNote 4 Acquired Intangible Assets, NetNote 5 Intangible Lease Liabilities, NetNote 6 Other Assets, NetNote 7 Accounts Payable and Other LiabilitiesNote 8 Notes PayableNote 9 Credit FacilityNote 10 Related-party Transactions and ArrangementsNote 11 Segment ReportingNote 12 Future Minimum RentNote 13 Fair ValueNote 14 Derivative Instruments and Hedging ActivitiesNote 13 "fair Value"Note 15 Accumulated Other Comprehensive IncomeNote 16 Stock-based CompensationNote 17 Income TaxesNote 18 Commitments and ContingenciesNote 19 Economic DependencyNote 20 Selected Quarterly Financial Data (unaudited)Note 21 Subsequent EventsItem 16. Form 10-k Summary