SILA REALTY TRUST, INC.
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________
FORM 10-Q
(Mark One)
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☒
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
September 30, 2019
OR
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☐
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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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)
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Maryland
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46-1854011
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(State or Other Jurisdiction of
Incorporation or Organization)
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(I.R.S. Employer
Identification No.)
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4890 West Kennedy Blvd., Suite 650
Tampa, FL 33609
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(813) 287-0101
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(Address of Principal Executive Offices; Zip Code)
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(Registrant’s Telephone Number)
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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☐
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Accelerated filer
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☐
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Non-accelerated filer
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☒
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Smaller reporting company
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☐
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Emerging growth company
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☒
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|||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act: None
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Title of each class
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Trading Symbol
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Name of each exchange on which registered
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||
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N/A
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N/A
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N/A
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||
As of
November 8, 2019
, there were approximately
166,779,000
shares of Class A common stock,
12,636,000
shares of Class I common stock,
38,750,000
shares of Class T common stock and
3,497,000
shares of Class T2 common stock of Carter Validus Mission Critical REIT II, Inc. outstanding.
CARTER VALIDUS MISSION CRITICAL REIT II, INC.
(A Maryland Corporation)
TABLE OF CONTENTS
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Page
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PART I.
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||
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Item 1.
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||
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Item 2.
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||
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Item 3.
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||
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Item 4.
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||
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PART II.
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||
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Item 1.
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||
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Item 1A.
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||
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Item 2.
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||
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Item 3.
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||
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Item 4.
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||
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Item 5.
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||
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Item 6.
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||
CARTER VALIDUS MISSION CRITICAL REIT II, INC.
(in thousands, except share data)
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(Unaudited)
September 30, 2019 |
December 31, 2018
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||||||
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ASSETS
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|||||||
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Real estate:
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|||||||
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Land
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$
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247,351
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$
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246,790
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Buildings and improvements, less accumulated depreciation of $112,138 and $84,594, respectively
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1,444,110
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1,426,942
|
|
|||
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Total real estate, net
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1,691,461
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1,673,732
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|||
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Cash and cash equivalents
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67,969
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68,360
|
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|||
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Acquired intangible assets, less accumulated amortization of $56,004 and $42,081, respectively
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142,643
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154,204
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|||
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Right-of-use assets - operating leases
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13,665
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|
—
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|||
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Other assets, net
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73,631
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67,533
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|||
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Total assets
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$
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1,989,369
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$
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1,963,829
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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|||||||
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Liabilities:
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|||||||
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Notes payable, net of deferred financing costs of $2,736 and $3,441, respectively
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$
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463,770
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$
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464,345
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Credit facility, net of deferred financing costs of $3,088 and $2,489, respectively
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436,912
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352,511
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|||
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Accounts payable due to affiliates
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9,592
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12,427
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|||
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Accounts payable and other liabilities
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35,643
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29,555
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|||
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Acquired intangible liabilities, less accumulated amortization of $10,976 and $7,592, respectively
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53,701
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57,606
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|||
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Operating lease liabilities
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10,485
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—
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|||
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Total liabilities
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1,010,103
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916,444
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|||
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Stockholders’ equity:
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|||||||
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Preferred stock, $0.01 par value per share, 100,000,000 shares authorized; none issued and outstanding
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—
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—
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|||
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Common stock, $0.01 par value per share, 500,000,000 shares authorized; 146,803,214 and 143,412,353 shares issued, respectively; 137,438,343 and 136,466,242 shares outstanding, respectively
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1,374
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1,364
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|
|||
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Additional paid-in capital
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1,200,917
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1,192,340
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|||
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Accumulated distributions in excess of earnings
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(215,943
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)
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(152,421
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)
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|||
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Accumulated other comprehensive (loss) income
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(7,083
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)
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6,100
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|||
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Total stockholders’ equity
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979,265
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1,047,383
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|||
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Noncontrolling interests
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1
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2
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|||
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Total equity
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979,266
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1,047,385
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|||
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Total liabilities and stockholders’ equity
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$
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1,989,369
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$
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1,963,829
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The accompanying notes are an integral part of these
condensed consolidated
financial statements.
3
CARTER VALIDUS MISSION CRITICAL REIT II, INC.
(in thousands, except share data and per share amounts)
(Unaudited)
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|
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
|||||||||||||
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2019
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2018
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2019
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2018
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||||||||||||
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Revenue:
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|||||||||||||||
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Rental revenue
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$
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48,063
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$
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45,518
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$
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141,467
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$
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130,760
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|||
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Expenses:
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|||||||||||||||
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Rental expenses
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10,740
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9,447
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30,010
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27,439
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|||||||
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General and administrative expenses
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2,239
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1,244
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5,177
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3,526
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|||||||
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Asset management fees
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3,540
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3,323
|
|
10,527
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|
9,655
|
|
|||||||
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Depreciation and amortization
|
16,254
|
|
14,849
|
|
50,110
|
|
42,848
|
|
|||||||
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Impairment loss on real estate
|
13,000
|
|
—
|
|
13,000
|
|
—
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|
|||||||
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Total expenses
|
45,773
|
|
28,863
|
|
108,824
|
|
83,468
|
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|||||||
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Income from operations
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2,290
|
|
16,655
|
|
32,643
|
|
47,292
|
|
|||||||
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Interest and other expense, net
|
11,920
|
|
8,938
|
|
31,648
|
|
24,885
|
|
|||||||
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Net (loss) income attributable to common stockholders
|
$
|
(9,630
|
)
|
$
|
7,717
|
|
$
|
995
|
|
$
|
22,407
|
|
|||
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Other comprehensive (loss) income:
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|||||||||||||||
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Unrealized (loss) income on interest rate swaps, net
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$
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(2,123
|
)
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$
|
972
|
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$
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(13,286
|
)
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$
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7,365
|
|
|||
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Other comprehensive (loss) income
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(2,123
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)
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972
|
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(13,286
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)
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7,365
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|||||||
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Comprehensive (loss) income attributable to common stockholders
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$
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(11,753
|
)
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$
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8,689
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$
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(12,291
|
)
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$
|
29,772
|
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|||
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Weighted average number of common shares outstanding:
|
|||||||||||||||
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Basic
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137,063,509
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132,467,127
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136,461,135
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129,614,816
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|||||||
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Diluted
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137,063,509
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132,491,755
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136,484,303
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129,637,967
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|||||||
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Net (loss) income per common share attributable to common stockholders:
|
|||||||||||||||
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Basic
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$
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(0.07
|
)
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$
|
0.06
|
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$
|
0.01
|
|
$
|
0.17
|
|
|||
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Diluted
|
$
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(0.07
|
)
|
$
|
0.06
|
|
$
|
0.01
|
|
$
|
0.17
|
|
|||
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Distributions declared per common share
|
$
|
0.16
|
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$
|
0.16
|
|
$
|
0.47
|
|
$
|
0.47
|
|
|||
The accompanying notes are an integral part of these
condensed consolidated
financial statements.
4
CARTER VALIDUS MISSION CRITICAL REIT II, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
(Unaudited)
|
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, 2017
|
124,327,777
|
|
$
|
1,243
|
|
$
|
1,084,905
|
|
$
|
(99,309
|
)
|
$
|
3,710
|
|
$
|
990,549
|
|
$
|
2
|
|
$
|
990,551
|
|
|||||||
|
Issuance of common stock
|
3,530,242
|
|
35
|
|
34,061
|
|
—
|
|
—
|
|
34,096
|
|
—
|
|
34,096
|
|
||||||||||||||
|
Issuance of common stock under the distribution reinvestment plan
|
1,080,606
|
|
11
|
|
9,909
|
|
—
|
|
—
|
|
9,920
|
|
—
|
|
9,920
|
|
||||||||||||||
|
Vesting of restricted stock
|
—
|
|
—
|
|
22
|
|
—
|
|
—
|
|
22
|
|
—
|
|
22
|
|
||||||||||||||
|
Commissions on sale of common stock and related dealer manager fees
|
—
|
|
—
|
|
(1,689
|
)
|
—
|
|
—
|
|
(1,689
|
)
|
—
|
|
(1,689
|
)
|
||||||||||||||
|
Distribution and servicing fees
|
—
|
|
—
|
|
(374
|
)
|
—
|
|
—
|
|
(374
|
)
|
—
|
|
(374
|
)
|
||||||||||||||
|
Other offering costs
|
—
|
|
—
|
|
(1,032
|
)
|
—
|
|
—
|
|
(1,032
|
)
|
—
|
|
(1,032
|
)
|
||||||||||||||
|
Repurchase of common stock
|
(917,212
|
)
|
(9
|
)
|
(8,411
|
)
|
—
|
|
—
|
|
(8,420
|
)
|
—
|
|
(8,420
|
)
|
||||||||||||||
|
Distributions to common stockholders
|
—
|
|
—
|
|
—
|
|
(19,447
|
)
|
—
|
|
(19,447
|
)
|
—
|
|
(19,447
|
)
|
||||||||||||||
|
Other comprehensive income
|
—
|
|
—
|
|
—
|
|
—
|
|
4,575
|
|
4,575
|
|
—
|
|
4,575
|
|
||||||||||||||
|
Net income
|
—
|
|
—
|
|
—
|
|
7,504
|
|
—
|
|
7,504
|
|
—
|
|
7,504
|
|
||||||||||||||
|
Balance, March 31, 2018
|
128,021,413
|
|
$
|
1,280
|
|
$
|
1,117,391
|
|
$
|
(111,252
|
)
|
$
|
8,285
|
|
$
|
1,015,704
|
|
$
|
2
|
|
$
|
1,015,706
|
|
|||||||
|
Issuance of common stock
|
3,519,385
|
|
36
|
|
33,812
|
|
—
|
|
—
|
|
33,848
|
|
—
|
|
33,848
|
|
||||||||||||||
|
Issuance of common stock under the distribution reinvestment plan
|
1,119,736
|
|
11
|
|
10,268
|
|
—
|
|
—
|
|
10,279
|
|
—
|
|
10,279
|
|
||||||||||||||
|
Vesting of restricted common stock
|
2,250
|
|
—
|
|
22
|
|
—
|
|
—
|
|
22
|
|
—
|
|
22
|
|
||||||||||||||
|
Commissions on sale of common stock and related dealer manager fees
|
—
|
|
—
|
|
(1,540
|
)
|
—
|
|
—
|
|
(1,540
|
)
|
—
|
|
(1,540
|
)
|
||||||||||||||
|
Distribution and servicing fees
|
—
|
|
—
|
|
(320
|
)
|
—
|
|
—
|
|
(320
|
)
|
—
|
|
(320
|
)
|
||||||||||||||
|
Other offering costs
|
—
|
|
—
|
|
(1,259
|
)
|
—
|
|
—
|
|
(1,259
|
)
|
—
|
|
(1,259
|
)
|
||||||||||||||
|
Repurchase of common stock
|
(1,586,090
|
)
|
(16
|
)
|
(14,544
|
)
|
—
|
|
—
|
|
(14,560
|
)
|
—
|
|
(14,560
|
)
|
||||||||||||||
|
Distributions to common stockholders
|
—
|
|
—
|
|
—
|
|
(20,201
|
)
|
—
|
|
(20,201
|
)
|
—
|
|
(20,201
|
)
|
||||||||||||||
|
Other comprehensive income
|
—
|
|
—
|
|
—
|
|
—
|
|
1,818
|
|
1,818
|
|
—
|
|
1,818
|
|
||||||||||||||
|
Net income
|
—
|
|
—
|
|
—
|
|
7,186
|
|
—
|
|
7,186
|
|
—
|
|
7,186
|
|
||||||||||||||
|
Balance, June 30, 2018
|
131,076,694
|
|
$
|
1,311
|
|
$
|
1,143,830
|
|
$
|
(124,267
|
)
|
$
|
10,103
|
|
$
|
1,030,977
|
|
$
|
2
|
|
$
|
1,030,979
|
|
|||||||
|
Issuance of common stock
|
3,104,445
|
|
31
|
|
29,311
|
|
—
|
|
—
|
|
29,342
|
|
—
|
|
29,342
|
|
||||||||||||||
|
Issuance of common stock under the distribution reinvestment plan
|
1,124,068
|
|
11
|
|
10,309
|
|
—
|
|
—
|
|
10,320
|
|
—
|
|
10,320
|
|
||||||||||||||
|
Vesting of restricted stock
|
6,750
|
|
—
|
|
23
|
|
—
|
|
—
|
|
23
|
|
—
|
|
23
|
|
||||||||||||||
|
Commissions on sale of common stock and related dealer manager fees
|
—
|
|
—
|
|
(844
|
)
|
—
|
|
—
|
|
(844
|
)
|
—
|
|
(844
|
)
|
||||||||||||||
|
Distribution and servicing fees
|
—
|
|
—
|
|
292
|
|
—
|
|
—
|
|
292
|
|
—
|
|
292
|
|
||||||||||||||
|
Other offering costs
|
—
|
|
—
|
|
(1,032
|
)
|
—
|
|
—
|
|
(1,032
|
)
|
—
|
|
(1,032
|
)
|
||||||||||||||
|
Repurchase of common stock
|
(1,063,816
|
)
|
(11
|
)
|
(9,755
|
)
|
—
|
|
—
|
|
(9,766
|
)
|
—
|
|
(9,766
|
)
|
||||||||||||||
|
Distributions to common stockholders
|
—
|
|
—
|
|
—
|
|
(20,814
|
)
|
—
|
|
(20,814
|
)
|
—
|
|
(20,814
|
)
|
||||||||||||||
|
Other comprehensive income
|
—
|
|
—
|
|
—
|
|
—
|
|
972
|
|
972
|
|
—
|
|
972
|
|
||||||||||||||
|
Net income
|
—
|
|
—
|
|
—
|
|
7,717
|
|
—
|
|
7,717
|
|
—
|
|
7,717
|
|
||||||||||||||
|
Balance, September 30, 2018
|
134,248,141
|
|
$
|
1,342
|
|
$
|
1,172,134
|
|
$
|
(137,364
|
)
|
$
|
11,075
|
|
$
|
1,047,187
|
|
$
|
2
|
|
$
|
1,047,189
|
|
|||||||
The accompanying notes are an integral part of these
condensed consolidated
financial statements.
5
|
Common Stock
|
||||||||||||||||||||||||||||||
|
No. of
Shares |
Par
Value |
Additional
Paid-in Capital |
Accumulated Distributions in Excess of Earnings
|
Accumulated Other Comprehensive Income (Loss)
|
Total
Stockholders’ Equity |
Noncontrolling
Interests |
Total
Equity |
|||||||||||||||||||||||
|
Balance, December 31, 2018
|
136,466,242
|
|
$
|
1,364
|
|
$
|
1,192,340
|
|
$
|
(152,421
|
)
|
$
|
6,100
|
|
$
|
1,047,383
|
|
$
|
2
|
|
$
|
1,047,385
|
|
|||||||
|
Cumulative effect of accounting change
|
—
|
|
—
|
|
—
|
|
(103
|
)
|
103
|
|
—
|
|
—
|
|
—
|
|
||||||||||||||
|
Issuance of common stock under the distribution reinvestment plan
|
1,122,412
|
|
12
|
|
10,373
|
|
—
|
|
—
|
|
10,385
|
|
—
|
|
10,385
|
|
||||||||||||||
|
Vesting of restricted stock
|
—
|
|
—
|
|
23
|
|
—
|
|
—
|
|
23
|
|
—
|
|
23
|
|
||||||||||||||
|
Distribution and servicing fees
|
—
|
|
—
|
|
52
|
|
—
|
|
—
|
|
52
|
|
—
|
|
52
|
|
||||||||||||||
|
Other offering costs
|
—
|
|
—
|
|
(5
|
)
|
—
|
|
—
|
|
(5
|
)
|
—
|
|
(5
|
)
|
||||||||||||||
|
Repurchase of common stock
|
(1,160,279
|
)
|
(12
|
)
|
(10,721
|
)
|
—
|
|
—
|
|
(10,733
|
)
|
—
|
|
(10,733
|
)
|
||||||||||||||
|
Distributions to common stockholders
|
—
|
|
—
|
|
—
|
|
(21,196
|
)
|
—
|
|
(21,196
|
)
|
—
|
|
(21,196
|
)
|
||||||||||||||
|
Other comprehensive loss
|
—
|
|
—
|
|
—
|
|
—
|
|
(3,611
|
)
|
(3,611
|
)
|
—
|
|
(3,611
|
)
|
||||||||||||||
|
Net income
|
—
|
|
—
|
|
—
|
|
4,361
|
|
—
|
|
4,361
|
|
—
|
|
4,361
|
|
||||||||||||||
|
Balance, March 31, 2019
|
136,428,375
|
|
$
|
1,364
|
|
$
|
1,192,062
|
|
$
|
(169,359
|
)
|
$
|
2,592
|
|
$
|
1,026,659
|
|
$
|
2
|
|
$
|
1,026,661
|
|
|||||||
|
Issuance of common stock under the distribution reinvestment plan
|
1,133,525
|
|
11
|
|
10,470
|
|
—
|
|
—
|
|
10,481
|
|
—
|
|
10,481
|
|
||||||||||||||
|
Vesting of restricted stock
|
2,250
|
|
—
|
|
23
|
|
—
|
|
—
|
|
23
|
|
—
|
|
23
|
|
||||||||||||||
|
Distribution and servicing fees
|
—
|
|
—
|
|
42
|
|
—
|
|
—
|
|
42
|
|
—
|
|
42
|
|
||||||||||||||
|
Other offering costs
|
—
|
|
—
|
|
(284
|
)
|
—
|
|
—
|
|
(284
|
)
|
—
|
|
(284
|
)
|
||||||||||||||
|
Repurchase of common stock
|
(1,165,436
|
)
|
(11
|
)
|
(10,769
|
)
|
—
|
|
—
|
|
(10,780
|
)
|
—
|
|
(10,780
|
)
|
||||||||||||||
|
Distributions to common stockholders
|
—
|
|
—
|
|
—
|
|
(21,420
|
)
|
—
|
|
(21,420
|
)
|
—
|
|
(21,420
|
)
|
||||||||||||||
|
Other comprehensive loss
|
—
|
|
—
|
|
—
|
|
—
|
|
(7,552
|
)
|
(7,552
|
)
|
—
|
|
(7,552
|
)
|
||||||||||||||
|
Net income
|
—
|
|
—
|
|
—
|
|
6,264
|
|
—
|
|
6,264
|
|
—
|
|
6,264
|
|
||||||||||||||
|
Balance, June 30, 2019
|
136,398,714
|
|
$
|
1,364
|
|
$
|
1,191,544
|
|
$
|
(184,515
|
)
|
$
|
(4,960
|
)
|
$
|
1,003,433
|
|
$
|
2
|
|
$
|
1,003,435
|
|
|||||||
|
Issuance of common stock under the distribution reinvestment plan
|
1,125,174
|
|
11
|
|
10,398
|
|
—
|
|
—
|
|
10,409
|
|
—
|
|
10,409
|
|
||||||||||||||
|
Vesting of restricted stock
|
7,500
|
|
—
|
|
18
|
|
—
|
|
—
|
|
18
|
|
—
|
|
18
|
|
||||||||||||||
|
Distribution and servicing fees
|
—
|
|
—
|
|
5
|
|
—
|
|
—
|
|
5
|
|
—
|
|
5
|
|
||||||||||||||
|
Other offering costs
|
—
|
|
—
|
|
(188
|
)
|
—
|
|
—
|
|
(188
|
)
|
—
|
|
(188
|
)
|
||||||||||||||
|
Repurchase of common stock
|
(93,045
|
)
|
(1
|
)
|
(860
|
)
|
—
|
|
—
|
|
(861
|
)
|
—
|
|
(861
|
)
|
||||||||||||||
|
Distributions to common stockholders
|
—
|
|
—
|
|
—
|
|
(21,798
|
)
|
—
|
|
(21,798
|
)
|
—
|
|
(21,798
|
)
|
||||||||||||||
|
Distributions to noncontrolling interests
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(1
|
)
|
(1
|
)
|
||||||||||||||
|
Other comprehensive loss
|
—
|
|
—
|
|
—
|
|
—
|
|
(2,123
|
)
|
(2,123
|
)
|
—
|
|
(2,123
|
)
|
||||||||||||||
|
Net loss
|
—
|
|
—
|
|
—
|
|
(9,630
|
)
|
—
|
|
(9,630
|
)
|
—
|
|
(9,630
|
)
|
||||||||||||||
|
Balance, September 30, 2019
|
137,438,343
|
|
$
|
1,374
|
|
$
|
1,200,917
|
|
$
|
(215,943
|
)
|
$
|
(7,083
|
)
|
$
|
979,265
|
|
$
|
1
|
|
$
|
979,266
|
|
|||||||
The accompanying notes are an integral part of these
condensed consolidated
financial statements.
6
CARTER VALIDUS MISSION CRITICAL REIT II, INC.
(in thousands)
(Unaudited)
|
|
Nine Months Ended
September 30, |
||||||
|
|
2019
|
2018
|
|||||
|
Cash flows from operating activities:
|
|||||||
|
Net income attributable to common stockholders
|
$
|
995
|
|
$
|
22,407
|
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|||||||
|
Depreciation and amortization
|
50,110
|
|
42,848
|
|
|||
|
Amortization of deferred financing costs
|
1,876
|
|
2,205
|
|
|||
|
Amortization of above-market leases
|
467
|
|
404
|
|
|||
|
Amortization of below-market leases
|
(3,905
|
)
|
(3,662
|
)
|
|||
|
Operating leases
|
365
|
|
—
|
|
|||
|
Impairment loss on real estate
|
13,000
|
|
—
|
|
|||
|
Straight-line rent
|
(8,440
|
)
|
(10,009
|
)
|
|||
|
Stock-based compensation
|
64
|
|
67
|
|
|||
|
Ineffectiveness of interest rate swaps
|
—
|
|
28
|
|
|||
|
Changes in operating assets and liabilities:
|
|||||||
|
Accounts payable and other liabilities
|
(316
|
)
|
6,349
|
|
|||
|
Accounts payable due to affiliates
|
(150
|
)
|
133
|
|
|||
|
Other assets
|
(1,526
|
)
|
(3,450
|
)
|
|||
|
Net cash provided by operating activities
|
52,540
|
|
57,320
|
|
|||
|
Cash flows from investing activities:
|
|||||||
|
Investment in real estate
|
(69,830
|
)
|
(141,380
|
)
|
|||
|
Capital expenditures
|
(6,978
|
)
|
(13,351
|
)
|
|||
|
Real estate deposits paid
|
—
|
|
(600
|
)
|
|||
|
Payments of deal costs
|
(1,016
|
)
|
—
|
|
|||
|
Net cash used in investing activities
|
(77,824
|
)
|
(155,331
|
)
|
|||
|
Cash flows from financing activities:
|
|||||||
|
Proceeds from issuance of common stock
|
—
|
|
97,286
|
|
|||
|
Payments on notes payable
|
(1,280
|
)
|
(260
|
)
|
|||
|
Proceeds from credit facility
|
85,000
|
|
90,000
|
|
|||
|
Payments of deferred financing costs
|
(1,385
|
)
|
(4,800
|
)
|
|||
|
Repurchase of common stock
|
(22,374
|
)
|
(32,746
|
)
|
|||
|
Offering costs on issuance of common stock
|
(2,825
|
)
|
(10,054
|
)
|
|||
|
Distributions to stockholders
|
(33,329
|
)
|
(29,673
|
)
|
|||
|
Distributions to noncontrolling interests
|
(1
|
)
|
—
|
|
|||
|
Net cash provided by financing activities
|
23,806
|
|
109,753
|
|
|||
|
Net change in cash, cash equivalents and restricted cash
|
(1,478
|
)
|
11,742
|
|
|||
|
Cash, cash equivalents and restricted cash - Beginning of period
|
79,527
|
|
85,747
|
|
|||
|
Cash, cash equivalents and restricted cash - End of period
|
$
|
78,049
|
|
$
|
97,489
|
|
|
|
Supplemental cash flow disclosure:
|
|||||||
|
Interest paid, net of interest capitalized of $69 and $1,171, respectively
|
$
|
30,248
|
|
$
|
23,583
|
|
|
|
Supplemental disclosure of non-cash transactions:
|
|||||||
|
Common stock issued through distribution reinvestment plan
|
$
|
31,275
|
|
$
|
30,519
|
|
|
|
Credit facility revolving loan to term loan conversion
|
$
|
30,000
|
|
$
|
—
|
|
|
|
Accrued deal costs
|
$
|
1,966
|
|
$
|
—
|
|
|
The accompanying notes are an integral part of these
condensed consolidated
financial statements.
7
CARTER VALIDUS MISSION CRITICAL REIT II, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2019
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, and currently qualifies, 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. 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 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 leases to creditworthy tenants, as well as to make other real estate-related investments in such property types, which may include equity or debt interests, including securities, in other real estate entities. As of
September 30, 2019
, the Company owned
64
real estate investments, consisting of
90
properties.
The Company commenced the initial public offering of
$2,350,000,000
in shares of common stock, or the Initial Offering, 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 May 29, 2014 pursuant to a Registration Statement on Form S-11 filed with the SEC. 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 issued pursuant to the DRIP, resulting in gross proceeds of
$1,223,803,000
.
On October 13, 2017, the Company filed a Registration Statement on Form S-3 to register
10,893,246
shares of common stock under the DRIP for a proposed maximum offering price of
$100,000,000
in shares of common stock, or the DRIP Offering. The Company will continue to issue shares of common stock under the DRIP Offering until such time as the Company sells all of the shares registered for sale under the DRIP Offering, unless the Company files a new registration statement with the U.S. Securities and Exchange Commission, or the SEC, or the DRIP Offering is terminated by the Company's board of directors.
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, or the Offerings. On March 14, 2018, the Company ceased offering shares of Class T common stock in the Offering and began offering shares of Class T2 common stock on March 15, 2018. The Company continues to offer shares of Class T common stock in the DRIP Offering. The Company ceased offering shares of common stock pursuant to the Offering on November 27, 2018. At the completion of the Offering, the Company had accepted investors' subscriptions for and issued approximately
13,491,000
shares of Class A, Class I, Class T and Class T2 common stock resulting in gross proceeds of
$129,308,000
. The Company deregistered the remaining
$870,692,000
of shares of Class A, Class I, Class T and Class T2 common stock under the Offering.
On April 11, 2019, the Company, along with Carter Validus Mission Critical REIT, Inc., or REIT I, the Operating Partnership, Carter/Validus Operating Partnership, LP, the operating partnership of REIT I, or REIT I Operating Partnership, and Lightning Merger Sub, LLC, a wholly-owned subsidiary of the Company, or Merger Sub, entered into an Agreement and Plan of Merger, or the Merger Agreement.
Pursuant to the terms and conditions of the Merger Agreement, on
October 4, 2019
, REIT I merged with and into Merger Sub, or the REIT Merger, with Merger Sub surviving the REIT Merger, or the Surviving Entity, such that following the REIT Merger, the Surviving Entity continues as a wholly-owned subsidiary of the Company. In accordance with the applicable provisions of the Maryland General Corporation Law, the separate existence of REIT I ceased. The combined company after the REIT Merger, or the Combined Company, retained the name “Carter Validus Mission Critical REIT II, Inc.” See
Note 16—"Subsequent Events"
for further discussion. See
Note 16—"Subsequent Events"
for further discussion.
Except as the context otherwise requires, the “Company” refers to Carter Validus Mission Critical REIT II, Inc., the Operating Partnership and all wholly-owned subsidiaries through the quarter ended September 30, 2019, and does not take into account the REIT Merger or the Contributions (as defined in
Note 10—"Related-Party Transactions and Arrangements"
). See
Note 16—"Subsequent Events"
for further discussion.
8
Note 2—
Summary of Significant Accounting Policies
The summary of significant accounting policies presented below is designed to assist in understanding the Company’s
condensed consolidated
financial statements. Such
condensed consolidated
financial statements and the accompanying notes thereto are the representation of management. These accounting policies conform to United States generally accepted accounting principles, or GAAP, for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of a normal and recurring nature considered for a fair presentation, have been included. Operating results for the
three and nine months
ended
September 30, 2019
, are not necessarily indicative of the results that may be expected for the year ending
December 31, 2019
.
The
condensed consolidated
balance sheet at
December 31, 2018
, has been derived from the audited consolidated financial statements at that date but does not include all of the information and notes required by GAAP for complete financial statements. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s audited consolidated financial statements as of and for the year ended
December 31, 2018
, and related notes thereto set forth in the Company’s Annual Report on Form 10-K, filed with the SEC on March 22, 2019.
Principles of Consolidation and Basis of Presentation
The accompanying
condensed 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
condensed 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 condensed consolidated 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.
Restricted Cash
Restricted cash consists of restricted cash held in escrow and restricted bank deposits. Restricted cash held in escrow includes 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 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 cash held in escrow and restricted bank deposits are reported in
other assets, net
in the accompanying
condensed consolidated balance sheets
. See
Note 7—"Other Assets, Net."
The following table presents a reconciliation of the beginning of period and end of period cash, cash equivalents and restricted cash reported within the
condensed consolidated balance sheets
to the totals shown in the
condensed consolidated statements of cash flows
(amounts in thousands):
|
Nine Months Ended
September 30, |
||||||||
|
Beginning of period:
|
2019
|
2018
|
||||||
|
Cash and cash equivalents
|
68,360
|
|
74,803
|
|
||||
|
Restricted cash
|
11,167
|
|
10,944
|
|
||||
|
Cash, cash equivalents and restricted cash
|
$
|
79,527
|
|
$
|
85,747
|
|
||
|
End of period:
|
||||||||
|
Cash and cash equivalents
|
67,969
|
|
84,789
|
|
||||
|
Restricted cash
|
10,080
|
|
12,700
|
|
||||
|
Cash, cash equivalents and restricted cash
|
$
|
78,049
|
|
$
|
97,489
|
|
||
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 assets through its undiscounted future cash
9
flows and their eventual disposition. If, based on this analysis, the Company does not believe that it will be able to recover the carrying value of the assets, the Company will record an impairment loss to the extent that the carrying value exceeds the estimated fair value of the assets.
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 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 impairment, the extent of such loss, if any, as well as the carrying value of the real estate and related assets.
In addition, the Company applies a market approach using comparable sales for certain properties. The use of alternative assumptions in the market approach analysis could result in a different determination of the property’s estimated fair value 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.
Impairment of Real Estate
During the
three and nine months
ended
September 30, 2019
, real estate assets related to
one
healthcare property were determined to be impaired
due to a tenant of the property, which was experiencing financial difficulty, vacating its space, and a second tenant indicating its desire to terminate its lease early, which the Company determined would be consistent with its strategic plans for the property. The early lease termination was executed subsequent to September 30, 2019.
The aggregate carrying amount of the assets of
$40,266,000
exceeded their fair value. The carrying value of the property was reduced to its estimated fair value of
$27,266,000
, resulting in an impairment charge of
$13,000,000
, which is included in impairment loss on real estate in the
condensed consolidated statements of comprehensive (loss) income
. During the
three and nine months
ended
September 30, 2018
,
no
impairment losses were recorded on real estate. See
Note 12—"Fair Value"
for further discussion.
Impairment of Acquired Intangible Assets and Acquired Intangible Liabilities
During the
three and nine months
ended
September 30, 2019
, the Company wrote off
one
below-market lease intangible liability in the amount of approximately
$212,000
, by accelerating the amortization of the acquired intangible liability related to the healthcare segment.
During the
three and nine months
ended
September 30, 2019
, the Company recognized impairments of in-place lease intangible assets in the amount of approximately
$537,000
and
$3,195,000
, respectively, by accelerating the amortization of the acquired intangible assets related to the healthcare segment.
During the
three and nine months
ended
September 30, 2018
,
no
impairment losses were recorded on acquired intangible assets or intangible liabilities.
Revenue Recognition, Tenant Receivables and Allowance for Uncollectible Accounts
Effective January 1, 2018, the Company recognizes non-rental related revenue in accordance with Accounting Standards Codification, or ASC, 606,
Revenue from Contracts with Customers
, or ASC 606. The Company has identified its revenue streams as rental income from leasing arrangements and tenant reimbursements, which are outside the scope of ASC 606. The core principle of ASC 606 is that an entity should recognize revenue to depict the transfer of promised goods or 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. Non-rental revenue, subject to ASC 606, is immaterial to the Company's
condensed consolidated
financial statements.
The majority of the Company's revenue is derived from rental revenue which is accounted for in accordance with ASC 842,
Leases,
or ASC 842. In accordance with ASC 842, minimum rental revenue is recognized on a straight-line basis over the term of the related lease (including rent holidays). For lease arrangements when it is not probable that the Company will collect all or substantially all of the remaining lease payments under the term of the lease, rental revenue is limited to the lesser of the rental revenue that would be recognized on a straight-line basis or the lease payments that have been collected from the lessee. Differences between rental revenue recognized and amounts contractually due under the lease agreements are credited or charged to straight-line rent receivable or straight-line rent liability, as applicable. Tenant reimbursements, which are comprised of additional amounts recoverable from tenants for common area maintenance expenses and certain other recoverable expenses, are recognized when the services are provided and the performance obligations are satisfied.
Prior to the adoption of ASC 842, tenant receivables and straight-line rent receivables were carried net of the provision for credit losses. The provision for credit losses was established for estimated losses resulting from the inability of certain tenants to meet the contractual obligations under their lease agreements. The Company’s determination of the adequacy of these provisions was based primarily upon evaluations of historical loss experience, the tenant’s financial condition, security deposits, letters of credit, lease guarantees, current economic conditions and other relevant factors. Effective January 1, 2019,
10
upon adoption of ASC 842, the Company is no longer recording a provision for credit losses but is, instead, assessing whether or not it is probable that the Company will collect all or substantially all of the remaining lease payments under the term of the lease. When it is not probable that the Company will collect all or substantially all of the remaining lease payments under the term of the lease, rental revenue is limited to the lesser of the rental revenue that would be recognized on a straight-line basis or the lease payments that have been collected from the lessee. For the
three and nine months
ended
September 30, 2019
, the Company recorded
$85,000
and
$655,000
, respectively, in bad debt expenses as a reduction of rental revenue in the accompanying
condensed consolidated statements of comprehensive (loss) income
.
Concentration of Credit Risk and Significant Leases
As of
September 30, 2019
, the Company had cash on deposit, including restricted cash, in certain financial institutions that had deposits in excess of current federally insured levels. The Company limits its cash investments to financial institutions with high credit standings; therefore, the Company believes it is not exposed to any significant credit risk on its cash deposits. To date, the Company has not experienced a loss or lack of access to cash in its accounts.
As of
September 30, 2019
, the Company owned real estate investments in
one
micropolitan statistical area and
45
metropolitan statistical areas, or MSAs,
one
of which accounted for 10.0% or more of revenue. Real estate investments located in the
Atlanta-Sandy Springs-Roswell, Georgia MSA
accounted for
16.9%
of revenue for the
nine months
ended
September 30, 2019
.
As of
September 30, 2019
, the Company had
no
exposure to tenant concentration that accounted for 10.0% or more of revenue for the
nine months
ended
September 30, 2019
.
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 distribution reinvestment plan, or 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, provided, however, that the Company will limit the number of shares repurchased during any calendar year to
5.0%
of the number of shares of common stock outstanding as of December 31
st
of the previous calendar year. In addition, the Company’s board of directors, in its sole discretion, may suspend (in whole or in part) the share repurchase program at any time, and may amend, 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.
In connection with entering into the Merger Agreement, on April 10, 2019, the Company's board of directors approved the Sixth Amended and Restated Share Repurchase Program, or the Sixth Amended & Restated SRP, which became effective on May 11, 2019, and was applied beginning with repurchases made on the 2019 third quarter Repurchase Date. Under the Sixth Amended & Restated SRP, the Company only repurchases shares of common stock (Class A shares, Class I shares, Class T Shares and Class T2 shares) in connection with the death, qualifying disability, or involuntary exigent circumstance (as determined by the Company's board of directors in its sole discretion) of a stockholder, subject to certain terms and conditions specified in the Sixth Amended & Restated SRP.
On October 2, 2019, in connection with the REIT Merger, the Company's board of directors approved an amended share repurchase program, or the Amended SRP. The Amended SRP will apply to all eligible stockholders, beginning with repurchases made on the first quarter repurchase date of 2020, which is expected to be January 30, 2020. See
Note 16—"Subsequent Events"
for further discussion.
During the
nine months
ended
September 30, 2019
, the Company repurchased
2,418,760
Class A shares, Class I shares, Class T shares and Class T2 shares of common stock (
1,816,319
Class A shares,
189,947
Class I shares,
407,095
Class T shares and
5,399
Class T2 shares) for an aggregate purchase price of approximately
$22,374,000
(an average of
$9.25
per share).
During the
nine months
ended
September 30, 2018
, the Company repurchased
3,567,118
Class A shares, Class I shares and Class T shares of common stock (
3,202,255
Class A shares,
49,528
Class I shares and
315,335
Class T shares) for an aggregate purchase price of approximately
$32,746,000
(an average of
$9.18
per share).
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. Distributions are payable to stockholders from legally available funds therefor.
11
Earnings Per Share
The Company calculates basic earnings per share by dividing
net (loss) income 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
three months
ended
September 30, 2019
, diluted earnings per share was computed the same as basic earnings per share because the Company recorded a net loss attributable to common stockholders, which would make potentially dilutive shares related to non-vested shares of restricted common stock, antidilutive. For the
nine months
ended
September 30, 2019
, diluted earnings per share reflected the effect of approximately
23,000
of non-vested shares of restricted common stock that were outstanding as of such period. For the
three and nine months
ended
September 30, 2018
, diluted earnings per share reflected the effect of approximately
25,000
and
23,000
of non-vested shares of restricted common stock, respectively.
Reportable Segments
ASC 280,
Segment Reporting
, establishes standards for reporting financial and descriptive information about an enterprise’s reportable segments. As of
September 30, 2019
and
December 31, 2018
, the Company operated through
two
reportable segments — 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
reportable 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 at fair value as assets and liabilities on its
condensed consolidated balance sheets
. 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
condensed consolidated statements of comprehensive (loss) income
during such period.
In accordance with the fair value measurement guidance Accounting Standards Update, or 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.
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 of 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 gains or losses on the derivative instruments are reported as a component of
other comprehensive (loss) income
in the
condensed consolidated statements of comprehensive (loss) income
and reclassified into earnings in the same line item associated with the forecasted transaction and the same period during which the hedged transactions affect earnings. See additional discussion in
Note 13—"Derivative Instruments and Hedging Activities."
Recently Adopted Accounting Pronouncements
Leases
In February 2016, the Financial Accounting Standards Board, or FASB established ASC 842, by issuing ASU 2016-02,
Leases
, which replaces the guidance previously outlined in ASC 840,
Leases
. The new standard increases transparency by requiring the recognition by lessees of right-of-use, or ROU, assets and lease liabilities on the balance sheet for all leases with a term of greater than 12 months, regardless of lease classification. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.
Effective January 1, 2019, the Company adopted ASC 842, using the modified retrospective approach. Consequently, financial information is not updated, and the disclosures required under the new standard are not provided for dates and periods before January 1, 2019. Further, the Company reduces the ROU assets and operating lease liabilities over the remaining lease term and presents the reduction of ROU assets - operating leases and accretion of operating lease liabilities as a single line item within operating activities in the
condensed consolidated
statement of cash flow for the
nine months
ended
September 30,
12
2019
. The Company elected the package of practical expedients, which permits it to not reassess (1) whether any expired or existing contracts are or contain leases, (2) the lease classification for any expired or existing leases, and (3) any initial direct costs for any existing leases as of the effective date. The Company did not elect the hindsight practical expedient, which permits entities to use hindsight in determining the lease term and assessing impairment.
Lessor
As a lessor, the Company's recognition of rental revenue remained largely unchanged. Additionally, the Company capitalizes initial direct costs related to lease negotiations. Effective January 1, 2019, indirect leasing costs, such as legal costs related to lease negotiations no longer meet the definition of capitalized initial direct costs under ASU 2016-02 and are recorded in general and administrative expenses in the
condensed consolidated statements of comprehensive (loss) income
, and are no longer capitalized.
In July 2018, the FASB issued ASU 2018-11,
Targeted Improvements
, to simplify the guidance, that allows lessors to combine non-lease components with the related lease components if both the timing and pattern of transfer are the same for the non-lease component and related lease component, and the lease component would be classified as an operating lease. The single combined component is accounted for under ASC 842 if the lease component is the predominant component and is accounted for under ASC 606, if the non-lease components are the predominant components. Lessors are permitted to apply the practical expedient to all existing leases on a retrospective or prospective basis. The Company elected the practical expedient to combine its lease and non-lease components that meet the defined criteria and is accounting for the combined lease components under ASC 842. As a result, the Company is no longer presenting rental revenue and tenant reimbursements related to common area maintenance and other expense recoveries separately in the
condensed consolidated statements of comprehensive (loss) income
.
In December 2018, the FASB issued ASU 2018-20,
Narrow-Scope Improvements for Lessors
, that allows lessors to make an accounting policy election not to evaluate whether real estate taxes and other similar taxes imposed by a governmental authority on a specific lease revenue-producing transaction are the primary obligation of the lessor as owner of the underlying leased asset. A lessor that makes this election excludes these taxes from the measurement of lease revenue and the associated expense. ASU 2018-20 also requires lessors to (1) exclude lessor costs paid directly by lessees to third parties on the lessor’s behalf from variable payments and, therefore, variable lease revenue and (2) include lessor costs that are paid by the lessor and reimbursed by the lessee in the measurement of variable lease revenue and the associated expense. The Company adopted ASU 2018-20 effective January 1, 2019. The adoption of this standard resulted in a decrease of approximately
$393,000
and
$1,199,000
during the
three and nine months
ended
September 30, 2019
, respectively, in rental revenue and rental expense, as the aforementioned real estate tax payments are paid by a lessee directly to a third party, and, therefore, are no longer presented on a gross basis in the Company's
condensed consolidated statements of comprehensive (loss) income
. The adoption of this standard had no impact on the Company's
net (loss) income attributable to common stockholders
.
Lessee
The Company is a lessee on
ten
ground leases, of which
three
do not have corresponding operating lease liabilities because the Company did not have future payment obligations at the acquisition of these leases. The Company recognized a ROU asset and operating lease liability for the other
seven
ground leases on the Company's condensed consolidated balance sheet due to the adoption of ASU 2016-02. See
Note 6—"Leases"
for further discussion.
Derivatives and Hedging
In August 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. The Company adopted this standard on January 1, 2019. The adoption of ASU 2017-12 resulted in an immaterial cumulative adjustment to accumulated other comprehensive income related to the cumulative ineffectiveness previously recognized on existing cash flow hedges on the Company's
condensed consolidated
financial statements.
In October 2018, the FASB issued ASU 2018-16,
Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes
, or ASU 2018-16. ASU 2018-16 permits the use of the OIS rate based on SOFR as a United States benchmark interest rate for hedge accounting purposes under Topic 815. ASU 2018-16 was effective upon adoption of ASU 2017-12. The Company adopted ASU 2018-16 on January 1, 2019, and its provisions did not have an impact on its
condensed consolidated
financial statements; however, the provisions may impact existing agreements, new contracts and transactions not yet contemplated in the future.
13
Disclosure Update and Simplification
In August 2018, the SEC issued a final rule, SEC Final Rule Release No. 33-10532,
Disclosure Update and Simplification
, that amends the interim financial statement requirements to require a reconciliation of changes in stockholders' equity in the notes or as a separate statement. This analysis should reconcile the beginning balance to the ending balance of each caption in stockholders' equity for each period for which an income statement is required to be filed and comply with the remaining content requirements of Rule 3-04 of Regulation S-X. Registrants will have to provide the reconciliation for both the year-to-date and quarterly periods and comparable periods in Form 10-Q, but only for the year-to-date periods in registration statements. The final rule became effective on November 5, 2018. As a result, the Company applied these changes in the presentation of the Company's condensed consolidated statements of stockholders' equity for the
three and nine months
ended
September 30, 2019
and 2018.
Recently Issued Accounting Pronouncements Not Yet Adopted
Fair Value Measurement
In August 2018, the FASB issued ASU 2018-13
, Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement
, or ASU 2018-13. ASU 2018-13 removes certain disclosure requirements, including the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between the levels and the valuation processes for Level 3 fair value measurements. ASU 2018-13 also adds certain disclosure requirements, including the requirement to disclose the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, and interim periods therein. Early adoption is permitted. The Company does not anticipate ASU 2018-13 to have a material impact to the Company's
condensed consolidated
financial statements.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current financial statement presentation, primarily related to the recently adopted accounting pronouncements discussed within this note. Amounts previously disclosed as rental and parking revenue and tenant reimbursements during the
three and nine months
ended
September 30, 2019
and 2018, are now included in rental revenue and will no longer be presented separately on the
condensed consolidated statements of comprehensive (loss) income
.
Note 3—
Real Estate Investments
During the
nine months
ended
September 30, 2019
, the Company purchased
two
real estate investments, the 2019 Acquisitions, consisting of
five
properties, all of which were determined to be asset acquisitions. Upon the acquisition of the 2019 Acquisitions, the Company allocated the purchase price of the real estate properties to acquired tangible assets, consisting of land, buildings and improvements, tenant improvements, and acquired intangible assets, based on a relative fair value method allocating all accumulated costs.
The following table summarizes the consideration transferred for the 2019 Acquisitions during the
nine months
ended
September 30, 2019
:
|
Property Description
|
Date Acquired
|
Ownership Percentage
|
Purchase Price
(amounts in thousands) |
|||||
|
Bryant Healthcare Facility
|
8/16/2019
|
100%
|
$
|
4,408
|
|
|||
|
TAM Healthcare Facilities
(1)
|
9/19/2019
|
100%
|
65,443
|
|
||||
|
Total
|
$
|
69,851
|
|
|||||
|
(1)
|
The TAM Healthcare Facilities consists of
four
properties.
|
14
The following table summarizes the Company's purchase price allocation of the 2019 Acquisitions during the
nine months
ended
September 30, 2019
, (amounts in thousands):
|
Total
|
||||
|
Land
|
$
|
647
|
|
|
|
Buildings and improvements
|
55,654
|
|
||
|
In-place leases
|
8,337
|
|
||
|
Tenant improvements
|
3,038
|
|
||
|
Ground leasehold assets
|
2,175
|
|
||
|
Total assets acquired
|
$
|
69,851
|
|
|
Acquisition fees and costs associated with transactions determined to be asset acquisitions are capitalized. The Company capitalized acquisition fees and costs of approximately
$1,717,000
related to the 2019 Acquisitions during the
three and nine months
ended
September 30, 2019
, which are included in the Company's allocation of the real estate acquisitions presented above. The total amount of all acquisition fees and costs is limited to
6.0%
of the contract purchase price of a property, unless the Company’s board of directors determines a higher transaction fee to be commercially competitive, fair and reasonable to the Company. The contract purchase price is the amount actually paid or allocated in respect of the purchase, development, construction or improvement of a property exclusive of acquisition fees and costs. For the
nine months
ended
September 30, 2019
, acquisition fees and costs did not exceed
6.0%
of the contract purchase price of the 2019 Acquisitions during such period.
Note 4—
Acquired Intangible Assets, Net
Acquired intangible assets, net, consisted of the following as of
September 30, 2019
and
December 31, 2018
(amounts in thousands, except weighted average life amounts):
|
|
September 30, 2019
|
December 31, 2018
|
|||||
|
In-place leases, net of accumulated amortization of $54,638 and $41,143, respectively (with a weighted average remaining life of 9.6 years and 10.1 years, respectively)
|
$
|
141,400
|
|
$
|
151,135
|
|
|
|
Above-market leases, net of accumulated amortization of $1,366 and $899, respectively (with a weighted average remaining life of 4.3 years and 5.1 years, respectively)
|
1,243
|
|
1,710
|
|
|||
|
Ground leasehold assets, net of accumulated amortization of $0 and $39, respectively (with a weighted average remaining life of 0.0 years and 83.5 years, respectively)
|
—
|
|
(1)
|
1,359
|
|
||
|
$
|
142,643
|
|
$
|
154,204
|
|
||
|
(1)
|
On January 1, 2019, as part of
the adoption of ASC 842,
as discussed in Note 2—"Summary of Significant Accounting Policies - Recently Adopted Accounting Pronouncements," the Company reclassified the ground leasehold assets balance from acquired intangible assets, net, to right-of-use assets - operating leases within the condensed consolidated balance sheet.
|
The aggregate weighted average remaining life of the acquired intangible assets was
9.5 years
and
10.6 years
as of
September 30, 2019
and
December 31, 2018
, respectively.
Amortization of the acquired intangible assets was
$5,644,000
and
$5,102,000
for the
three months
ended
September 30, 2019
and
2018
, respectively. Amortization of the acquired intangible assets was
$18,539,000
and
$14,743,000
for the
nine months
ended
September 30, 2019
and
2018
, respectively. Of the
$5,644,000
and
$18,539,000
recorded for the
three and nine months
ended
September 30, 2019
, respectively,
$537,000
and
$3,195,000
, respectively, were attributable to accelerated amortization due to the impairment of
two
in-place lease intangible assets. Amortization of the in-place leases is included in depreciation and amortization and the above-market leases are recorded as an adjustment to rental revenue in the accompanying
condensed consolidated statements of comprehensive (loss) income
.
15
Note 5—
Acquired Intangible Liabilities, Net
Acquired intangible liabilities, net, consisted of the following as of
September 30, 2019
and
December 31, 2018
(amounts in thousands, except weighted average life amounts):
|
September 30, 2019
|
December 31, 2018
|
||||||
|
Below-market leases, net of accumulated amortization of $10,976 and $7,592, respectively (with a weighted average remaining life of 17.0 years and 17.6 years, respectively)
|
$
|
53,701
|
|
$
|
57,606
|
|
|
Amortization of the below-market leases was
$1,441,000
and
$1,220,000
for the
three months
ended
September 30, 2019
and
2018
, respectively, and
$3,905,000
and
$3,662,000
for the
nine months
ended
September 30, 2019
and
2018
, respectively. Of the
$1,441,000
and
$3,905,000
recorded for the
three and nine months
ended
September 30, 2019
, respectively,
$212,000
was attributable to accelerated amortization of a below-market lease intangible liability. Amortization of below-market leases is recorded as an adjustment to rental revenue in the accompanying
condensed consolidated statements of comprehensive (loss) income
.
Note 6—
Leases
Lessor
Rental Revenue
The Company’s real estate properties are leased to tenants under operating leases with varying terms. Typically, the leases 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 properties leased to tenants.
Future minimum rent to be received from the Company's investments in real estate assets under the terms of non-cancelable operating leases in effect as of
September 30, 2019
, including optional renewal periods for the
three months
ending
December 31, 2019
, and for each of the next four years ending December 31 and thereafter, are as follows (amounts in thousands):
|
Year
|
Amount
(1)
|
|||
|
Three months ending December 31, 2019
|
$
|
37,450
|
|
|
|
2020
|
150,633
|
|
||
|
2021
|
153,242
|
|
||
|
2022
|
154,253
|
|
||
|
2023
|
151,853
|
|
||
|
Thereafter
|
1,059,102
|
|
||
|
$
|
1,706,533
|
|
||
|
(1)
|
The table above includes the total future minimum rent in the amount of
$2,212,000
from a tenant, whose original lease expiration date was
September 30, 2022
.
On November 8, 2019, the Company and the tenant entered into an early termination agreement, which will have a lease termination date of
December 31, 2019
.
|
Lessee
Rental Expense
The Company has
ten
ground leases, for which
three
do not have corresponding operating lease liabilities because the Company did not have future payment obligations at the acquisition of these leases. During the
three and nine months
ended
September 30, 2019
, the Company entered into
four
ground lease agreements for an aggregate present value of future rent payments of
$1,722,000
. The ground lease obligations generally require fixed annual rental payments and may also include escalation clauses. The weighted average remaining lease term for the Company's operating leases was
69.9 years
and
27.2 years
as of
September 30, 2019
and
December 31, 2018
, respectively.
The Company's ground leases do not provide an implicit interest rate. In order to calculate the present value of the remaining ground lease payments, the Company used incremental borrowing rates, or IBR, adjusted for a number of factors. The determination of an appropriate IBR involves multiple inputs and judgments. The Company determined its IBR considering the general economic environment, the Company's credit rating and various financing and asset specific adjustments to ensure the IBR is appropriate for the intended use of the underlying ground lease.
As a result,
the weighted
16
average adjusted incremental borrowing rates ranged between
5.6%
and
6.6%
.
The future minimum rent payments, discounted by the Company's adjusted incremental borrowing rates, under non-cancelable ground leases, for the
three months
ending
December 31, 2019
, and for each of the next four years ending December 31 and thereafter, are as follows (amounts in thousands):
|
Year
|
Amount
|
|||
|
Three months ending December 31, 2019
|
$
|
134
|
|
|
|
2020
|
536
|
|
||
|
2021
|
536
|
|
||
|
2022
|
536
|
|
||
|
2023
|
536
|
|
||
|
Thereafter
|
81,982
|
|
||
|
Total undiscounted rental payments
|
84,260
|
|
||
|
Less imputed interest
|
(73,775
|
)
|
||
|
Total operating lease liabilities
|
$
|
10,485
|
|
|
Due
to the adoption of the
of ASC 842, the Company reclassified ground leasehold assets as of January 1, 2019, from acquired intangible assets and liabilities, to right-of-use assets - operating leases within the
condensed consolidated
balance sheet.
As discussed in
Note 2—"Summary of Significant Accounting Policies,"
the Company adopted ASU 2016-02, effective January 1, 2019, and consequently, financial information was not updated, and the disclosures required under the new lease standard are not provided for dates and periods before January 1, 2019.
The following represents approximate future minimum rent payments under non-cancelable ground leases by year as of December 31, 2018, and for each of the next four years ending December 31 and thereafter, are as follows (amounts in thousands):
|
Year
|
Amount
|
|||
|
2019
|
$
|
123
|
|
|
|
2020
|
123
|
|
||
|
2021
|
123
|
|
||
|
2022
|
123
|
|
||
|
2023
|
123
|
|
||
|
Thereafter
|
2,246
|
|
||
|
Total undiscounted rental payments
|
$
|
2,861
|
|
|
This table excludes future minimum rent payments from one tenant that pays the ground lease obligations directly to the lessor, consistent with the Company's accounting policy prior to its adoption of ASC 842 on January 1, 2019.
Note 7—
Other Assets, Net
Other assets, net, consisted of the following as of
September 30, 2019
and
December 31, 2018
(amounts in thousands):
|
|
September 30, 2019
|
December 31, 2018
|
|||||
|
Deferred financing costs, related to the revolver portion of the credit facility, net of accumulated amortization of $5,408 and $4,686, respectively
|
$
|
2,858
|
|
$
|
3,053
|
|
|
|
Restricted cash
|
10,080
|
|
11,167
|
|
|||
|
Tenant receivables
|
7,135
|
|
6,080
|
|
|||
|
Straight-line rent receivable
|
41,125
|
|
32,685
|
|
|||
|
Prepaid and other assets
|
12,000
|
|
8,344
|
|
|||
|
Derivative assets
|
433
|
|
6,204
|
|
|||
|
$
|
73,631
|
|
$
|
67,533
|
|
||
17
Note 8—
Accounts Payable and Other Liabilities
Accounts payable and other liabilities consisted of the following as of
September 30, 2019
and
December 31, 2018
(amounts in thousands):
|
|
September 30, 2019
|
December 31, 2018
|
|||||
|
Accounts payable and accrued expenses
|
$
|
7,770
|
|
$
|
9,188
|
|
|
|
Accrued interest expense
|
3,224
|
|
3,219
|
|
|||
|
Accrued property taxes
|
3,248
|
|
2,309
|
|
|||
|
Distributions payable to stockholders
|
7,127
|
|
7,317
|
|
|||
|
Tenant deposits
|
875
|
|
875
|
|
|||
|
Deferred rental income
|
5,883
|
|
6,647
|
|
|||
|
Derivative liabilities
|
7,516
|
|
—
|
|
|||
|
$
|
35,643
|
|
$
|
29,555
|
|
||
Note 9—
Notes Payable and Credit Facility
The Company's debt outstanding as of
September 30, 2019
and
December 31, 2018
, consisted of the following (amounts in thousands):
|
September 30, 2019
|
December 31, 2018
|
||||||
|
Notes payable:
|
|||||||
|
Fixed rate notes payable
|
$
|
219,850
|
|
$
|
220,351
|
|
|
|
Variable rate notes payable fixed through interest rate swaps
|
246,656
|
|
247,435
|
|
|||
|
Total notes payable, principal amount outstanding
|
466,506
|
|
467,786
|
|
|||
|
Unamortized deferred financing costs related to notes payable
|
(2,736
|
)
|
(3,441
|
)
|
|||
|
Total notes payable, net of deferred financing costs
|
463,770
|
|
464,345
|
|
|||
|
Credit facility:
|
|||||||
|
Variable rate revolving line of credit
|
160,000
|
|
$
|
105,000
|
|
||
|
Variable rate term loan fixed through interest rate swaps
|
250,000
|
|
100,000
|
|
|||
|
Variable rate term loans
|
30,000
|
|
150,000
|
|
|||
|
Total credit facility, principal amount outstanding
|
440,000
|
|
355,000
|
|
|||
|
Unamortized deferred financing costs related to the term loan credit facility
|
(3,088
|
)
|
(2,489
|
)
|
|||
|
Total credit facility, net of deferred financing costs
|
436,912
|
|
352,511
|
|
|||
|
Total debt outstanding
|
$
|
900,682
|
|
$
|
816,856
|
|
|
Significant debt activity during the
nine months
ended
September 30, 2019
and subsequent, excluding scheduled principal payments, includes:
|
•
|
During the
nine months
ended
September 30, 2019
, the Company drew
$85,000,000
on its credit facility to fund share repurchases and the 2019 Acquisitions.
|
|
•
|
During the
nine months
ended
September 30, 2019
, the Company entered into
two
interest rate swap agreements, with an effective date of
April 1, 2019
, which effectively fixed the London Interbank Offered Rate, or LIBOR, related to
$150,000,000
of the term loans of its credit facility.
|
|
•
|
On January 29, 2019, the Company amended its credit facility agreement by adding beneficial ownership provisions, modifying certain definitions related to change of control and consolidated total secured debt and clarified certain covenants related to restrictions on indebtedness and restrictions on liens.
|
|
•
|
On April 11, 2019, the Operating Partnership, the Company and certain of the Operating Partnership’s subsidiaries entered into the Consent and Second Amendment to the Third Amended and Restated Credit Agreement, which (i) increased the amount of Secured Debt that is Recourse Indebtedness from
15%
to
17.5%
for four full consecutive fiscal quarters immediately following the date on which the REIT Merger was consummated and one partial fiscal quarter (to include the quarter in which the REIT Merger was consummated), (ii) allowed, after April 27, 2019, the Operating Partnership, the Company, Merger Sub and the REIT I Operating Partnership to incur, assume or guarantee indebtedness as permitted under the Company's credit facility and with respect to which there is a lien on any equity interests of such entity, and (iii) from and after the consummation of the REIT Merger, allowed Merger Sub and REIT I Operating Partnership to be additional guarantors to the the Company's credit facility.
|
18
|
•
|
On April 11, 2019, in connection with the execution of the Merger Agreement, the Operating Partnership entered into a commitment letter, or the Commitment Letter, to obtain a senior secured bridge facility, or the Bridge Facility, in an amount of
$475,000,000
. Upon the closing of the Term Loan (defined below), on August 7, 2019, the Company terminated its Bridge Facility.
|
|
•
|
On April 29, 2019, KeyBank National Association, or KeyBank, and the Operating Partnership entered into the Release of Collateral Assignment of Interests, whereby KeyBank released its lien and security interest in the mortgaged properties. Therefore, effective April 29, 2019, the Company's credit facility is unsecured.
|
|
•
|
On August 7, 2019, in anticipation of the REIT Merger, the Company and certain of the Company’s subsidiaries entered into the Fourth Amended and Restated Credit Agreement, or the A&R Credit Agreement, with KeyBank to amend the borrower from the Operating Partnership to the Company. The A&R Credit Agreement increases the maximum commitments available under the Company's credit facility from
$700,000,000
to an aggregate of up to
$780,000,000
, consisting of a
$500,000,000
revolving line of credit, with a maturity date of
April 27, 2022
, subject to the Company's right to
one
,
12
-month extension period, and a
$280,000,000
term loan, with a maturity date of
April 27, 2023
. In addition, the A&R Credit Agreement allows the Company, upon consummation of the REIT Merger, to add certain, but not all, REIT I real estate properties to be included to the "Pool Properties," as defined in the A&R Credit Agreement.
|
|
•
|
On August 7, 2019, as a result of entering into the A&R Credit Agreement, the Company converted
$30,000,000
of its variable rate revolving line of credit under its credit facility to a variable rate term loan under its credit facility.
|
|
•
|
Simultaneously with the A&R Credit Agreement’s execution, on August 7, 2019, the Company and certain of the Company’s subsidiaries entered into the Senior Unsecured Term Loan Agreement, or the Term Loan, with KeyBank, for the maximum commitment available of up to
$520,000,000
with a maturity date of
December 31, 2024
, which was closed at the date of the REIT Merger on October 4, 2019. Subject to certain conditions, the Term Loan can be increased to
$600,000,000
any time before December 31, 2023. The Term Loan is pari passu with the A&R Credit Agreement.
The Term Loan was funded upon the consummation of the REIT Merger on
October 4, 2019
.
|
|
•
|
In connection with the REIT Merger, on October 3, 2019, the Operating Partnership, the Company, certain of the Company's subsidiaries, and KeyBank entered into the First Amendment to the A&R Credit Agreement and the First Amendment to the Term Loan (together, the "First Amendments to the Unsecured Credit Facility"). The First Amendments to the Unsecured Credit Facility allow for the Contributions (as defined in
Note 16—"Subsequent Events"
) by amending and adding certain language in the A&R Credit Agreement and Term Loan Agreement in order to conform to the contemplated organizational structure following the REIT Merger.
|
The principal payments due on the notes payable and credit facility for the
three months
ending
December 31, 2019
, and for each of the next four years ending December 31 and thereafter, are as follows (amounts in thousands):
|
Year
|
Amount
|
|||
|
Three months ending December 31, 2019
|
$
|
711
|
|
|
|
2020
|
4,547
|
|
||
|
2021
|
155,186
|
|
||
|
2022
|
324,876
|
|
||
|
2023
|
282,710
|
|
||
|
Thereafter
|
138,476
|
|
||
|
$
|
906,506
|
|
||
Note 10—
Related-Party Transactions and Arrangements
The Company has
no
direct employees. Substantially all of the Company's business is managed by the Advisor. The employees of the Advisor and other affiliates provide services to the Company related to acquisitions, property management, asset management, accounting, investor relations, and all other administrative services.
Distribution and Servicing Fees
Through the termination of the Offering on November 27, 2018, the Company paid the Dealer Manager selling commissions and dealer manager fees in connection with the sale of shares of certain classes of common stock. The Company continues to pay the Dealer Manager a distribution and servicing fee with respect to its Class T and Class T2 shares of common stock that were sold in the Company's Initial Offering (primary portion of the Initial Offering only) and Offering. Distribution and servicing fees are recorded in the accompanying
condensed consolidated statements of stockholders' equity
as a reduction
19
to equity as incurred. For more information on the terms of the distribution and servicing fees that are payable with respect to Class T and Class T2 shares of common stock, please see Item 13. "Certain Relationships and Related Transactions, and Director Independence" of the Company's Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on March 22, 2019.
Acquisition Fees and Expenses
The Company pays to the Advisor
2.0%
of the contract purchase price of each property or asset acquired. 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. Since the Company's formation through
September 30, 2019
, the Company reimbursed the Advisor expenses of approximately
0.01%
of the aggregate purchase price all of properties acquired. 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. Acquisition fees and expenses associated with transactions determined to be asset acquisitions are capitalized in real estate, net, in the accompanying
condensed consolidated balance sheets
.
Asset Management Fees
The Company pays to the Advisor an asset management fee calculated on a monthly basis in an amount equal to 1/12th of 0.75% of aggregate asset value, which is payable monthly, in arrears.
Operating Expense Reimbursement
The Company reimburses the Advisor for all operating 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 exceed the greater of (a)
2%
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. Operating expenses incurred on the Company’s behalf are recorded in general and administrative expenses in the accompanying
condensed consolidated statements of comprehensive (loss) income
.
Property Management Fees
In connection with the rental, leasing, operation and management of the Company’s properties, the Company pays Carter Validus Real Estate Management Services II, LLC, or 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 reimburses the Property Manager and its affiliates for property-level expenses that any of them pay or incur on the Company’s behalf, including certain 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. Property management fees are recorded in rental expenses in the accompanying
condensed consolidated statements of comprehensive (loss) income
.
Leasing Commission Fees
The Company pays the Property Manager a separate fee for the initial lease-up, leasing-up of newly constructed properties or re-leasing to existing tenants. Leasing commission fees are capitalized in other assets, net, in the accompanying
condensed consolidated balance sheets
and amortized over the terms of the related leases.
Construction Management Fees
For acting as general contractor and/or construction manager to supervise or coordinate projects or to provide major repairs or rehabilitation on the Company's 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. Construction management fees are capitalized in buildings and improvements, in the accompanying
condensed consolidated balance sheets
.
Disposition Fees
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 the lesser
20
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
September 30, 2019
, the Company had
no
t incurred any disposition fees to the Advisor or its affiliates.
Subordinated Participation in Net Sale Proceeds
Prior to the completion of the REIT Merger, upon the sale of the Company, the Advisor would have received
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
September 30, 2019
, the Company had
no
t incurred any subordinated participation in net sale proceeds to the Advisor or its affiliates. The Fourth A&R CVREIT II Advisory Agreement (as defined and described in
Note 16—"Subsequent Events"
), which became effective immediately following the Contributions (as defined in
Note 16—"Subsequent Events"
) does not provide for the payment of a subordinated participation in net sales proceeds to the Advisor or its affiliates.
The A&R CVOP II Partnership Agreement (as defined and described in
Note 16—"Subsequent Events"
) became effective following completion of the Contributions, and provides that the Advisor, as a special limited partner of CVOP II, would be entitled to a distribution upon an Investment Liquidity Event (as defined in the A&R CVOP II Partnership Agreement). The A&R CVOP II Partnership Agreement also increases the threshold of the Priority Return (as defined in the A&R CVOP II Partnership Agreement) from
6.0%
to
8.0%
, as previously agreed to and disclosed in connection with the REIT Merger. See
Note 16—"Subsequent Events"
for further discussion.
Subordinated Incentive Listing Fee
Prior to the completion of the REIT Merger, upon the listing of the Company’s shares on a national securities exchange, the Advisor would have received
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 a
6.0%
annual cumulative, non-compounded return to investors, or the subordinated incentive listing fee. As of
September 30, 2019
, the Company had
no
t incurred any subordinated incentive listing fees to the Advisor or its affiliates. The Fourth A&R CVREIT II Advisory Agreement does not provide for the payment of a subordinated incentive listing fee to the Advisor or its affiliates. The A&R CVOP II Partnership Agreement provides that the Advisor, as a special limited partner of CVOP II, would be entitled to a distribution upon an Investment Liquidity Event (as defined in the A&R CVOP II Partnership Agreement). See
Note 16—"Subsequent Events"
for further discussion.
Subordinated Distribution Upon Termination Fee
Prior to the completion of the REIT Merger, upon termination or non-renewal of the advisory agreement, with or without cause, the Advisor would have been 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 exceeded the sum of the aggregate capital contributed by investors plus an amount equal to an annual
6.0%
cumulative, non-compounded return to investors. As of
September 30, 2019
, the Company had
no
t incurred any subordinated termination fees to the Advisor or its affiliates. The Fourth A&R CVREIT II Advisory Agreement does not provide for the payment of a subordinated termination fee to the Advisor or its affiliates. The A&R CVOP II Partnership Agreement provides that the Advisor, as a special limited partner of CVOP II, would be entitled to a distribution upon the termination of the Fourth A&R Advisory Agreement (unless such termination is by the Company because of a material breach of the Fourth A&R Advisory Agreement or occurs upon a change of control). See
Note 16—"Subsequent Events"
for further discussion.
21
The following table details amounts incurred in connection with the Company's related parties transactions as described above for the
three and nine months
ended
September 30, 2019
and
2018
(amounts in thousands):
|
|
|
|
|
Incurred
|
||||||||||||||
|
|
|
|
|
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
|||||||||||||
|
Fee
|
|
Entity
|
|
2019
|
2018
|
2019
|
2018
|
|||||||||||
|
Distribution and servicing fees
|
|
SC Distributors, LLC
|
|
$
|
(5
|
)
|
$
|
(292
|
)
|
$
|
(99
|
)
|
$
|
402
|
|
|||
|
Acquisition fees and costs
|
|
Carter Validus Advisors II, LLC and its affiliates
|
|
1,366
|
|
282
|
|
1,366
|
|
2,769
|
|
|||||||
|
Asset management fees
|
|
Carter Validus Advisors II, LLC and its affiliates
|
|
3,540
|
|
3,323
|
|
10,527
|
|
9,655
|
|
|||||||
|
Property management fees
|
|
Carter Validus Real Estate Management Services II, LLC
|
|
1,195
|
|
1,123
|
|
3,632
|
|
3,282
|
|
|||||||
|
Operating expense reimbursement
|
|
Carter Validus Advisors II, LLC and its affiliates
|
|
766
|
|
620
|
|
3,246
|
|
1,779
|
|
|||||||
|
Leasing commission fees
|
|
Carter Validus Real Estate Management Services II, LLC
|
|
—
|
|
42
|
|
98
|
|
473
|
|
|||||||
|
Construction management fees
|
|
Carter Validus Real Estate Management Services II, LLC
|
|
(14
|
)
|
30
|
|
150
|
|
203
|
|
|||||||
|
Total
|
|
|
$
|
6,848
|
|
$
|
5,128
|
|
$
|
18,920
|
|
$
|
18,563
|
|
||||
The following table details amounts payable to affiliates in connection with the Company's related parties transactions as described above and as of
September 30, 2019
and
December 31, 2018
(amounts in thousands):
|
Payable
|
||||||||||
|
September 30, 2019
|
December 31, 2018
|
|||||||||
|
Fee
|
Entity
|
|||||||||
|
Other offering costs reimbursement
|
Carter Validus Advisors II, LLC and its affiliates
|
$
|
—
|
|
$
|
89
|
|
|||
|
Distribution and servicing fees
|
SC Distributors, LLC
|
7,521
|
|
10,218
|
|
|||||
|
Acquisition fees and costs
|
Carter Validus Advisors II, LLC and its affiliates
|
3
|
|
32
|
|
|||||
|
Asset management fees
|
Carter Validus Advisors II, LLC and its affiliates
|
1,210
|
|
1,182
|
|
|||||
|
Property management fees
|
Carter Validus Real Estate Management Services II, LLC
|
389
|
|
420
|
|
|||||
|
Operating expense reimbursement
|
Carter Validus Advisors II, LLC and its affiliates
|
299
|
|
421
|
|
|||||
|
Leasing commission fees
|
Carter Validus Real Estate Management Services II, LLC
|
—
|
|
25
|
|
|||||
|
Construction management fees
|
Carter Validus Real Estate Management Services II, LLC
|
170
|
|
40
|
|
|||||
|
Total
|
$
|
9,592
|
|
$
|
12,427
|
|
||||
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.
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 rental revenue, less rental expenses, which excludes depreciation and amortization, general and administrative expenses, asset management fees and interest and other expense, net. The Company believes that segment net operating income serves as a useful supplement to
net (loss) income
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 (loss) income
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 (loss) income
as presented in the accompanying
condensed consolidated
financial statements and data included elsewhere in this
Quarterly Report on Form 10-Q
.
22
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 credit facility and other assets not attributable to individual properties.
Summary information for the reportable segments during the
three and nine months
ended
September 30, 2019
and
2018
, is as follows (amounts in thousands):
|
Data Center
|
Healthcare
|
Three Months Ended
September 30, 2019 |
|||||||||
|
Revenue:
|
|||||||||||
|
Rental revenue
|
$
|
28,230
|
|
$
|
19,833
|
|
$
|
48,063
|
|
||
|
Expenses:
|
|||||||||||
|
Rental expenses
|
(8,414
|
)
|
(2,326
|
)
|
(10,740
|
)
|
|||||
|
Segment net operating income
|
$
|
19,816
|
|
$
|
17,507
|
|
37,323
|
|
|||
|
Expenses:
|
|||||||||||
|
General and administrative expenses
|
(2,239
|
)
|
|||||||||
|
Asset management fees
|
(3,540
|
)
|
|||||||||
|
Depreciation and amortization
|
(16,254
|
)
|
|||||||||
|
Impairment loss on real estate - healthcare
|
(13,000
|
)
|
|||||||||
|
Income from operations
|
2,290
|
|
|||||||||
|
Interest and other expense, net
|
(11,920
|
)
|
|||||||||
|
Net loss attributable to common stockholders
|
$
|
(9,630
|
)
|
||||||||
|
Data Center
|
Healthcare
|
Three Months Ended
September 30, 2018 |
|||||||||
|
Revenue:
|
|||||||||||
|
Rental revenue
|
$
|
26,843
|
|
$
|
18,675
|
|
$
|
45,518
|
|
||
|
Expenses:
|
|||||||||||
|
Rental expenses
|
(6,893
|
)
|
(2,554
|
)
|
(9,447
|
)
|
|||||
|
Segment net operating income
|
$
|
19,950
|
|
$
|
16,121
|
|
36,071
|
|
|||
|
Expenses:
|
|||||||||||
|
General and administrative expenses
|
(1,244
|
)
|
|||||||||
|
Asset management fees
|
(3,323
|
)
|
|||||||||
|
Depreciation and amortization
|
(14,849
|
)
|
|||||||||
|
Income from operations
|
16,655
|
|
|||||||||
|
Interest and other expense, net
|
(8,938
|
)
|
|||||||||
|
Net income attributable to common stockholders
|
$
|
7,717
|
|
||||||||
23
|
Data Centers
|
Healthcare
|
Nine Months Ended
September 30, 2019 |
|||||||||
|
Revenue:
|
|||||||||||
|
Rental revenue
|
$
|
82,745
|
|
$
|
58,722
|
|
$
|
141,467
|
|
||
|
Expenses:
|
|||||||||||
|
Rental expenses
|
(23,516
|
)
|
(6,494
|
)
|
(30,010
|
)
|
|||||
|
Segment net operating income
|
$
|
59,229
|
|
$
|
52,228
|
|
111,457
|
|
|||
|
Expenses:
|
|||||||||||
|
General and administrative expenses
|
(5,177
|
)
|
|||||||||
|
Asset management fees
|
(10,527
|
)
|
|||||||||
|
Depreciation and amortization
|
(50,110
|
)
|
|||||||||
|
Impairment loss on real estate - healthcare
|
(13,000
|
)
|
|||||||||
|
Income from operations
|
32,643
|
|
|||||||||
|
Interest and other expense, net
|
(31,648
|
)
|
|||||||||
|
Net income attributable to common stockholders
|
$
|
995
|
|
||||||||
|
Data Centers
|
Healthcare
|
Nine Months Ended
September 30, 2018 |
|||||||||
|
Revenue:
|
|||||||||||
|
Rental revenue
|
$
|
76,443
|
|
$
|
54,317
|
|
$
|
130,760
|
|
||
|
Expenses:
|
|||||||||||
|
Rental expenses
|
(20,030
|
)
|
(7,409
|
)
|
(27,439
|
)
|
|||||
|
Segment net operating income
|
$
|
56,413
|
|
$
|
46,908
|
|
103,321
|
|
|||
|
|
|||||||||||
|
Expenses:
|
|||||||||||
|
General and administrative expenses
|
(3,526
|
)
|
|||||||||
|
Asset management fees
|
(9,655
|
)
|
|||||||||
|
Depreciation and amortization
|
(42,848
|
)
|
|||||||||
|
Income from operations
|
47,292
|
|
|||||||||
|
Interest and other expense, net
|
(24,885
|
)
|
|||||||||
|
Net income attributable to common stockholders
|
$
|
22,407
|
|
||||||||
There were
no
intersegment sales or transfers during the
three and nine months
ended
September 30, 2019
and
2018
.
Assets by each reportable segment as of
September 30, 2019
and
December 31, 2018
are as follows (amounts in thousands):
|
September 30, 2019
|
December 31, 2018
|
||||||
|
Assets by segment:
|
|||||||
|
Data centers
|
$
|
987,141
|
|
$
|
1,001,357
|
|
|
|
Healthcare
|
935,549
|
|
900,114
|
|
|||
|
All other
|
66,679
|
|
62,358
|
|
|||
|
Total assets
|
$
|
1,989,369
|
|
$
|
1,963,829
|
|
|
24
Capital additions and acquisitions by reportable segments for the
nine months
ended
September 30, 2019
and
2018
are as follows (amounts in thousands):
|
Nine Months Ended
September 30, |
|||||||
|
2019
|
2018
|
||||||
|
Capital additions and acquisitions by segment:
|
|||||||
|
Data centers
|
$
|
6,801
|
|
$
|
104,532
|
|
|
|
Healthcare
|
70,007
|
|
50,199
|
|
|||
|
Total capital additions and acquisitions
|
$
|
76,808
|
|
$
|
154,731
|
|
|
Note 12—
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
$225,916,000
and
$214,282,000
as of
September 30, 2019
and
December 31, 2018
, respectively, as compared to the outstanding principal of
$219,850,000
and
$220,351,000
as of
September 30, 2019
and
December 31, 2018
, respectively. The estimated fair value of notes payable
—
variable rate fixed through interest rate swap agreements (Level 2) was approximately
$248,021,000
and
$241,739,000
as of
September 30, 2019
and
December 31, 2018
, respectively, as compared to the outstanding principal of
$246,656,000
and
$247,435,000
as of
September 30, 2019
and
December 31, 2018
, respectively.
Credit facility
—
Variable Rate
—The outstanding principal of the credit facility—variable was
$190,000,000
and
$255,000,000
, which approximated its fair value as of
September 30, 2019
and
December 31, 2018
, respectively. The fair value of the Company's variable rate credit facility is estimated based on the interest rates currently offered to the Company by financial institutions.
Credit facility
—
Fixed Rate
—The estimated fair value of the credit facility—variable rate fixed through interest rate swap agreements (Level 2) was approximately
$253,321,000
and
$96,146,000
as of
September 30, 2019
and
December 31, 2018
, respectively, as compared to the outstanding principal of
$250,000,000
and
$100,000,000
as of
September 30, 2019
and
December 31, 2018
, respectively.
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 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
September 30, 2019
, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions, and 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 in its entirety is classified in Level 2 of the fair value hierarchy. See
Note 13—"Derivative Instruments and Hedging Activities"
for further discussion of the Company's derivative instruments.
25
The following tables show 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
September 30, 2019
and
December 31, 2018
(amounts in thousands):
|
|
September 30, 2019
|
||||||||||||||
|
|
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
|
$
|
—
|
|
$
|
433
|
|
$
|
—
|
|
$
|
433
|
|
|||
|
Total assets at fair value
|
$
|
—
|
|
$
|
433
|
|
$
|
—
|
|
$
|
433
|
|
|||
|
Liabilities:
|
|||||||||||||||
|
Derivative liabilities
|
$
|
—
|
|
$
|
7,516
|
|
$
|
—
|
|
$
|
7,516
|
|
|||
|
Total liabilities at fair value
|
$
|
—
|
|
$
|
7,516
|
|
$
|
—
|
|
$
|
7,516
|
|
|||
|
|
December 31, 2018
|
||||||||||||||
|
|
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
|
$
|
—
|
|
$
|
6,204
|
|
$
|
—
|
|
$
|
6,204
|
|
|||
|
Total assets at fair value
|
$
|
—
|
|
$
|
6,204
|
|
$
|
—
|
|
$
|
6,204
|
|
|||
Real estate assets
—As discussed in Note 2—"Summary of Significant Accounting Policies," during the
three and nine months
ended
September 30, 2019
, real estate assets related to
one
healthcare property with an aggregate carrying amount of
$40,266,000
were determined to be impaired and the carrying value of the property was reduced to its estimated fair value of
$27,266,000
. The fair value of the Company's impaired real estate assets was estimated using significant other observable inputs based on market activity. The Company used a market valuation approach, using comparable properties to estimate the fair value. Based upon these inputs, the Company determined that its valuation of the property using a market approach model is classified within Level 2 of the fair value hierarchy.
During the
three and nine months
ended
September 30, 2018
,
no
impairment losses were recorded on real estate.
The following table shows the fair value of the Company's real estate assets measured at fair value on a non-recurring basis as of
September 30, 2019
(amounts in thousands):
|
September 30, 2019
|
|||||||||||||||||||
|
Fair Value Hierarchy
|
|||||||||||||||||||
|
Quoted Prices in Active
Markets for Identical Assets (Level 1) |
Significant Other
Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Re-Measured Balance
|
Total Losses
(1)
|
|||||||||||||||
|
Real estate assets
|
$
|
—
|
|
$
|
27,266
|
|
$
|
—
|
|
$
|
27,266
|
|
$
|
13,000
|
|
||||
|
(1)
|
Total losses are included in impairment loss on real estate in the
condensed consolidated statements of comprehensive (loss) income
.
|
Note 13—
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.
26
Changes in the fair value of derivatives designated, and that qualify, as cash flow hedges are recorded in
accumulated other comprehensive income (loss)
in the accompanying
condensed consolidated statements of stockholders' equity
and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.
On January 1, 2019, the Company adopted ASU 2017-12. As a result of the adoption of ASU 2017-12, the cumulative ineffectiveness gain of
$103,000
previously recognized on existing cash flow hedges was reclassified to
accumulated other comprehensive income (loss)
from
accumulated distributions in excess of earnings
. See
Note 2—"Summary of Significant Accounting Policies"
for additional information regarding ASU 2017-12.
Amounts reported in
accumulated other comprehensive income (loss)
related to derivatives will be reclassified to
interest and other expense, net
, as interest payments are made on the Company’s variable rate debt. During the next twelve months, the Company estimates that an additional
$1,320,000
will be reclassified from accumulated other comprehensive income (loss) as an increase to interest and other expense, net.
See
Note 12—"Fair Value"
for 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 |
September 30, 2019
|
December 31, 2018
|
|||||||||||||||||||||||||
|
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
04/01/2019 |
(1)
|
12/22/2020 to
04/27/2023 |
$
|
496,656
|
|
$
|
433
|
|
$
|
(7,516
|
)
|
$
|
347,435
|
|
$
|
6,204
|
|
$
|
—
|
|
||||||||
|
(1)
|
During the
nine months
ended
September 30, 2019
, the Company entered into
two
interest rate swap agreements, which effectively fixed LIBOR related to
$150,000,000
of the term loans of the credit facility.
|
The notional amount under the agreements is an indication of the extent of the Company’s involvement in each instrument 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 credit facility and notes payable. The change in fair value of the derivative instruments that are designated as hedges are recorded in
other comprehensive (loss) income
, or OCI, in the accompanying
condensed consolidated statements of comprehensive (loss) income
.
The table below summarizes the amount of (loss) income recognized on the interest rate derivatives designated as cash flow hedges for the
three and nine months
ended
September 30, 2019
and
2018
(amounts in thousands):
|
Derivatives in Cash Flow Hedging Relationships
|
Amount of (Loss) Income Recognized
in OCI on Derivatives |
Location of (Loss) Income
Reclassified From Accumulated Other Comprehensive Income to Net (Loss) Income |
Amount of Income
Reclassified From Accumulated Other Comprehensive Income to Net (Loss) Income |
|||||||
|
Three Months Ended September 30, 2019
|
||||||||||
|
Interest rate swaps
|
$
|
(1,701
|
)
|
Interest and other expense, net
|
$
|
422
|
|
|||
|
Total
|
$
|
(1,701
|
)
|
$
|
422
|
|
||||
|
Three Months Ended September 30, 2018
|
||||||||||
|
Interest rate swaps
|
$
|
1,276
|
|
Interest and other expense, net
|
$
|
304
|
|
|||
|
Total
|
$
|
1,276
|
|
$
|
304
|
|
||||
|
Nine Months Ended September 30, 2019
|
||||||||||
|
Interest rate swaps
|
$
|
(11,502
|
)
|
Interest and other expense, net
|
$
|
1,784
|
|
|||
|
Total
|
$
|
(11,502
|
)
|
$
|
1,784
|
|
||||
|
Nine Months Ended September 30, 2018
|
||||||||||
|
Interest rate swaps
|
$
|
7,693
|
|
Interest and other expense, net
|
$
|
328
|
|
|||
|
Total
|
$
|
7,693
|
|
$
|
328
|
|
||||
27
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
September 30, 2019
, the fair value of derivatives in a net liability position was
$7,845,000
, inclusive of accrued interest but excluding any adjustment for nonperformance risk related to the agreement. As of
September 30, 2019
, there were no termination events or events of default related to the interest rate swaps.
Tabular Disclosure Offsetting Derivatives
The Company has elected not to offset derivative positions in its
condensed 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
September 30, 2019
and
December 31, 2018
(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 |
||||||||||||||||||
|
September 30, 2019
|
$
|
433
|
|
$
|
—
|
|
$
|
433
|
|
$
|
(10
|
)
|
$
|
—
|
|
$
|
423
|
|
||||||
|
December 31, 2018
|
$
|
6,204
|
|
$
|
—
|
|
$
|
6,204
|
|
$
|
—
|
|
$
|
—
|
|
$
|
6,204
|
|
||||||
|
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 |
||||||||||||||||||
|
September 30, 2019
|
$
|
7,516
|
|
$
|
—
|
|
$
|
7,516
|
|
$
|
(10
|
)
|
$
|
—
|
|
$
|
7,506
|
|
||||||
|
December 31, 2018
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
||||||
The Company reports derivative assets and derivative liabilities in the accompanying
condensed consolidated balance sheets
as
other assets, net
, and
accounts payable and other liabilities
, respectively.
Note 14—
Accumulated Other Comprehensive Income (Loss)
The following table presents a rollforward of amounts recognized in
accumulated other comprehensive income (loss)
by component for the
nine months
ended
September 30, 2019
and
2018
(amounts in thousands):
|
Unrealized Loss on Derivative
Instruments |
||||
|
Balance as of December 31, 2018
|
$
|
6,100
|
|
|
|
Cumulative effect of accounting change
|
103
|
|
||
|
Balance as of January 1, 2019
|
6,203
|
|
||
|
Other comprehensive loss before reclassification
|
(11,502
|
)
|
||
|
Amount of income reclassified from accumulated other comprehensive income to net income
|
(1,784
|
)
|
||
|
Other comprehensive loss
|
(13,286
|
)
|
||
|
Balance as of September 30, 2019
|
$
|
(7,083
|
)
|
|
28
|
Unrealized Income on Derivative
Instruments |
||||
|
Balance as of December 31, 2017
|
$
|
3,710
|
|
|
|
Other comprehensive income before reclassification
|
7,693
|
|
||
|
Amount of income reclassified from accumulated other comprehensive income to net income
|
(328
|
)
|
||
|
Other comprehensive income
|
7,365
|
|
||
|
Balance as of September 30, 2018
|
$
|
11,075
|
|
|
The following table presents reclassifications out of
accumulated other comprehensive income (loss)
for the
nine months
ended
September 30, 2019
and
2018
(amounts in thousands):
|
Details about Accumulated Other
Comprehensive Income (Loss) Components |
Amounts Reclassified from
Accumulated Other Comprehensive Income (Loss) to Net (Loss) Income |
Affected Line Items in the Condensed Consolidated Statements of Comprehensive (Loss) Income
|
||||||||
|
Nine Months Ended
September 30, |
||||||||||
|
2019
|
2018
|
|||||||||
|
Interest rate swap contracts
|
$
|
(1,784
|
)
|
$
|
(328
|
)
|
Interest and other expense, net
|
|||
Note 15—
Commitments and Contingencies
Litigation
In the ordinary course of business, the Company may become subject to litigation or claims. As of
September 30, 2019
, there were, and currently there are,
no
material pending legal proceedings to which the Company is a party. While the resolution of a lawsuit or proceeding may have an impact to the Company's financial results for the period in which it is resolved, the Company believes that the final resolution of the lawsuits or proceedings in which it is currently involved, either individually or in the aggregate, will not have a material adverse effect on its financial position, results of operations or liquidity.
Note 16—
Subsequent Events
Distributions Paid to Stockholders
The following table summarizes the Company's distributions paid on October 1, 2019, for the period from September 1, 2019 through
September 30, 2019
(amounts in thousands):
|
Payment Date
|
Common Stock
|
Cash
|
DRIP
|
Total Distribution
|
||||||||||
|
October 1, 2019
|
Class A
|
$
|
2,442
|
|
$
|
2,034
|
|
$
|
4,476
|
|
||||
|
October 1, 2019
|
Class I
|
402
|
|
278
|
|
680
|
|
|||||||
|
October 1, 2019
|
Class T
|
836
|
|
972
|
|
1,808
|
|
|||||||
|
October 1, 2019
|
Class T2
|
70
|
|
93
|
|
163
|
|
|||||||
|
$
|
3,750
|
|
$
|
3,377
|
|
$
|
7,127
|
|
||||||
The following table summarizes the Company's distributions paid on November 4, 2019, for the period from October 1, 2019 through October 31, 2019 (amounts in thousands):
|
Payment Date
|
Common Stock
|
Cash
|
DRIP
|
Total Distribution
|
||||||||||
|
November 4, 2019
|
Class A
|
$
|
5,160
|
|
$
|
1,681
|
|
$
|
6,841
|
|
||||
|
November 4, 2019
|
Class I
|
327
|
|
225
|
|
552
|
|
|||||||
|
November 4, 2019
|
Class T
|
644
|
|
747
|
|
1,391
|
|
|||||||
|
November 4, 2019
|
Class T2
|
54
|
|
71
|
|
125
|
|
|||||||
|
$
|
6,185
|
|
$
|
2,724
|
|
$
|
8,909
|
|
||||||
29
Distributions Authorized
The following tables summarize the daily distributions approved and authorized by the board of directors of the Company subsequent to
September 30, 2019
:
|
Authorization Date
(1)
|
Common Stock
|
Daily Distribution Rate
(1)
|
Annualized Distribution Per Share
|
|||||||
|
October 2, 2019
|
Class A
|
$
|
0.001369863
|
|
$
|
0.50
|
|
|||
|
October 2, 2019
|
Class I
|
$
|
0.001369863
|
|
$
|
0.50
|
|
|||
|
October 2, 2019
|
Class T
|
$
|
0.001116438
|
|
$
|
0.41
|
|
|||
|
October 2, 2019
|
Class T2
|
$
|
0.001116438
|
|
$
|
0.41
|
|
|||
|
Authorization Date
(2)
|
Common Stock
|
Daily Distribution Rate
(2)
|
Annualized Distribution Per Share
|
|||||||
|
October 28, 2019
|
Class A
|
$
|
0.001369863
|
|
$
|
0.50
|
|
|||
|
October 28, 2019
|
Class I
|
$
|
0.001369863
|
|
$
|
0.50
|
|
|||
|
October 28, 2019
|
Class T
|
$
|
0.001116438
|
|
$
|
0.41
|
|
|||
|
October 28, 2019
|
Class T2
|
$
|
0.001116438
|
|
$
|
0.41
|
|
|||
|
Authorization Date
(3)
|
Common Stock
|
Daily Distribution Rate
(3)
|
Annualized Distribution Per Share
|
|||||||
|
November 7, 2019
|
Class A
|
$
|
0.001369863
|
|
$
|
0.50
|
|
|||
|
November 7, 2019
|
Class I
|
$
|
0.001369863
|
|
$
|
0.50
|
|
|||
|
November 7, 2019
|
Class T
|
$
|
0.001116438
|
|
$
|
0.41
|
|
|||
|
November 7, 2019
|
Class T2
|
$
|
0.001116438
|
|
$
|
0.41
|
|
|||
|
Authorization Date
(4)
|
Common Stock
|
Daily Distribution Rate
(4)
|
Annualized Distribution Per Share
|
|||||||
|
November 7, 2019
|
Class A
|
$
|
0.001366120
|
|
$
|
0.50
|
|
|||
|
November 7, 2019
|
Class I
|
$
|
0.001366120
|
|
$
|
0.50
|
|
|||
|
November 7, 2019
|
Class T
|
$
|
0.001113388
|
|
$
|
0.41
|
|
|||
|
November 7, 2019
|
Class T2
|
$
|
0.001113388
|
|
$
|
0.41
|
|
|||
|
(1)
|
Distributions approved and authorized to stockholders of record as of the close of business on each day of the period commencing on October 4, 2019, the date of the REIT Merger, and ending on October 31, 2019. The distributions were calculated based on
365
days in the calendar year. The distributions declared for each record date in October 2019 were paid in November 2019. The distributions paid to stockholders were from legally available funds therefor.
|
|
(2)
|
Distributions approved and authorized to stockholders of record as of the close of business on each day of the period commencing on November 1, 2019 and ending on November 30, 2019. The distributions will be calculated based on
365
days in the calendar year. The distributions declared for each record date in November 2019 will be paid in December 2019. The distributions will be payable to stockholders from legally available funds therefor.
|
|
(3)
|
Distributions approved and authorized to stockholders of record as of the close of business on each day of the period commencing on December 1, 2019 and ending on December 31, 2019. The distributions will be calculated based on
365
days in the calendar year. The distributions declared for each record date in December 2019 will be paid in January 2020. The distributions will be payable to stockholders from legally available funds therefor.
|
|
(4)
|
Distributions approved and authorized to stockholders of record as of the close of business on each day of the period commencing on January 1, 2020 and ending on February 29, 2020. The distributions will be calculated based on
366
days in the calendar year. The distributions declared for each record date in January 2020 and February 2020 will be paid in February 2020 and March 2020, respectively. The distributions will be payable to stockholders from legally available funds therefor.
|
30
REIT Merger
Completion of REIT Merger
On
October 4, 2019
, pursuant to the terms and conditions of the Merger Agreement, REIT I merged with and into Merger Sub, with Merger Sub surviving the REIT Merger, such that following the REIT Merger, the Surviving Entity continued as a wholly-owned subsidiary of the Company. In accordance with the applicable provisions of the Maryland General Corporation Law, the separate existence of REIT I ceased. The Combined Company retained the name “Carter Validus Mission Critical REIT II, Inc.”
At the effective time of the REIT Merger, each issued and outstanding share of REIT I’s common stock (or a fraction thereof),
$0.01
par value per share, or the REIT I Common Stock, was converted into the right to receive:
|
(i)
|
$1.00
in cash; and
|
|
(ii)
|
0.4681
shares of the Company's Class A Common Stock, par value
$0.01
per share, or the REIT II Class A Common Stock.
|
The total consideration transferred for the REIT Merger to REIT I stockholders was approximately
$952.8 million
consisting of
$178.8 million
in cash and
$774.0 million
in equity. The Company determined the REIT Merger transaction to be an asset acquisition. Following the REIT Merger, as of
October 4, 2019
, the Company is comprised of
150
healthcare and data center properties in
one
micropolitan statistical area and
69
MSAs, encompassing approximately
8.7 million
rentable square feet, with a weighted average remaining lease term of
10.1 years
. The real estate portfolio of the Combined Company as of the effective time of the REIT Merger represented approximately
$3.2 billion
of total real estate investments.
Amendments to CVREIT II Advisory Agreement
On April 11, 2019, concurrently with the execution of the Merger Agreement, the Company, Carter/Validus Operating Partnership, LP, or CVOP, the Operating Partnership and the Advisor entered into the Third Amended and Restated CVREIT II Advisory Agreement, or the Third A&R CVREIT II Advisory Agreement, which became effective as of the effective time of the REIT Merger.
First Amendment to Third A&R CVREIT II Advisory Agreement
On October 3, 2019, the Company, CVOP, the Operating Partnership and the Advisor entered into the First Amendment to the Third A&R CVREIT II Advisory Agreement, or the First Amendment, which became effective on October 4, 2019, simultaneously with the effectiveness of the Third A&R CVREIT II Advisory Agreement at the effective time of the REIT Merger. The purpose of the First Amendment was to clarify that any subordinated fees payable to the Advisor under the Third A&R CVREIT II Advisory Agreement will be offset by any distributions the Advisor or any of its affiliates receives as a special limited partner of the Operating Partnership or CVOP.
Fourth A&R CVREIT II Advisory Agreement
Following the completion of the Contributions (as defined herein), on October 4, 2019, the Company, the Operating Partnership and the Advisor entered into the Fourth Amended and Restated Advisory Agreement, or the Fourth A&R CVREIT II Advisory Agreement, in order to, among other things, clarify that CVOP will not be a party to the Fourth A&R CVREIT II Advisory Agreement and that any subordinated fees the Advisor would have received under the Third A&R CVREIT II Advisory Agreement would be made to the Advisor in its capacity as a special limited partner of the Operating Partnership pursuant to the A&R CVOP II Partnership Agreement (as defined herein).
Amendments to CVOP II Operating Partnership Agreement
Fifth Amendment to CVOP II Operating Partnership Agreement
Concurrent with the execution of the Merger Agreement, the Company entered into an amendment, or the Fifth Amendment, to the Amended and Restated Limited Partnership Agreement of the Operating Partnership, by and between the Company and the Advisor, as amended, or the CVOP II Partnership Agreement. The purpose of the Fifth Amendment was to revise the economic interests of the Advisor by providing that the Advisor would not receive any subordinated distributions as a special limited partner of the Operating Partnership. The Fifth Amendment was to become effective as of the effective time of the REIT Merger.
Sixth Amendment to CVOP II Operating Partnership Agreement
On October 3, 2019, the Company and the Advisor entered into the Sixth Amendment to CVOP II Partnership Agreement, or the Sixth Amendment. The purpose of the Sixth Amendment is to rescind the Fifth Amendment in its entirety such that the revisions to the CVOP II Partnership Agreement set forth in the Fifth Amendment did not go into effect.
31
A&R CVOP II Partnership Agreement
Following the completion of the Contributions (as defined herein), on October 4, 2019, the Company and the Advisor entered into the Second Amended and Restated Agreement of Limited Partnership of the Operating Partnership, or the A&R CVOP II Partnership Agreement. The A&R CVOP II Partnership Agreement amends and restates the CVOP II Partnership Agreement in order to, among other things, amend the provisions related to distributions payable to the Advisor upon a Listing (as defined in the A&R CVOP II Partnership Agreement), termination of the Fourth A&R Advisory Agreement (unless such termination is by the Company because of a material breach of the Fourth A&R Advisory Agreement or occurs upon a change of control), and upon an Investment Liquidity Event (as defined in the A&R CVOP II Partnership Agreement). The A&R CVOP II Partnership Agreement also increases the threshold of the Priority Return (as defined in the A&R CVOP II Partnership Agreement) from
6.0%
to
8.0%
, as previously agreed to and disclosed in connection with the REIT Merger.
Omnibus Assignment and Amendment to Property Management and Leasing Agreements
On October 4, 2019, immediately prior to the effective time of the REIT Merger, pursuant to the Omnibus Assignment and Amendment to the Property Management and Leasing Agreements, or the Assignment Amendment, the Property Manager, as assignee, or the Assignee, acquired, and Carter Validus Real Estate Management Services, LLC, as assignor, or the Assignor, assigned, transferred, conveyed, and delivered to the Assignee, all of the Assignor's rights, titles, and interests in the Property Management and Leasing Agreements by and among the Assignor and CVOP's wholly-owned subsidiaries. Therefore, the Assignee, the property manager for the Company, will act as the property manager and leasing agent for the properties the Company acquired in the REIT Merger.
Operating Partnership Contribution
On October 4, 2019, following completion of the REIT Merger, the Advisor purchased all of Carter/Validus Advisors, LLC's, or CVREIT Advisor, units of ownership interest in CVOP, or OP Units, and all of CVREIT Advisor's rights and entitlements as a partner of CVOP, or the CVREIT II Advisor OP Unit Purchase, for an aggregate purchase price of
$1,066
, pursuant to that certain Partnership Interest Purchase Agreement, or the Purchase Agreement, by and between the Advisor, as buyer, and CVREIT Advisor, as Seller, dated October 4, 2019. On October 4, 2019, CVOP, the Company, the Operating Partnership, the Advisor, Merger Sub, and CVOP Partner, LLC, or CVOP Partner, a wholly owned subsidiary of the Operating Partnership, entered into a contribution agreement, or the Contribution Agreement, whereby effective on October 4, 2019, following the CVREIT II Advisor OP Unit Purchase, (i) Merger Sub and the Advisor, each a Contributor, and together, the Contributors, each contributed to the Operating Partnership all of their interests in CVOP and the Operating Partnership acquired from the Contributors all of the Contributors’ right, title and interest in CVOP in exchange for limited partnership interests in the Operating Partnership, and (ii) the Operating Partnership contributed to CVOP Partner all of its limited OP Units, or collectively, the Contributions.
Amended and Restated CVOP Partnership Agreement
Following the completion of the Contributions, on October 4, 2019, the Operating Partnership, as the general partner of CVOP, and CVOP Partner, as the limited partner of CVOP, entered into the First Amended and Restated Agreement of Limited Partnership of CVOP, or the A&R CVOP Partnership Agreement. The primary purpose of the A&R CVOP Partnership Agreement is to provide for the allocation of CVOP’s profits and losses and distributions of cash and other assets of CVOP to the Operating Partnership as general partner and CVOP Partner as limited partner of CVOP.
Share Repurchase Program
On October 2, 2019, the board of directors of the Company approved the Amended SRP for the Combined Company following the REIT Merger. The Amended SRP will apply beginning with repurchases made on the first quarter repurchase date of 2020, which is expected to be January 30, 2020. For purposes of determining whether any former CVREIT stockholder qualifies for participation under the Amended SRP, former CVREIT stockholders will receive full credit for the time they held CVREIT common stock prior to the closing of the REIT Merger. Subject to the terms and limitations of the Amended SRP, including, but not limited to, quarterly share limitations, an annual
5.0%
share limitation, and DRIP funding limitations, the Amended SRP may be available to any stockholder as a potential means of interim liquidity. The Company will honor valid repurchase requests approximately 30 days following the end of the applicable quarter. See PART II, "Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds"
for further discussion.
32
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our
condensed consolidated
financial statements and the notes thereto and the other financial information appearing elsewhere in this
Quarterly Report on Form 10-Q
.
The following discussion should also be read in conjunction with our audited consolidated financial statements, and the notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the U.S. Securities and Exchange Commission, or the SEC, on March 22, 2019, or the 2018 Annual Report on Form 10-K.
The terms “we,” “our,” "us," and the “Company” refer to Carter Validus Mission Critical REIT II, Inc., Carter Validus Operating Partnership II, LP, or our Operating Partnership, and all wholly-owned subsidiaries.
Forward-Looking Statements
Certain statements contained in this Quarterly Report on Form 10-Q, other than historical facts, include forward-looking statements that reflect our expectations and projections about our future results, performance, prospects and opportunities. 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. Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect our management’s view only as of the date this Quarterly Report on Form 10-Q is filed with the SEC. We make no representation or warranty (express or implied) about the accuracy of any such forward-looking statements contained in this Quarterly Report on Form 10-Q, 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. See Item 1A. “Risk Factors” of our 2018 Annual Report on Form 10-K for a discussion of some, although not all, of the risks and uncertainties that could cause actual results to differ materially from those presented in our forward-looking statements.
Management’s discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles, or GAAP. The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. We evaluate these estimates on a regular basis. These estimates are based on management’s historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
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 ceased offering shares of common stock in 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 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 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 November 27, 2017, we commenced our follow-on offering of up to $1,000,000,000 in shares of Class A common stock, Class I common stock, and Class T common stock, or our Offering, and collectively with our Initial Offering and the DRIP Offering, our Offerings. On March 14, 2018, we ceased offering shares of Class T common stock in our Offering, and we began offering shares of Class T2 common stock in our Offering on March 15, 2018. We continue to offer shares of Class T common stock in the DRIP Offering. We ceased offering shares of common stock pursuant to our Offering on November 27,
33
2018. At the completion of our Offering, we had accepted investors' subscriptions for and issued approximately
13,491,000
shares of Class A, Class I, Class T and Class T2 common stock resulting in gross proceeds of
$129,308,000
. We deregistered the remaining
$870,692,000
of shares of Class A, Class I, Class T and Class T2 common stock.
As of
September 30, 2019
, we had accepted investors’ subscriptions for and issued approximately
146,771,000
shares of Class A, Class I, Class T and Class T2 common stock in our Offerings, resulting in receipt of gross proceeds of approximately
$1,428,456,000
, before share repurchases of
$86,188,000
, selling commissions and dealer manager fees of approximately
$96,734,000
and other offering costs of approximately
$27,477,000
.
On September 27, 2018, our board of directors, at the recommendation of our audit committee, which is comprised solely of independent directors, established an estimated net asset value, or the NAV, per share of our common stock, or the Estimated Per Share NAV, calculated as of June 30, 2018, of $9.25. Therefore, effective October 1, 2018 through the termination of our Offering, shares of common stock were offered for a price per share of $10.278 per Class A share, $9.343 per Class I share and $9.788 per Class T2 share. Further, effective October 1, 2018, shares of common stock are offered pursuant to the DRIP Offering for a price per share of $9.25. The Estimated Per Share NAV was calculated for purposes of assisting broker-dealers participating in the Initial Offering and the Offering in meeting their customer account statement reporting obligations under the National Association of Securities Dealers Conduct Rule 2340. The Estimated Per Share NAV was determined by our board of directors after consultation with Carter Validus Advisors II, LLC, or our Advisor, and an independent third-party valuation firm. 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, which we expect to have available during the fourth quarter of 2019.
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 by and among us, our Operating Partnership 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 our liquidation stage. SC Distributors, LLC, an affiliate of the Advisor, or the Dealer Manager, served as the dealer manager of our Initial Offering and our Offering. The Dealer Manager received fees for services related to the Initial Offering and the Offering. We continue to pay the Dealer Manager a distribution and servicing fee with respect to Class T and Class T2 shares that were sold in our Initial Offering and Offering.
We currently operate through two reportable segments – commercial real estate investments in data centers and healthcare. As of
September 30, 2019
, we had purchased
64
real estate investments, consisting of
90
properties, comprising approximately
6,117,000
of gross rental square feet for an aggregate purchase price of approximately
$1,898,269,000
.
On June 12, 2019, Todd M. Sakow resigned as our Chief Operating Officer and Secretary, effective immediately. In connection with Mr. Sakow's resignation, the board of directors elected Kay C. Neely to serve as our Secretary, effective as of June 12, 2019.
Completion of Merger with Carter Validus Mission Critical REIT, Inc.
On April 11, 2019, we, along with Carter Validus Mission Critical REIT, Inc., or REIT I, our Operating Partnership, Carter/Validus Operating Partnership, LP, the operating partnership of REIT I, or the REIT I Operating Partnership, and Lightning Merger Sub, LLC, our wholly-owned subsidiary, or Merger Sub, entered into an Agreement and Plan of Merger, or the Merger Agreement.
Pursuant to the terms and conditions of the Merger Agreement, on
October 4, 2019
, REIT I merged with and into Merger Sub, or the REIT Merger, with Merger Sub surviving the REIT Merger, or the Surviving Entity, such that following the REIT Merger, the Surviving Entity continued as our wholly-owned subsidiary. In accordance with the applicable provisions of the Maryland General Corporation Law, the separate existence of REIT I ceased.
At the effective time of the REIT Merger, each issued and outstanding share of REIT I’s common stock (or a fraction thereof), $0.01 par value per share, or the REIT I Common Stock, was converted into the right to receive:
|
(i)
|
$1.00 in cash; and
|
|
(ii)
|
0.4681 shares of our Class A Common Stock, par value $0.01 per share, or the REIT II Class A Common Stock.
|
34
The combined company after the REIT Merger, or the Combined Company, retained the name “Carter Validus Mission Critical REIT II, Inc.” The REIT Merger is intended to qualify as a “reorganization” under, and within the meaning of, Section 368(a) of the Internal Revenue Code of 1986, as amended or the Code.
Following the completion of the REIT Merger, our financial information will materially change, however; the financial information included in this Quarterly Report on Form 10-Q does not purport these changes.
The total consideration transferred for the REIT Merger to REIT I stockholders was approximately
$952.8 million
consisting of $178.8 million in cash and $774.0 million in equity. Following the REIT Merger, as of
October 4, 2019
, our real estate investments are comprised of
150
healthcare and data center properties in
one
micropolitan statistical area and
69
metropolitan statistical areas, encompassing approximately of
8.7 million
rentable square feet, with a weighted average remaining lease term of
10.1 years
. The real estate portfolio of the Combined Company represented approximately
$3.2 billion
of total real estate investments.
Critical Accounting Policies
Our critical accounting policies were disclosed in our 2018 Annual Report on Form 10-K. There have been no material changes to our critical accounting policies as disclosed therein.
Interim Unaudited Financial Data
Our accompanying condensed consolidated financial statements have been prepared by us in accordance with GAAP in conjunction with the rules and regulations of the SEC. Certain information and footnote disclosures required for annual financial statements have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, our accompanying condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. Our accompanying condensed consolidated financial statements reflect all adjustments, which are, in our view, of a normal recurring nature and necessary for a fair presentation of our financial position, results of operations and cash flows for the interim period. Interim results of operations are not necessarily indicative of the results to be expected for the full year; such full year results may be less favorable. Our accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our 2018 Annual Report on Form 10-K.
Qualification as a REIT
We elected, and qualify, to be taxed as a REIT for federal income tax purposes and we intend to continue to be taxed as a REIT. To maintain our qualification as a REIT, we must continue to meet certain organizational and operational requirements, including a requirement to currently distribute at least 90.0% of our REIT taxable income 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 (loss) income
and net cash available for distribution to our stockholders.
Recently Issued Accounting Pronouncements
For a discussion of recently issued accounting pronouncements, see Note 2—“Summary of Significant Accounting Policies—
Recently Adopted Accounting Pronouncements and
—
Recently Issued Accounting Pronouncements Not Yet Adopted
” to our
condensed consolidated
financial statements that are a part of this
Quarterly Report on Form 10-Q
.
Segment Reporting
We report our financial performance based on two reporting segments—commercial real estate investments in data centers and healthcare. See
Note 11—"Segment Reporting"
to our
condensed consolidated
financial statements that are a part of this
Quarterly Report on Form 10-Q
for additional information about our two reporting segments.
35
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, 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 other than those set forth in our 2018 Annual Report on Form 10-K and in Part II, Item 1A. "Risk Factors" of this
Quarterly Report on Form 10-Q
.
Results of Operations
Our results of operations are influenced by the timing of acquisitions and the operating performance of our operating real estate properties. The following table shows the property statistics of our real estate properties as of
September 30, 2019
and
2018
:
|
|
September 30,
|
||||
|
|
2019
|
2018
|
|||
|
Number of operating real estate properties
|
90
|
|
77
|
|
|
|
Leased square feet
|
5,933,000
|
|
5,401,000
|
|
|
|
Weighted average percentage of rentable square feet leased
|
97
|
%
|
98
|
%
|
|
The following table summarizes our real estate activity for the
three and nine months
ended
September 30, 2019
and
2018
:
|
|
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
|||||||||||||
|
|
2019
|
2018
|
2019
|
2018
|
|||||||||||
|
Operating real estate properties acquired
|
5
|
|
2
|
|
5
|
|
7
|
|
|||||||
|
Real estate properties placed into service
|
—
|
|
1
|
|
—
|
|
1
|
|
|||||||
|
Aggregate purchase price of acquired real estate properties
|
$
|
69,851,000
|
|
$
|
14,471,000
|
|
$
|
69,851,000
|
|
$
|
141,380,000
|
|
|||
|
Aggregate cost of properties placed into service
|
$
|
—
|
|
$
|
10,349,000
|
|
$
|
—
|
|
$
|
10,349,000
|
|
|||
|
Leased square feet of acquired real estate properties
|
302,000
|
|
87,000
|
|
302,000
|
|
328,000
|
|
|||||||
This section describes and compares our results of operations for the
three and nine months
ended
September 30, 2019
and
2018
. We generate almost all of our 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 revenue and expenses 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 (loss) income
.
Three Months Ended September 30, 2019
Compared to
Three Months Ended September 30, 2018
Changes in our revenues are summarized in the following table (amounts in thousands):
|
Three Months Ended
September 30, |
|||||||||||
|
2019
|
2018
|
Change
|
|||||||||
|
Same store rental revenue
|
$
|
38,180
|
|
$
|
38,509
|
|
$
|
(329
|
)
|
||
|
Non-same store rental revenue
|
2,948
|
|
656
|
|
2,292
|
|
|||||
|
Same store tenant reimbursements
|
6,611
|
|
6,365
|
|
246
|
|
|||||
|
Non-same store tenant reimbursements
|
320
|
|
19
|
|
301
|
|
|||||
|
Other operating income
|
4
|
|
(31
|
)
|
35
|
|
|||||
|
Total rental revenue
|
$
|
48,063
|
|
$
|
45,518
|
|
$
|
2,545
|
|
||
|
•
|
Same store rental revenue decreased primarily due to not recognizing rental revenue during the
three months
ended
September 30, 2019
, from a tenant that was experiencing financial difficulties and vacated the space, coupled with a write-off of straight-line rent from a second tenant at the same property due to low probability that the lease will stay in place. The decrease was partially offset by an increase in same store rental revenue related to entering into certain lease amendments at one of our properties and accelerated amortization of a below-market lease recorded during the
three months
ended
September 30, 2019
.
|
36
|
•
|
Same store tenant reimbursements, which is a non-GAAP metric, increased primarily due to an increase in recoverable real estate taxes during the
three months
ended
September 30, 2019
, attributable to a real estate tax assessment at one of our properties, offset by the adoption of ASU 2018-20,
Narrow-Scope Improvements for Lessors
, or ASU 2018-20, related to real estate taxes.
|
|
•
|
Non-same store rental revenue and tenant reimbursements increased due to the acquisition of
15
operating properties and placing one development property in service since July 1, 2018.
|
Changes in our expenses are summarized in the following table (amounts in thousands):
|
Three Months Ended
September 30, |
|||||||||||
|
2019
|
2018
|
Change
|
|||||||||
|
Same store rental expenses
|
$
|
10,347
|
|
$
|
9,372
|
|
$
|
975
|
|
||
|
Non-same store rental expenses
|
393
|
|
75
|
|
318
|
|
|||||
|
General and administrative expenses
|
2,239
|
|
1,244
|
|
995
|
|
|||||
|
Asset management fees
|
3,540
|
|
3,323
|
|
217
|
|
|||||
|
Depreciation and amortization
|
16,254
|
|
14,849
|
|
1,405
|
|
|||||
|
Impairment loss on real estate
|
13,000
|
|
—
|
|
13,000
|
|
|||||
|
Total expenses
|
$
|
45,773
|
|
$
|
28,863
|
|
$
|
16,910
|
|
||
|
•
|
Same store rental expenses, certain of which are subject to reimbursement by our tenants, increased primarily due to an increase in recoverable real estate taxes during the
three months
ended
September 30, 2019
, attributable to a real estate tax assessment at one of our properties, coupled with the gross-up of ground lease rental payments from one tenant that pays the ground lease obligations directly to the lessor, consistent with the adoption of ASC 842 on January 1, 2019, partially offset due to the adoption of ASU 2018-20, related to real estate taxes. See Note 2—"Summary of Significant Accounting Policies" for further discussion.
|
|
•
|
Non-same store rental expenses, certain of which are subject to reimbursement by our tenants, increased primarily due to the acquisition of
15
operating properties and placing one development property in service since July 1, 2018.
|
|
•
|
General and administrative expenses increased primarily due to an increase in custodial fees related to maintaining and safekeeping services of our stockholders' accounts, an increase in administrative costs of managing and operating our real estate properties in connection with our Company's growth and an increase in acquisition costs associated with real estate investments not consummated.
|
|
•
|
Asset management fees increased due to an increase in our real estate properties since July 1, 2018.
|
|
•
|
Depreciation and amortization increased due to an increase in the weighted average depreciable basis of operating real estate properties since July 1, 2018, coupled with the acceleration of amortization recorded in the amount of
$0.5 million
during the
three months
ended
September 30, 2019
, related to one in-place lease intangible asset.
|
|
•
|
Impairment loss on real estate increased due to impairment recorded in the amount of
$13.0 million
related to one healthcare property.
|
Changes in interest and other expense, net, are summarized in the following table (amounts in thousands):
|
Three Months Ended
September 30, |
|||||||||||
|
2019
|
2018
|
Change
|
|||||||||
|
Interest and other expense, net:
|
|
|
|
||||||||
|
Interest on notes payable
|
$
|
5,277
|
|
$
|
5,251
|
|
$
|
26
|
|
||
|
Interest on credit facility
|
6,167
|
|
3,370
|
|
2,797
|
|
|||||
|
Amortization of deferred financing costs
|
647
|
|
600
|
|
47
|
|
|||||
|
Cash deposits interest
|
(158
|
)
|
(101
|
)
|
(57
|
)
|
|||||
|
Capitalized interest
|
(13
|
)
|
(182
|
)
|
169
|
|
|||||
|
Total interest and other expense, net
|
$
|
11,920
|
|
$
|
8,938
|
|
$
|
2,982
|
|
||
|
•
|
Interest on the credit facility increased due to an
increase
in the weighted average outstanding principal balance on the credit facility, an
increase
in interest rates and write offs of the deferred financing costs related to the termination of the Bridge Facility.
|
37
|
•
|
Capitalized interest decreased due to a decrease in the average accumulated expenditures on development properties due to placing one development property in service since July 1, 2018.
|
Nine Months Ended September 30, 2019
Compared to
Nine Months Ended September 30, 2018
Changes in our revenues are summarized in the following table (amounts in thousands):
|
Nine Months Ended September 30,
|
|||||||||||
|
2019
|
2018
|
Change
|
|||||||||
|
Same store rental revenue
|
$
|
104,857
|
|
$
|
106,033
|
|
$
|
(1,176
|
)
|
||
|
Non-same store rental revenue
|
17,780
|
|
6,257
|
|
11,523
|
|
|||||
|
Same store tenant reimbursements
|
15,868
|
|
16,977
|
|
(1,109
|
)
|
|||||
|
Non-same store tenant reimbursements
|
2,778
|
|
1,146
|
|
1,632
|
|
|||||
|
Other operating income
|
184
|
|
347
|
|
(163
|
)
|
|||||
|
Total rental revenue
|
$
|
141,467
|
|
$
|
130,760
|
|
$
|
10,707
|
|
||
|
•
|
Same store rental revenue decreased primarily due to terminating the lease with a tenant who was experiencing financial difficulties, coupled with a write-off of straight-line rent from a second tenant at the same property due to low probability that the lease will stay in place. The decrease was partially offset by an increase in same store rental revenue related to entering into certain lease amendments at one of our properties and accelerated amortization of a below-market lease recorded during the
nine months
ended
September 30, 2019
.
|
|
•
|
Same store tenant reimbursements, which is a non-GAAP metric, decreased primarily due to the adoption of ASU 2018-20, related to real estate taxes, coupled with the write-offs related to tenant reimbursements due to a tenant experiencing financial difficulties.
|
|
•
|
Non-same store rental revenue and tenant reimbursements increased due to the acquisition of
20
operating properties and placing one development property in service since January 1, 2018.
|
Changes in our expenses are summarized in the following table (amounts in thousands):
|
Nine Months Ended September 30,
|
|||||||||||
|
2019
|
2018
|
Change
|
|||||||||
|
Same store rental expenses
|
$
|
25,335
|
|
$
|
25,139
|
|
$
|
196
|
|
||
|
Non-same store rental expenses
|
4,675
|
|
2,300
|
|
2,375
|
|
|||||
|
General and administrative expenses
|
5,177
|
|
3,526
|
|
1,651
|
|
|||||
|
Asset management fees
|
10,527
|
|
9,655
|
|
872
|
|
|||||
|
Depreciation and amortization
|
50,110
|
|
42,848
|
|
7,262
|
|
|||||
|
Impairment loss on real estate
|
13,000
|
|
—
|
|
13,000
|
|
|||||
|
Total expenses
|
$
|
108,824
|
|
$
|
83,468
|
|
$
|
25,356
|
|
||
|
•
|
Same store rental expenses, certain of which are subject to reimbursement by our tenants, increased primarily due to an increase in recoverable real estate taxes during the
nine months
ended
September 30, 2019
, attributable to a real estate tax assessment at one of our properties, coupled with the gross-up of ground lease rental payments from one tenant that pays the ground lease obligations directly to the lessor, consistent with the adoption of ASC 842 on January 1, 2019, partially offset by the adoption of ASU 2018-20, related to real estate taxes. See Note 2—"Summary of Significant Accounting Policies" for further discussion.
|
|
•
|
Non-same store rental expenses, certain of which are subject to reimbursement by our tenants, increased primarily due to the acquisition of
20
operating properties and placing one development property in service since January 1, 2018.
|
|
•
|
General and administrative expenses increased primarily due to an increase in custodial fees related to maintaining and safekeeping services of our stockholders' accounts, an increase in administrative costs of managing and operating our real estate properties in connection with our Company's growth and an increase in acquisition costs associated with real estate investments not consummated.
|
|
•
|
Asset management fees increased due to an increase in our real estate properties since January 1, 2018.
|
38
|
•
|
Depreciation and amortization increased due to an increase in the weighted average depreciable basis of operating real estate properties since January 1, 2018, coupled with the acceleration of amortization recorded in the amount of
$3.2 million
during the
nine months
ended
September 30, 2019
, related to
two
in-place lease intangible assets.
|
|
•
|
Impairment loss on real estate increased due to impairment recorded in the amount of
$13.0 million
related to one healthcare property
|
Changes in interest and other expense, net, are summarized in the following table (amounts in thousands):
|
Nine Months Ended September 30,
|
|||||||||||
|
2019
|
2018
|
Change
|
|||||||||
|
Interest and other expense, net:
|
|||||||||||
|
Interest on notes payable
|
$
|
15,670
|
|
$
|
15,696
|
|
$
|
(26
|
)
|
||
|
Interest on credit facility
|
14,582
|
|
8,385
|
|
6,197
|
|
|||||
|
Amortization of deferred financing costs
|
1,876
|
|
2,205
|
|
(329
|
)
|
|||||
|
Cash deposits interest
|
(411
|
)
|
(230
|
)
|
(181
|
)
|
|||||
|
Capitalized interest
|
(69
|
)
|
(1,171
|
)
|
1,102
|
|
|||||
|
Total interest and other expense, net
|
$
|
31,648
|
|
$
|
24,885
|
|
$
|
6,763
|
|
||
|
•
|
Interest on credit facility increased due to an
increase
in the weighted average outstanding principal balance on the credit facility, an
increase
in interest rates and write offs of the deferred financing costs related to the termination of the Bridge Facility.
|
|
•
|
Capitalized interest decreased due to a decrease in the average accumulated expenditures on development properties due to placing one development property in service since January 1, 2018.
|
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, capital expenditures, operating expenses, distributions to and repurchases from stockholders and principal and interest on any current and future indebtedness. Generally, cash needs for these items are generated from operations of our current and future investments. Our sources of funds are primarily operating cash flows, funds equal to amounts reinvested in the DRIP, the credit facility and other borrowings.
Generally, cash needs for items other than acquisitions of real estate and real estate-related investments are met from operations, primarily through rental income received from current and future tenants of our leased properties and borrowings.
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. 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, funds equal to amounts reinvested in the DRIP, borrowings on the credit facility, as well as secured and unsecured borrowings from banks and other lenders.
39
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 credit facility, proceeds from secured or unsecured borrowings from banks or other lenders 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, funds equal to amounts reinvested in the DRIP, borrowings on the 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 returns on the properties held, distributions paid to stockholders may be lower. We expect that substantially all net cash flows from our operations 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
$7.5 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
September 30, 2019
, we had
$4.5 million
of restricted cash in escrow reserve accounts for such capital expenditures. In addition, as of
September 30, 2019
, we had approximately
$68.0 million
in cash and cash equivalents. For the
nine months
ended
September 30, 2019
, we paid capital expenditures of
$7.0 million
that primarily related to two data center properties.
Credit Facility
Generally, the proceeds of loans made under the 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.
On January 29, 2019, we amended the credit facility agreement by adding beneficial ownership provisions, modifying certain definitions related to change of control and consolidated total debt and clarifying certain covenants related to restrictions on indebtedness and restrictions on liens.
On April 11, 2019, we, through our Operating Partnership and certain of our Operating Partnership’s subsidiaries entered into the Consent and Second Amendment to the Third Amended and Restated Credit Agreement, or the KeyBank Credit Facility, with KeyBank National Association, a national banking association, or KeyBank, certain other lenders, and KeyBank, as Administrative Agent, which provides for KeyBank’s consent, as Administrative Agent, to REIT I Operating Partnership’s and our execution and delivery of the Merger Agreement, and a conditional consent to the consummation of the Merger Agreement, subject to certain Merger Effectiveness Conditions (as defined in the Consent and Second Amendment).
In addition, the Consent and Second Amendment to the KeyBank Credit Facility (i) increases the amount of Secured Debt that is Recourse Indebtedness (as defined in the KeyBank Credit Facility) from 15% to 17.5% for four full consecutive fiscal quarters immediately following the date on which the REIT Merger is consummated and one partial fiscal quarter (to include the quarter in which the REIT Merger is consummated, if this occurs), (ii) allows, after April 27, 2019, us, our Operating Partnership, Merger Sub and the REIT I Operating Partnership to incur, assume or guarantee indebtedness as permitted under the KeyBank Credit Facility and with respect to which there is a lien on any equity interests of such entity, and (iii) from and after the consummation of the REIT Merger, allows Merger Sub and REIT I Operating Partnership to be additional guarantors to the KeyBank Credit Facility.
On April 11, 2019, in connection with the execution of the Merger Agreement, the Operating Partnership entered into a commitment letter, or the Commitment Letter, to obtain a senior secured bridge facility, or the Bridge Facility, in an amount of
$475,000,000
.
On April 29, 2019, KeyBank and REIT II Operating Partnership entered into the Release of Collateral Assignment of Interests, whereby KeyBank released its lien and security interest in the mortgaged properties. Therefore, effective April 29, 2019, the credit facility is unsecured. We were in compliance with all financial covenant requirements under the credit facility at
September 30, 2019
.
On August 7, 2019, in anticipation to the REIT Merger, we and certain of our subsidiaries entered into the Fourth Amended and Restated Credit Agreement, or the A&R Credit Agreement, with KeyBank as Administrative Agent for the lenders, to amend the borrower to us from the Operating Partnership. As a result, Operating Partnership became a guarantor, and, upon consummation of the REIT Merger, REIT I Operating Partnership and Merger Sub collectively became guarantors of the A&R Credit Agreement.
40
The A&R Credit Agreement increases the maximum commitments available under the credit facility from $700,000,000 to an aggregate of up to $780,000,000, consisting of a $500,000,000 revolving line of credit, with a maturity date of April 27, 2022, subject to our right for one, 12-month extension period and a $280,000,000 term loan, with a maturity date of April 27, 2023. The annual interest rate under the A&R Credit Agreement is coterminous with the current credit facility.
In addition, the A&R Credit Agreement removes certain security language related to restrictions on indebtedness and restrictions on liens, amends the Change of Control language, as defined in the A&R Credit Agreement, adds certain language describing the process required to determine a replacement index in anticipation of the discontinuance of LIBOR rate loans, and allows, upon consummation of the merger, to add certain, but not all, REIT I real estate properties to be included to the Pool Properties, as defined in the A&R Credit Agreement.
Simultaneously with the A&R Credit Agreement’s execution, on August 7, 2019, we and certain of our subsidiaries entered into the Senior Unsecured Term Loan Agreement, or the Term Loan, with KeyBank as Administrative Agent for the lenders for the maximum commitment available of up to $520,000,000 with a maturity date of December 31, 2024, which was closed at the date of the REIT Merger on October 4, 2019. Subject to certain conditions, the Term Loan can be increased to $600,000,000 any time before December 31, 2023. The Term Loan is pari passu with the A&R Credit Agreement.
The Term Loan was funded upon the consummation of the REIT Merger on
October 4, 2019
.
Upon the closing of the Term Loan, on August 7, 2019, we terminated our Bridge Facility.
During the
nine months
ended
September 30, 2019
, the Company added
four
healthcare properties to the unencumbered pool of the credit facility, which increased the Company’s total pool availability under the credit facility by approximately
$25,729,000
. As of
September 30, 2019
, we had a total pool availability under the Unsecured Credit Facility of
$551,470,000
and an aggregate outstanding principal balance of
$440,000,000
; therefore,
$111,470,000
was available to be drawn under the Unsecured Credit Facility.
In connection with the REIT Merger, on October 3, 2019, we with the Operating Partnership, certain of our subsidiaries, and KeyBank, entered into the First Amendment to the A&R Credit Agreement and the First Amendment to the Term Loan and together with the First Amendment to A&R Credit Agreement, or the First Amendments to the Unsecured Credit Facility. The First Amendments to the Unsecured Credit Facility allow for the Contributions (as defined in
Note 16—"Subsequent Events"
) by amending and adding certain language in the A&R Credit Agreement and Term Loan Agreement in order to conform with the contemplated structure chart of the REIT Merger.
Additionally, on
October 4, 2019
, concurrent with the REIT Merger, we added 61 properties to the unencumbered pool of credit facility, which increased our total pool availability under the Unsecured Credit Facility by approximately
$577,946,000
.
Cash Flows
Nine Months Ended September 30, 2019
Compared to
Nine Months Ended September 30, 2018
|
Nine Months Ended
September 30, |
|||||||||||
|
(in thousands)
|
2019
|
2018
|
Change
|
||||||||
|
Net cash provided by operating activities
|
$
|
52,540
|
|
$
|
57,320
|
|
$
|
(4,780
|
)
|
||
|
Net cash used in investing activities
|
$
|
(77,824
|
)
|
$
|
(155,331
|
)
|
$
|
77,507
|
|
||
|
Net cash provided by financing activities
|
$
|
23,806
|
|
$
|
109,753
|
|
$
|
(85,947
|
)
|
||
Operating Activities
|
•
|
Net cash provided by operating activities decreased primarily due to rent not being collected from a tenant who was experiencing financial difficulties and whose lease terminated, coupled with the interest expense paid related to the revolving portion of our credit facility and deferred financing costs paid related to the Bridge Facility, which was terminated on August 7, 2019, offset by an increase in rental revenues resulting from the acquisition of
15
operating properties and placing one development property in service since July 1, 2018.
|
Investing Activities
|
•
|
Net cash used in investing activities decreased primarily due to a decrease in acquisition of real estate properties, coupled with a decrease in capital projects during the
nine months
ended
September 30, 2019
, offset by an increase in costs incurred in connection with the REIT Merger.
|
Financing Activities
|
•
|
Net cash provided by financing activities decreased primarily due to a decrease in proceeds from issuance of common stock as a result of the termination of our offering, offset by a decrease of repurchases of common stock due to entering
|
41
into the Sixth Amended & Restated SRP (as defined and discussed in
Note 2—"Summary of Significant Accounting Policies"
in this Quarterly Report on Form 10-Q).
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, lenders' restrictions and limitations, capital expenditure requirements and the annual distribution requirements needed to maintain our status as a REIT under the Internal Revenue Code of 1986, as amended. 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 funds equal to amounts reinvested in the DRIP, 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 and funds equal to amounts reinvested in the DRIP. 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 the sources of distributions paid during the
nine months
ended
September 30, 2019
and
2018
(amounts in thousands):
|
Nine Months Ended September 30,
|
|||||||||||||
|
2019
|
2018
|
||||||||||||
|
Distributions paid in cash - common stockholders
|
$
|
33,329
|
|
$
|
29,673
|
|
|||||||
|
Distributions reinvested (shares issued)
|
31,275
|
|
30,519
|
|
|||||||||
|
Total distributions
|
$
|
64,604
|
|
$
|
60,192
|
|
|||||||
|
Source of distributions:
|
|||||||||||||
|
Cash flows provided by operations
(1)
|
$
|
33,329
|
|
52
|
%
|
$
|
29,673
|
|
49
|
%
|
|||
|
Offering proceeds from issuance of common stock pursuant to the DRIP
(1)
|
31,275
|
|
48
|
%
|
30,519
|
|
51
|
%
|
|||||
|
Total sources
|
$
|
64,604
|
|
100
|
%
|
$
|
60,192
|
|
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, Class T shares and Class T2 shares as of
September 30, 2019
, were approximately
$7.1 million
for common stockholders. These distributions were paid on October 1, 2019.
For the
nine months
ended
September 30, 2019
, we declared and paid distributions of approximately
$64.6 million
to Class A stockholders, Class I stockholders, Class T stockholders and Class T2 stockholders, including shares issued pursuant to the DRIP, as compared to FFO (as defined below) for the
nine months
ended
September 30, 2019
of approximately
$64.1 million
.
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
September 30, 2019
, see
Note 16—"Subsequent Events"
to the
condensed consolidated
financial statements included in this
Quarterly Report on Form 10-Q
.
42
Contractual Obligations
As of
September 30, 2019
, we had approximately
$906.5 million
of principal debt outstanding, of which
$466.5 million
related to notes payable and
$440.0 million
related to the credit facility. See
Note 9—"Notes Payable and Credit Facility"
to the
condensed consolidated
financial statements that are a part of this
Quarterly Report on Form 10-Q
for certain terms of the debt outstanding.
Our contractual obligations as of
September 30, 2019
, 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
|
$
|
1,139
|
|
$
|
76,874
|
|
$
|
25,124
|
|
$
|
116,713
|
|
$
|
219,850
|
|
||||
|
Interest payments—fixed rate debt
|
9,523
|
|
16,476
|
|
11,450
|
|
12,490
|
|
49,939
|
|
|||||||||
|
Principal payments—variable rate debt fixed through interest rate swap agreements
|
2,859
|
|
195,677
|
|
298,120
|
|
—
|
|
496,656
|
|
|||||||||
|
Interest payments—variable rate debt fixed through interest rate swap agreements
(1)
|
21,636
|
|
37,882
|
|
6,568
|
|
—
|
|
66,086
|
|
|||||||||
|
Principal payments—variable rate debt
|
—
|
|
160,000
|
|
30,000
|
|
—
|
|
190,000
|
|
|||||||||
|
Interest payments—variable rate debt
(2)
|
8,067
|
|
13,306
|
|
746
|
|
—
|
|
22,119
|
|
|||||||||
|
Capital expenditures
|
7,461
|
|
4,259
|
|
3,172
|
|
4,089
|
|
18,981
|
|
|||||||||
|
Ground lease payments
|
536
|
|
1,072
|
|
1,072
|
|
81,580
|
|
84,260
|
|
|||||||||
|
Total
|
$
|
51,221
|
|
$
|
505,546
|
|
$
|
376,252
|
|
$
|
214,872
|
|
$
|
1,147,891
|
|
||||
|
(1)
|
We used the fixed rates under our interest rate swap agreements as of
September 30, 2019
, to calculate the debt payment obligations in future periods.
|
|
(2)
|
We used the London Interbank Offered Rate, or LIBOR, plus the applicable margin under our variable rate debt agreements as of
September 30, 2019
, to calculate the debt payment obligations in future periods.
|
Off-Balance Sheet Arrangements
As of
September 30, 2019
, 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
condensed consolidated
financial statements that are a part of this
Quarterly Report on Form 10-Q
for a detailed discussion of the various related-party transactions and agreements.
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 (loss) income
as determined under GAAP.
We define FFO, consistent with NAREIT’s definition, as
net (loss) income
(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 (loss) income
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
43
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 non-cash adjustments 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 or when indicators of impairment exist. 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 identifying impairments is 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.
In 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 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.
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, like us, 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 cash flows from operations and debt financings to acquire real estate assets and real estate-related investments, and our board of directors will determine to pursue a liquidity event when it believes that the then-current market conditions are favorable; however, our board of directors does not anticipate evaluating a liquidity event (i.e., listing of our shares of common stock on a national securities exchange, a sale, the sale of all or substantially all of our assets, or another similar transaction) until five to seven years after the termination of our primary offering of our initial public offering, 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 Institute for Portfolio Alternatives, 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 (loss) income
as determined under GAAP.
44
We define MFFO, a non-GAAP measure, consistent with the IPA’s definition in its Practice Guideline: FFO further adjusted for the following items included in the determination of GAAP
net (loss) income
; acquisition fees and expenses; amounts related to straight-line rental income and amortization of above and below intangible lease assets and liabilities; accretion of discounts and amortization of premiums on debt investments; mark-to-market adjustments included in
net (loss) income
; nonrecurring gains or losses included in
net (loss) income
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 (loss) income
, 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 amortization of above and below-market leases, along with the net of right-of-use assets - operating leases and operating lease liabilities, resulting from above- and below- market ground leases, and 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 Practice 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 proceeds remaining 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, when incurred, are included in acquisition related expenses in the accompanying
condensed consolidated statements of comprehensive (loss) income
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 (loss) income
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 hence the use of such measures may be useful to investors. For example, acquisition fees and expenses are intended to be funded from 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 (loss) income
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, MFFO may be useful in assisting management and investors in
45
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 (loss) income
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 (loss) income attributable to common stockholders
, which is the most directly comparable GAAP financial measure, to FFO and MFFO for the
three and nine months
ended
September 30, 2019
and
2018
(amounts in thousands, except share data and per share amounts):
|
|
Three Months Ended
September 30, |
For the Nine Months Ended
September 30, |
|||||||||||||
|
2019
|
2018
|
2019
|
2018
|
||||||||||||
|
Net (loss) income attributable to common stockholders
|
$
|
(9,630
|
)
|
$
|
7,717
|
|
$
|
995
|
|
$
|
22,407
|
|
|||
|
Adjustments:
|
|||||||||||||||
|
Depreciation and amortization
(1)
|
16,254
|
|
14,849
|
|
50,110
|
|
42,848
|
|
|||||||
|
Impairment loss on real estate
|
13,000
|
|
—
|
|
13,000
|
|
—
|
|
|||||||
|
FFO attributable to common stockholders
|
$
|
19,624
|
|
$
|
22,566
|
|
$
|
64,105
|
|
$
|
65,255
|
|
|||
|
Adjustments:
|
|||||||||||||||
|
Amortization of intangible assets and liabilities
(2)
|
(1,285
|
)
|
(1,086
|
)
|
(3,438
|
)
|
(3,258
|
)
|
|||||||
|
Operating leases
|
141
|
|
—
|
|
365
|
|
—
|
|
|||||||
|
Straight-line rent
(3)
|
(2,784
|
)
|
(3,326
|
)
|
(8,440
|
)
|
(10,009
|
)
|
|||||||
|
Ineffectiveness of interest rate swaps
|
—
|
|
(49
|
)
|
—
|
|
28
|
|
|||||||
|
MFFO attributable to common stockholders
|
$
|
15,696
|
|
$
|
18,105
|
|
$
|
52,592
|
|
$
|
52,016
|
|
|||
|
Weighted average common shares outstanding - basic
|
137,063,509
|
|
132,467,127
|
|
136,461,135
|
|
129,614,816
|
|
|||||||
|
Weighted average common shares outstanding - diluted
|
137,063,509
|
|
132,491,755
|
|
136,484,303
|
|
129,637,967
|
|
|||||||
|
Weighted average common shares outstanding - diluted for FFO
|
137,082,259
|
|
132,491,755
|
|
136,484,303
|
|
129,637,967
|
|
|||||||
|
Net (loss) income per common share - basic
|
$
|
(0.07
|
)
|
$
|
0.06
|
|
$
|
0.01
|
|
$
|
0.17
|
|
|||
|
Net (loss) income per common share - diluted
|
$
|
(0.07
|
)
|
$
|
0.06
|
|
$
|
0.01
|
|
$
|
0.17
|
|
|||
|
FFO per common share - basic
|
$
|
0.14
|
|
$
|
0.17
|
|
$
|
0.47
|
|
$
|
0.50
|
|
|||
|
FFO per common share - diluted
|
$
|
0.14
|
|
$
|
0.17
|
|
$
|
0.47
|
|
$
|
0.50
|
|
|||
|
(1)
|
During the
three months
ended
September 30, 2019
, we wrote off one in-place lease intangible asset in the amount of approximately
$0.5 million
by accelerating the amortization of the acquired intangible asset. During the
nine months
ended
September 30, 2019
, we wrote off
two
in-place lease intangible assets in the amount of approximately
$3.2 million
by accelerating the amortization of the acquired intangible assets.
|
|
(2)
|
Under GAAP, certain intangibles are accounted for at cost and reviewed for impairment. 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. During the
three and nine months
ended
September 30, 2019
, we wrote off one below-market lease intangible liability in the amount of approximately
$0.2 million
by accelerating the amortization of the acquired intangible liability.
|
|
(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. During the
three and nine months
ended
September 30, 2019
, we wrote off approximately
$0.1 million
and
$0.6 million
of straight-line rent, respectively. By adjusting for the change in straight-line rent receivable, 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.
|
46
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
September 30, 2019
(amounts in thousands):
|
September 30, 2019
|
|||
|
Notes payable:
|
|||
|
Fixed rate notes payable
|
$
|
219,850
|
|
|
Variable rate notes payable fixed through interest rate swaps
|
246,656
|
|
|
|
Total notes payable
|
466,506
|
|
|
|
Credit facility:
|
|||
|
Variable rate revolving line of credit
|
160,000
|
|
|
|
Variable rate term loan fixed through interest rate swaps
|
250,000
|
|
|
|
Variable rate term loans
|
30,000
|
|
|
|
Total credit facility
|
440,000
|
|
|
|
Total principal debt outstanding
(1)
|
$
|
906,506
|
|
|
(1)
|
As of
September 30, 2019
, the weighted average interest rate on our total debt outstanding was
4.3%
.
|
As of
September 30, 2019
,
$190.0 million
of the
$906.5 million
total principal debt outstanding was subject to variable interest rates with a weighted average interest rate of
4.3%
per annum. As of
September 30, 2019
, an increase of 50 basis points in the market rates of interest would have resulted in an increase in interest expense of approximately
$0.9 million
per year.
As of
September 30, 2019
, we had
15
interest rate swap agreements outstanding, which mature on various dates from
December 2020
to
April 2023
, with an aggregate notional amount under the swap agreements of
$496.7 million
. As of
September 30, 2019
, the aggregate settlement value was
$(7.4) million
. The settlement value of these interest rate swap agreements is dependent upon existing market interest rates and swap spreads. As of
September 30, 2019
, an increase of 50 basis points in the market rates of interest would have resulted in an increase to the settlement value of these interest rate swaps to
$(1.4) million
. These interest rate swaps were designated as hedging instruments.
We do not have any foreign operations and thus we are not exposed to foreign currency fluctuations.
(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
47
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
September 30, 2019
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
September 30, 2019
, were effective at a reasonable assurance level.
(b)
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
September 30, 2019
, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
48
We are not aware of any material pending legal proceedings to which we are a party or to which our properties are the subject. See
Note 15—"Commitments and Contingencies"
to the
condensed consolidated
financial statements that are a part of this
Quarterly Report on Form 10-Q
.
There have been no material changes from the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the SEC on March 22, 2019, except as noted below.
Distributions paid from sources other than our cash flows from operations, including from the proceeds of our Offerings, 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
nine months
ended
September 30, 2019
, our cash flows provided by operations of approximately
$52.5 million
was a shortfall of approximately
$12.1 million
, or
18.7%
, of our distributions paid (total distributions were approximately
$64.6 million
, of which
$33.3 million
was cash and
$31.3 million
was reinvested in shares of our common stock pursuant to the DRIP) during such period and such shortfall was paid from proceeds from our DRIP Offering. For the year ended December 31, 2018, our cash flows provided by operations of approximately
$74.2 million
was a shortfall of approximately $7.0 million, or 8.6% of our distributions paid (total distributions were approximately
$81.2 million
, of which
$40.3 million
was cash and
$40.9 million
was reinvested in shares of our common stock pursuant to the DRIP) during such period and such shortfall was paid from proceeds from our DRIP Offering.
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. Funding distributions from borrowings could restrict the amount we can borrow for investments, which may affect our profitability. Funding distributions from 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. As a result, the return investors may realize on their investment may be reduced and investors who invested in us before we generated 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.
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
September 30, 2019
, we owned
64
real estate investments, located in
45
metropolitan statistical areas, or MSA, and one micropolitan statistical area,
one
of which accounted for 10.0% or more of our revenue for the
nine months
ended
September 30, 2019
. Real estate investments located in the
Atlanta-Sandy Springs-Roswell, Georgia MSA
accounted for
16.9%
of our revenue for the
nine months
ended
September 30, 2019
. 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.
As of
September 30, 2019
, we had
no
exposure to tenant concentration that accounted for 10.0% or more of revenue for the
nine months
ended
September 30, 2019
.
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.
During the
nine months
ended
September 30, 2019
, approximately
13.6%
of our total rental revenue was derived from tenants that had an investment grade credit rating from a major ratings agency,
25.9%
of our total rental revenue was derived from tenants that were rated but did not have an investment grade credit rating from a major ratings agency and
60.5%
of our total rental revenue was derived from tenants that were not rated. Approximately
16.5%
of our total rental revenue was derived
49
from non-rated tenants that 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 include but are 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.
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
September 30, 2019
, we had two tenants that experienced a deterioration in their creditworthiness.
Unregistered Sales of Equity Securities
On
September 25, 2019
, we granted an aggregate of 12,000 shares of restricted Class A common stock under our 2014 Restricted Share Plan to our four independent directors in connection with such independent directors’ re-election to our board of directors. Each independent director received 3,000 shares of restricted Class A common stock.
The shares were not registered under the Securities Act and were issued in reliance on Section 4(a)(2) of the Securities Act. There were no other sales of unregistered securities during the
three months
ended
September 30, 2019
.
Use of Public Offering Proceeds
We commenced our Initial Offering of up to $2,350,000,000 of shares of our common stock 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 November 27, 2017, we began offering up to $1,000,000,000 in shares of Class A common stock, Class I common stock, and Class T common stock in the Offering pursuant to a registration statement on Form S-11, or the Follow-On Registration Statement.
We ceased offering shares of Class T common stock in our Offering on March 14, 2018 and began offering shares of Class T2 common stock on March 15, 2018.
We ceased offering shares of common stock pursuant to our Offering on November 27, 2018.
On December 1, 2017, we commenced our DRIP Offering of up to $100,000,000 in shares of Class A common stock, Class I common stock and Class T common stock pursuant to the DRIP Registration Statement. We amended the DRIP Registration Statement to include Class A common stock, Class T common stock, Class I common stock and Class T2 common stock on December 6, 2017.
As of
September 30, 2019
, we had issued approximately
146.8 million
shares of our Class A, Class I, Class T and Class T2 common stock in our Offerings for gross proceeds of approximately
$1.4 billion
, of which we paid
$96.7 million
in selling commissions and dealer manager fees, incurred approximately
$27.5 million
in organization and offering costs and paid
50
approximately
$38.4 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.
With the net offering proceeds and associated borrowings, we acquired
$1.9 billion
in real estate investments as of
September 30, 2019
. In addition, we invested
$64.6 million
in capital improvements related to certain real estate investments.
Share Repurchase Program
On October 2, 2019, our board of directors approved the Share Repurchase Program, or the Amended SRP, for the Combined Company following the REIT Merger. The Amended SRP will apply beginning with repurchases made on the first quarter repurchase date of 2020, which is expected to be January 30, 2020.
Prior to the time that our shares are listed on a national securities exchange, which we currently do not intend to do, 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. We are not obligated to repurchase shares under our share repurchase program.
Holding Period.
Generally, 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. A stockholder or his or her estate, heir or beneficiary may present to us fewer than all of the shares owned for repurchase.
a.
Former Carter Validus Mission Critical REIT, Inc. Stockholders.
For purposes of determining whether any former Carter Validus Mission Critical REIT, Inc., or CVREIT, stockholder qualifies for participation under our share repurchase program, former CVREIT stockholders will receive full credit for the time they held CVREIT common stock prior to the consummation of our merger with CVREIT.
b.
Distribution Reinvestment Plan
. In the event that we repurchase all of one stockholder’s shares, any shares that the stockholder purchased pursuant to our DRIP will be excluded from the one-year holding requirement. In the event that a stockholder requests a repurchase of all of its shares, and such stockholder is participating in the DRIP, the stockholder will be deemed to have notified us, at the time the stockholder submits the repurchase request, that the stockholder is terminating participation in the DRIP and has elected to receive future distributions in cash. This election will continue in effect even if less than all of the stockholder’s shares are accepted for repurchase unless the stockholder notifies us that the stockholder wishes to resume participation in the DRIP.
c.
Death of a Stockholder.
Subject to the conditions and limitations described within the Amended SRP, we may repurchase shares held for less than one year upon the death of a stockholder who is a natural person, including shares held by such stockholder through an IRA or other retirement or profit-sharing plan, after receiving written notice from the estate of the stockholder or the recipient of the shares through bequest or inheritance within 18 months from the date of death. If spouses are joint registered holders of the shares, the request to repurchase the shares may be made only if both registered holders die. The waiver of the one-year holding period will not apply to a stockholder that is not a natural person, such as a trust, partnership, corporation or other similar entity.
d.
Qualifying Disability.
Subject to the conditions and limitations described within the Amended SRP, we will repurchase shares held for less than one year requested by a stockholder who is a natural person, including shares of our common stock held by such stockholder through an IRA or other retirement or profit-sharing plan, with a “Qualifying Disability” as defined within the Amended SRP, after receiving written notice from such stockholder within 18 months from the date of the qualifying disability, provided that the condition causing the qualifying disability was not pre-existing on the date that the stockholder became a stockholder. The waiver of the one-year holding period will not apply to a stockholder that is not a natural person, such as a trust, partnership, corporation, or similar entity.
e.
Involuntary Exigent Circumstance.
Our board of directors may, in its sole discretion, waive the one-year holding period requirement for stockholders who demonstrate, in the discretion of our board of directors, an involuntary exigent circumstance, such as bankruptcy.
Purchase Price.
The purchase price for shares repurchased under our share repurchase program will be 100% of the most recent estimated NAV per share 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 will adjust the estimated NAV per share of each our classes of common stock if we have made one or more special distributions to stockholders. Our board of directors will determine, in its sole discretion, which distributions, if any, constitute a special distribution.
Repurchases of Shares.
Repurchases of our shares of common stock are at our discretion and generally will be made quarterly upon written request to us by the last day of the applicable quarter. Valid repurchase requests will be honored approximately 30 days following the end of the applicable quarter, which we refer to as the “Repurchase Date.” Stockholders
51
may withdraw their repurchase request at any time up to 15 days prior to the Repurchase Date. If a repurchase request is granted, we or our agent will send the repurchase amount to each stockholder or heir, beneficiary or estate of a stockholder on or about the Repurchase Date.
Repurchase Limitations.
We will determine whether we have sufficient funds and/or shares available as soon as practicable after the end of each fiscal quarter, but in any event prior to the applicable Repurchase Date.
a.
5% Share Limitation.
During any calendar year, we will not repurchase in excess of 5.0% of the number of shares of common stock outstanding on December 31st of the previous calendar year, or the 5% Share Limitation.
b.
Quarterly Share Limitations.
We limit the number of shares repurchased each quarter pursuant to our share repurchase program as follows (subject to the DRIP Funding Limitation (as defined below)):
|
•
|
On the first quarter Repurchase Date, which generally will be January 30 of the applicable year, we will not repurchase in excess of 1.25% of the number of shares outstanding on December 31st of the previous calendar year;
|
|
•
|
On the second quarter Repurchase Date, which generally will be April 30 of the applicable year, we will not repurchase in excess of 1.25% of the number of shares outstanding on December 31st of the previous calendar year;
|
|
•
|
On the third quarter Repurchase Date, which generally will be July 30 of the applicable year, we will not repurchase in excess of 1.25% of the number of shares outstanding on December 31st of the previous calendar year; and
|
|
•
|
On the fourth quarter Repurchase Date, which generally will be October 30 of the applicable year, we will not repurchase in excess of 1.25% of the number of shares outstanding on December 31st of the previous calendar year.
|
In the event we do not repurchase 1.25% of the number of shares outstanding on December 31st of the previous calendar year in any particular quarter, we will increase the limitation on the number of shares to be repurchased in the next quarter and continue to adjust the quarterly limitations as necessary in accordance with the 5% annual limitation.
c.
DRIP Funding Limitations.
We intend to fund our share repurchase program with proceeds we received during the prior year ended December 31 from the sale of shares pursuant to the DRIP. We will limit the amount of DRIP proceeds used to fund share repurchases in each quarter to 25% of the amount of DRIP proceeds received during the previous calendar year, or the DRIP Funding Limitation; provided, however, that if we do not reach the DRIP Funding Limitation in any particular quarter, we will apply the remaining DRIP proceeds to the next quarter Repurchase Date and continue to adjust the quarterly limitations as necessary in order to use all of the available DRIP proceeds for a calendar year, if needed. We cannot guarantee that DRIP proceeds will be sufficient to accommodate all requests made each quarter. Our board of directors may, in its sole discretion, reserve other operating funds to fund the share repurchase program, but is not required to reserve such funds.
As a result of the limitations described above in (a) – (c) above, some or all of a stockholder’s shares may not be repurchased. Each quarter, we will process repurchase requests made in connection with the death or Qualifying Disability of a stockholder, or, in the discretion of the Board, an involuntary exigent circumstance, such as bankruptcy, prior to processing any other repurchase requests. If we are unable to process all eligible repurchase requests within a quarter due to the limitations described above or in the event sufficient funds are not available, 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, an 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.
If we do not repurchase all of the shares for which repurchase requests were submitted in any quarter, all outstanding repurchase requests will automatically roll over to the subsequent quarter and priority will be given to the repurchase requests in the subsequent quarter as provided above. A stockholder or his or her estate, heir or beneficiary, as applicable, may withdraw a repurchase request in whole or in part at any time up to 15 days prior to the Repurchase Date.
Deadline for Presentment.
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 by the last day of the quarter 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, which we must receive by the last day of the quarter in which the estate, heir, or beneficiary is requesting a repurchase of its shares.
52
No Encumbrances.
All shares presented for repurchase must be owned by the stockholder(s) making the presentment, or the party presenting the shares must be authorized to do so by the owner(s) of the shares. Such shares must be fully transferable and not subject to any liens or encumbrances. Upon receipt of a request for repurchase, we may conduct a Uniform Commercial Code search to ensure that no liens are held against the shares. Any costs in conducting the Uniform Commercial Code search will be borne by us.
Account Minimum.
In the event any stockholder fails to maintain a minimum balance of $2,000 of Class A shares, Class I shares, Class T shares, or Class T2 shares, we may repurchase all of the shares held by that stockholder at the NAV per share repurchase price in effect on the date we determine that the stockholder has failed to meet the minimum balance.
During the
three months
ended
September 30, 2019
, we fulfilled the following repurchase requests pursuant to our share repurchase program:
|
Period
|
Total Number of
Shares Repurchased |
Average
Price Paid per Share |
Total Number 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 |
||||||||||
|
July 2019
|
91,778
|
|
$
|
9.25
|
|
—
|
|
$
|
—
|
|
||||
|
August 2019
|
—
|
|
$
|
—
|
|
—
|
|
$
|
—
|
|
||||
|
September 2019
|
1,267
|
|
$
|
9.25
|
|
—
|
|
$
|
—
|
|
||||
|
Total
|
93,045
|
|
—
|
|
||||||||||
During the
three months
ended
September 30, 2019
, we repurchased approximately
$861,000
of Class A shares, Class I shares, Class T shares and Class T2 shares of common stock.
None.
Not applicable.
None.
53
|
Exhibit
No:
|
|
|
|
2.1
|
||
|
2.2
|
||
|
2.3
|
||
|
3.1
|
|
|
|
3.2
|
|
|
|
3.3
|
||
|
3.4
|
||
|
3.5
|
||
|
3.6
|
||
|
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
|
||
|
31.1*
|
||
|
31.2*
|
||
|
32.1**
|
||
|
32.2**
|
||
|
99.1
|
||
|
99.2
|
||
|
99.3
|
||
|
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.
|
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: November 13, 2019
|
By:
|
/s/ MICHAEL A. SETON
|
|
|
Michael A. Seton
|
|||
|
Chief Executive Officer
|
|||
|
(Principal Executive Officer)
|
|||
|
Date: November 13, 2019
|
By:
|
/s/ KAY C. NEELY
|
|
|
Kay C. Neely
|
|||
|
Chief Financial Officer
|
|||
|
(Principal Financial Officer and Principal Accounting Officer)
|
|||
TABLE OF CONTENTS
Part I. Financial InformationItem 1. Condensed Consolidated Financial StatementsNote 1 Organization and Business OperationsNote 16 "subsequent Events"Note 10 "related-party Transactions and Arrangements"Note 2 Summary Of Significant Accounting PoliciesNote 7 "other Assets, Net."Note 12 "fair Value"Note 11 "segment Reporting"Note 13 "derivative Instruments and Hedging Activities."Note 6 "leases"Note 3 Real Estate InvestmentsNote 4 Acquired Intangible Assets, NetNote 5 Acquired Intangible Liabilities, NetNote 6 LeasesNote 2 "summary Of Significant Accounting Policies,"Note 7 Other Assets, NetNote 8 Accounts Payable and Other LiabilitiesNote 9 Notes Payable and Credit FacilityNote 10 Related-party Transactions and ArrangementsNote 11 Segment ReportingNote 12 Fair ValueNote 13 "derivative Instruments and Hedging Activities"Note 13 Derivative Instruments and Hedging ActivitiesNote 2 "summary Of Significant Accounting Policies"Note 14 Accumulated Other Comprehensive Income (loss)Note 15 Commitments and ContingenciesNote 16 Subsequent EventsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsNote 9 "notes Payable and Credit Facility"Item 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1. Legal ProceedingsNote 15 "commitments and Contingencies"Item 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits