| ● | A decrease in interest rates and financing costs could increase demand for real estate and, thus, the price of real estate. An increase in demand for real estate could make it more difficult for us to acquire additional healthcare facilities at attractive prices or prevent us from purchasing additional facilities at all; and |
| ● | An increase in interest rates and financing costs could decrease the demand for real estate and, thus, the price of real estate. A decrease in demand for real estate could make it more difficult for us to dispose of our healthcare facilities at attractive prices or prevent us from disposing of our facilities at all. |
If we experience one or more of the risks described above, our business, financial condition, results of operations, our ability to make distributions to our stockholders and the trading price of our common and preferred stock could be materially adversely affected.
Illiquidity of real estate investments could significantly impede our ability to respond to adverse changes in the performance of our healthcare facilities.
Because real estate investments are relatively illiquid, our ability to promptly sell one or more of our healthcare facilities in response to changing economic, financial and investment conditions is limited. The real estate market is affected by many factors, such as general economic conditions, availability of financing, interest rates and other factors, including supply and demand, that are beyond our control. We cannot predict whether we will be able to sell any of our healthcare facilities for the price or on the terms set by us or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of any of our healthcare facilities. We may be required to expend funds to correct defects or to make improvements before a healthcare facility can be sold. We cannot assure you that we will have funds available to correct those defects or to make those improvements.
In acquiring a healthcare facility, we have in the past and may in the future agree to transfer restrictions that materially restrict us from selling that healthcare facility for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that healthcare facility. These transfer restrictions would impede our ability to sell a healthcare facility even if we deem it necessary or appropriate. These facts and any others that would impede our ability to respond to adverse changes in the performance of our healthcare facilities may have a material adverse effect on our business, financial condition, results of operations, orour ability to make distributions to our stockholders and the trading price of our common and preferred stock.
Uncertain market conditions could cause us to sell our healthcare facilities at a loss in the future.
We intend to hold our various real estate investments until we determine that a sale or other disposition appears to be advantageous to achieve our investment objectives. Our senior management team and our board of directorsWe may exercise theirour discretion as to whether and when to sell a healthcare facility, and we have no obligation to sell our facilities. We generally intend to hold our healthcare facilities for an extended period, of time, and we cannot predict with any certainty the various market conditions affecting real estate investments that will exist at any particular time in the future. Because of the uncertainty of market conditions that may affect the future disposition of our healthcare facilities, we may not be able to sell our buildings at a profit in the future or at all. We may incur prepayment penalties if we sell a healthcare facility subject to a mortgage earlier than we otherwise had planned. Additionally, we could be forced to sell healthcare facilities at inopportune times which could result in us selling the affected building at a substantial loss. Accordingly, the extent to which you will receive cash distributions and realize potential appreciation on our real estate investments will, among other things, be dependent upon fluctuating market conditions. Any inability to sell a healthcare facility could materially, adversely affect our business, financial condition, results of operations, orour ability to make distributions to our stockholders and the trading price of our common and preferred stock.
Our assets may become subject to impairment charges.
We will periodically evaluate our real estate investments and other assets for impairment indicators. The judgment regarding the existence of impairment indicators is based upon factors such as market conditions, lease re-negotiations, tenant performance and legal structure. For example, the termination of a lease by a major tenant may lead to an impairment charge. If we determine that an impairment has occurred, we would be required to make an adjustment to the net carrying value of the asset which could have a material adverse effect on our business, financial condition, results of operations and the trading price of our common and preferred stock.
Costs associated with complying with the Americans with Disabilities Act of 1990 may result in unanticipated expenses.
Under the Americans with Disabilities Act of 1990, or the ADA, all places of public accommodation are required to meet certain U.S. federal requirements related to access and use by disabled persons. A number of additional U.S. federal, state and local laws may also require modifications to our healthcare facilities, or restrict certain further renovations of the buildings, with respect to access thereto by disabled persons. Noncompliance with the ADA could result in the imposition of fines, an award of damages to private litigants and/or an order to correct any non-complying feature which could result in substantial capital expenditures. Our leases typically provide that our tenants shall maintain our healthcare facilities in compliance with such laws, however, we have not conducted a detailed audit or investigation of all of our healthcare facilities to determine such compliance, and we cannot predict the ultimate cost of compliance with the ADA or other legislation. If one or more of our healthcare facilities is not in compliance with the ADA or other related legislation, then our tenants would be required to incur additional costs to bring the facility into compliance. These costs, if substantial, could have an adverse economic effect on our tenants, which could, in turn, materially adversely affect our business, financial condition and results of operations, our ability to make distributions to our stockholders and the trading price of our common stock may be adversely affected.
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Risks Related to Our Formation and Structure
We will have no direct operations and rely on funds received from our Operating Partnership and its subsidiaries to meet our obligations.
We conduct substantially all of our operations through our Operating Partnership. We own approximately 93.63%As of December 31, 2023, we owned 92.91% of the outstanding OP Units and apartUnits. Apart from this ownership interest in our Operating Partnership, we do not have any independent operations. As a result, we rely on distributions from our Operating Partnership to pay any dividends that we might declare on our common and preferred stock. We also rely on distributions from our Operating Partnership to meet our obligations, including tax liability on taxable income allocated to us from our Operating Partnership (which might make distributions to us not equal to the tax on such allocated taxable income).obligations. Stockholders’ claims will consequently be structurally subordinated to all existing and future liabilities and obligations (whether or not for borrowed money) of our Operating Partnership and its subsidiaries. Therefore, in the event of our bankruptcy, liquidation or reorganization, claims of our stockholders will be satisfied only after all of our and our Operating Partnership’s and its subsidiaries’ liabilities and obligations have been paid in full.If we do not receive sufficientenough funds from our Operating Partnership, our ability to make distributions to our stockholders and the trading price of our common and preferred stock may be materially, adversely affected.
Subject to certain requirements under Maryland law and REIT requirements, our board of directorsthe Board has sole discretion to determine if we will pay distributions and the amount and frequency of such distributions, and past distribution amounts may not be indicative of future distribution amounts.
Any future distributions will be at the sole discretion of our board of directorsthe Board and will depend upon a number of factors, including our actual and projected results of operations, the cash flow generated by our operations, funds from operations (“FFO”), adjusted FFO AFFO, Normalized AFFO,(“AFFO”), liquidity, our operating expenses, our debt service requirements, capital expenditure requirements for the properties in our portfolio, prohibitions and other limitations under our financing arrangements, our REIT taxable income, the annual REIT distribution requirements, restrictions on making distributions under Maryland law and such other factors as our board of directorsthe Board deems relevant. During 2017, we declared distributions aggregating $0.80 and per common share. The tax treatment of 2017 dividends includes a $0.67 return of capital. We cannot assure you that our distribution policy will not change in the future or that our board of directorsthe Board will continue to declare dividends at the same rate as in 2017, especially if we are unable to reduce the amount of our distributions that are treated as returns of capital.2023.
Our use of OP Units as currency to acquire healthcare facilities could result in stockholder dilution and/or limit our ability to sell such healthcare facilities, which could have a material adverse effect on us.
We have acquired, and in the future may acquire, healthcare facilities or portfolios of healthcare facilities through tax-deferred contribution transactions in exchange for OP Units, which may result in stockholder dilution. This acquisition structure may have the effect of, among other things, reducing the amount of tax depreciation we could deduct over the tax life of the acquired healthcare facilities, and has required, and may in the future require, that we agree to protect the contributors’ ability to defer recognition of taxable gain through restrictions on our ability to dispose of the acquired healthcare facilities or the allocation of partnership debt to the contributors to maintain their tax bases. These restrictions could limit our ability to sell healthcare facilities at a time, or on terms, that would be favorable absent such restrictions which, in turn, could materially, adversely affect our business, financial condition, results of operations, orour ability to make distributions to our stockholders and the trading price of our common and preferred stock.
Our Operating Partnership may issue additional OP Units to third parties without the consent of our stockholders, which would reduce our ownership percentage in our Operating Partnership and could have a dilutive effect on the amount of distributions made to us by our Operating Partnership and, therefore, the amount of distributions we can make to our stockholders.
We own 93.63%Holders of shares of our common stock will generally not have any voting rights with respect to activities of our Operating Partnership, including issuances of additional OP Units in amounts that do not exceed 20% of our outstanding shares of common stock. As of December 31, 2023, we owned 92.91% of the outstanding OP Units. Our Operating Partnership may, in connection with our acquisition of healthcare facilities or otherwise, issue additional OP Units to third parties. Such issuances would reduce our ownership percentage in our Operating Partnership and could affect the amount of distributions made to us by our Operating Partnership and, therefore, the amount of distributions we can make to our stockholders. Holders of shares of our common stock will generally not have any voting rights with respect to activities of our Operating Partnership, including issuances of additional OP Units in amounts that do not exceed 20% of our outstanding shares of common stock.
FailureWe may be unable to maintain effective internal control over financial reporting could harm our business, results of operations and financial condition.
reporting.
Pursuant to the Sarbanes-Oxley Act of 2002, we are required to provide a report by management on internal control over financial reporting, including management’s assessment of the effectiveness of such control.controls. Because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud, effective internal controlscontrol over financial
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reporting may not prevent or detect misstatementmisstatements and can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If we fail to maintain the adequacy of our internal controls, including any failure to implement required new or improved controls as a result of changes to our business or otherwise, or if we experience difficulties in their implementation, our business, results of operations and financial condition, our ability to make distributions to our stockholders and the trading price of our common and preferred stock could be materially adversely impacted and we could fail to meet our reporting obligations.
Conflicts of interest could arise as a resultbecause of our UPREIT structure.
Conflicts of interest could arise in the future as a resultbecause of the relationships between us and our affiliates, on the one hand, and our Operating Partnership or any partner thereof, on the other. Our directors and officers have duties to us under applicable Maryland law in connection with their management of our company. At the same time, we, as the sole member of the general partner of the Operating Partnership, have fiduciary duties to our Operating Partnership and to the limited partners under Delaware law in connection with the management of our Operating Partnership. Our duties, as the sole member of the general partner, to our Operating Partnership and its limited partners may come into conflict with the duties of our directors and officers to us.
Unless otherwise provided for in the relevant partnership agreement, Delaware law generally requires a general partner of a Delaware limited partnership to adhere to fiduciary duty standards under which it owes its limited partners the highest duties of good faith, fairness and loyalty and which generally prohibits such general partner from taking any action or engaging in any transaction as to which it has a conflict of interest.
Additionally, the partnership agreement expressly limits our liability by providing that we, as the sole member of the general partner of the Operating Partnership, and our directors or officers, will not be liable or accountable in damages to our Operating Partnership, the limited partners or assignees for errors in judgment, mistakes of fact or law or for any act or omission if the general partner or such director or officer acted in good faith. In addition, our Operating Partnership is required to indemnify us, our affiliates and each of our respective officers and directors, to the fullest extent permitted by applicable law against any and all losses, claims, damages, liabilities (whether joint or several), expenses (including, without limitation, attorneys’ fees and other legal fees and expenses), judgments, fines, settlements and other amounts arising from any and all claims, demands, actions, suits or proceedings, civil, criminal, administrative or investigative, that relate to the operations of theour Operating Partnership, provided that our Operating Partnership will not indemnify any such person for (1) acts or omissions committed in bad faith or that were the result of active and deliberate dishonesty, (2) any transaction for which such person received an improper personal benefit in money, healthcare facility or services, or (3) in the case of a criminal proceeding, the person had reasonable cause to believe the act or omission was unlawful.
Our charter restricts the ownership and transfer of our outstanding shares of stock which may have the effect of delaying, deferring or preventing a transaction or change of control of our company.
In order forFor us to qualify as a REIT, no more than 50% of the value of our outstanding shares of stock may be owned, beneficially or constructively, by five or fewer individuals at any time during the last half of each taxable year other than our initial REIT taxable year. Subject to certain exceptions, our charter prohibits any stockholder from owning actually or constructively more than 9.8% in value or number of shares, whichever is more restrictive, of any class or series of our outstanding shares. The constructive ownership rules under the Internal Revenue Code of 1986, as amended (the “Code”), are complex and may cause the outstanding shares owned by a group of related individuals or entities to be deemed to be constructively owned by one individual or entity. As a result, the acquisition of less than 9.8% of our outstanding shares of any class or series by an individual or entity could cause that individual or entity to own constructively in excess of 9.8% of any class or series of our outstanding beneficial interests and to be subject to our charter’s ownership limit. Our charter also prohibits any person from owning shares of our beneficial interests that would result in our being “closely held” under Section 856(h) of the Code or otherwise cause us to fail to qualify as a REIT. Any attempt to own or transfer shares of our beneficial interest in violation of these restrictions may result in the shares being automatically transferred to a charitable trust or may be void.
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Certain provisions of Maryland law could inhibit changes of control, which may discourage third parties from conducting a tender offer or seeking other change of control transactions that could involve a premium price for shares of our common stock or that our stockholders otherwise believe to be in their best interests.
Certain provisions of the Maryland General Corporation Law, or MGCL, may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change of control under circumstances that otherwise could provide our common stockholders with the opportunity to realize a premium over the then-prevailing market price of such shares, including:
| ● | “business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our shares of common stock or an affiliate thereof or an affiliate or associate of ours who was the beneficial owner, directly or indirectly, of 10% or more of the voting power of our shares of common stock at any time within the two-year period immediately prior to the date in question) for five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter imposes certain fair price and/or supermajority and stockholder voting requirements on these combinations; and |
| ● | “control share” provisions that provide that holders of “control shares” of our company (defined as shares that, when aggregated with other shares controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of issued and outstanding “control shares”) have no voting rights with respect to their control shares, except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares. |
By resolution of our board of directors,the Board, we have opted out of the business combination provisions of the MGCL and provide that any business combination between us and any other person is exempt from the business combination provisions of the MGCL, provided that the business combination is first approved by our board of directorsthe Board (including a majority of directors who are not affiliates or associates of such persons). In addition, pursuant to a provision in our bylaws, we have opted out of the control share provisions of the MGCL. However, our board of directorsthe Board may by resolution elect to opt in tointo the business combination provisions of the MGCL and we may, by amendment to our bylaws, opt in tointo the control share provisions of the MGCL in the future.
Certain provisions of the MGCL permit our board of directors,the Board, without stockholder approval and regardless of what is currently provided in our charter or bylaws, to implement certain corporate governance provisions, some of which (for example, a classified board) are not currently applicable to us. If implemented, these provisions may have the effect of limiting or precluding a third party from making an unsolicited acquisition proposal for us or of delaying, deferring, or preventing a change in control of us under circumstances that otherwise could provide our common stockholders with the opportunity to realize a premium over the then current market price. Our charter contains a provision whereby we have elected to be subject to the provisions of Title 3, Subtitle 8 of the MGCL relating to the filling of vacancies on our board of directors.the Board.
We could increase the number of authorized shares of common and preferred stock, classify and reclassify unissued shares and issue shares without stockholder approval.
Our board of directors,The Board, without stockholder approval, has the power under our charter to amend our charter to increase or decrease the aggregate number of shares or the number of shares of any class or series that we are authorized to issue, to authorize us to issue authorized but unissued shares of our common stock or preferred stock. In addition, under our charter, our board of directorsthe Board has the power to classify or reclassify any unissued common or preferred stock into one or more classes or series of shares and set the preference, conversion, or other rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications or terms or conditions of redemption for such newly classified or reclassified shares. As a result, we may issue series or classes of common or preferred stock with preferences, dividends, powers and rights, voting or otherwise, that are senior to, or otherwise conflict with, the rights of holders of our common or preferred stock. Although our board of directorsthe Board has no such intention at the present time, it could establish a class or series of preferred stock that could, depending on the terms of such series, delay, defer or prevent a transaction or a change of control that might involve a premium price for shares of our common stock or that our stockholders otherwise believe to be in their best interests.
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We may change our business, investment, and financing strategies without stockholder approval.
We may change our business, investment, and financing strategies without a vote of, or notice to, our stockholders, which could result in our making investments and engaging in business activities that are different from, and possibly riskier than, the investments and businesses described in this annual report. In particular, a change in our investment strategy, including the manner in which we allocate our resources across our portfolio or the types of assets in which we seek to invest, may increase our exposure to real estate market fluctuations. In addition, we may in the future increase the use of leverage at times and in amounts that we, in our discretion, deem prudent, and such decision would not be subject to stockholder approval. Furthermore, our board of directorsthe Board may determine that healthcare facilities do not offer the potential for attractive risk-adjusted returns for an investment strategy. Changes to our strategies with regards to the foregoing could adversely affect our business, financial condition and results of operations, our ability to make distributions to our stockholders and the trading price of our common and preferred stock.
Our rights and the rights of our stockholders to take action against our directors and officers are limited, which could limit your recourse in the event that we take certain actions which are not in your best interests.
Under Maryland law, generally, directors and officers are required to perform their duties in good faith, in a manner that they reasonably believe to be in our best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. Under Maryland law, directors and officers are presumed to have acted with this standard of care. Maryland law permits a Maryland corporation to include in its charter a provision limiting the liability of its directors and officers to the corporation and its stockholders for money damages except for liability resulting from (a) actual receipt of an improper benefit or profit in money, property, or services or (b) active and deliberate dishonesty established by a final judgment and which is material to the cause of action. Our charter contains such a provision which eliminates directors’ and officers’ liability to the maximum extent permitted by Maryland law.
Our charter authorizes us to indemnify our present and former directors and officers for actions taken by them in those and other capacities to the maximum extent permitted by Maryland law. Our bylaws obligate us to indemnify each present and former director or officer, to the maximum extent permitted by Maryland law, in the defense of any proceeding to which he or she is made, or threatened to be made, a party by reason of his or her service to us. In addition, we may be obligated to advance the defense costs incurred by our directors and officers. We have entered into indemnification agreements with our directors and officers granting them express indemnification rights. As a result, we and our stockholders may have more limited rights against our directors and officers than might otherwise exist absent the current provisions in our charter, bylaws and indemnification agreements or that might exist with other companies.
Our charter contains provisions that make removal of our directors difficult, which could make it difficult for our stockholders to effect changes to our management and may prevent a change in control of our company that is in the best interests of our stockholders. Our charter provides that a director may only be removed for cause upon the affirmative vote of holders of two-thirds of all the votes entitled to be cast generally in the election of directors. Vacancies may be filled only by a majority of the remaining directors in office, even if less than a quorum,.quorum. These requirements make it more difficult to change our management by removing and replacing directors and may prevent a change in control of our company that is in the best interests of our stockholders.
Certain provisions in the partnership agreement of our Operating Partnership may delay or prevent unsolicited acquisitions of us.
Provisions in the partnership agreement of our Operating Partnership may delay, or make more difficult, unsolicited acquisitions of us or changes of our control. These provisions could discourage third parties from making proposals involving an unsolicited acquisition of us or change of our control, although some stockholders might consider such proposals, if made, desirable. These provisions include, among others:
| ● | Redemption rights; |
| ● | A requirement that we may not be removed as the general partner of our Operating Partnership without our consent; |
| ● | Transfer restrictions on OP Units; |
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| ● | Our ability, as the sole member of the general partner of our Operating Partnership, in some cases, to amend the partnership agreement and to cause the Operating Partnership to issue units with terms that could delay, defer or prevent a merger or other change of control of us or our Operating Partnership without the consent of the limited partners; and |
| ● | The right of the limited partners to consent to direct or indirect transfers of the general partnership interest, including as a result of a merger or a sale of all or substantially all of our assets, in the event that such transfer requires approval by our common stockholders. |
Our charter and bylaws, Maryland law and the partnership agreement of our Operating Partnership also contain other provisions that may delay, defer or prevent a transaction or a change of control that might involve a premium price for our shares of common stock or that our stockholders otherwise believe to be in their best interest.
We may be unable to obtain or retain key personnel or continue to remain appropriately staffed.
Risks RelatedOur success depends to Our Relationship with our Advisor and Other Conflicts of Interest
We have no employees and are entirely dependenta significant degree upon our Advisor for all the services we require, and we cannot assure you that our Advisor will allocate the resources necessary to meet our business objectives or adequately perform its responsibilities under the management agreement.
Because we are externally managed, we do not retain our own personnel, but instead depend upon our Advisor, and its affiliates for virtually all of our services. Our Advisor selects and manages the acquisition of our healthcare facilities; administers the collection of rents, monitors lease compliance and deals with vacancies and re-letting of our healthcare facilities; coordinates disposition of our healthcare facilities; provides financial and regulatory reporting services; communicates with our stockholders, pays distributions and provide transfer agent services; and provides all of our other administrative services. Accordingly, our success is largely dependent upon the expertise and services of the executive officers and other key personnelpersonnel. We rely on the services of Jeffrey Busch, our AdvisorChief Executive Officer and its affiliates.
Our ability to achieveChairman of the Board; Robert Kiernan, our objectives depends onChief Financial Officer; Alfonzo Leon, our Advisor’s ability to identifyChief Investment Officer; Danica Holley, our Chief Operating Officer; and acquire healthcare facilities that meetJamie Barber, our investment criteria. Accomplishing our objectives is largely a function of our Advisor’s structuring of our investment process, our access to financing on acceptable termsSecretary and general market conditions. Our stockholders will not have input into our investment decisions. All of these factors increase the uncertainty, and thus the risk, of investing in our common stock. The senior management team of our Advisor has substantial responsibilities under the management agreement. In order to implement certain strategies, our Advisor may need to hire, train, supervise and manage new employees successfully. Any failureGeneral Counsel, to manage our future growth effectivelyoperations. Additionally, we rely on several other key personnel to manage our day-to-day operations, including accounting and finance staff, acquisition and due diligence personnel, asset managers and facilities personnel. We cannot guarantee that all, or any one of these key personnel, will remain affiliated with us, especially given the current tightness of the U.S. labor market, nor do we maintain key person life insurance on any person. Our failure to retain key employees and retain highly skilled managerial and operational personnel, could have a material adverse effect on our business, financial condition, and results of operations, our ability to make distributions to our stockholders and the trading price of our common and preferred stock.
Our Advisor may be unable to obtain or retain key personnel.
Our success depends to a significant degree upon the executive officers and other key personnel of our Advisor. In particular, we rely on the services of Jeffrey Busch, our Chief Executive Officer and Chairman of our board of directors; Robert Kiernan, our Chief Financial Officer; Alfonzo Leon, our Chief Investment Officer; Danica Holley, our Chief Operating Officer; Allen Webb, our Senior Vice President, SEC Reporting and Technical Accounting and Jamie A. Barber, our Secretary and General Counsel, to manage our operations. We cannot guarantee that all, or any particular one of these key personnel, will remain affiliated with us or our Advisor. We do not separately maintain key person life insurance on any person. Failure of our Advisor to retain key employees and retain highly skilled managerial, operational and marketing personnel could have a material adverse effect on our business, financial condition, results of operations, or ability to make distributions to our stockholders and the trading price of our common and preferred stock.
The base management fees payable to our Advisor are payable regardless of the performance of our portfolio, which may reduce our Advisor’s incentive to devote the time and effort to seeking profitable opportunities for our portfolio.
We pay our Advisor base management fees, which may be substantial, based on our stockholders’ equity (as defined in the management agreement) regardless of the performance of our portfolio. The base management fee takes into account the net issuance proceeds of both common and preferred stock offerings, as well as the issuance of OP Units. Our advisor’s entitlement to non-performance-based compensation might reduce its incentive to devote the time and effort of its professionals to seeking profitable opportunities for our portfolio, which could result in a lower performance of our portfolio and materially adversely affect our business, financial condition and results of operations, our ability to make distributions to our stockholders and the trading price of our common stock.
The incentive fee payable to our Advisor under the management agreement may cause our Advisor to select investments in more risky assets to increase its incentive compensation.
Our Advisor is entitled to receive incentive compensation based upon our achievement of targeted levels of AFFO (as defined in the management agreement). In evaluating investments and other management strategies, the opportunity to earn incentive compensation based on AFFO may lead our Advisor to place undue emphasis on the maximization of AFFO at the expense of other criteria, such as preservation of capital, in order to achieve higher incentive compensation. Investments with higher yield potential are generally riskier or more speculative. This could result in increased risk to the value of our investment portfolio, which, in turn, could materially, adversely affect our business, financial condition and results of operations, our ability to make distributions to our stockholders and the trading price of our common stock.
There are conflicts of interest in our relationships with our Advisor, which could result in outcomes that are not in the best interests of our stockholders.
We are subject to conflicts of interest arising out of our relationships with our Advisor. Pursuant to the management agreement, our Advisor is obligated to supply us with our management team. However, our Advisor is not obligated to dedicate any specific personnel exclusively to us, nor are the Advisor’s personnel obligated to dedicate any specific portion of their time to the management of our business. Additionally, our officers are employees of our Advisor. As a result, our Advisor, officers and directors may have conflicts between their duties to us and their duties to, and interests in, our Advisor.
In addition to our existing portfolio, we may acquire or sell healthcare facilities in which our Advisor or its affiliates have or may have an interest. Similarly, our Advisor or its affiliates may acquire or sell healthcare facilities in which we have or may have an interest. Although such acquisitions or dispositions may present conflicts of interest, we nonetheless may pursue and consummate such transactions. Additionally, we may engage in transactions directly with our Advisor or its affiliates, including the purchase and sale of all or a portion of a portfolio asset.
In deciding whether to issue additional debt or equity securities, we will rely in part on recommendations made by our advisor. Our Advisor earns management fees that are based on the total amount of our equity capital. Our advisor may have an incentive to recommend that we issue additional debt or equity securities or OP Units. Future offerings of debt securities, which would rank senior to our common stock upon liquidation, and future offerings of equity securities which would dilute the common stock holdings of our existing stockholders and may be senior to our common stock for the purposes of dividend and liquidating distributions, may adversely affect the market price of our common stock.
The officers of our Advisor and its affiliates will devote as much time to us as our Advisor deems appropriate, however, these officers may have conflicts in allocating their time and services between us and our Advisor and our Advisor’s other fund. During turbulent conditions in the real estate industries or other times when we will need focused support and assistance from our Advisor, may require greater focus and attention, placing our Advisor’s resources in high demand. In such situations, we may not receive the necessary support and assistance we require or would otherwise receive if we were internally managed.
The management agreement with our Advisor was not negotiated on an arm’s-length basis, may not be as favorable to us as if it had been negotiated with an unaffiliated third party and may be costly and difficult to terminate.
The management agreement with our Advisor was negotiated between related parties, and its terms, including fees payable, may not be as favorable to us as if it had been negotiated with an unaffiliated third party.
Termination of our management agreement without cause is subject to several conditions which may make such a termination difficult and costly. Termination of the management agreement with our Advisor may require us to pay our Advisor a substantial termination fee, which will increase the effective cost to us of terminating the management agreement, thereby making it more difficult for us to terminate our Advisor without cause.
If our Advisor ceases to be our Advisor pursuant to the management agreement, counterparties to our agreements may cease doing business with us.
If our Advisor ceases to be our Advisor, it could constitute an event of default or early termination event under our financing agreements, upon which our counterparties would have the right to terminate their agreements with us. If our Advisor ceases to be our Advisor for any reason, including upon the non-renewal of our management agreement, our business, financial condition and results of operations and our ability to make distributions to our stockholders and the trading price of our common and preferred stock may be materially adversely affected.
Risks Related to Our Qualification and Operation as a REIT
Failure to remain qualified as a REIT would cause us to be taxed as a regular corporation, which would substantially reduce funds available for distributions to our stockholders.
If we fail to qualify as a REIT in any taxable year, we will face serious tax consequences that will substantially reduce the funds available for distributions to our stockholders because:
| ● | We would not be allowed a deduction for dividends paid to stockholders in computing our taxable income and would be subject to U.S. federal income tax at regular corporate rates; |
| ● | We could be subject to increased state and local taxes; and |
| ● | Unless we are entitled to relief under certain U.S. federal income tax laws, we could not re-elect REIT status until the fifth calendar year after the year in which we failed to qualify as a REIT. |
In addition, if we fail to qualify as a REIT for any taxable year, we will no longer be required to make distributions. As a result of all these factors, our failure to qualifymaintain our qualification as a REIT could impair our ability to expand our business and raise capital, and it wouldcould materially, adversely affect our business, financial condition, results of operations, orour ability to make distributions to our stockholders and the trading price of our common and preferred stock.
Even if we continue to qualify as a REIT, we may face other tax liabilities that could reduce our cash flows and negatively impact our results of operations and financial condition.
Even if we continue to qualify for taxation as a REIT, we may be subject to certain U.S. federal, state and local taxes on our income and assets, including taxes on any undistributed income, taxtaxes on income from some activities conducted as a resultbecause of a foreclosure, and state or local income, property, and transfer taxes. In addition, anyour taxable REIT subsidiary or TRS, that we may form in the future(“TRS”) will be subject to regular corporate U.S. federal, state, and local taxes. In addition, if aour TRS borrows funds either from us or a third party, it may be unable to deduct all or a portion of the interest paid, resulting in a higher corporate-level tax liability. Specifically, recently enacted tax reform legislationthe Code imposes a disallowance of deductions for business interest expense (even if paid to third parties) in excess of the sum of a taxpayer’s business
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interest income and 30% of the adjusted taxable income of the business, which is its taxable income computed without regard to business interest income or expense, net operating losses or the pass-through income deduction (and for taxable years before 2022, excludes depreciation and amortization).deduction. The TRS rules also impose a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis. Any of these taxes would decrease cash available for distributions to our stockholders, which, in turn, could materially adversely affect our business, financial condition, results of operations, orour ability to make distributions to our stockholders and the trading price of our common and preferred stock.
Failure to make required distributions would subject us to U.S. federal corporate income tax.
In order to qualifyTo maintain our qualification as a REIT, we generally are required to distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain, each year to our stockholders. To the extent that we satisfy this distribution requirement but distribute less than 100% of our REIT taxable income, we will be subject to U.S. federal corporate income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified under the Code. Any of these taxes would decrease cash available for distributions to our stockholders which, in turn, could materially adversely affect our business, financial condition, results of operations, orour ability to make distributions to our stockholders and the trading price of our common and preferred stock.
Recharacterization of sale-leaseback transactions may cause us to lose our REIT status.
We have engaged, and expect to engage in the future, in transactions in which we purchase healthcare facilities and lease them back to the sellers of such healthcare facilities. Although we have structured, and intend to continue to structure, any such sale-leaseback transaction so that the lease will be characterized as a “true lease” for U.S. federal income tax purposes, thereby allowing us to be treated as the owner of the healthcare facility for U.S. federal income tax purposes, we cannot assure you that the IRSInternal Revenue Service (the “IRS”) will not challenge such characterization. If any sale-leaseback transaction is challenged as a partnership for U.S. federal income tax purposes, all of the payments that we receive from the tenant may not be treated as qualifying income for the 75% or 95% gross income tests required for REIT qualification and we may fail to qualifymaintain our qualification as a REIT as a result. If any sale-leaseback transaction is challenged as a financing transaction or loan for U.S. federal income tax purposes, we would not be treated as the owner of the applicable healthcare facility and our deductions for depreciation and cost recovery relating to such healthcare facility would be disallowed. As a result, the amount of our REIT taxable income could be recalculated, which might cause us to fail to meet the distribution requirement required for REIT qualification. Although we may be able to cure such failure by making a distribution in a subsequent taxable year and paying an interest change,charge, no assurance can be provided that we will be able to make the required distribution or pay the required interest charge. If we lose our REIT status, our business, financial condition, results of operations, ability to make distributions to our stockholders and the trading price of our common and preferred stock could be materially adversely affected.
Complying with REIT requirements may cause us to forego otherwise attractive opportunities or liquidate otherwise attractive investments.
To qualifymaintain our qualification as a REIT for U.S. federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our shares of stock. In order toTo meet these tests, we may be required to forego investments we might otherwise make. Thus, compliance with the REIT requirements may hinder our performance.
In particular, weWe must ensure that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified real estate assets. The remainder of our investment in securities (other than government securities, securities of TRSs and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities, securities of TRSs and qualified real estate assets) can consist of the securities of any one issuer, no more than 20% of the value of our total assets can be represented by the securities of one or more TRSs, and no more than 25% of our assets can be represented by debt of “publicly offered”offered REITs” (i.e., REITs that are required to file annual and periodic reports with the SEC under the Exchange Act) that is not secured by real property or interests in real property. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate otherwise attractive investments. These actions could materially adversely affect our
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business, financial condition, results of operations, orour ability to make distributions to our stockholders and the trading price of our common and preferred stock.
Certain taxes may limit our ability to dispose of our healthcare facilities.
A REIT’s net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, held primarily for sale to customers in the ordinary course of business. We may be subject to the prohibited transaction tax equal to 100% of net gain upon a disposition of real property. Although a safe harbor to the characterization of the sale of real property by a REIT as a prohibited transaction is available, we cannot assure you that we can comply with the safe harbor or that we will avoid owning property that may be characterized as held primarily for sale to customers in the ordinary course of business. Consequently, we may choose not to engage in certain sales of our healthcare facilities or may conduct such sales through anya TRS, that we may form, which would be subject to U.S. federal and state income taxation.
In addition, in the case of assets we owned as of January 1, 2016 (the start of our first REIT taxable year), we also will be subject to U.S. federal income tax at the highest regular corporate tax rate (currently 21%) on all or a portion of the gain recognized from a taxable disposition of any such asset occurring within the five-year period following January 1, 2016. The amount of the gain subject to tax would not exceed the difference between the fair market value of the asset sold as of January 1, 2016 and our adjusted tax basis in the asset on that date. Gain from a sale of such an asset occurring after the end of that five-year period will not be subject to this tax. We estimate that the aggregate amount of built-in gain in the assets we held at the start of our first REIT taxable year will not be significant. However, we are under no obligation to retain these assets to avoid this tax.
We may pay taxable dividends in our common stock and cash, in which case stockholders may sell shares of our common stock to pay tax on such dividends, placing downward pressure on the market price of our common stock.
We may satisfy the 90% distribution test with taxable distributions of our common stock. On August 11, 2017, theThe IRS has issued Revenue Procedure 2017-45 authorizing elective cash/stock dividends to be made by publicly offered REITs (e.g., REITs that are required to file annual and periodic reports with the SEC under the Exchange Act).REITs. Pursuant to Revenue Procedure 2017-45, effective for distributions declared on or after August 11, 2017, the IRS will treat the distribution of stock pursuant to an elective cash/stock dividend as a distribution of property under Section 301 of the Code (e.g.(i.e., a dividend), as long as at least 20% of the total dividend is available in cash and certain other parameters detailed in the Revenue Procedure are satisfied.
Although we have no current intention of paying dividends in our common stock, if we mademake a taxable dividend payable in cash and common stock, taxable stockholders receiving such dividends will be required to include the full amount of the dividend as income to the extent of our current and accumulated earnings and profits, as determined for U.S. federal income tax purposes. As a result, stockholders may be required to pay income tax with respect to such dividends in excess of the cash dividends received. If a U.S. stockholder sells the common stock that it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our common stock at the time of the sale. Furthermore, with respect to certain non-U.S. stockholders, we may be required to withhold U.S. federal income tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in common stock. If we mademake a taxable dividend payable in cash and our common stock and a significant number of our stockholders determine to sell shares of our common stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our common stock.
The ability of our board of directorsthe Board to revoke our REIT qualification without stockholder approval may cause adverse consequences to our stockholders.
Our charter provides that our board of directorsthe Board may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines that it is no longer in our best interest to continue to qualify as a REIT. If we cease to qualify as a REIT, we would become subject to U.S. federal income tax on our taxable income and would no longer be required to distribute most of our taxable income to our stockholders, which could materially adversely affect our ability to make distributions to our stockholders and the trading price of our common and preferred stock.
AnyOur ownership of aour TRS we may form in the future will beis subject to limitations and our transactions with aour TRS will cause us to be subject to a 100% penalty tax on certain income or deductions if those transactions are not conducted on arm’s-length terms.
Overall, no more than 20% of the value of a REIT’s assets may consist of stock or securities of one or more TRS. In addition,TRSs. Several provisions of the Code limitsregarding the deductibility of interest paid or accrued byarrangements between a REIT and its TRSs ensure that a TRS to its parent REIT to assure that the TRS iswill be subject to an appropriate level of corporateU.S. federal income taxation. TheFor example, the Code also imposes a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis. In addition, any income earned by a TRS that is attributable to services provided to its parent REIT, or on the REIT’s behalf to any of its tenants, that is less than the amounts that would have been charged based upon arm’s-length negotiations, will also be subject to a 100% excise tax. We will monitor the value of our respective investmentsinvestment in our TRS and any other TRS that we may form for the purpose of ensuring compliance with TRS ownership limitations and will structure our transactions with any such TRS on terms that we believe are arm’s length to avoid incurring the 100% excise taxtaxes described above. There can be no assurance, however, that we will be able to comply with the 20% limitation or to avoid application of the 100% excise tax.
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taxes. If we are subject to theeither 100% excise tax, our business, financial condition, results of operations, our ability to make distributions to our stockholders and the trading price of our common and preferred stock could be materially adversely affected.
The formation of a TRS lessee would increase our overall tax liability.
We may, in the future, form one or more TRS lessees to lease “qualified health care properties” from us. Any TRS lessee we may form will be subject to U.S. federal and state income tax on its taxable income, which will consist of the revenues from the qualified healthcare facilities leased by the TRS lessee, net of the operating expenses for such healthcare facilities and rent payments to us. In addition, if a TRS borrows funds either from us or a third party, it may be unable to deduct all or a portion of the interest paid, resulting in a higher corporate-level tax liability. Specifically, recently enacted tax reform legislationthe Code imposes a disallowance of deductions for business interest expense (even if paid to third parties) in excess of the sum of a taxpayer’s business interest income and 30% of the adjusted taxable income of the business, which is its taxable income computed without regard to business interest income or expense, net operating losses or the pass-through income deduction (and for taxable years before 2022, excludes depreciation and amortization).deduction. Accordingly, although our ownership of a TRS lessee would allow us to participate in the operating income from our healthcare facilities leased to the TRS lessee on an after-tax basis in addition to receiving rent, that operating income would be fully subject to U.S. federal and state income tax, which could materially adversely affect our business, financial conditions, results of operations, ability to make distributions to our stockholders and the trading price of our common and preferred stock.
If leases of our healthcare facilities are not respected as true leases for U.S. federal income tax purposes, we would fail to qualify as a REIT and would be subject to higher taxes and have less cash available for distribution to our stockholders.
To qualifymaintain our qualification as a REIT, we must satisfy two gross income tests, under which specified percentages of our gross income must be derived from certain sources, such as “rents from real property.” Rents paid to our Operating Partnership by third-party lessees and any TRS lessee that we may form in the future pursuant to the leases of our healthcare facilities will constitute substantially all of our gross income. In order forFor such rent to qualify as “rents from real property” for purposes of the gross income tests, the leases must be respected as true leases for U.S. federal income tax purposes and not be treated as service contracts, joint ventures or some other type of arrangement. If our leases are not respected as true leases for U.S. federal income tax purposes, we would fail to qualify as a REIT, which, in turn, could materially adversely affect our business, financial conditions, results of operations, ability to make distributions to our stockholders and the trading price of our common and preferred stock.
If a TRS lessee failed to qualify as a TRS or the facility operators engaged by a TRS lessee did not qualify as “eligible independent contractors,” we would fail to qualify as a REIT and would be subject to higher taxes and have less cash available for distribution to our stockholders.
Rent paid by a lessee that is a “related party tenant” of ours will not be qualifying income for purposes of the two gross income tests applicable to REITs. We may, in the future, lease certain of our healthcare facilities that qualify as “qualified health care properties” to a TRS lessee. So long as that TRS lessee qualifies as a TRS, it will not be treated as a “related party tenant” with respect to our healthcare facilities that are managed by an independent facility operator that qualifies as an “eligible independent contractor.” We would seek to structure any future arrangements with a TRS lessee such that the TRS lessee would qualify to be treated as a TRS for U.S. federal income tax purposes, but there can be no assurance that the IRS would not challenge the status of a TRS for U.S. federal income tax purposes or that a court would not sustain such a challenge. If the IRS were successful in disqualifying a TRS lessee from treatment as a TRS, it is possible that we would fail to meet the asset tests applicable to REITs and a significant portion of our income would fail to qualify for the gross income tests. If we failed to meet either the asset or gross income tests, we would likely lose our REIT qualification for U.S. federal income tax purposes, which, in turn, could materially adversely affect our business, financial condition, results of operations, ability to make distributions to our stockholders and the trading price of our common and preferred stock.
Additionally, if the facility operators engaged by a TRS lessee do not qualify as “eligible independent contractors,” we would fail to qualify as a REIT. Each of the facility operators that would enter into a management contract with any TRS lessee must qualify as an “eligible independent contractor” under the REIT rules in order for the rent paid to us by such a TRS lessee to be qualifying income for purposes of the REIT gross income tests. Among other requirements, in order to qualify as an eligible“eligible independent contractor,” a facility operator must not own, directly or indirectly, more than 35% of our outstanding shares and no person or group of persons can own more than 35% of our outstanding shares and the ownership interests of the facility operator, taking into account certain ownership attribution rules. The ownership attribution rules that apply for purposes of these 35% thresholds are complex. Although we would monitor ownership of our shares of common stock by any facility operators and their owners, there can be no assurance that these ownership levels will not be exceeded.
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You may be restricted from acquiring or transferring certain amounts of our common stock.
The stock ownership restrictions offor REITs in the Code for REITs and the 9.8% share ownership limit in our charter may inhibit market activity in our capital stock and restrict our business combination opportunities.
In order to qualifymaintain our qualification as a REIT for each taxable year, five or fewer individuals, as defined in the Code, may not own, beneficially or constructively, more than 50% in value of our issued and outstanding shares of capital stock at any time during the last half of a taxable year. Attribution rules in the Code determine if any individual or entity beneficially or constructively owns our shares of capital stock under this requirement. Additionally, at least 100 persons must beneficially own our shares of capital stock during at least 335 days of a taxable year for each taxable year. To help insureensure that we meet these tests, our charter restricts the acquisition and ownership of shares of our capital stock.
Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. Unless exempted by our board of directors,the Board, our charter prohibits any person from beneficially or constructively owning more than 9.8% in value or number of shares, whichever is more restrictive, of the outstanding shares of any class or series of our shares of capital stock. Our board of directorsThe Board may not grant an exemption from this restriction to any proposed transferee whose ownership in excess of 9.8% of the value of our outstanding shares would result in our failing to qualify as a REIT.
Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.
The maximum U.S. federal income tax rate applicable to “qualified dividend income” payable to U.S. stockholders that are taxed at individual rates is 20% (plus the 3.8% surtax on net investment income, if applicable). Dividends payable by REITs, however, generally are not eligible for the reduced rates on qualified dividend income. Rather, under the recently-enacted TCJA,ordinary REIT dividends constitute “qualified business income” and thus a 20% deduction is available to individual taxpayers with respect to such dividends, resulting in a 29.6% maximum U.S. federal income tax rate (plus the 3.8% surtax on net investment income, if applicable) for individual U.S. stockholders. Additionally, withoutTo qualify for this deduction, the stockholder receiving such dividends must hold the dividend-paying REIT stock for at least 46 days (taking into account certain special holding period rules) of the 91-day period beginning 45 days before the stock became ex-dividend and cannot be under an obligation to make related payments with respect to a position in substantially similar or related property. Without further legislative action, the 20% deduction applicable to ordinary REIT dividends will expire on January 1, 2026. The more favorable rates applicable to regular corporate qualified dividends could cause investors who are taxed at individual rates to perceive investments in REITs to be relatively less attractive than investments in the stocksstock of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including our common and preferred stock.
We may be subject to adverse legislative or regulatory tax changes.
At any time, the U.S. federal income tax laws or regulations governing REITs, or the administrative interpretations of those laws or regulations, may be amended. We cannot predict when or if any new U.S. federal income tax law, regulation or administrative interpretation, or any amendment to any existing U.S. federal income tax law, regulation, or administrative interpretation, will be adopted, promulgated, or become effective and any such law, regulation, or interpretation may take effect retroactively. We and our stockholders could be adversely affected by any such change in the U.S. federal income tax laws, regulations, or administrative interpretations which, in turn, could materially adversely affect our business, financial conditions, results of operation, ability to make distributions to our stockholders and the trading price of our common and preferred stock.
The recently-enacted TCJA makes significant changes to the U.S. federal income tax rules for taxation of individuals and corporations. In the case of individuals, the tax brackets have been adjusted, the top federal income rate has been reduced to 37%, special rules reduce taxation of certain income earned through pass-through entities and reduce the top effective rate applicable to ordinary dividends from REITs to 29.6% (through a 20% deduction for ordinary REIT dividends received) and various deductions have been eliminated or limited, including limiting the deduction for state and local taxes to $10,000 per year. Most of the changes applicable to individuals are temporary and apply only to taxable years beginning after December 31, 2017 and before January 1, 2026. The top corporate income tax rate has been reduced to 21%. There are only minor changes to the REIT rules (other than the 20% deduction applicable to individuals for ordinary REIT dividends received). The TCJA makes numerous other large and small changes to the tax rules that do not affect REITs directly but may affect our stockholders and may indirectly affect us.
If our Operating Partnership failed to qualify as a partnership for U.S. federal income tax purposes, we would cease to qualify as a REIT and suffer other adverse consequences.
We believe that our Operating Partnership will be treated as a partnership for U.S. federal income tax purposes. As a partnership, our Operating Partnership will not be subject to U.S. federal income tax on its income. Instead, each of its partners, including us, will be allocated, and may be required to pay tax with respect to, its share of our Operating Partnership’s income. We cannot assure you, however, that the IRS will not challenge the status of our Operating Partnership or any other subsidiary partnership in which we own an interest as a partnership for U.S. federal income tax purposes, or that a court would not sustain such a challenge. If the IRS were successful in treating our Operating Partnership or any such other subsidiary partnership as an entity taxable as a corporation for U.S. federal income tax purposes, we would fail to meet the gross income tests and certain of the asset tests applicable to REITs and, accordingly, we would likely cease to qualify as a REIT. Also, the failure of our Operating Partnership or any subsidiary partnershipspartnership to qualify as a partnership for U.S. federal income tax purposes could cause it to become subject to U.S. federal and state corporate income
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tax, which, in turn, could materially adversely affect our business, financial condition, results of operations, ability to make distributions to our stockholders and the trading price of our common and preferred stock.
Tax protection agreements may limit our ability to sell or otherwise dispose of certain properties and may require our Operating Partnership to maintain certain debt levels that otherwise would not be required to operate our business.
In connection with contributions of properties to our Operating Partnership, our Operating Partnership has entered and may in the future enter into tax protection agreements under which it agrees to minimize the tax consequences to the contributing partners resulting from the sale or other disposition of the contributed properties. Tax protection agreements may make it economically prohibitive to sell any properties that are subject to such agreements even though it may otherwise be in our stockholders’ best interests to do so. In addition, we may be required to maintain a minimum level of indebtedness throughout the term of any tax protection agreement regardless of whether such debt levels are otherwise required to operate our business. Nevertheless, we have entered and may in the future enter into tax protection agreements to assist contributors of properties to our Operating Partnership in deferring the recognition of taxable gain because of and after any such contribution.
General Risk Factors
We are subject to risks related to corporate social responsibility.
Our business faces public scrutiny related to ESG activities. We risk damage to our reputation if we fail to act responsibly in a number of areas, such as diversity and inclusion, environmental stewardship, support for local communities, corporate governance and transparency and considering ESG factors in our investment processes. Adverse incidents with respect to ESG activities could impact the cost of our operations and relationships with investors and tenants, all of which could materially adversely affect our business, financial condition, results of operations, our ability to make distributions to our stockholders and the trading price of our common and preferred stock. Additionally, new legislative or regulatory initiatives related to ESG could adversely affect our business.
None.
ITEM 1C. CYBERSECURITY
Information about cybersecurity risks and our risk management processes is collected, analyzed and considered as part of our overall enterprise risk management. The Company recognizes the critical importance of maintaining the trust and confidence of our tenants and business partners. The Board plays an active role in overseeing management of our risks, and cybersecurity represents an important component of the Company’s overall approach to risk management and oversight. We believe we have built a strong and collaborative risk management culture focused on awareness which supports appropriate understanding and management of our key risks. Each employee is accountable for identifying, monitoring and managing risk within their area of responsibility.
The Company maintains cybersecurity prevention and response plans and procedures (the “Cybersecurity Policies”) that set forth the Company’s plan to prevent, manage, report and resolve cybersecurity events. The Cybersecurity Policies set forth the Company’s policies and procedures for cybersecurity event prevention, including the Company’s (i) network and computer systems acceptable use policy, (ii) data backup procedures, (iii) business continuity plan, (iii) data retention policy, (iv) disaster recovery plan, (v) email use and security policy, (vi) network change management procedures, and (vii) password and authentication requirements policy. The Cybersecurity Policies also (i) provide indicators that Company employees should be aware of to recognize a cybersecurity event, (ii) outline the roles and responsibilities for Company employees and other third parties with respect to the Company’s cybersecurity incident response team (“CSIR Team”), (iii) set forth the steps to take in response to a cybersecurity incident, including reporting the incident, investigating the incident, preserving non-affected systems and data, informing, as appropriate, Senior Management (as defined below), insurance carriers, law enforcement and other parties that may be affected by the incident and (iv) maintaining business continuity.
The Company’s President and Chief Executive Officer, Chief Financial Officer and Treasurer, Chief Operating Officer and General Counsel and Secretary (“Senior Management”) are responsible for assessing and managing cybersecurity risks with the support of the entire CSIR Team, led by the Director of Operations/Risk Management. The Director of Operations/Risk Management is the
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primary lead for monitoring the prevention, detection, mitigation and remediation of cybersecurity threats and incidents and ensuring that the Cybersecurity Policies are followed. Senior Management works collaboratively with the Director of Operations/Risk Management and the entire CSIR Team to implement a program designed to protect the Company’s information systems from cybersecurity threats and to promptly respond to any cybersecurity incidents in accordance with the Cybersecurity Policies. The CSIR Team also includes a third-party, on-demand IT support team, a Primary IT Support Contact, who is the technical response lead, a Primary Communications Contact responsible for handling external communications during and after an incident, as well as other delineated primary contacts in areas including, but not limited to, HR, Legal, Accounting, Asset Management and Acquisitions.
Pursuant to the Cybersecurity Policies, information security incidents must be reported, without delay, to the IT support team or the Director of Operations/Risk Management, who will then advise Senior Management of the incident. Senior Management will then report such threats and incidents to the Audit Committee, when appropriate.
Risk Management and Strategy
The Company’s cybersecurity program is focused on the following key areas:
| ● | Governance: As discussed in more detail under “Item 1C. Cybersecurity—Governance,” the Board’s oversight of cybersecurity risk management is supported by the Audit Committee of the Board (the “Audit Committee”), which regularly interacts with the Company’s management team. |
| ● | Collaborative Approach: The Company has implemented a comprehensive, cross-functional approach to identifying, preventing and mitigating cybersecurity threats and incidents, while also implementing controls and procedures that provide for the prompt escalation of certain cybersecurity incidents so that decisions regarding the public disclosure and reporting of such incidents can be made by management in a timely manner. |
| ● | Technical Safeguards: The Company deploys technical safeguards that are designed to protect information systems from cybersecurity threats, including firewalls, intrusion prevention and detection systems, anti-malware functionality and access controls, which are evaluated and improved through vulnerability assessments and cybersecurity threat intelligence. |
| ● | Incident Response and Recovery Planning: The Company has established and maintains comprehensive incident response and recovery plans that fully address the response to a cybersecurity incident, and such plans are tested and evaluated on a regular basis. |
| ● | Third-Party Risk Management: The Company maintains a comprehensive, risk-based approach to identifying and overseeing cybersecurity risks presented by third parties, including vendors, service providers and other external users of the Company’s systems, as well as the systems of third parties that could adversely impact the Company’s business in the event of a cybersecurity incident affecting those third-party systems. |
| ● | Education and Awareness: The Company provides regular, mandatory training for personnel regarding cybersecurity threats as a means to equip personnel with effective tools to address cybersecurity threats, and to communicate evolving information security policies, standards, processes and practices. |
The Company engages in the periodic assessment and testing of its policies, standards, processes and practices that are designed to address cybersecurity threats and incidents. These efforts include a wide range of activities, including audits, assessments, tabletop exercises, threat modeling, vulnerability testing and other exercises focused on evaluating the effectiveness of the Company’s cybersecurity measures and planning. The Company regularly engages third parties to perform assessments on its cybersecurity measures, including information security maturity assessments and independent reviews of the Company’s information security control environment and operating effectiveness. The results of such assessments and reviews are reported to the Audit Committee and the Board, and the Company adjusts its cybersecurity policies, standards, processes and practices as necessary based on the information provided by these assessments and reviews.
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Governance
The Board, in coordination with the Audit Committee, oversees the Company’scybersecurity risk management process. The Audit Committee has adopted a charter that provides that the Audit Committee has duties and responsibilities with respect to the oversight of the Company’s cybersecurity risk protocol (which includes oversight of risk assessment, risk management plan and process to control/monitor, business continuity plan, incident response, and disaster recovery).
There can be no assurance that our cybersecurity risk management program and processes, including our policies, controls or procedures, will be fully implemented, complied with or effective in protecting our systems and information.
To date, cybersecurity threats, including as a result of any previous cybersecurity incidents, have not materially affected and are not reasonably likely to affect the Company, including its business strategy, results of operations or financial condition. We face certain ongoing risks from cybersecurity risks that, if realized, are reasonably likely to materially affect us, including our operations, business strategy, results of operations, or financial condition. See “Risk Factors - We, our tenants, and our property managers face risks associated with security breaches through cyber-attacks, cyber-intrusions, or otherwise, as well as other significant disruptions of information technology networks and related systems.”
The information set forth under the caption “Our Properties” in Item 1 of this Annual Report on Form 10-K is incorporated by reference herein.
We are currently not involved in any pending legal proceeding or litigation, thatand, to the best of our knowledge, no governmental authority is contemplating any proceeding to which we believe couldare a party or to which any of our properties is subject, which would reasonably be likely to have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or,From time to the knowledge of the executive officerstime, we may become involved in litigation relating to claims arising out of our companyoperations in the normal course of business. There can be no assurance that these matters that arise in the future, individually or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision couldthe aggregate, will not have a material adverse effect.effect on our financial condition or results of operations in any future period.
Not applicable.
Our common stock is quoted on the New York Stock Exchange under the ticker symbol “GMRE.” Prior to July 1, 2016 (the closing date
The Company declared and paid a dividend of our IPO), our stock was listed on the OTC pink tier$0.21 per share of the OTC Markets, Inc. under the symbol “GMRE” and trading of our common stock at that time was limited and sporadic. The following table sets forth, for the periods indicated, the high and low sale prices of our common stock forwith respect to each quarter within the fiscal years ended December 31, 20172023 and 2016, respectively, and the dividends paid by us with respect to those periods.
| 2017 | High | Low | Dividends per Share1 | |||||||||
| First quarter | $ | 9.18 | $ | 8.15 | $ | 0.20 | ||||||
| Second quarter | $ | 10.23 | $ | 8.22 | $ | 0.20 | ||||||
| Third quarter | $ | 9.45 | $ | 8.36 | $ | 0.20 | ||||||
| Fourth quarter | $ | 9.75 | $ | 8.19 | $ | 0.20 | ||||||
| 2016 | High | Low | Dividends per Share1 | |||||||||
| First quarter | $ | 3.58 | $ | 0.125 | $ | 0.2556 | ||||||
| Second quarter | $ | 3.58 | $ | 0.125 | $ | 0.2556 | ||||||
| Third quarter | $ | 11.38 | $ | 9.52 | $ | 0.20 | ||||||
| Fourth quarter | $ | 9.89 | $ | 6.73 | $ | 0.20 | ||||||
1Dividend information is for dividends declared with respect to that quarter.
2022. The declaration and payment of quarterly dividends remains subject to the review and approval of the Board, of Directors, see “Risk Factors —Subject to certain requirements under Maryland law and REIT requirements, our board of directorsthe Board has sole discretion to determine if we will pay distributions and the amount and frequency of such distributions, and past distribution amounts may not be indicative of future distribution amounts.”
Performance Graph
This performance graph shall not be deemed “soliciting material” or to be “filed” with the SEC for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities under that Section 18, and shall not be deemed to be incorporated by reference into any filing of Global Medical REIT Inc. under the Securities Act or the Exchange Act.
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The graph below compares the cumulative total return of our common shares,stock, the S&P 500 the MSCI US REIT Index, and the SNLMSCI U.S. REIT Healthcare Index from July 1, 2016 (the completion date of our IPO)December 31, 2018 through December 31, 2017.2023. The comparison assumes $100 was invested on July 1, 2016December 31, 2018 in our common sharesstock and in each of the foregoing indexesindices and assumes reinvestment of dividends, as applicable. The MSCI USU.S. REIT Index consists of equity REITs that are included in the MSCI US Investable Market 2500 Index, except for specialty equity REITS that do not generate a majority of their revenue and income from real estate rental and leasing operations. The SNL U.S REIT Healthcare Index consists of all publicly traded (NYSE, NYSE MKT, NASDAQ, OTC) Healthcare REITs in SNL’s coverage universe. We have included the MSCI US REIT Index and the SNL U.S. REIT Healthcare Index because we believe that they areit is representative of the industry in which we compete and areis relevant to an assessment of our performance.
| | | | | | | | | | | | | | | | | | |
|
| Period Ending | ||||||||||||||||
Index |
| 12/31/18 |
| 12/31/19 |
| 12/31/20 |
| 12/31/21 |
| 12/31/22 |
| 12/31/23 | ||||||
Global Medical REIT Inc. | | $ | 100.00 | | $ | 159.98 | | $ | 169.20 | | $ | 242.82 | | $ | 139.91 | | $ | 178.95 |
S&P 500 Index | | $ | 100.00 | | $ | 131.49 | | $ | 155.68 | | $ | 200.37 | | $ | 164.08 | | $ | 207.21 |
MSCI U.S. REIT Index | | $ | 100.00 | | $ | 125.84 | | $ | 116.31 | | $ | 166.39 | | $ | 125.61 | | $ | 142.87 |
| Period Ending | ||||||||||||||||||||||||||||
| Index | 07/01/16 | 09/30/16 | 12/31/16 | 03/31/17 | 06/30/17 | 09/30/17 | 12/31/17 | |||||||||||||||||||||
| Global Medical REIT Inc. | $ | 100.00 | $ | 98.05 | $ | 91.60 | $ | 95.47 | $ | 95.83 | $ | 98.43 | $ | 89.88 | ||||||||||||||
| S&P 500 Index | $ | 100.00 | $ | 103.63 | $ | 107.59 | $ | 114.12 | $ | 117.64 | $ | 122.92 | $ | 131.08 | ||||||||||||||
| MSCI U.S. REIT Index | $ | 100.00 | $ | 98.46 | $ | 95.55 | $ | 96.50 | $ | 98.09 | $ | 99.00 | $ | 100.39 | ||||||||||||||
| SNL U.S. REIT Healthcare Index | $ | 100.00 | $ | 102.22 | $ | 91.98 | $ | 98.28 | $ | 103.38 | $ | 97.51 | $ | 91.84 | ||||||||||||||
As of March 2, 2018February 26, 2024, there were approximately 3432 record holders, and 21,630,67565,574,549 shares of common stock issued and outstanding. A substantially greater number of holders of our common stock are “street name” or beneficial holders, whose shares of record are held by banks, brokers, and other financial institutions.As of December 31, 20172023 and 2016,2022, there were 21,630,67565,564,943 and 17,605,67565,518,306 outstanding shares of common stock, respectively.
Unregistered Sales of Equity Securities
None.
Issuer Purchases of Equity Securities
None.
The following sets forth selected financial and operating data on a historical consolidated basis. The following data should be read in conjunction with the financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Annual Report on Form 10-K. Effective beginning with the year ended December 31, 2014, we changed our fiscal year from August 31 to the calendar twelve months ending December 31. Accordingly, our 2014 fiscal period was shortened from twelve months to a four-month transition period that ended on December 31, 2014, with a comparative period presented below for the four-month period ended December 31, 2013. Our change in fiscal year was required based upon our intention to qualify and be taxed as a REIT for federal income tax purposes. The amounts in the following table are presented in thousands, except per share amounts.
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| Year Ended December 31, | Four Months Ended December 31, | Year Ended August 31, | ||||||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2014 | 2013 | 2014 | 2013 | ||||||||||||||||||||||
| Statement of Operations Data | ||||||||||||||||||||||||||||
| Total revenue | $ | 30,344 | $ | 8,211 | $ | 2,062 | $ | 597 | $ | - | $ | 380 | $ | - | ||||||||||||||
| Total expenses | 30,431 | 14,564 | 3,671 | 1,007 | 12 | 1,032 | - | |||||||||||||||||||||
| Net loss | (87 | ) | (6,353 | ) | (1,609 | ) | (410 | ) | (12 | ) | (652 | ) | (45 | )1 | ||||||||||||||
| Less: Preferred stock dividends | (1,714 | ) | - | - | - | - | - | - | ||||||||||||||||||||
| Less: Net loss attributable to noncontrolling interest | 49 | - | - | - | - | - | - | |||||||||||||||||||||
| Net loss attributable to common stockholders | $ | (1,752 | ) | $ | (6,353 | ) | $ | (1,609 | ) | $ | (410 | ) | $ | (12 | ) | $ | (652 | ) | $ | (45 | ) | |||||||
| Dividends declared per share of common stock | $ | 0.80 | $ | 0.74 | $ | 1.02 | $ | 0.34 | $ | - | $ | 0.17 | $ | - | ||||||||||||||
| Net loss attributable to common stockholders per share – basic and diluted | $ | (0.09 | ) | $ | (0.68 | ) | $ | (6.44 | ) | $ | (1.64 | ) | $ | (0.61 | ) | $ | (13.49 | ) | $ | (2.32 | )1 | |||||||
| Weighted average shares outstanding – basic and diluted | 19,617 | 9.302 | 250 | 250 | 20 | 48 | 20 | |||||||||||||||||||||
| As of December 31, | As of August 31, | |||||||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2014 | 20133 | 2014 | 2013 | ||||||||||||||||||||||
| Balance Sheet Data | ||||||||||||||||||||||||||||
| Net investment in real estate | $ | 457,913 | $ | 203,510 | $ | 55,149 | $ | 24,044 | $ | - | 3 | $ | 21,738 | $ | - | |||||||||||||
| Total assets | $ | 474,571 | $ | 227,319 | $ | 65,329 | $ | 24,640 | $ | - | 3 | $ | 22,245 | $ | 4 | 2 | ||||||||||||
| Revolving Credit Facility | $ | 164,900 | $ | 27,700 | $ | - | $ | - | $ | - | 3 | $ | - | $ | - | |||||||||||||
| Notes payable – third parties, net of discount | $ | 38,545 | $ | 38,413 | $ | 23,485 | $ | 16,468 | $ | - | 3 | $ | 14,750 | $ | - | |||||||||||||
| Total liabilities | $ | 215,558 | $ | 72,291 | $ | 65,467 | $ | 22,914 | $ | - | 3 | $ | 20,023 | $ | 19 | 2 | ||||||||||||
| Preferred stock | $ | 74,959 | $ | - | $ | - | $ | - | $ | - | 3 | $ | - | $ | - | |||||||||||||
| Noncontrolling interest | $ | 12,678 | $ | - | $ | - | $ | - | $ | - | 3 | $ | - | $ | - | |||||||||||||
| Total stockholders’ equity (deficit) | $ | 259,013 | $ | 155,028 | $ | (139 | ) | $ | 1,726 | $ | - | 3 | $ | 2,221 | $ | (16 | )2 | |||||||||||
ITEM 6. [Reserved]
1Represents loss and loss per share from discontinued operations, respectively.
2Represents the Company’s predecessor company’s balance. The predecessor was converted into the Company on January 15, 2014.
3The Company changed its fiscal year end to a December year end for the calendar year ended December 31, 2014. A balance sheet for the Company as of December 31, 2013 was not required to be filed and has not been filed.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion should be read in conjunction with our financial statements, including the notes to those financial statements, included elsewhere in this Report. Some of the statements we make in this section are forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, see the section in this Report entitled “Forward-Looking“Special Note Regarding Forward-Looking Statements.” Certain risk factors may cause actual results, performance, or achievements to differ materially from those expressed or implied by the following discussion. For a discussion of such risk factors, see the section in this Report entitled “Risk Factors.” Unless otherwise indicated, all dollar and share amounts in the following discussion are presented in thousands.
Objective of MD&A
OverviewManagement’s Discussion and Analysis (“MD&A”) is a narrative explanation of the financial statements and other statistical data that we believe will enhance a reader’s understanding of our financial condition, changes in financial condition and results of operations.
The objectives of MD&A are:
| a. | To provide a narrative explanation of our financial statements that enables investors to see the Company from management’s perspective; |
| b. | To enhance the overall financial disclosure and provide the context within which financial information should be analyzed; and |
| c. | To provide information about the quality of, and potential variability of, our earnings and cash flow so that investors can ascertain the likelihood that past performance is indicative of future performance. |
Overview
Global Medical REIT Inc. (the “Company,” “us,” “we,” or “our”) is an externally-managed,a Maryland corporation engaged primarily in the acquisition of licensed, state-of-the-art, purpose-builtand internally managed REIT that owns and acquires healthcare facilities and the leasing of theseleases those facilities to strong clinical operators with leading market share. The Company is externally managedphysician groups and advised by Inter-American Management, LLC (the “Advisor”).
regional and national healthcare systems. We elected to be taxed as a REIT for U.S. federal income tax purposes commencing withhold our taxable year ended December 31, 2016. Wefacilities and conduct our businessoperations through an umbrellaa Delaware limited partnership real estate investment trust, or UPREIT, structure in which our properties are owned by wholly-owned subsidiaries of our operating partnership,subsidiary, Global Medical REIT L.P. (the “Operating Partnership”). Our wholly-ownedwholly owned subsidiary, Global Medical REIT GP LLC, is the sole general partner of our Operating Partnership and, as of December 31, 2017,2023, we owned approximately 93.63%92.91% of the outstanding common operating partnership units (“OP Units”) of our Operating Partnership.
Partnership, with an aggregate of 7.09% of the Operating Partnership owned by holders of long-term incentive plan units (“LTIP Units”) and third-party limited partners who contributed properties or services to the Operating Partnership in exchange for OP Units.
Our Business Objectivesrevenues are derived from the rental and Investment Strategy
Our principal business objective is to provide attractive, risk-adjusted returns tooperating expense reimbursement payments we receive from our stockholders through a combination of (i) sustainabletenants, and increasing rental income that allows us to pay reliable, increasing dividends, and (ii) potential long-term appreciation in the valuemost of our healthcare facilities and common stock.leases are medium to long-term triple net leases with contractual rent escalation provisions. Our primary strategies to achieveexpenses are depreciation, interest, and general and administrative expenses. We finance our business objective are to:acquisitions with a mixture of debt and equity primarily from our cash from operations, borrowings under our Second Amended and Restated Credit Facility (the “Credit Facility”), and stock issuances.
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20172023 Executive Summary
The following table summarizestables summarize the materialprimary changes in our business and operations during 2017:the years presented.
| Year Ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| Rental revenue | $ | 28,511 | $ | 8,080 | ||||
| Interest expense | $ | 7,435 | $ | 4,139 | ||||
| General and administrative expense | $ | 5,489 | $ | 4,219 | ||||
| Preferred stock dividends | $ | 1,714 | $ | - | ||||
| Net loss attributable to common stockholders per share | $ | (0.09 | ) | $ | (0.68 | ) | ||
| AFFO per share(1) | $ | 0.54 | $ | (0.03 | ) | |||
| Dividends per common share | $ | 0.80 | $ | 0.74 | ||||
| Weighted average common shares outstanding | 19,617 | 9,302 | ||||||
| | | | | | |
|
| Year Ended December 31, | ||||
|
| 2023 |
| 2022 | ||
| | (in thousands, except per share and unit amounts) | ||||
Rental revenue | | $ | 140,934 | | $ | 137,167 |
Depreciation and amortization expense | | $ | 58,135 | | $ | 56,723 |
Interest expense | | $ | 30,893 | | $ | 25,230 |
General and administrative expense | | $ | 16,853 | | $ | 16,545 |
Gain on sale of investment properties | | $ | 15,560 | | $ | 6,753 |
| | | | | | |
Net income attributable to common stockholders per share | | $ | 0.23 | | $ | 0.20 |
FFO per share and unit(1) | | $ | 0.83 | | $ | 0.92 |
AFFO per share and unit(1) | | $ | 0.91 | | $ | 0.98 |
Dividends per share of common stock | | $ | 0.84 | | $ | 0.84 |
| | | | | | |
Weighted average common stock outstanding | |
| 65,550 | |
| 65,462 |
Weighted average OP Units outstanding | |
| 2,077 | |
| 1,669 |
Weighted average LTIP Units outstanding | |
| 2,751 | |
| 2,531 |
Total weighted average shares and units outstanding | |
| 70,378 | |
| 69,662 |
| (1) | See “—Non-GAAP Financial Measures,” for a description of our non-GAAP financial measures and a reconciliation of our non-GAAP financial measures. |
| | | | | | | |
|
| As of |
| ||||
| | December 31, | | December 31, |
| ||
|
| 2023 |
| 2022 |
| ||
| | (dollars in thousands) |
| ||||
Investment in real estate, gross | | $ | 1,426,969 | | $ | 1,484,177 | |
Total debt, net | | $ | 611,232 | | $ | 694,119 | |
Weighted average interest rate | |
| 3.83 | % |
| 4.20 | % |
Total equity (including noncontrolling interest) | | $ | 605,814 | | $ | 649,065 | |
Net leasable square feet | |
| 4,748,626 | |
| 4,895,635 | |
| As of December 31, | ||||||||
| 2017 | 2016 | |||||||
| Total investment in real estate, gross | $ | 471,507 | $ | 206,877 | ||||
| Total debt | $ | 203,445 | $ | 66,534 | ||||
| Weighted average interest rate | 3.72 | % | 4.29 | % | ||||
| Total equity | $ | 259,013 | $ | 155,028 | ||||
| Net rentable square feet | 1,331 | 665 | ||||||
Our Properties
WeCompleted Acquisitions
During the year ended December 31, 2023 we completed our initial public offering in July 2016, issuing an aggregate of 15 million shares of common stock at an offeringone acquisition encompassing 18,698 leasable square feet for a contractual purchase price of $10.00 per share for aggregate net proceeds$6.7 million with annualized base rent of $137.3$0.5 million. We utilizedfunded this acquisition primarily through the proceeds from this offering as well as credit received from banksissuance of OP Units to acquire real estate assets consistent with our business objectives and investment strategy. During 2017, we completed a follow-on offering of our common stock issuing an aggregate of 4 million shares at an offering price of $9.00 share for aggregate net proceeds of $33.8 million. We also completed an underwritten public offering of our Series A Preferred Stock during 2017, issuing an aggregate of 3.1 million shares with a liquidation preference of $25.00 per share for aggregate net proceeds of $75 million. In addition to these offerings, during 2017 the Company established a revolving credit facility with a group of lenders, pursuant to which we have the ability to borrow up to $340 million and established a $50 million “at-the-market” program for our common stock. See “—Liquidity and Capital Resources” for additional detail regarding our debt and equity transactions.
seller. As of December 31, 2017, and 2016, the Company had2023, our portfolio consisted of gross investment in real estate of $471.5$1.4 billion, with an aggregate of 4.7 million leasable square feet and $206.9an aggregate $110.2 million respectively. of annualized base rent.
Completed Property Dispositions
During the yearsyear ended December 31, 2017 and 2016, we2023, the Company completed three dispositions that generated rental revenueaggregate gross proceeds of $28.5$80.5 million, and $8.1 million, respectively, from these investments. Reflecting the impactresulting in an aggregate gain of our increasing investment balances during 2017, our net loss attributable to common shareholders decreased to $1.8 million in 2017 from $6.4 million in 2016.$15.6 million.
Recent Developments
Debt Activity
During the period beginning on January 1, 2018year ended December 31, 2023, we borrowed $83.1 million under our Credit Facility and ending on March 1, 2018, we completed four acquisitions with an aggregate purchase pricerepaid $136.4 million, for a net amount repaid of $48.4 million, an aggregate of 323,400 net rentable square feet and a weighted average capitalization rate of approximately 8.6%. The table below summarizes our post-2017 acquisitions:
| Property | City | Type | Rentable Square Feet (RSF) |
Purchase Price(1) (in thousands) | Annualized Base Rent(2) (in thousands) | Cap. Rate(3) | Lease Years Remaining | |||||||||||||||||
| Quad City Kidney Center | Moline, IL | MOB | 27,173 | $ | 6,706 | $ | 548 | 8.17 | % | 14 | ||||||||||||||
| NOMS | Fremont, OH | MOB | 25,893 | 8,286 | 608 | 7.34 | % | 12 | ||||||||||||||||
| Gainesville Eye | Gainesville, GA | MOB/ASC | 34,020 | 10,400 | 776 | 7.46 | % | 12 | ||||||||||||||||
| City Hospital of White Rock | Dallas, TX | Hospital | 236,314 | 23,000 | 2,230 | 9.70 | % | 20 | ||||||||||||||||
| Total/Weighted Average | 323,400 | $ | 48,392 | $ | 4,162 | 8.60 | % | 16 | ||||||||||||||||
(1) Represents the contractual purchase price.
(2)Monthly base rent in the month of acquisition multiplied by 12.
(3)Capitalization rates are calculated based on current lease terms and do not give effect to future rent escalations.
Properties Under Contract
Summary information about transactions we have under purchase agreements as of March 6, 2018 is presented in the table below:
| Property | City | Rentable Square Feet (RSF) | Purchase Price(1) (in thousands) | Annualized Base Rent(2) (in thousands) | Cap. Rate(3) | |||||||||||||
| Orlando Health | Orlando, FL | 59,594 | $ | 16,200 | $ | 1,340 | 8.27 | % | ||||||||||
| Memorial Health System | Belpre, OH | 155,600 | 64,200 | 5,040 | 7.85 | % | ||||||||||||
| Totals/Weighted Average | 215,194 | $ | 80,400 | $ | 6,380 | 7.94 | % | |||||||||||
(1) Represents contractual purchase price.
(2)Monthly base rent in the month placed under contract multiplied by 12.
(3)Capitalization rates are calculated based on current lease terms and do not give effect to future rent escalations.
We entered into the purchase and sale agreements for the Orlando and Belpre transactions on January 24, 2018 and March 6, 2018, respectively. We are currently in the due diligence periods for these transactions. If we identify problems with the properties or the operators of the properties during our due diligence review, we may not close the transactions on a timely basis or we may terminate the purchase agreements and not close the transactions.
Increase in Capacity of our Revolving Credit Facility
On March 6, 2018, we amended our revolving credit facility to increase the aggregate size of the facility by $90 million to $340$53.3 million. As of December 31, 2017,2023, the net outstanding Credit Facility balance was $307.6 million and as of February 26, 2024, we had $164.9unutilized borrowing capacity under the Credit Facility of $293.6 million.
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In December 2023, we completed the defeasance of a CMBS loan by making a total payment of $31.5 million, including transaction costs, that was funded by borrowings on our Revolver. The carrying value of outstanding borrowingsthe loan, net of unamortized debt issuance costs, was $30.6 million on the date of the defeasance, resulting in a loss on extinguishment of debt of $0.9 million. In connection with the loan defeasance, we subsequently received $8.4 million in escrowed funds held by the CMBS servicer and used those funds to reduce our total debt.
Capital Raising Activity
In January 2024, the Company and the Operating Partnership implemented a $300 million “at-the-market” equity offering program, pursuant to which we may offer and sell, from time to time, shares of our common stock (the “2024 ATM Program”). No shares were sold under this facility.the 2024 ATM Program from January 2024 through February 26, 2024.
Trends Which May Influence our Business andOur Results of Operations
We believe the following trends may positively impact our business and results of operations:
We believe the following trends may negatively impact our business and results of operations:
| ● | Fed’s “wait-and-see” approach could cause interest rates to remain elevated for longer than previously expected. Market reaction to the Fed’s commentary after its January 2024 meeting, where it maintained the target range for the Federal Funds Rate at 5.25% to 5.50%, indicated that the Fed does not plan to cut interest rates until mid-2024 at the earliest, which could result in continued elevated interest rates for the first half of 2024, if not longer. Although term SOFR, which is the reference rate for our floating rate debt, is expected to decrease during 2024 and 2025, any action or inaction by the Fed in the coming months could affect the timing and amounts of such decreases. |
Continued elevated interest rates have contributed to a continued lull in the common stock prices of many REITs, including the price of the Company’s common stock. A continued low stock price and elevated interest rates have caused the Company’s cost of capital to remain elevated, which, in turn, has significantly reduced the ability to acquire assets that meet the Company’s investment requirements.
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| Changes in third party reimbursement methods and policies. |
Critical Accounting Policies
Estimates
The preparation of financial statements in conformity with GAAP requires our management to use judgment in the application of accounting policies, including making estimates and assumptions. We base estimates on the best information available to us at the time, our experience and on various other assumptions believed to be reasonable under the circumstances. These estimates affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to various transactions or other matters had been different, it is possible that different accounting would have been applied, resulting in a different presentation of our financial statements. From time-to-time, we re-evaluate our estimates and assumptions. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current estimates and assumptions about matters that are inherently uncertain.
For a more detailed discussion of our significant accounting policies, see Note 2 – “Summary of Significant Accounting Policies” in the footnotes to the accompanying consolidated financial statements. Below is a discussion of accounting policies that we consider critical in that theyit may require complex judgment in theirits application or require estimates about matters that are inherently uncertain.
Use of Estimates
The preparationWe consider our critical accounting estimates to be those used in the determination of the financial statementsreported amounts and disclosure related to the following:
Investment in Real Estate
All of our facility acquisitions for the years ended December 31, 2023 and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Purchase of Real Estate
Transactions in which real estate assets are purchased that are not subject to an existing lease are treated2022 were accounted for as asset acquisitions and are recorded at their purchase price, including capitalized acquisition costs, which is allocated to land and building based upon their relative fair values at the datebecause substantially all of acquisition. Transactions in which real estate assets are acquired either subject to an existing lease or as part of a portfolio level transaction with significant leasing activity are treated as a business combination under Accounting Standards Codification (“ASC”) Topic 805, Business Combinations, and the assets acquired and liabilities assumed, including identified intangible assets and liabilities, are recorded at their fair value. Fair value is determined based upon the guidance of ASC Topic 820, Fair Value Measurements and Disclosures and generally are determined using Level 2 inputs, such as rent comparables, sales comparables, and broker indications. Although Level 3 Inputs are utilized, they are minor in comparison to the Level 2 data used for the primary assumptions. The determination of fair value involves the use of significant judgment and estimates. We make estimates to determine the fair value of the gross assets that we acquired were concentrated in a single asset or group of similar identifiable assets. Accordingly, the purchase prices of acquired tangible and intangible assets acquired and liabilities assumed usingwere recorded and allocated at fair value on a relative basis. The recorded allocations are based on estimated cash flow projections of the properties acquired, which incorporates discount, capitalization and interest rates as well as available comparable market information. We use considerable judgement in our estimates of cash flow projections, discount, capitalization and interest rates, fair market lease rates, carrying costs during hypothetical expected lease-up periods, and costs to execute similar leases.
While our methodology for purchase price allocations did not change during the year ended December 31, 2023, the real estate market is fluid and our assumptions are based on information obtained from multiple sources, including pre-acquisition due diligence, and we routinely utilize the assistance of a third-party appraiser. Initial valuations are subject to change until the information is finalized, no later than 12 months from the acquisition date. We expense transaction costs associated with acquisitions accounted for as business combinationscurrently available in the period incurred.
Valuationmarket at the time of tangible assets:
Theacquisition. Significant increases or decreases in these key estimates, particularly with regards to cash flow projections and discount and capitalization rates, would result in a significantly lower or higher fair value of land is determined usingallocated to acquired tangible and intangible assets and liabilities.
In the sales comparison approach whereby recent comparable land sales and listings are gathered and summarized. The available market data is analyzed and compared to the land being valued and adjustments are made for dissimilar characteristics such as market conditions, size, and location. We estimatecase of the fair value of buildings and fair value of land and certain other intangibles, our estimates of the values of these components will affect the amount of depreciation or amortization we record over the estimated useful life of the property acquired on an as-if-vacant basis and depreciateor the building value over its estimated remaining life. We determinelease term. In the case of the fair value of site improvements (non-building improvements that include paving and other) using the cost approach, with a deduction for depreciation, and depreciate the site improvements over their estimated remaining useful lives. Tenant improvements represent fixed improvements to tenant spaces, the fair value of which is estimated using prevailing market tenant improvement allowances that would be given to attract a new tenant, estimated based on the assumption that it is a necessary cost of leasing up a vacant building. Tenant improvements are amortized over the remaining term of the lease. As of December 31, 2017, we recorded site improvements of $4.8 million and tenant improvement of $8.0 million, resulting from the acquisitions that were accounted for as business combinations.
Valuation of intangible assets:
In determining the fair value of in-place leases (the avoided cost associated with existing in-place leases) management considers current market conditions and costs to execute similar leases in arriving at an estimate of the carrying costs during the expected lease-up period from vacant to existing occupancy. In estimating carrying costs, management includes reimbursable (based on market lease terms) real estate taxes, insurance, other operating expenses, as well as estimates of lost market rental revenue during the expected lease-up periods. The values assigned to in-place leases are amortized over the remaining term of the lease. As of December 31, 2017, we recorded in-place lease assets of $17.1 million, resulting from the acquisitions that were accounted for as business combinations.
The fair value of above-or-below market leases is estimated based on the present value (using an interest rate which reflected the risks associated with the leases acquired) of the difference between contractual amounts to be received pursuant to the leases and management’s estimate of market lease rates measured over a period equal to the estimated remaining term of the lease. An above market lease is classified as an intangible asset and a below market lease is classified as an intangible liability. The capitalized above-market or below-market lease intangibles, our estimates of the values of these components will affect the amount of rental revenue we record as these values are amortized as a reduction of or an addition to rental income over the estimated remaining term of the respective leases. As
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Intangible assets related to leasing costs consist of leasing commissions and legal fees. Leasing commissions are estimated by multiplying the remaining contract rent associated with each lease by a market leasing commission. Legal fees represent legal costs associated with writing, reviewing, and sometimes negotiating various lease terms. Leasing costs are amortized over the remaining useful life of the respective leases. As of December 31, 2017, we recorded leasing cost assets of $9.5 million resulting from the acquisitions that were accounted for as business combinations.
Impairment of Long LivedLong-Lived Assets
We evaluatereview our real estate assets on an asset group basis for impairment. We identify an asset group based on the lowest level of identifiable cash flows. In the impairment periodicallyanalysis we must determine whether there are indicators of impairment. For operating properties, these indicators could include a reduction in our estimated hold period, a significant decline in a property’s leasing percentage, a current period operating loss or whenever eventsnegative cash flows combined with a history of losses at the property, a significant decline in lease rates for that property or circumstances indicateothers in the property’s market, a significant change in the market value of the property, or an adverse change in the financial condition of significant tenants.
If we determine that its carrying amount may not be recoverable. If an asset has indicators of impairment, indicator exists, we comparemust determine whether the expected future undiscounted cash flows against the carrying amount of an asset. If the sum of the estimated undiscounted cash flows is less than the carrying amount ofassociated with the asset we would record an impairment loss for the difference between the estimated fair value andexceed the carrying amount of the asset. In calculating the undiscounted net cash flows of an asset, we use considerable judgement to estimate a number of inputs. We determinedmust estimate future rental rates, future capital expenditures, future operating expenses, and market capitalization rates for residual values, among other things. In addition, if there are alternative strategies for the future use of the asset, we assess the probability of each alternative strategy and perform a probability-weighted undiscounted cash flow analysis to assess the recoverability of the asset.
In determining the fair value of an asset, we exercise considerable judgment on a number of factors. We may determine fair value by using a discounted cash flow calculation or by utilizing comparable market information. We use judgement to determine an appropriate discount rate to apply to the cash flows in the discounted cash flow calculation. We also use judgment in analyzing comparable market information because no two real estate assets are identical in location and price.
The estimates and judgments used in the impairment process are highly subjective and susceptible to frequent change. Significant increases or decreases in any of these inputs, particularly with regards to cash flow projections and discount and capitalization rates, would result in a significantly lower or higher fair value measurement of the real estate assets being assessed. Additionally, changes in economic and operating conditions, including changes in the financial condition of our tenants, and changes to our intent and ability to hold the related asset, that nooccur subsequent to our impairment assessment could impact the assumptions used in that assessment and could result in future charges were warranted during the years ended December 31, 2017, 2016, and 2015.to earnings if assumptions regarding those investments differ from actual results.
Revenue Recognition
Our operations primarily consist of rental revenue earned from tenants under leasing arrangements which provide for minimum rent and escalations. TheseManagement exercises considerable judgment in the rental property revenue recognition process including the treatment of the contractual rental stream and the determination of its collectability.
Our leases arehave been accounted for as operating leases. For operating leases with contingent rental escalators, revenue is recorded based on the contractual cash rental payments due during the period. Revenue from leases with fixed annual rental escalators are recognized on a straight-line basis over the initial lease term, subject to a collectability assessment. Ifwhen we determine that collectabilitybelieve substantially all lease income, including the related straight-line receivable, is probable of rents is not reasonably assured, future revenue recognition is limited to amounts contractually owed and paid, and, when appropriate, an allowance for estimated losses is established.
collection.
We consistently assess the need for an allowance for doubtful accounts, including an allowance for operating lease straight-line rent receivables, for estimated losses resulting from tenant defaults, or the inability of tenants to make contractual rent and tenant recovery payments. We also monitor the liquidity and creditworthiness of itsour tenants and operators and exercise considerable judgement in assessing the probability of collection. Our assessment of collectability incorporates available operational performance measures such as sales and the aging of billed amounts as well as other publicly available information with respect to our tenant’s financial condition, liquidity and capital resources, including declines in such conditions. In the event that we determine receivables are not probable of collection, lease income will be recorded on a continuous basis. This evaluation considers industrycash basis, with the corresponding tenant receivable and economic conditions, property performance, credit enhancements and other factors. For operating lease straight-line rent amounts, our assessment is based on amounts estimated to be recoverable overreceivable charged as a direct write-off against rental revenue in the termperiod of the lease. Aschange in our collectability determination. If management’s assumptions regarding the collectability of December 31, 2017 and December 31, 2016, no allowance was recorded as it was not deemed necessary.lease-related receivables prove incorrect, we could experience decreases in rental revenue, including decreases in excess of any amounts initially recognized.
In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers.” ASU 2014-09 creates a new Topic, ASC Topic 606, which is principle-based and provides a five-step model to determine when and how revenue is recognized. We will implement this standard effective with the interim period beginning January 1, 2018 and do not expect the standard to have a significant impact on our consolidated financial statements or related disclosures.
Fair Value of Financial Instruments
Fair value is a market-based measurement and should be determined based on the assumptions that market participants would use in pricing an asset or liability. In accordance with ASC Topic 820, the valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels are defined as follows:
• Level 1-Inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets;
• Level 2-Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument; and
• Level 3-Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
We consider the carrying values of cash and cash equivalents, escrow deposits, accounts and other receivables, and accounts payable and accrued expenses to approximate the fair value for these financial instruments because of the short period of time since origination or the short period of time between origination of the instruments and their expected realization. Due to the short-term nature of these instruments, Level 1 and Level 2 inputs are utilized to estimate the fair value of these financial instruments. The fair values determined related to the Company’s transactions that are accounted for as business combinations primarily utilize Level 2 inputs since there is heavy reliance on market observable data such as rent comparables, sales comparables, and broker indications. Although some Level 3 inputs are utilized they are minor in comparison to the Level 2 date used for the primary assumptions as it relates to business combination valuations.
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Stock-Based Compensation
We expense the fair value of LTIP unit awards in accordance with the fair value recognition requirements of ASC Topic 718, Compensation-Stock Compensation, and ASC Topic 505, Equity. Under ASC Topic 718, the Company’s independent directors are deemed to be employees and therefore compensation expense for these units is recognized based on the closing share price for the Company’s common stock at the date of grant, ratably over the 12-month service period, using the straight-line method. Under ASC Topic 505, the employees of the Advisor and its affiliates are deemed to be non-employees of the Company and therefore compensation expense for these units is recognized using the fair value of the award at the end of each reporting period, ratably over the respective service periods, depending on the grant terms, using the straight-line method.
Consolidated Results of Operations
The major factorfactors that resulted in variances in our results of operations for each revenue and expense category for the year ended December 31, 2017,2023 compared to the year ended December 31, 2016 was2022, were higher interest rates, significantly lower acquisition activity, increased disposition activity, and the increase inrecognition of a reserve related to one tenant. Regarding acquisitions, we completed one acquisition for a contractual purchase price of $6.7 million during the sizeyear ended December 31, 2023 compared to 14 completed acquisitions for an aggregate contractual purchase price of our$148.9 million during the year ended December 31 2022. Regarding dispositions, we had three property portfolio.dispositions during the year ended December 31, 2023 that generated aggregate gross proceeds of $80.5 million compared to one property disposition during the year ended December 31, 2022 that generated gross proceeds of $17.9 million. Our total investments in real estate, net of accumulated depreciation and amortization, was $457.9 million$1.2 billion and $203.5 million$1.3 billion as of December 31, 20172023 and 2016,2022, respectively.
Similarly,For a discussion related to our results of operations for the year ended December 31, 2016,2022 compared to 2015, the major factor that resulted in variancesyear ended December 31, 2021, refer to Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our results of operationsAnnual Report on Form 10-K for each revenue and expense category was our June 2016 initial public offering and the increase in the size of our property portfolio during 2016. Our total investments in real estate, net of accumulated depreciation and amortization, was $203.5 million and $55.1 million as ofyear ended December 31, 2016 and 2015, respectively.2022, which was filed with the SEC on March 1, 2023.
Year Ended December 31, 20172023 Compared to Year Ended December 31, 20162022
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| Revenue |
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| Rental revenue | $ | 28,511 | $ | 8,080 | $ | 20,431 | | $ | 140,934 | | $ | 137,167 | | $ | 3,767 | ||||||
| Expense recoveries | 1,712 | - | 1,712 | ||||||||||||||||||
| Other income | 121 | 131 | (10 | ) | |
| 115 | |
| 116 | |
| (1) | ||||||||
| Total revenue | 30,344 | 8,211 | 22,133 | |
| 141,049 | |
| 137,283 | |
| 3,766 | |||||||||
| | | | | | | | | | ||||||||||||
| Expenses | | | | | |
| | | | ||||||||||||
| Acquisition fees | 2,523 | 1,568 | 955 | ||||||||||||||||||
| Acquisition fees – related party | - | 754 | (754 | ) | |||||||||||||||||
| General and administrative | 5,489 | 4,219 | 1,270 | |
| 16,853 | |
| 16,545 | |
| 308 | |||||||||
| Operating expenses | 1,860 | 73 | 1,787 | |
| 28,082 | |
| 25,188 | |
| 2,894 | |||||||||
| Management fees – related party | 3,123 | 1,434 | 1,689 | ||||||||||||||||||
| Depreciation expense | 7,929 | 2,335 | 5,594 | |
| 41,266 | |
| 40,008 | |
| 1,258 | |||||||||
| Amortization expense | 2,072 | 42 | 2,030 | |
| 16,869 | |
| 16,715 | |
| 154 | |||||||||
| Interest expense | 7,435 | 4,139 | 3,296 | |
| 30,893 | |
| 25,230 | |
| 5,663 | |||||||||
Preacquisition expense | |
| 44 | |
| 354 | |
| (310) | ||||||||||||
| Total expenses | 30,431 | 14,564 | 15,867 | |
| 134,007 | |
| 124,040 | |
| 9,967 | |||||||||
| Net loss | $ | (87 | ) | $ | (6,353 | ) | $ | 6,266 | |||||||||||||
Income before gain from sale of investment properties and loss on extinguishment of debt | | | 7,042 | | | 13,243 | | | (6,201) | ||||||||||||
Gain on sale of investment properties | | | 15,560 | | | 6,753 | | | 8,807 | ||||||||||||
Loss on extinguishment of debt | | | (868) | | | — | | | (868) | ||||||||||||
Net income | | $ | 21,734 | | $ | 19,996 | | $ | 1,738 | ||||||||||||
Revenue
Total Revenue
Total revenue for the year ended December 31, 20172023 was $30.3$141.0 million, compared to $8.2$137.3 million for the same period in 2016,2022, an increase of $22.1$3.7 million. The increase is primarily the result of rental revenue earned from the facilities we acquired during 2017, as well asresulted from the recognition of a full year of rental revenue in 20172023 from acquisitions that were completed during 2016. Additionally, $1.72022, partially offset by the impact of property dispositions and the recognition of reserves for $0.9 of rent and the write-off of $0.2 million of deferred rent. Within that increase, $19.5 million in revenue was recognized from net lease expense recoveries during the year ended December 31, 2017, which related to tenant reimbursement of real estate taxes, insurance, and certain other operating expenses. We recognize these reimbursements and related expenses on a gross basis in our Consolidated Statements of Operations (i.e., we recognize an equivalent increase in revenue (expense recoveries) and expense (operating expenses)). We did not recognize any revenue from expense recoveries during the year ended December 31, 2016.
Expenses
Acquisition Fees
Acquisition fees to unrelated parties for the year ended December 31, 2017 were $2.5 million,2023, compared to $1.6$18.7 million for the same period in 2016, an increase2022.
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Expenses
Acquisition Fees – related party
Acquisition fees to a related party for the year ended December 31, 2017 was zero, compared to $0.8 million for the same period in 2016. Related party acquisition fees for the year ended December 31, 2016 consisted of $0.4 million, $0.3 million and $0.1 million that were expensed in connection with the acquisitions of the Plano Facility, the Melbourne Facility, and the Westland Facility, respectively. Pursuant to our original management agreement, the acquisition fees payable to our Advisor were computed at a rate of 2% of the purchase price of the facility.
General and Administrative
General and administrative expenses for the year ended December 31, 20172023 were $5.5$16.9 million, compared with $4.2to $16.5 million for the same period in 2016,2022, an increase of $1.3$0.4 million. Non-cash LTIP expenses included in general and administrative expense included $1.8 million in 2017 compared to $1.7 million in 2016. The remaining increase in general and administrative expenses primarily relates toresulted from an increase in professional fees incurred during 2017 reflectingcash compensation costs and general corporate expenses, partially offset by a fullreduction in non-cash LTIP compensation expense, which was $4.2 million for the year of public company costs as well as Sarbanes-Oxley implementation costs.ended December 31, 2023, compared to $4.7 million for the same period in 2022.
Operating expenses
Expenses
Operating expenses for the year ended December 31, 20172023 were $1.9$28.1 million, compared with $0.07$25.2 million for the same period in 2016,2022, an increase of $1.8$2.9 million. The increase results primarily results from $1.7$19.5 million of reimbursablerecoverable property operating expenses incurred during the year ended December 31, 2023, compared to $18.7 million for the same period in 2017 that we paid on behalf2022. In addition, our operating expenses included $5.9 million of certain of our tenants but for which we receive reimbursementnon-recoverable property operating expenses from the tenant under the applicable lease.
Management Fees – related party
Management feesgross leases for the year ended December 31, 2017 were $3.1 million,2023, compared with $1.4to $4.7 million for the same period in 2016, an increase of $1.7 million. The increase results from our larger stockholders’ equity balance, which is used to calculate the fee, resulting from our common stock and preferred stock issuances that were completed during 2017.2022.
Depreciation Expense
Depreciation expense for the year ended December 31, 20172023 was $7.9$41.3 million, compared with $2.3to $40.0 million for the same period in 2016,2022, an increase of $5.6$1.3 million. The increase resultsresulted primarily from depreciation expense incurred on the facilities we acquired during 2017 and the recognition of a full year of depreciation expense in 2017 related to2023 from acquisitions that were completed during 2016. 2022, partially offset by the impact of property dispositions.
Amortization Expense
Amortization expense for the year ended December 31, 20172023 was $2.1$16.9 million, compared with $0.04to $16.7 million for the same period in 2016,2022, an increase of $2.1$0.2 million. AmortizationThe increase resulted primarily from the recognition of a full year of amortization expense was incurred on the in-place lease and leasing cost intangible assets recognizedin 2023 from our acquisitions that were accounted for as business combinations. Forcompleted during 2022, partially offset by the year ended December 31, 2017 we had 12 acquisitions that were accounted for as business combinations versus only three during the same period in 2016.impact of property dispositions.
Interest Expense
Interest expense for the year ended December 31, 20172023 was $7.4$30.9 million, compared with $4.1to $25.2 million for the same period in 2016,2022, an increase of $3.3$ 5.7 million. This increase iswas due to higherincreased interest rates, partially offset by lower average borrowings during the year reflectingended December 31, 2023, compared to the same period in 2022.
The weighted average interest incurred onrate of our debt for the outstanding borrowings from our revolving credit facility as well as amortization ofyear ended December 31, 2023 was 4.12% compared to 3.43% in 2022. Additionally, the deferred financing costs incurred to procure debt, which is recorded as interest expense.
The weighted average interest rate and term of our debt was 3.72%3.83% and 2.942.9 years, respectively, at December 31, 2017, compared to 4.29%2023.
Income Before Gain on Sale of Investment Properties and 6.04 years, respectively, at December 31, 2016.Loss on Extinguishment of Debt
Net Loss
NetIncome before gain on sale of investment properties and loss on extinguishment of debt for the year ended December 31, 20172023 was $0.09$8.1 million, compared with $6.4to $13.2 million for the same period in 2016,2022, a decrease of $5.1 million.
Gain on Sale of Investment Properties
During the year ended December 31, 2023, we completed three dispositions. In August 2023, we sold a medical office building located in net lossNorth Charleston, South Carolina receiving gross proceeds of $6.3$10.1 million, resulting in a gain of $2.3 million. The decreaseIn June 2023, we sold a portfolio of four medical office buildings located in net loss was primarilyOklahoma City, Oklahoma receiving gross proceeds of $66.0 million, resulting in a gain of $12.8 million. In March 2023, we sold a medical office building located in Jacksonville, Florida receiving gross proceeds of $4.4 million, resulting in a gain of $0.5 million.
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During the resultyear ended December 31, 2022, we sold a medical office building located in Germantown, Tennessee receiving gross proceeds of an increase$17.9 million, resulting in rental revenue earned froma gain of $6.8 million.
Loss on Extinguishment of Debt
In December 2023, we completed the facilities we acquired during 2017, as well as from the recognitiondefeasance of a full yearCMBS loan by making a total payment of rental revenue$31.5 million, including transaction costs, that was funded by borrowings on our Revolver. The carrying value of the loan, net of unamortized debt issuance costs, was $30.6 million on the date of the defeasance, resulting in 2017 from acquisitions that were completed during 2016.a loss on extinguishment of debt of $0.9 million. In connection with the loan defeasance, we subsequently received $8.4 million in escrowed funds held by the CMBS servicer and used those funds to reduce our total debt.
Net Income
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
| For the Year Ended December 31, | ||||||||||||
| 2016 | 2015 | $ Change | ||||||||||
| Revenue | ||||||||||||
| Rental revenue | $ | 8,080 | $ | 2,049 | $ | 6,031 | ||||||
| Other income | 131 | 13 | 118 | |||||||||
| Total revenue | 8,211 | 2,062 | 6,149 | |||||||||
| Expenses | ||||||||||||
| Acquisition fees | 1,568 | - | 1,568 | |||||||||
| Acquisition fees – related party | 754 | 627 | 127 | |||||||||
| General and administrative | 4,219 | 425 | 3,794 | |||||||||
| Operating expenses | 73 | 80 | (7 | ) | ||||||||
| Management fees – related party | 1,434 | 360 | 1,074 | |||||||||
| Depreciation expense | 2,335 | 660 | 1,675 | |||||||||
| Amortization expense | 42 | - | 42 | |||||||||
| Interest expense | 4,139 | 1,519 | 2,620 | |||||||||
| Total expenses | 14,564 | 3,671 | 10,893 | |||||||||
| Net loss | $ | (6,353 | ) | $ | (1,609 | ) | $ | (4,744 | ) | |||
Revenue
Total Revenue
Total revenueNet income for the year ended December 31, 20162023 was $8.2$22.8 million compared to $2.1 million for the same period in 2015, an increase of$6.1 million.The increase is primarily the result of rental revenue derived from the facilities that we acquired during the year ended December 31, 2016, as well as from the recognition of a full year of rental revenue relating to acquisitions that occurred during 2015.
Expenses
Acquisition Fees
Acquisition fees to unrelated parties forthe year ended December 31, 2016 were $1.6 million, compared to zero for the same period in 2015. These acquisition fees during the year ended December 31, 2016 were primarily related to three acquisitions that were accounted for as business combinations. As discussed below in the “Acquisition Fees – related party” section, prior to July 1, 2016, the effective date of our Amended Management Agreement, our acquisition fees were payable to our Advisor.
Acquisition Fees – related party
Acquisition fees – related party forthe year ended December 31, 2016 were $0.8 million, compared to $0.6 millionfor the year ended December 31, 2015, an increase of $0.2 million. The 2016 expense included acquisition fees that were incurred and paid to our Advisor in accordance with the management agreement that was in place through June 30, 2016 (consisting of $0.4 million, $0.3 million and $0.1 million in connection with the acquisitions of the Plano, Melbourne, and Westland facilities, respectively) compared to $0.6 million of acquisition fees that were incurred and paid to our Advisor in the 2015 (consisting of $0.4 million and $0.2 million in connection with the acquisitions of the Tennessee and West Mifflin facilities, respectively). Pursuant to our original management agreement, the acquisition fees payable to our Advisor were computed at a rate of 2% of the purchase price of the facility.
General and Administrative
General and administrative expenses for the year ended December 31, 2016 were$4.2 million, compared to $0.4$20.0 million for the same period in 2015,2022, an increase of$3.8 $2.8 million.The increase primarily results from an increase of $1.7 million in non-cash compensation expense incurred related to the LTIP units during the year ended December 31, 2016 as well as from an increase in costs incurred during the same year related to Sarbanes-Oxley implementation and public company related costs such as capital market advisory and investor relations.
Operating expenses
Operating expenses for the year ended December 31, 2016 was $0.07 million, compared with $0.08 million for the same period in 2015, a decrease of $0.01 million. The decrease is primarily related to a decrease in ground rent expense recorded during the 2016 fiscal year.
Management Fees – related party
Management fees forthe year ended December 31, 2016 were $1.4 million, compared to $0.4 million for the same period in 2015, an increase of$1.0 million. The increase during the year ended December 31, 2016 was due primarily to the larger stockholders’ equity balance due to our initial public offering during 2016 as well as changes in the fee calculation as follows. The management fee for the period beginning on July 1, 2016 and ending on December 31, 2016 was calculated based on the terms of the Amended Management Agreement, which became effective on July 1, 2016 and requires an annual base management fee equal to 1.5% of our stockholders’ equity balance (as defined in the Amended Management Agreement). The management fee for the period beginning on January 1, 2016 through June 30, 2016 and for the year ended December 31, 2015 was based on the terms of the original management agreement with a fixed fee of $0.03 million per month.
Depreciation Expense
Depreciation expenseforthe year ended December 31, 2016 was $2.3 million, compared to $0.7 millionfor the same period in 2015, an increase of $1.6 million. The increase results from depreciation expense incurred on the facilities acquired during the year ended December 31, 2016 and the recognition of depreciation expense for a full year related to acquisitions completed during the year ended December 31, 2015.
Amortization Expense
Amortization expense for the year ended December 31, 2016 was$0.04 million, compared to zero for the same period in 2015. Amortization expense was incurred on the in-place lease and leasing cost intangible assets recognized from our three acquisitions during 2016 that were accounted for as business combinations. We had no acquisitions that were accounted for as business combinations during the year ended December 31, 2015.
Interest Expense
Interest expenseforthe year ended December 31, 2016 was $4.1 million, compared to $1.5 millionfor the same period in 2015, an increase of $2.6 million. The increase results from increased borrowing in 2016 compared to 2015, including interest incurred on the Cantor Loan that was procured during the first quarter of 2016, a full year of interest expense incurred on third party debt and related party borrowings used to acquire facilities in 2015, the early termination fee of $0.3 million that was incurred related to the early pay-off of the Omaha facility debt, the amortization of debt issuance costs (recorded as interest expense) primarily incurred on the Cantor Loan, and full year of amortization of debt issuance costs that were incurred in connection with our West Mifflin and Tennessee acquisitions late in 2015.
The weighted average interest rate and term of our debt was 4.29% and 6.04 years, respectively, at December 31, 2016. The weighted average interest rate and term of our debt was 6.67% and 4.06 years, respectively, at December 31, 2015.
Net Loss
Net loss for the year ended December 31, 2016 was $6.4 million, compared with $1.6 million for the same period in 2015, an increase of $4.8 million. The increase in net loss was primarily the result of acquisition fees to unrelated parties incurred on our business combination transactions, an increase in non-cash compensation expense incurred related to LTIP units during the year ended December 31, 2016 as well as from an increase in costs incurred during the same year related to Sarbanes-Oxley implementation and public company related costs such as capital market advisory and investor relations. Additionally, during 2016 there was an increase in management fees incurred based on the terms of the Amended Management Agreement and an increase in depreciation expense resulting from the growth of our portfolio of properties during 2016. This increase in expenses was partially offset by an increase in rental revenue earned from the facilities we acquired during the 2016, as well as from the recognition of a full year of rental revenue in 2016 from acquisitions that were completed during 2015.
Assets and Liabilities
As of December 31, 20172023 and December 31, 2016,2022, our principal assets consisted of investments in real estate, net, of $457.9 million$1.2 billion and $203.5 million, respectively,$1.3 billion, respectively. We completed one acquisition during the year ended December 31, 2023 and oursold six medical office buildings through three disposition transactions. Our liquid assets consisted primarily of cash and cash equivalents and restricted cash of $5.1$6.7 million and $19.7 million, respectively.
The increase in our investments in real estate, net, to $457.9$14.5 million, as of December 31, 2017, compared to $203.5 million as of December 31, 2016, was the result of the 23 acquisitions that we completed during the year ended December 31, 2017.
2023 and 2022, respectively.
The decrease in our cash balanceand cash equivalents and restricted cash balances to $5.1$6.7 million as of December 31, 2017,2023, compared to $19.7$14.5 million as of December 31, 2016,2022, was primarily due to $252.7 millionnet repayments on our Credit Facility primarily using funds from our property dispositions, funds used to pay dividends to our common and preferred stockholders and holders of cashOP Units and LTIP Units, a payment for the defeasance of a CMBS loan, and funds used for the acquisitions that we completed during 2017, approximately $16 million of dividends paid during 2017, $2.9 million of cash paid for deferred financing costs during 2017 related to the revolving credit facility, and approximately $0.5 million used to repay related party debt. These decreases in cash during 2017 werecapital expenditures on existing real estate investments, partially offset by net borrowings from the revolving credit facility in the amount of $137.2 million, net proceeds received from our common stock offeringthe sale of $33.8 million,investment properties and net proceeds received from our preferred stock offering of approximately $75 million, and an increase in cash provided by operating activities of $11.6 million. activities.
The increasedecrease in our total liabilities to $215.6$662.0 million as of December 31, 20172023 compared to $72.3$744.2 million as of December 31, 2016,2022, was primarily the result of lower net borrowings from the revolving credit facility in the amount of $137.2 million as well as from increases in the security deposit liability balance, the accounts payable and accrued expenses balance, the dividends payable balance, and the acquired lease intangible liability balance.outstanding.
Liquidity and Capital Resources
General
General
Our short-term (up to 12 months) liquidity requirements include:
| ● | Interest expense and scheduled principal payments on outstanding indebtedness; |
| ● | General and administrative expenses; |
| ● |
| ● |
| ● | Distributions on our common and preferred stock and OP Units and LTIP Units; and |
| ● |
In 2024, we are contractually obligated to pay, or have capital commitments for, approximately (i) $34.8 million of principal and interest payments on our outstanding debt, and (ii) $0.7 million in ground and operating lease expenses. In addition, if we require funds for future distributions expecteddecide to be paidredeem our preferred stock, we would have to our common and preferred stockholders and OP and LTIP unit holders in our Operating Partnership.
As of December 31, 2017, we had $5.1 million of cash and also had borrowing capacity under our revolving credit facility as described below. Our primary sources of cash include rent we collect from our tenants, borrowings under our revolving credit facility, secured term loans and net proceeds received from equity issuances.
On September 15, 2017, we closed on an underwritten public offering of 3.1 million shares of our Series A Preferred Stock, $0.001 par value per share, with apay the liquidation preference of $25 per share, inclusive of 0.4 million shares issued in connection with the underwriters’ exercise of their over-allotment option. The issuance raised aggregate net proceeds of approximately $75 million. We used the proceeds from this transaction primarily to repay borrowings on our revolving credit facility.
On August 25, 2017, the Company and the Operating Partnership entered into separate Sales Agreements (the “Sales Agreements”) with each of Cantor Fitzgerald & Co. and FBR Capital Markets & Co. (the “Agents”), pursuant to which the Company may issue and sell, from time to time, its common shares having an aggregate offering price of up to $50 million, through the Agents (the “ATM Program”). In accordance with the Sales Agreements, the Company may offer and sell its common shares through either of the Agents, from time to time, by any method deemed to be an “at the market offering” as defined in Rule 415 under the Securities Act of 1933, as amended, which includes sales made directly on the New York Stock Exchange or other existing trading market, sales made to or through a market maker, sales made through negotiated transactions or any other method permitted by law. As of December 31, 2017, we had not made any sales of our common shares through the ATM Program.
On June 30, 2017, we closed an underwritten public offering of our common stock and on July 20, 2017 we closed on the over-allotment option granted to the underwriters. These transactions resulted in an aggregate of 4 million shares of our common stock being issued at a public offering price of $9.00 per share, resulting in aggregate net proceeds of approximately $33.8 million. We used the proceeds from this transaction primarily to repay borrowings on our revolving credit facility.
On March 3, 2017, the Company, the Operating Partnership, as borrower, and the subsidiary guarantors of the Operating Partnership amended our revolving credit facility (the “Revolving Credit Facility”) with BMO Harris Bank N.A., as Administrative Agent, which increased the commitment amount to $200$77.6 million plus an accordion feature that allows for up to an additional $50 millionaccrued dividends, fees and expenses.
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On March 6, 2018, we amended the Revolving Credit Facility to increase the aggregate size of the facility by $90 million to $340 million.
With the exception of funds required to make additional property acquisitions, we believe we will be able to satisfy our short-term liquidity requirements through our existing cash and cash equivalents and cash flow from operating activities. In order to continue acquiring healthcare properties, we will need to continue to have access to debt and equity financing.
Our long-term (beyond 12 months) liquidity needsrequirements consist primarily of funds necessary to pay for acquisitions, recurringcapital and non-recurring capital expenditures,tenant improvements at our properties, scheduled debt maturities, general and administrative expenses, operating expenses, and dividends. distributions. Beyond 2024, we are contractually obligated to pay, or have capital commitments for, approximately (i) $655.5 million of principal and interest payments on our outstanding debt, and (ii) $12.7 million in ground and operating lease expenses.
We expect to satisfy our short and long-term liquidity needs through various internal and external sources, including cash flow from operations, long-term secured and unsecured borrowings,debt financing, sales of additional equity securities, and,the issuance of OP Units in connection with acquisitions of additional properties, proceeds from select property dispositions and recapitalization transactions.
As of December 31, 2023, the issuanceCompany had aggregate capital improvement commitments and obligations to improve, expand, and maintain the Company’s existing facilities of OP Units,approximately $18 million. Many of these amounts are subject to contingencies that make it difficult to predict when they will be utilized, if at all. In accordance with the terms of the Company’s existing and proposed leases, capital improvement obligations in the next 12 months are expected to total approximately $14 million.
Internal Sources of Liquidity
Our primary internal sources of liquidity include cash flow from operations and proceeds from select property dispositions and joint venturerecapitalization transactions. We currently do not expect
External Sources of Liquidity
Our primary external sources of liquidity include net proceeds received from equity issuances, including the issuance of OP Units in connection with acquisitions of additional properties, and debt financing, including borrowings under our Credit Facility and secured term loans.
Equity Issuances
In January 2024, the Company and the Operating Partnership implemented the 2024 ATM Program, pursuant to which we may offer and sell, anyfrom time to time, shares of our propertiescommon stock. No shares were sold under the 2024 ATM Program from January 2024 through February 26, 2024. In March 2022, the Company and the Operating Partnership implemented a $300 million “at-the-market” equity offering program, pursuant to meet our liquidity needs, althoughwhich the Company could offer and sell, from time to time, shares of its common stock (the “2022 ATM Program”). No shares were sold under the 2022 ATM Program during the year ended December 31, 2023. The 2022 ATM Program was terminated in connection with implementing the 2024 ATM Program.
Debt Financing.
Credit Facility. Our Credit Facility consists of (i) the $350 million Term Loan A, (ii) the $150 million Term Loan B, and (iii) the $400 million Revolver. The Credit Facility also contains a $500 million accordion feature. As of February 26, 2024, we may do sohad unutilized borrowing capacity under the Credit Facility of $293.6 million.
The Credit Facility is an unsecured facility with a term of (i) four years (beginning on August 1, 2022) for the Revolver (subject to two, six-month extension options), (ii) five years for Term Loan A (beginning on its origination date of May 3, 2021), and (iii) five years and six months (beginning on August 1, 2022) for Term Loan B.
We are subject to a number of financial covenants under the Credit Facility, including, among other things, the following as of the end of each fiscal quarter, (i) a maximum consolidated unsecured leverage ratio of less than 60%, (ii) a maximum consolidated secured leverage ratio of less than 30%, (iii) a maximum consolidated secured recourse leverage ratio of less than 10%, (iv) a minimum fixed charge coverage ratio of 1.50:1.00, (v) a minimum unsecured interest coverage ratio of 1.50:1.00, (vi) a maximum consolidated leverage ratio of less than 60%, and (vii) a minimum net worth of $573 million plus 75% of all net proceeds raised through equity offerings subsequent to March 31, 2022. As of December 31, 2023, management believed it complied with all of the financial and non-financial covenants contained in the future.Credit Facility.
Other Fixed Debt. We have $26.0 million in gross notes payable as of December 31, 2023, which is comprised of three instruments.
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Hedging Instruments. We have ten interest rate swaps and three forward-starting interest rate swaps that are used to manage our interest rate risk. A description of these swaps is below:
See “—Trends Which May Influence
Term Loan A Swaps
As of December 31, 2023, six of our Business and Resultsinterest rate swaps related to Term Loan A. The combined notional value of Operations” for a discussionthese swaps is $350 million, with $200 million of the trends affectingswaps maturing in August 2024 and the remaining $150 million maturing in April 2026. In addition, we have three forward starting interest rate swaps with a combined notional value of $200 million, each with a maturity date of April 2026, that will become effective on the August 2024 maturity date of the existing swaps. Currently, the Term Loan A swaps fix the SOFR component of Term Loan A at a rate of 1.50% through August 2024. From August 2024 to April 2026 the SOFR component of Term Loan A will be fixed at 1.36%.
Term Loan B Swaps
As of December 31, 2023, four of our abilityinterest rate swaps related to incurTerm Loan B with a combined notional value of $150 million that fix the SOFR component on Term Loan B through January 2028 at 2.54%.
Total Fixed Debt. Our fixed debt and equity financingtotaled $526.0 million on a cost-effectivegross basis or at all.December 31, 2023, with a weighted average interest rate of 3.31% based on our interest rate swaps and at current leverage. The weighted average maturity of our fixed debt was 2.8 years at December 31, 2023. Due to our forward starting interest rate swaps related to Team Loan A, the weighted average interest rate on fixed debt outstanding as of December 31, 2023 is expected to improve over the next two years.
Cash Flow Information
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Net cash provided by operating activities for the year ended December 31, 20172023 was $11.6$67.6 million, compared with net cash used in operating activities of $2.7to $76.5 million for the same period in 2016. This increase in cash flows from operating activities2022. The decrease during the 2023 year was primarily derived from the increase in the sizedue to lower income before gain on sale of our property portfolio at December 31, 2017 compared to December 31, 2016.investment properties.
Net cash used inprovided by investing activities for the year ended December 31, 20172023 was $252.7$67.6 million, compared with $150.4to net cash used in investing activities of $137.3 million for the same period in 2016. This increase was primarily2022. During the result2023 year less funds were used to complete property acquisitions and we received more net proceeds from the sale of increased investment activity in 2017, specifically funds used for the 23 acquisitions that we completed during the year ended December 31, 2017. Cash flows used in investing activities are heavily dependent upon the investment in properties and real estate assets.properties.
Net cash provided byused in financing activities for the year ended December 31, 20172023 was $226.5$143.8 million, compared to net cash provided by financing activities with $163.6$62.4 million for the same period in 2016. Cash flows provided by financing activities2022. During the 2023 year we completed no common equity offerings and therefore did not receive any equity offering proceeds, we made net repayments on our Credit Facility, and we made a payment for the year ended December 31, 2017 were derived primarily from net proceeds received from the Revolving Credit Facility, net proceeds received from our common stock offering, and net proceeds received from our preferred stock offering, partially offset by the paymentdefeasance of dividends and deferred financing costs.
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015a CMBS loan.
Non-GAAP Financial Measures
Net cash used in operating activities for the year ended December 31, 2016 was $2.7 million, compared with $0.2 million used in operating activities for the year ended December 31, 2015. The increase during the 2016 year was primarily derived from increases in net loss, $1.4 million in management fees paidManagement considers certain non-GAAP financial measures to the Advisor, and increases in operating assets. The net cash used in operating activities was partially offset by increases in non-cash expenses such as depreciation expense, amortization of debt issuance costs, and LTIP compensation expense.
Net cash used in investing activities for the year ended December 31, 2016 was $150.4 million, compared with $32.3 million used in investing activities for the year ended December 31, 2015. The increase during the 2016 year was primarily derived from the completed acquisitions of ten facilities during 2016. Cash flows used in investing activities are heavily dependent upon the investment in properties and real estate assets.
Net cash provided by financing activities for the year ended December 31, 2016 was $163.6 million compared with $41.6 million provided by financing activities for the year ended December 31, 2015. The increase during the 2016 year was primarily derived from the net proceeds received from the initial public offering of $137.3 million, proceeds received from the revolving credit facility that was entered into and December 2016, and proceeds of $32.1 million received from the Cantor Loan. These financing cash inflows were partially offset by the full repaymentbe useful supplemental measures of the Omaha and Asheville third party debt, a partial payment of the remaining Convertible Debenture balance, and payments of dividends, deferred debt issuance costs, and deferred public offering costs.
Common Stock Dividends
Since July 2016, our Board had declaredCompany's operating performance. A non-GAAP financial measure is generally defined as one that purports to measure financial performance, financial position or cash dividends on our common stock as summarizedflows, but excludes or includes amounts that would not be so adjusted in the following table.
| Date Announced | Record Date | Applicable Quarter | Payment Date | Dividend Amount(1) | Dividends per Share | |||||||||
| September 14, 2016 | September 27, 2016 | Q3 2016 | October 11, 2016 | $ | 3,593 | $ | 0.20 | |||||||
| December 14, 2016 | December 27, 2016 | Q4 2016 | January 10, 2017 | $ | 3,604 | $ | 0.20 | |||||||
| March 20, 2017 | March 27, 2017 | Q1 2017 | April 10, 2017 | $ | 3,603 | $ | 0.20 | |||||||
| June 16, 2017 | June 27, 2017 | Q2 2017 | July 10, 2017 | $ | 3,608 | $ | 0.20 | |||||||
| September 8, 2017 | September 26, 2017 | Q3 2017 | October 9, 2017 | $ | 4,416 | $ | 0.20 | |||||||
| December 15, 2017 | December 26, 2017 | Q4 2017 | January 10, 2018 | $ | 4,552 | $ | 0.20 | |||||||
(1) Includes dividends on granted LTIP units and OP Units issued to third parties.
During the year ended December 31, 2017, we paid total dividends on our common stock, LTIP units and OP Units in the amount of $15.2 million, consisting of the dividends declared for the fourth quarter of 2016 through the third quarter of 2017. Additionally, during the year ended December 31, 2016, we paid total dividends in the amount of $3.9 million.
The amount of the dividends paid to our stockholders ismost comparable measure determined by our Board and is dependent on a number of factors, including funds available for payment of dividends, our financial condition and capital expenditure requirements except that, in accordance with our organizational documentsGAAP. The Company reports non-GAAP financial measures because these measures are observed by management to also be among the most predominant measures used by the REIT industry and Maryland law, we mayby industry analysts to evaluate REITs. For these reasons, management deems it appropriate to disclose and discuss these non-GAAP financial measures. Set forth below are descriptions of the non-GAAP financial measures management considers relevant to the Company's business and useful to investors, as well as reconciliations of those measures to the most directly comparable GAAP financial measure.
The non-GAAP financial measures presented herein are not make dividend distributionsnecessarily identical to those presented by other real estate companies due to the fact that would: (i) cause usnot all real estate companies use the same definitions. These measures should not be considered as alternatives to net income, as indicators of the Company's financial performance, or as alternatives to cash flow from operating activities as measures of the Company's liquidity, nor are these measures necessarily indicative of sufficient cash flow to fund all of the Company's needs. Management believes that in order to facilitate a clear understanding of the Company's historical consolidated operating results,
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these measures should be unable to pay our debtsexamined in conjunction with net income and cash flows from operations as they become duepresented in the usual course of business; (ii) cause our total assets to be less than the sum of our total liabilities plus senior liquidation preferences; or (iii) jeopardize our ability to maintain our qualification as a REIT. See “Risk Factors—Subject to certain requirements under Maryland lawConsolidated Financial Statements and REIT requirements, our board of directors has sole discretion to determine if we will pay distributionsother financial data included elsewhere in this Annual Report on Form 10-K.
Funds from Operations and the amount and frequency of such distributions, and past distribution amounts may not be indicative of future distribution amounts.”
Preferred Stock Dividends
The holders of the Company’s Series A Preferred Stock will be entitled to receive dividend payments only when, as and if declared by the Board (or a duly authorized committee of the Board). Any such dividends will accrue or be payable in cashAdjusted Funds from the original issue date, on a cumulative basis, quarterly in arrears on each dividend payment date. Additionally, the terms specify that dividends will be payable at a fixed rate per annum equal to 7.50% of the liquidation preference of $25 per share (equivalent to $1.875 per share on an annual basis). Dividends on the Series A Preferred Stock will be cumulative and will accrue whether or not funds are legally available for the payment of those dividends, whether or not the Company has earnings and whether or not those dividends are authorized.
The quarterly dividend payment dates on the Series A Preferred Stock are January 31, April 30, July 31 and October 31 of each year, commencing on October 31, 2017. During the year ended December 31, 2017 we paid dividends of $0.7 million on our preferred stock.
Non-GAAP Financial Measures
Operations
Funds from operations (“FFO”), Adjusted and adjusted funds from operations (“AFFO”), and Normalized AFFO are non-GAAP financial measures within the meaning of the rules of the SEC. The Company considers FFO AFFO, and Normalized AFFO to be important supplemental measures of its operating performance and believes FFO is frequently used by securities analysts, investors, and other interested parties in the evaluation of REITs, many of which present FFO when reporting their results.
In accordance with the National Association of Real Estate Investment Trusts’ (“NAREIT”) definition, FFO means net income or loss computed in accordance with GAAP before non-controllingnoncontrolling interests of holders of operating partnership unitsOP Units and LTIP units,Units, excluding gains (or losses) from sales of property and extraordinary items, less preferred stock dividends, plus real estate relatedestate-related depreciation and amortization (excluding amortization of deferred financing costs)debt issuance costs and the amortization of above and below market leases), and after adjustments for unconsolidated partnerships and joint ventures. The Company did not incur any gains or losses from the sales of property or record any adjustments for unconsolidated partnerships and joint ventures during the years ended December 31, 2017 and 2016. Because FFO excludes real estate relatedestate-related depreciation and amortization (other than amortization of deferred financing costs)debt issuance costs and above and below market lease amortization expense), the Company believes that FFO provides a performance measure that, when compared period-over-period, reflects the impact to operations from trends in occupancy rates, rental rates, operating costs, development activities and interest costs, providing perspective not immediately apparent from the closest GAAP measurement, net income or loss.
AFFO is a non-GAAP measure used by many investors and analysts to measure a real estate company’s operating performance by removing the effect of items that do not reflect ongoing property operations. Management calculates AFFO by modifying the NAREIT computation of FFO by adjusting it for certain cash and non-cash items and certain recurring and non-recurring items. For the Company these items include recurring acquisition and disposition costs, loss on the extinguishment of debt, recurring straight line deferred rental revenue, recurring stock-based compensation expense, recurring amortization of deferred financingabove and below market leases, recurring amortization of debt issuance costs, recurring capital expenditures, recurring lease commissions, recurring tenant improvements, an advisory fee settled with the issuance of OP Units, and other items.
Management calculates Normalized AFFO, which is also a non-GAAP financial measure, by modifying AFFO by adjusting for non-recurring income and expenses. For the Company this item includes the costs of establishing a system of Sarbanes-Oxley compliant internal controls and procedures. During the second and third quarters of 2017, Normalized AFFO included the portion of our General Counsel and Secretary’s salary for 2017 that is reimbursable by the Company to the Advisor. During the fourth quarter of 2017, the Company learned that the Advisor may request that such reimbursement arrangement be extended; therefore, until the terms of such potential extension are finalized, the Company is removing such expense from Normalized AFFO.
Management believes that reporting AFFO in addition to FFO is a useful supplemental measure for the investment community to use when evaluating the operating performance of the Company on a comparative basis. Management also considers Normalized AFFO to be a useful measure to evaluate the Company’s operating results excluding non-recurring income and expenses. Normalized AFFO can help investors compare the operating performance
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A reconciliation of FFO AFFO, and Normalized AFFO for the years ended December 31, 2017, 2016,2023, 2022, and 20152021 is as follows:
| Year Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| (unaudited, in thousands except per share) | ||||||||||||
| Net loss | $ | (87 | ) | $ | (6,353 | ) | $ | (1,609 | ) | |||
| Less: Preferred stock dividends | (1,714 | ) | - | - | ||||||||
| Depreciation and amortization expense | 10,001 | 2,377 | 660 | |||||||||
| Amortization of above market leases | 129 | (1 | ) | - | ||||||||
| FFO | $ | 8,329 | $ | (3,977 | ) | $ | (949 | ) | ||||
| Acquisition costs | 2,523 | 2,322 | 627 | |||||||||
| Straight line deferred rental revenue | (3,137 | ) | (681 | ) | (23 | ) | ||||||
| Stock-based compensation expense | 1,796 | 1,685 | - | |||||||||
| Amortization of deferred financing costs | 1,224 | 350 | 127 | |||||||||
| Non-cash advisory fee | 232 | - | - | |||||||||
| AFFO | $ | 10,967 | $ | (301 | ) | $ | (218 | ) | ||||
| Professional fees and services related to Sarbanes-Oxley implementation | 430 | 73 | - | |||||||||
| Normalized AFFO | $ | 11,397 | $ | (228 | ) | $ | (218 | ) | ||||
| Net loss attributable to common stockholders per share – basic and diluted | $ | (0.09 | ) | $ | (0.68 | ) | $ | (6.44 | ) | |||
| FFO per Share | $ | 0.41 | $ | (0.43 | ) | $ | (3.80 | ) | ||||
| AFFO per Share | $ | 0.54 | $ | (0.03 | ) | $ | (0.87 | ) | ||||
| Normalized AFFO per Share | $ | 0.56 | $ | (0.02 | ) | $ | (0.87 | ) | ||||
| Weighted Average Shares and Units Outstanding – basic and diluted | 20,242 | 9,302 | 250 | |||||||||
| | | | | | | | | |
| | Year Ended December 31, | |||||||
|
| 2023 |
| 2022 |
| 2021 | |||
| | (unaudited, in thousands except per share and unit amounts) | |||||||
Net income | | $ | 21,734 | | $ | 19,996 | | $ | 18,342 |
Less: Preferred stock dividends | |
| (5,822) | |
| (5,822) | |
| (5,822) |
Depreciation and amortization expense | | | 58,007 | | | 56,611 | | | 46,764 |
Gain on sale of investment properties | | | (15,560) | | | (6,753) | | | (1,069) |
FFO | | $ | 58,359 | | $ | 64,032 | | $ | 58,215 |
Loss on extinguishment of debt | | | 868 | | | — | | | — |
Amortization of above market leases, net | |
| 1,052 | |
| 1,027 | |
| 520 |
Straight line deferred rental revenue | |
| (2,636) | |
| (4,251) | |
| (5,317) |
Stock-based compensation expense | |
| 4,242 | |
| 4,681 | |
| 5,810 |
Amortization of debt issuance costs and other | |
| 2,376 | |
| 2,201 | |
| 1,982 |
Preacquisition expense | |
| 44 | |
| 354 | |
| 151 |
AFFO | | $ | 64,305 | | $ | 68,044 | | $ | 61,361 |
| | | | | | | | | |
Net income attributable to common stockholders per share – basic and diluted | | $ | 0.24 | | $ | 0.20 | | $ | 0.19 |
FFO per share and unit | | $ | 0.83 | | $ | 0.92 | | $ | 0.90 |
AFFO per share and unit | | $ | 0.91 | | $ | 0.98 | | $ | 0.95 |
| | | | | | | | | |
Weighted Average Shares and Units Outstanding – basic and diluted | |
| 70,378 | |
| 69,662 | |
| 64,548 |
| | | | | | | | | |
Weighted Average Shares and Units Outstanding: | | | | | | | | | |
Weighted Average Common Shares | |
| 65,550 | |
| 65,462 | |
| 60,640 |
Weighted Average OP Units | |
| 2,077 | |
| 1,669 | |
| 1,732 |
Weighted Average LTIP Units | |
| 2,751 | |
| 2,531 | |
| 2,176 |
Weighted Average Shares and Units Outstanding – basic and diluted | |
| 70,378 | |
| 69,662 | |
| 64,548 |
ReconciliationEarnings Before Interest, Taxes, Depreciation and Amortization for Real Estate (EBITDAre) and Adjusted EBITDAre
The Company calculates EBITDAre in accordance with standards established by NAREIT and defines EBITDAre as net income or loss computed in accordance with GAAP plus depreciation and amortization, interest expense, gain or loss on the sale of Weighted Average Sharesinvestment properties, and Units Outstanding:
| Weighted Average Common Shares | 19,617 | 9,302 | 250 | |||||||||
| Weighted Average OP Units | 204 | - | - | |||||||||
| Weighted Average LTIP Units | 421 | - | - | |||||||||
| Weighted Average Shares and Units Outstanding – basic and diluted | 20,242 | 9,302 | 250 |
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likelyimpairment loss, as applicable. The Company defines Adjusted EBITDAre as EBITDAre plus loss on extinguishment of debt, non-cash stock compensation expense, non-cash intangible amortization related to have a current or future effect or change on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are materialabove and below market leases, preacquisition expense and other normalizing items. Management considers EBITDAre and Adjusted EBITDAre important measures because they provide additional information to investors. The term “off-balance sheet arrangement” generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have (i) any obligation arising under a guarantee contract, derivative instrument or variable interest; or (ii) a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.
Contractual Obligations
We are a party to aallow management, agreement with our Advisor. Pursuant to that agreement, our Advisor is entitled to receive a base management fee and an incentive fee and, in certain circumstances, a termination fee. Such fees and expenses do not have fixed and determinable payments. For a description of the management agreement provisions, see “Business—Our Advisorinvestors, and our Management Agreement.”
The following table summarizescurrent and potential creditors to evaluate and compare our material contractual payment obligationscore operating results and commitments asour ability to service debt.
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A reconciliation of net income to EBITDAre and Adjusted EBITDAre for the years ended December 31, 2017:
| Payments Due By Period | ||||||||||||||||||||
| Total | Less than 1 Year | 2019-2020 | 2021-2022 | Thereafter | ||||||||||||||||
| Principal – fixed rate debt, gross | $ | 39,475 | $ | 22 | $ | 7,356 | $ | 764 | $ | 31,333 | ||||||||||
| Principal – variable rate debt | 164,900 | - | 164,900 | - | - | |||||||||||||||
| Interest – fixed rate debt | 14,630 | 1,977 | 3,899 | 3,364 | 5,390 | |||||||||||||||
| Interest – variable rate debt | 11,019 | 5,746 | 5,273 | - | - | |||||||||||||||
| Ground and other operating leases | 2,202 | 78 | 164 | 164 | 1,796 | |||||||||||||||
| Total | $ | 232,226 | $ | 7,823 | $ | 181,592 | $ | 4,292 | $ | 38,519 | ||||||||||
As of December 31, 2017, the Company had tenant improvement allowances of approximately $10 million. These tenant improvement allowances are subject to contingencies that make it difficult to predict when such allowances will be utilized, if at all.
Inflation
Historically, inflation has had a minimal impact on the operating performance of our healthcare facilities. Many of our triple-net lease agreements contain provisions designed to mitigate the adverse impact of inflation. These provisions include clauses that enable us to receive payment of increased rent pursuant to escalation clauses which generally increase rental rates during the terms of the leases. These escalation clauses often provide for fixed rent increases or indexed escalations (based upon the consumer price index or other measures). However, some of these contractual rent increases may be less than the actual rate of inflation. Most of our triple-net lease agreements require the tenant-operator to pay an allocable share of operating expenses, including common area maintenance costs, real estate taxes2023, 2022, and insurance. This requirement reduces our exposure to increases in these costs and operating expenses resulting from inflation.2021 is as follows:
| | | | | | | | |
| Year Ended December 31, | |||||||
| 2023 |
| 2022 |
| 2021 | |||
| (unaudited and in thousands) | |||||||
Net income | $ | 21,734 | | $ | 19,996 | | $ | 18,342 |
Interest expense |
| 30,893 | |
| 25,230 | |
| 19,696 |
Depreciation and amortization expense | | 58,135 | | | 56,723 | | | 46,875 |
Gain on sale of investment properties | | (15,560) | | | (6,753) | | | (1,069) |
EBITDAre | $ | 95,202 | | $ | 95,196 | | $ | 83,844 |
Loss on extinguishment of debt | | 868 | | | — | | | — |
Stock-based compensation expense |
| 4,242 | |
| 4,681 | |
| 5,810 |
Amortization of above market leases, net |
| 1,052 | |
| 1,027 | |
| 520 |
Preacquisition expense |
| 44 | |
| 354 | |
| 151 |
Adjusted EBITDAre | $ | 101,408 | | $ | 101,258 | | $ | 90,325 |
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. In pursuing our business and investment objectives, we expect that the primary market risk to which we will be exposed is interest rate risk.
We may be exposed to the effects of interest rate changes primarily as a result of debt used to acquire healthcare facilities, including borrowings under the restated credit facility.Credit Facility. The analysis below presents the sensitivity of the market value of our variable rate financial instrumentsobligations to selected changes in market interest rates. The range of changes chosen reflects our view of changes which are reasonably possible over a one-year period.
As of December 31, 2017,2023, we had $164.9$92.4 million of unhedged borrowings outstanding under the Revolving Credit Facility, whichRevolver (before the netting of unamortized debt issuance costs) that bears interest at a variable rate, and $38.5 million outstanding, net of unamortized debt discount of $1 million on our third party debt.rate. See the “Liquidity and Capital Resources” section of our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sectionOperation — Liquidity and Capital Resources” for a detailed discussion of our Revolving Credit Facility. At December 31, 2017, LIBOR2023, SOFR on our outstanding floating-rate borrowings was 1.44%5.36%. Assuming no increase in the amount of our variable interest rate debt, if LIBORSOFR increased 100 basis points, our cash flow would decrease by approximately $1.7$0.9 million annually. Assuming no increase in the amount of our variable rate debt, if LIBORSOFR were reduced 100 basis points, our cash flow would increase by approximately $1.7$0.9 million annually.
As of December 31, 2022, our exposure to interest rate risk was not materially different from our exposure as of December 31, 2023.
Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve our objectives, we may borrow at fixed rates or variablefloating rates. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Hedging Instruments,” for a description of our interest rate swaps.
We also may enter into additional derivative financial instruments, such asincluding interest rate swaps and caps, in order to mitigate our interest rate risk on a related financial instrument.our future borrowings. We will not enter into derivative transactions for speculative purposes.
In addition to changes in interest rates, the value of our future investments is subject to fluctuations based on changes in local and regional economic conditions and changes in the creditworthiness of tenants/operators and borrowers, which may affect our ability to refinance our debt if necessary.
49
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| |
Report of Independent Registered Public Accounting Firm (PCAOB ID Number 34) | 51 |
| |
Consolidated Balance Sheets as of December 31, | 53 |
| |
54 | |
| |
55 | |
| |
56 | |
| |
57 | |
| |
58 |
50
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the ShareholdersStockholders and the Board of Directors of
Global Medical REIT Inc.
OpinionsOpinion on the Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of Global Medical REIT Inc. and its subsidiaries (collectively, the “Company”(the "Company") as of December 31, 20172023 and 2016, and2022, the related consolidated statements of operations, stockholders’comprehensive income, equity, and cash flows, for each of the three years in the three-year period ended December 31, 2017,2023, and the related notes and the schedule listed in the Index at Item 15(a)(2) (collectively referred to as the “consolidated financial statements”"financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20172023 and 2016,2022, and the results of theirits operations and theirits cash flows for each of the three years in the three-year period ended December 31, 2017,2023, in conformity with accounting principles generally accepted in the United States of America. Also
We have also audited, in our opinion,accordance with the standards of the Public Company maintained, in all material respects, effectiveAccounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017,2023, based on criteria established in Internal Control—Control — Integrated Framework (2013) issued by COSO.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effectivethe Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2024, expressed an unqualified opinion on the Company's internal control over financial reporting, andreporting.
Basis for its assessmentOpinion
These financial statements are the responsibility of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting.Company's management. Our responsibility is to express opinions on the Company’s consolidated financial statements and an opinion on the Company’s internal control overCompany's financial reportingstatements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the auditsaudit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
fraud. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respondsrespond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.opinion.
Definition and Limitations of Internal Control Over Financial ReportingCritical Audit Matter
A company’s internal control over financial reportingThe critical audit matter communicated below is a process designed to provide reasonable assurance regardingmatter arising from the reliabilitycurrent-period audit of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with accounting principles generally accepted inthat was communicated or required to be communicated to the United States of America. A company’s internal control over financial reporting includes those policiesaudit committee and procedures that (1) pertainrelates to accounts or disclosures that are material to the maintenancefinancial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of recordscritical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Real Estate Assets — Determination of Impairment Indicators — Refer to Notes 2
Critical Audit Matter Description
The Company’s evaluation of real estate assets for impairment involves an initial assessment of each real estate asset to determine whether events or changes in circumstances exist that may indicate that the carrying amounts of real estate assets are no longer recoverable. Possible indications of impairment may include events or changes in reasonable detail, accuratelycircumstances affecting occupancy, market rental rates, estimated hold periods and fairly reflectphysical condition. When events or changes in circumstances exist, the transactions and dispositionsCompany evaluates its real estate assets for impairment by comparing undiscounted future cash flows expected to be generated over the life of each asset to the
51
respective carrying amount. If the carrying amount of an asset exceeds the undiscounted future cash flows, an analysis is performed to determine the fair value of the asset.
The Company makes significant assumptions to evaluate real estate assets for possible indications of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statementsimpairment. Changes in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets thatthese assumptions could have a material effectsignificant impact on the consolidated financial statements.real estate assets identified for further analysis. For the year ended December 31, 2023, no impairment loss has been recognized on real estate assets.
BecauseGiven the Company’s evaluation of its inherent limitations, internal control over financial reportingpossible indications of impairment of real estate assets requires management to make significant assumptions, performing audit procedures to evaluate whether management appropriately identified events or changes in circumstances indicating that the carrying amounts of real estate assets may not prevent or detect misstatements. Also, projectionsbe recoverable required a high degree of anyauditor judgment.
For real estate assets where indicators of impairment were determined to be present, the determination of the future undiscounted cash flows involved significant judgment. In particular, the undiscounted cash flows were forecasted based on significant assumptions such as lease-up periods, lease revenue rates, operating expenses, and revenue and expense growth rates, and included judgments around the intended hold period and terminal capitalization rates.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the evaluation of effectiveness to future periods are subject toreal estate assets for possible indications of impairment included the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
following, among others:
| We tested the effectiveness of controls over management’s identification of possible circumstances that may indicate that the carrying amounts of real estate assets are no longer recoverable, including management’s controls over the review of assumptions such as estimated hold periods, lease-up periods, estimated future rental rates, future capital expenditures, future operating expenses, and market capitalization rates for residual values. |
| ● | We evaluated management’s impairment analysis by: |
| - | Testing real estate assets for possible indications of impairment, including searching for adverse asset-specific and/or market conditions. |
| - | Developing an independent expectation of impairment indicators and comparing such expectation to management’s analysis. |
| ● | For real estate assets where indicators of impairment were determined to be present, we subjected a sample of undiscounted cash flow models to testing by (1) evaluating the source information used by management, (2) testing the mathematical accuracy of the undiscounted cash flow models, (3) evaluating management’s intended hold period, and (4) performing an independent recoverability test based on market data. |
/s/ DELOITTE & TOUCHE LLP
McLean, VA
February 28, 2024
We have served as the Company's auditor since 2011.2019.
52
GLOBAL MEDICAL REIT INC.
Consolidated Balance Sheets
(in thousands, except par values)
| As of December 31, | ||||||||
| 2017 | 2016 | |||||||
| Assets | ||||||||
| Investment in real estate: | ||||||||
| Land | $ | 42,701 | $ | 17,786 | ||||
| Building | 384,338 | 179,253 | ||||||
| Site improvements | 4,808 | 1,465 | ||||||
| Tenant improvements | 8,010 | 1,186 | ||||||
| Acquired lease intangible assets | 31,650 | 7,187 | ||||||
| 471,507 | 206,877 | |||||||
| Less: accumulated depreciation and amortization | (13,594 | ) | (3,367 | ) | ||||
| Investment in real estate, net | 457,913 | 203,510 | ||||||
| Cash and cash equivalents | 5,109 | 19,671 | ||||||
| Restricted cash | 2,005 | 941 | ||||||
| Tenant receivables | 704 | 212 | ||||||
| Escrow deposits | 1,638 | 1,212 | ||||||
| Deferred assets | 3,993 | 705 | ||||||
| Deferred financing costs, net | 2,750 | 927 | ||||||
| Other assets | 459 | 141 | ||||||
| Total assets | $ | 474,571 | $ | 227,319 | ||||
| Liabilities and Stockholders’ Equity | ||||||||
| Liabilities: | ||||||||
| Revolving credit facility | $ | 164,900 | $ | 27,700 | ||||
| Notes payable, net of unamortized discount of $930 and $1,062 at December 31, 2017 and 2016, respectively | 38,545 | 38,413 | ||||||
| Notes payable to related parties | - | 421 | ||||||
| Accounts payable and accrued expenses | 2,020 | 574 | ||||||
| Dividends payable | 5,638 | 3,604 | ||||||
| Security deposits and other | 2,128 | 720 | ||||||
| Due to related parties, net | 1,036 | 581 | ||||||
| Acquired lease intangible liability, net | 1,291 | 278 | ||||||
| Total liabilities | 215,558 | 72,291 | ||||||
| Stockholders' equity: | ||||||||
| Preferred stock, $0.001 par value, 10,000 shares authorized; 3,105 and no shares issued and outstanding at December 31, 2017 and 2016, respectively (liquidation preference of $77,625 and $0, respectively) | 74,959 | - | ||||||
| Common stock, $0.001 par value, 500,000 shares authorized; 21,631 shares and 17,606 shares issued and outstanding at December 31, 2017 and 2016, respectively | 22 | 18 | ||||||
| Additional paid-in capital | 205,788 | 171,997 | ||||||
| Accumulated deficit | (34,434 | ) | (16,987 | ) | ||||
| Total Global Medical REIT Inc. stockholders' equity | 246,335 | 155,028 | ||||||
| Noncontrolling interest | 12,678 | - | ||||||
| Total equity | 259,013 | 155,028 | ||||||
| Total liabilities and stockholders' equity | $ | 474,571 | $ | 227,319 | ||||
| | | | | | |
| | As of December 31, | ||||
|
| 2023 |
| 2022 | ||
Assets | | | | | | |
Investment in real estate: | | | | | | |
Land | | $ | 164,315 | | $ | 168,308 |
Building | |
| 1,035,705 | |
| 1,079,781 |
Site improvements | |
| 21,974 | |
| 22,024 |
Tenant improvements | |
| 66,358 | |
| 65,987 |
Acquired lease intangible assets | |
| 138,617 | |
| 148,077 |
| |
| 1,426,969 | |
| 1,484,177 |
Less: accumulated depreciation and amortization | |
| (247,503) | |
| (198,218) |
Investment in real estate, net | |
| 1,179,466 | |
| 1,285,959 |
Cash and cash equivalents | |
| 1,278 | |
| 4,016 |
Restricted cash | |
| 5,446 | |
| 10,439 |
Tenant receivables, net | |
| 6,762 | |
| 8,040 |
Due from related parties | | | 193 | | | 200 |
Escrow deposits | |
| 673 | |
| 7,833 |
Deferred assets | |
| 27,132 | |
| 29,616 |
Derivative asset | | | 25,125 | | | 34,705 |
Goodwill | | | 5,903 | | | 5,903 |
Other assets | |
| 15,722 | |
| 6,550 |
Total assets | | $ | 1,267,700 | | $ | 1,393,261 |
| | | | | | |
Liabilities and Equity | | | | | | |
Liabilities: | | | | | | |
Credit Facility, net of unamortized debt issuance costs of $7,067 and $9,253 at December 31, 2023 and December 31, 2022, respectively | | $ | 585,333 | | $ | 636,447 |
Notes payable, net of unamortized debt issuance costs of $66 and $452 at December 31, 2023 and December 31, 2022, respectively | |
| 25,899 | |
| 57,672 |
Accounts payable and accrued expenses | |
| 12,781 | |
| 13,819 |
Dividends payable | |
| 16,134 | |
| 15,821 |
Security deposits | |
| 3,688 | |
| 5,461 |
Other liabilities | |
| 12,770 | |
| 7,363 |
Acquired lease intangible liability, net | |
| 5,281 | |
| 7,613 |
Total liabilities | |
| 661,886 | |
| 744,196 |
Commitments and Contingencies | | | | | | |
Equity: | | | | | | |
Preferred stock, $0.001 par value, 10,000 shares authorized; 3,105 issued and outstanding at December 31, 2023 and December 31, 2022, respectively (liquidation preference of $77,625 at December 31, 2023 and December 31, 2022, respectively) | |
| 74,959 | |
| 74,959 |
Common stock, $0.001 par value, 500,000 shares authorized; 65,565 shares and 65,518 shares issued and outstanding at December 31, 2023 and December 31, 2022, respectively | |
| 66 | |
| 66 |
Additional paid-in capital | |
| 722,418 | |
| 721,991 |
Accumulated deficit | |
| (238,984) | |
| (198,706) |
Accumulated other comprehensive income | |
| 25,125 | |
| 34,674 |
Total Global Medical REIT Inc. stockholders' equity | |
| 583,584 | |
| 632,984 |
Noncontrolling interest | |
| 22,230 | |
| 16,081 |
Total equity | |
| 605,814 | |
| 649,065 |
Total liabilities and equity | | $ | 1,267,700 | | $ | 1,393,261 |
The accompanying notes are an integral part of these consolidated financial statements.
53
GLOBAL MEDICAL REIT INC.
Consolidated Statements of Operations
(in thousands, except per share amounts)
| Year Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Revenue | ||||||||||||
| Rental revenue | $ | 28,511 | $ | 8,080 | $ | 2,049 | ||||||
| Expense recoveries | 1,712 | - | - | |||||||||
| Other income | 121 | 131 | 13 | |||||||||
| Total revenue | 30,344 | 8,211 | 2,062 | |||||||||
| Expenses | ||||||||||||
| Acquisition fees | 2,523 | 1,568 | - | |||||||||
| Acquisition fees – related party | - | 754 | 627 | |||||||||
| General and administrative | 5,489 | 4,219 | 425 | |||||||||
| Operating expenses | 1,860 | 73 | 80 | |||||||||
| Management fees – related party | 3,123 | 1,434 | 360 | |||||||||
| Depreciation expense | 7,929 | 2,335 | 660 | |||||||||
| Amortization expense | 2,072 | 42 | - | |||||||||
| Interest expense | 7,435 | 4,139 | 1,519 | |||||||||
| Total expenses | 30,431 | 14,564 | 3,671 | |||||||||
| Net loss | $ | (87 | ) | $ | (6,353 | ) | $ | (1,609 | ) | |||
| Less: Preferred stock dividends | (1,714 | ) | - | - | ||||||||
| Less: Net loss attributable to noncontrolling interest | 49 | - | - | |||||||||
| Net loss attributable to common stockholders | $ | (1,752 | ) | $ | (6,353 | ) | $ | (1,609 | ) | |||
| Net loss attributable to common stockholders per share – basic and diluted | $ | (0.09 | ) | $ | (0.68 | ) | $ | (6.44 | ) | |||
| Weighted average shares outstanding – basic and diluted | 19,617 | 9,302 | 250 | |||||||||
| | | | | | | | | |
| | Year Ended December 31, | |||||||
|
| 2023 |
| 2022 |
| 2021 | |||
| | | | | | | | | |
Revenue | | | | | | | | | |
Rental revenue | | $ | 140,934 | | $ | 137,167 | | $ | 115,804 |
Other income | |
| 115 | |
| 116 | |
| 132 |
Total revenue | |
| 141,049 | |
| 137,283 | |
| 115,936 |
| | | | | | | | | |
Expenses | | | | | | | | | |
General and administrative | |
| 16,853 | |
| 16,545 | |
| 16,453 |
Operating expenses | |
| 28,082 | |
| 25,188 | |
| 15,488 |
Depreciation expense | |
| 41,266 | |
| 40,008 | |
| 33,825 |
Amortization expense | |
| 16,869 | |
| 16,715 | |
| 13,050 |
Interest expense | |
| 30,893 | |
| 25,230 | |
| 19,696 |
Preacquisition expense | |
| 44 | |
| 354 | |
| 151 |
Total expenses | |
| 134,007 | |
| 124,040 | |
| 98,663 |
| | | | | | | | | |
Income before gain on sale of investment properties and loss on extinguishment of debt | | | 7,042 | | | 13,243 | | | 17,273 |
Gain on sale of investment properties | | | 15,560 | | | 6,753 | | | 1,069 |
Loss on extinguishment of debt | | | (868) | | | — | | | — |
| | | | | | | | | |
Net income | | $ | 21,734 | | $ | 19,996 | | $ | 18,342 |
Less: Preferred stock dividends | |
| (5,822) | |
| (5,822) | |
| (5,822) |
Less: Net income attributable to noncontrolling interest | |
| (1,122) | |
| (854) | |
| (720) |
Net income attributable to common stockholders | | $ | 14,790 | | $ | 13,320 | | $ | 11,800 |
| | | | | | | | | |
Net income attributable to common stockholders per share – basic and diluted | | $ | 0.23 | | $ | 0.20 | | $ | 0.19 |
| | | | | | | | | |
Weighted average shares outstanding – basic and diluted | |
| 65,550 | |
| 65,462 | |
| 60,640 |
The accompanying notes are an integral part of these consolidated financial statements.
54
GLOBAL MEDICAL REIT INC.
Consolidated Statements of Stockholders’ EquityComprehensive Income
(in thousands)
| Common Stock | Preferred Stock | |||||||||||||||||||||||||||||||||||
| Shares | $ | Shares | $ Amount | Additional Capital | Accumulated Deficit | GMR Equity | Non- controlling | Total Equity | ||||||||||||||||||||||||||||
| Balances, December 31, 2014 | 250 | $ | - | - | $ | - | $ | 3,012 | $ | (1,286 | ) | $ | 1,726 | $ | - | $ | 1,726 | |||||||||||||||||||
| Net loss | - | - | - | - | - | (1,609 | ) | (1,609 | ) | - | (1,609 | ) | ||||||||||||||||||||||||
| Dividends to stockholders | - | - | - | - | - | (256 | ) | (256 | ) | - | (256 | ) | ||||||||||||||||||||||||
| Balances, December 31, 2015 | 250 | - | - | - | 3,012 | (3,151 | ) | (139 | ) | - | (139 | ) | ||||||||||||||||||||||||
| Net loss | - | - | - | - | - | (6,353 | ) | (6,353 | ) | - | (6,353 | ) | ||||||||||||||||||||||||
| Issuance of initial public offering shares of common stock | 15,000 | 15 | - | - | 138,954 | - | 138,969 | - | 138,969 | |||||||||||||||||||||||||||
| Reclassification of deferred initial public offering costs | - | - | - | - | (1,681 | ) | - | (1,681 | ) | - | (1,681 | ) | ||||||||||||||||||||||||
| Conversion of convertible debenture due to related party to shares of common stock | 2,356 | 3 | - | - | 30,027 | - | 30,030 | - | 30,030 | |||||||||||||||||||||||||||
| Stock-based compensation expense | - | - | - | - | 1,685 | - | 1,685 | - | 1,685 | |||||||||||||||||||||||||||
| Dividends to stockholders | - | - | - | - | - | (7,483 | ) | (7,483 | ) | - | (7,483 | ) | ||||||||||||||||||||||||
| Balances, December 31, 2016 | 17,606 | 18 | - | - | 171,997 | (16,987 | ) | 155,028 | - | 155,028 | ||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | (38 | ) | (38 | ) | (49 | ) | (87 | ) | |||||||||||||||||||||||
| Issuance of shares of common stock | 4,025 | 4 | - | - | 34,234 | - | 34,238 | - | 34,238 | |||||||||||||||||||||||||||
| Reclassification of deferred common stock offering costs | - | - | - | - | (443 | ) | - | (443 | ) | - | (443 | ) | ||||||||||||||||||||||||
| Stock-based compensation expense | - | - | - | - | - | - | - | 1,796 | 1,796 | |||||||||||||||||||||||||||
| Issuance of shares of preferred stock | - | - | 3,105 | 75,180 | - | - | 75,180 | - | 75,180 | |||||||||||||||||||||||||||
| Reclassification of deferred preferred stock offering costs | - | - | - | (221 | ) | - | - | (221 | ) | - | (221 | ) | ||||||||||||||||||||||||
| Dividends to common stockholders | - | - | - | - | - | (15,695 | ) | (15,695 | ) | - | (15,695 | ) | ||||||||||||||||||||||||
| Dividends to preferred stockholders | - | - | - | - | - | (1,714 | ) | (1,714 | ) | - | (1,714 | ) | ||||||||||||||||||||||||
| Dividends to noncontrolling interest | - | - | - | - | - | - | - | (601 | ) | (601 | ) | |||||||||||||||||||||||||
| OP Units issued to third parties | - | - | - | - | - | - | - | 11,532 | 11,532 | |||||||||||||||||||||||||||
| Balances, December 31, 2017 | 21,631 | $ | 22 | 3,105 | $ | 74,959 | $ | 205,788 | $ | (34,434 | ) | $ | 246,335 | $ | 12,678 | $ | 259,013 | |||||||||||||||||||
| | | | | | | | | |
| | Year Ended December 31, | |||||||
|
| 2023 |
| 2022 |
| 2021 | |||
| | | | | | | | | |
Net income | | $ | 21,734 | | $ | 19,996 | | $ | 18,342 |
Other comprehensive (loss) income: | | | | | | | | | |
(Decrease) increase in fair value of interest rate swap agreements | |
| (9,549) | |
| 41,310 | |
| 11,583 |
Total other comprehensive (loss) income | |
| (9,549) | |
| 41,310 | |
| 11,583 |
Comprehensive income | |
| 12,185 | |
| 61,306 | |
| 29,925 |
Less: Preferred stock dividends | |
| (5,822) | |
| (5,822) | |
| (5,822) |
Less: Comprehensive income attributable to noncontrolling interest | |
| (464) | |
| (3,342) | |
| (1,390) |
Comprehensive income attributable to common stockholders | | $ | 5,899 | | $ | 52,142 | | $ | 22,713 |
The accompanying notes are an integral part of these consolidated financial statements.
55
GLOBAL MEDICAL REIT INC.
Consolidated Statements of Cash FlowsEquity
(in thousands)thousands, except per share amounts)
| Year Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Operating activities | ||||||||||||
| Net loss | $ | (87 | ) | $ | (6,353 | ) | $ | (1,609 | ) | |||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||||||
| Depreciation expense | 7,929 | 2,335 | 660 | |||||||||
| Amortization of acquired lease intangible assets | 2,072 | 42 | - | |||||||||
| Amortization of above (below) market leases, net | 129 | (1 | ) | - | ||||||||
| Amortization of deferred financing costs | 1,224 | 350 | 127 | |||||||||
| Stock-based compensation expense | 1,796 | 1,685 | - | |||||||||
| Capitalized deal costs charged to expense | 19 | - | - | |||||||||
| Advisory expense settled in OP Units | 232 | - | - | |||||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Restricted cash | (993 | ) | (558 | ) | - | |||||||
| Tenant receivables | (492 | ) | (212 | ) | 3 | |||||||
| Deferred assets | (3,288 | ) | (681 | ) | (94 | ) | ||||||
| Other assets | (144 | ) | - | - | ||||||||
| Accounts payable and accrued expenses | 1,355 | (40 | ) | 344 | ||||||||
| Security deposits and other | 1,408 | 719 | - | |||||||||
| Accrued management fees due to related party | 443 | (9 | ) | 360 | ||||||||
| Net cash provided by (used in) operating activities | 11,603 | (2,723 | ) | (209 | ) | |||||||
| Investing activities | ||||||||||||
| Purchase of land, buildings, and other tangible and intangible assets and liabilities | (252,220 | ) | (150,459 | ) | (31,764 | ) | ||||||
| Escrow deposits for purchase of properties | (352 | ) | 104 | (439 | ) | |||||||
| Loans repayments from (made to) related party | 21 | 138 | (136 | ) | ||||||||
| Pre-acquisition costs for purchase of properties | (102 | ) | (141 | ) | - | |||||||
| Net cash used in investing activities | (252,653 | ) | (150,358 | ) | (32,339 | ) | ||||||
| Financing activities | ||||||||||||
| Net proceeds received from preferred stock offering | 74,959 | - | - | |||||||||
| Net proceeds received from common equity offerings | 33,795 | 137,288 | - | |||||||||
| Change in restricted cash | (71 | ) | 64 | (251 | ) | |||||||
| Escrow deposits required by third party lenders | (74 | ) | (862 | ) | - | |||||||
| Loans (repaid to) from related party | (9 | ) | (395 | ) | 292 | |||||||
| (Repayment of) proceeds from convertible debenture, due to related party | - | (10,000 | ) | 34,584 | ||||||||
| Proceeds from notes payable from acquisitions | - | 41,321 | 7,378 | |||||||||
| Repayment of notes payable from acquisitions | - | (25,634 | ) | (349 | ) | |||||||
| Proceeds from note payable from related party | - | 1,950 | 383 | |||||||||
| Repayment of note payable from related party | (421 | ) | (1,950 | ) | - | |||||||
| Proceeds from revolving credit facility, net | 137,200 | 27,700 | - | |||||||||
| Payments of deferred financing costs | (2,915 | ) | (2,036 | ) | (138 | ) | ||||||
| Dividends paid to common stockholders, and OP Unit and LTIP Unit holders | (15,231 | ) | (3,878 | ) | (256 | ) | ||||||
| Dividends paid to preferred stockholders | (745 | ) | - | - | ||||||||
| Net cash provided by financing activities | 226,488 | 163,568 | 41,643 | |||||||||
| Net (decrease) increase in cash and cash equivalents | (14,562 | ) | 10,487 | 9,095 | ||||||||
| Cash and cash equivalents—beginning of period | 19,671 | 9,184 | 89 | |||||||||
| Cash and cash equivalents—end of period | $ | 5,109 | $ | 19,671 | $ | 9,184 | ||||||
| Supplemental cash flow information: | ||||||||||||
| Cash payments for interest | $ | 5,746 | $ | 4,099 | $ | 1,165 | ||||||
| Noncash financing and investing activities: | ||||||||||||
| Accrued dividends payable | $ | 5,638 | $ | 3,604 | $ | - | ||||||
| Conversion of convertible debenture due to majority stockholder to common stock | $ | - | $ | 30,030 | $ | - | ||||||
| Reclassification of common stock offering costs to additional paid-in capital | $ | 443 | $ | 1,681 | $ | - | ||||||
| Reclassification of preferred stock offering costs to preferred stock balance | $ | 221 | $ | - | $ | - | ||||||
| OP Units issued for noncash transaction | $ | 11,300 | $ | - | $ | - | ||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | Global | | | | | | | |
| | | | | | | | | | | | | | | | | | | Accumulated | | Medical | | | | | | | ||
| | | | | | | | | | | | | Additional | | | | | Other | | REIT Inc | | Non- | | | | ||||
| | Common Stock | | | Preferred Stock | | Paid-in | | Accumulated | | Comprehensive | | Stockholders’ | | controlling | | Total | ||||||||||||
|
| Shares |
| Amount | | Shares |
| Amount |
| Capital |
| Deficit |
| Income (Loss) |
| Equity |
| Interest |
| Equity | |||||||||
Balances, January 1, 2021 |
| 49,461 | | $ | 49 | | | 3,105 | | $ | 74,959 | | $ | 504,789 | | | (116,773) | | $ | (18,219) | | $ | 444,805 | | $ | 12,955 | | $ | 457,760 |
Net income |
| — | |
| — | |
| — | |
| — | |
| — | |
| 17,622 | |
| — | |
| 17,622 | |
| 720 | |
| 18,342 |
Issuance of shares of common stock, net |
| 15,350 | |
| 16 | |
| — | |
| — | |
| 205,586 | |
| — | |
| — | |
| 205,602 | |
| — | |
| 205,602 |
LTIP Units and OP Units redeemed for common stock | | 69 | | | — | | | — | | | — | | | 1,039 | | | — | | | — | | | 1,039 | | | (1,039) | | | — |
Change in fair value of interest rate swap agreements | | — | | | — | | | — | | | — | | | — | | | — | | | 11,583 | | | 11,583 | | | — | | | 11,583 |
Stock-based compensation expense | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 5,810 | | | 5,810 |
Dividends to common stockholders ($0.82 per share) |
| — | |
| — | |
| — | |
| — | |
| — | |
| (52,044) | |
| — | |
| (52,044) | |
| — | |
| (52,044) |
Dividends to preferred stockholders ($1.875 per share) |
| — | |
| — | |
| — | |
| — | |
| — | |
| (5,822) | |
| — | |
| (5,822) | |
| — | |
| (5,822) |
Dividends to noncontrolling interest | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (3,654) | | | (3,654) |
Balances, December 31, 2021 |
| 64,880 | |
| 65 | |
| 3,105 | |
| 74,959 | |
| 711,414 | |
| (157,017) | |
| (6,636) | |
| 622,785 | |
| 14,792 | |
| 637,577 |
Net income |
| — | |
| — | |
| — | |
| — | |
| — | |
| 19,142 | |
| — | |
| 19,142 | |
| 854 | |
| 19,996 |
Issuance of shares of common stock, net |
| 598 | |
| 1 | |
| — | |
| — | |
| 9,895 | |
| — | |
| — | |
| 9,896 | |
| — | |
| 9,896 |
LTIP Units and OP Units redeemed for common stock |
| 40 | |
| — | |
| — | |
| — | |
| 682 | |
| — | |
| — | |
| 682 | |
| (682) | |
| — |
Change in fair value of interest rate swap agreements |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| 41,310 | |
| 41,310 | |
| — | |
| 41,310 |
Stock-based compensation expense |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| 4,681 | |
| 4,681 |
Dividends to common stockholders ($0.84 per share) |
| — | |
| — | |
| — | |
| — | |
| — | |
| (55,009) | |
| — | |
| (55,009) | |
| — | |
| (55,009) |
Dividends to preferred stockholders ($1.875 per share) |
| — | |
| — | |
| — | |
| — | |
| — | |
| (5,822) | |
| — | |
| (5,822) | |
| — | |
| (5,822) |
Dividends to noncontrolling interest |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| (3,564) | |
| (3,564) |
Balances, December 31, 2022 |
| 65,518 | | | 66 | |
| 3,105 | | | 74,959 | | | 721,991 | | | (198,706) | | | 34,674 | | | 632,984 | | | 16,081 | | | 649,065 |
Net income |
| — | |
| — | |
| — | |
| — | |
| — | |
| 20,611 | |
| — | |
| 20,611 | |
| 1,123 | |
| 21,734 |
LTIP Units redeemed for common stock |
| 47 | |
| — | |
| — | |
| — | |
| 427 | |
| — | |
| — | |
| 427 | |
| (427) | |
| — |
OP Units issued for a property acquisition | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 5,482 | | | 5,482 |
Change in fair value of interest rate swap agreements |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| (9,549) | |
| (9,549) | |
| — | |
| (9,549) |
Stock-based compensation expense |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| 4,242 | |
| 4,242 |
Dividends to common stockholders ($0.84 per share) |
| — | |
| — | |
| — | |
| — | |
| — | |
| (55,067) | |
| — | |
| (55,067) | |
| — | |
| (55,067) |
Dividends to preferred stockholders ($1.875 per share) |
| — | |
| — | |
| — | |
| — | |
| — | |
| (5,822) | |
| — | |
| (5,822) | |
| — | |
| (5,822) |
Dividends to noncontrolling interest |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| (4,271) | |
| (4,271) |
Balances, December 31, 2023 |
| 65,565 | | $ | 66 | |
| 3,105 | | $ | 74,959 | | $ | 722,418 | | $ | (238,984) | | $ | 25,125 | | $ | 583,584 | | $ | 22,230 | | $ | 605,814 |
The accompanying notes are an integral part of these consolidated financial statements.
56
GLOBAL MEDICAL REIT INC.
Consolidated Statements of Cash Flows
(in thousands)
| | | | | | | | | |
| | Year Ended December 31, | |||||||
|
| 2023 |
| 2022 |
| 2021 | |||
Operating activities | | | | | | | | | |
Net income | | $ | 21,734 | | $ | 19,996 | | $ | 18,342 |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | |
Depreciation expense | |
| 41,266 | |
| 40,008 | |
| 33,825 |
Amortization of acquired lease intangible assets | |
| 16,691 | |
| 16,627 | |
| 12,963 |
Amortization of above market leases, net | |
| 1,052 | |
| 1,027 | |
| 520 |
Amortization of debt issuance costs and other | |
| 2,376 | |
| 2,201 | |
| 1,982 |
Stock-based compensation expense | |
| 4,242 | |
| 4,681 | |
| 5,810 |
Capitalized preacquisition and other costs charged to expense | | | 177 | | | 472 | | | 168 |
Reserve for uncollectible accounts, net | | | 852 | | | — | | | 183 |
Gain on sale of investment properties | | | (15,560) | | | (6,753) | | | (1,069) |
Loss on extinguishment of debt | | | 868 | | | — | | | — |
Other | |
| 433 | |
| 21 | |
| 62 |
Changes in operating assets and liabilities: | | | | | | | | | |
Tenant receivables | |
| 426 | |
| (2,970) | |
| (657) |
Deferred assets | |
| (2,863) | |
| (4,339) | |
| (5,298) |
Other assets and liabilities | |
| 542 | |
| 586 | |
| 12 |
Accounts payable and accrued expenses | |
| (2,023) | |
| 4,063 | |
| 1,924 |
Security deposits | | | (1,773) | | | 921 | | | 200 |
Net cash provided by operating activities | |
| 68,440 | |
| 76,541 | |
| 68,967 |
| | | | | | | | | |
Investing activities | | | | | | | | | |
Purchase of land, buildings, and other tangible and intangible assets and liabilities | |
| (442) | |
| (150,927) | | | (192,255) |
Net proceeds from sale of investment properties | | | 78,919 | | | 17,889 | | | 5,479 |
Escrow deposits for purchase of properties | |
| — | |
| 98 | | | 1,576 |
Repayments received from advances (made to) related parties | |
| 7 | |
| (38) | | | (60) |
Payment received on loan made to a tenant | | | — | | | 1,000 | | | — |
Capital expenditures on existing real estate investments | | | (9,604) | | | (5,274) | | | (9,405) |
Leasing commissions | | | (1,264) | | | — | | | — |
Net cash provided by (used in) investing activities | |
| 67,616 | |
| (137,252) | |
| (194,665) |
| | | | | | | | | |
Financing activities | | | | | | | | | |
Net proceeds received from common equity offerings | |
| — | |
| 9,896 | | | 205,522 |
Escrow deposits required by third party lenders | |
| 7,160 | |
| (1,974) | | | (2,716) |
Repayment of notes payable | |
| (1,262) | |
| (1,158) | | | (8,003) |
Payment for CMBS loan defeasance | | | (31,525) | | | — | | | — |
Proceeds from Credit Facility | |
| 83,100 | |
| 138,600 | | | 221,600 |
Repayment of Credit Facility | |
| (136,400) | |
| (15,500) | | | (224,200) |
Payment of debt issue costs | | | (13) | | | (3,215) | | | (6,177) |
Dividends paid to common stockholders, and OP Unit and LTIP Unit holders | |
| (59,025) | |
| (58,420) | | | (52,500) |
Dividends paid to preferred stockholders | |
| (5,822) | |
| (5,822) | | | (5,822) |
Net cash (used in) provided by financing activities | |
| (143,787) | |
| 62,407 | |
| 127,704 |
Net (decrease) increase in cash and cash equivalents and restricted cash | |
| (7,731) | |
| 1,696 | |
| 2,006 |
Cash and cash equivalents and restricted cash—beginning of period | |
| 14,455 | |
| 12,759 | |
| 10,753 |
Cash and cash equivalents and restricted cash—end of period | | $ | 6,724 | | $ | 14,455 | | $ | 12,759 |
| | | | | | | | | |
Supplemental cash flow information: | | | | | | | | | |
Cash payments for interest | | $ | 30,149 | | $ | 21,619 | | $ | 17,707 |
| | | | | | | | | |
Noncash financing and investing activities: | | | | | | | | | |
Accrued dividends payable | | $ | 16,134 | | $ | 15,821 | | $ | 15,668 |
Interest rate swap agreements fair value change recognized in other comprehensive (loss) income | | $ | 9,549 | | $ | (41,310) | | $ | (11,583) |
OP Units and LTIP Units redeemed for common stock | | $ | 427 | | $ | 682 | | $ | 1,039 |
Loan assumed in connection with a facility acquisition | | $ | — | | $ | 1,513 | | $ | — |
Accrued capital expenditures and leasing commissions included in accounts payable and accrued expenses | | $ | 2,230 | | $ | 1,365 | | $ | 1,220 |
OP Units issued for a property acquisition | | $ | 5,482 | | $ | — | | $ | — |
Recognition of lease liability related to right of use asset | | $ | 4,634 | | $ | — | | $ | — |
Write off of unamortized debt issuance costs from loan defeasance | | $ | 240 | | $ | — | | $ | — |
The accompanying notes are an integral part of these consolidated financial statements.
57
GLOBAL MEDICAL REIT INC.
Notes to Consolidated Financial Statements
(InDollars in thousands, except per share amounts)
Note 1 – Organization
Background
Global Medical REIT Inc. (the “Company”) is a Maryland corporation engaged primarily in the acquisition of licensed, state-of-the-art, purpose-builtand internally managed real estate investment trust (“REIT”) that owns and acquires healthcare facilities and the leasing of theseleases those facilities to strong clinical operators with leading market share. The Company is externally managedphysician groups and advised by Inter-American Management, LLC (the “Advisor”), a Delaware limited liability companyregional and affiliate of the Company. ZH International Holdings Limited (formerly known as Heng Fai Enterprises, Ltd.) a Hong Kong limited liability company that is engaged in real estate development, investments, hospitality management and investments, and REIT management, is an 85% owner of the Advisor and the Company’s Chief Executive Officer owns the remaining 15% interest.
national healthcare systems. The Company holds its facilities and conducts its operations through a Delaware limited partnership subsidiary, named Global Medical REIT L.P. (the “Operating Partnership”). The Company serves as the sole general partner of the Operating Partnership through a wholly-ownedwholly owned subsidiary of the Company, named Global Medical REIT GP LLC, (the “GP”), a Delaware limited liability company. As of December 31, 2017,2023, the Company was the 93.63%92.91% limited partner of the Operating Partnership, with an aggregate of 6.37%7.09% of the Operating Partnership owned by holders of long-term incentive plan units (“LTIP”LTIP Units”) units and third-party holders oflimited partners who contributed properties or services to the Operating Partnership Unitsin exchange for common limited partnership units (“OP Units”). The Operating Partnership holds the Company’s healthcare facilities through separate wholly-owned Delaware limited liability company subsidiaries that were formed for each healthcare facility acquisition. The Company’s common stock is listed on the New York Stock Exchange under the ticker symbol “GMRE.��” The Company's Series A Preferred Stock is listed on the New York Stock Exchange under the ticker symbol "GMRE PrA."
The Company elected to be taxed as a REIT for U.S. federal income tax purposes commencing with its taxable year ended December 31, 2016.
Note 2 – Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company including the Operating Partnership and its wholly-ownedwholly owned subsidiaries. The Company presents the portion of any equity it does not own but controls (and thus consolidates) as noncontrolling interest. Noncontrolling interest in the Company includes the LTIP unitsUnits that have been granted to directors, employeesofficers and affiliates of the Company and the OP Units held by third parties. Refer to Note 5 – “Stockholders’ Equity”“Equity” and Note 7 – “Stock-Based Compensation” and for additional information regarding the OP Units and LTIP units.
Units.
The Company classifies noncontrolling interest as a component of consolidated equity on its Consolidated Balance Sheets, separate from the Company’s total stockholders’ equity. The Company’s net income or loss is allocated to noncontrolling interests based on the respective ownership or voting percentage in the Operating Partnership associated with such noncontrolling interests and is removed from consolidated income or loss on the Consolidated Statements of Operations in order to derive net income or loss attributable to common stockholders. The noncontrolling ownership percentage is calculated by dividing the aggregate number of LTIP unitsUnits and OP Units held by the total number of units and shares outstanding. Any future issuances of additional LTIP units or OP Units would change the noncontrolling ownership interest.
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires the Company to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and footnotes. Actual results could differ from those estimates.
Revenue Recognition
Investment in Real Estate
The Company’s operations currently consist mainlyCompany determines when an acquisition meets the definition of rental revenue earned from tenants under leasing arrangements which provide for minimum rent and escalations. The leases have beena business or alternatively should be accounted for as operating leases. For operating leasesan asset acquisition in accordance with contingent rental escalators, revenueAccounting Standard Codification ("ASC") Topic 805 "Business Combinations" ("ASC Topic 805"), which requires that, when substantially all of the fair value of an acquisition is recorded based onconcentrated in a single identifiable asset or a group of similar identifiable assets, the contractual cash rental payments due duringasset or group of similar identifiable assets does not meet the period. Revenue from leases with fixed annual rental escalators are recognized ondefinition of a straight-line basis over the initial lease term, subject to a collectability assessment, with the difference between the contractual rental receiptsbusiness and the straight-line amounts recorded as a “deferred rent receivable.” Additionally, the Company recognizes “expense recoveries” revenue, which represents revenue recognized related to tenant reimbursement of real estate taxes, insurance, and certain other operating expenses. The Company recognizes these reimbursements and related expenses on a gross basis in its Consolidated Statements of Operations, i.e., the Company recognizes an equivalent increase in revenue (“expense recoveries”) and expense (“operating expenses”).
The Company consistently assesses the need for an allowance for doubtful accounts, including an allowance for operating lease straight-line rent receivables, for estimated losses resulting from tenant defaults, or the inability of tenants to make contractual rent and tenant recovery payments. The Company also monitors the liquidity and creditworthiness of its tenants and operators on a continuous basis. This evaluation considers industry and economic conditions, property performance, credit enhancements and other factors. For operating lease straight-line rent amounts, the Company's assessmenttherefore is based on amounts estimatedrequired to be recoverable over the term of the lease. As of December 31, 2017accounted for as an asset acquisition. Transaction costs are capitalized for asset acquisitions and 2016 no allowance was recordedexpensed as one was not deemed necessary.incurred for business combinations.
Purchase of Real Estate
Transactions in which real estate assets are purchasedFor asset acquisitions that are “owner occupied” (meaning that the seller either is the tenant or otherwise not subject to an existing lease are treated as asset acquisitions and recorded at theircontrols the tenant), the purchase price, including capitalized acquisition costs, which iswill be allocated to land and building based uponon their relative fair values atwith no value allocated to intangible assets or liabilities. For asset acquisitions where there is a lease in place but not “owner occupied,” the date of acquisition. Transactions in which real estateCompany will allocate the purchase price to tangible assets are acquired with an existing lease or as part of a portfolio level transaction with significant leasing activity are treated as a business combination under Accounting Standards Codification (“ASC”) Topic 805, Business Combinations, and theany intangible assets acquired andor liabilities assumed including identified intangible assets and liabilities, are recorded atbased on their relative fair value.values. Fair value is determined based upon the guidance of ASC Topic 820, Fair“Fair Value Measurements and Disclosures,” andgenerally
58
are determined using Level 2 inputs, such as rent comparables, sales comparables, and broker indications. Although Level 3 Inputs are utilized, they are minor in comparison to the Level 2 data used for the primary assumptions.assumptions. The determination of fair value involves the use of significant judgment and estimates. The Company makesWe make estimates to determine the fair value of the tangible and intangible assets acquired and liabilities assumed using information obtained from multiple sources, including pre-acquisition due diligence, and the Companywe routinely utilize the assistance of a third-party appraiser. Initial valuations are subject to change until the information is finalized, no later than 12 months from the acquisition date. The Company expenses transaction costs associated with acquisitions accounted for as business combinations in the period incurred.
Valuation of tangible assets in business combination:
assets:
The fair value of land is determined using the sales comparison approach whereby recent comparable land sales and listings are gathered and summarized. The available market data is analyzed and compared to the land being valued and adjustments are made for dissimilar characteristics such as market conditions, size, and location. The Company estimates the fair value of buildings acquired on an as-if-vacant basis and depreciatedepreciates the building value over its estimated remaining life. Fair value is primarily based on estimated cash flow projections that utilize discount and/or capitalization rates as well as available market information. The Company determines the fair value of site improvements (non-building improvements that include paving and other) using the cost approach, with a deduction for depreciation, and depreciatedepreciates the site improvements over their estimated remaining useful lives. Tenant improvements represent fixed improvements to tenant spaces, the fair value of which is estimated using prevailing market tenant improvement allowances that would be given to attract a new tenant, estimated based on the assumption that it is a necessary cost of leasing up a vacant building.allowances. Tenant improvements are amortized over the remaining term of the lease.
Valuation of intangible assets in business combination:
assets:
In determining the fair value of in-place leases (the avoided cost associated with existing in-place leases) management considers current market conditions and costs to execute similar leases in arriving at an estimate of the carrying costs during the expected lease-up period from vacant to existing occupancy. In estimating carrying costs, management includes reimbursable (based on market lease terms) real estate taxes, insurance, other operating expenses, as well as estimates of lost market rental revenue during the expected lease-up periods. The values assigned to in-place leases are amortized over the remaining term of the lease.
The fair value of above-or-below market leases is estimated based on the present value (using an interest rate which reflected the risks associated with the leases acquired) of the difference between contractual amounts to be received pursuant to the leases and management’s estimate of market lease rates measured over a period equal to the estimated remaining term of the lease. An above market lease is classified as an intangible asset and a below market lease is classified as an intangible liability. The capitalized above-market or below-market lease intangible isintangibles are amortized as a reduction of, rental revenue and the below-market lease intangible is amortized asor an addition to, rental revenueincome over the estimated remaining term of the respective leases.
Intangible assets related to leasing costs consist of leasing commissions and legal fees. Leasing commissions are estimated by multiplying the remaining contract rent associated with each lease by a market leasing commission. Legal fees represent legal costs associated with writing, reviewing, and sometimes negotiating various lease terms. Leasing costs are amortized over the remaining useful life of the respective leases.
Revenue Recognition
The Company’s operations primarily consist of rental revenue earned from tenants under leasing arrangements which provide for minimum rent and escalations. The leases have been accounted for as operating leases. For operating leases with contingent rental escalators, revenue is recorded based on the contractual cash rental payments due during the period. Revenue from leases with fixed annual rental escalators are recognized on a straight-line basis over the initial lease term, subject to a collectability assessment, with the difference between the contractual rental receipts and the straight-line amounts recorded as a “deferred rent receivable.” Additionally, the Company recognizes as a component of rental revenue, “expense recoveries” revenue, which represents revenue recognized related to tenant reimbursement of real estate taxes, insurance, and certain other operating expenses (“tenant reimbursements”). The Company recognizes these reimbursements and related expenses on a gross basis in its Consolidated Statements of Operations.
Assets Held for Sale and Sales of Real Estate
The Company classifies a property as held for sale when the following criteria are met: (i) management, having the authority to approve action, commits to a plan to sell the property in its present condition, (ii) the sale of the property is at a price reasonable in relation to its current fair value and (iii) the sale is probable and expected to be completed within one year. At that time, the Company
59
presents the assets and obligations associated with the real estate held for sale separately in its Consolidated Balance Sheets and ceases recording depreciation and amortization expense related to that asset. Real estate held for sale is reported at the lower of its carrying amount or its estimated fair value less estimated costs to sell. None of the Company’s properties were classified as held for sale as of December 31, 2023 or 2022.
Upon the disposition of a property, the Company recognizes a gain or loss at a point in time when the Company determines control of the underlying asset has been transferred to the buyer. The Company’s performance obligation is generally satisfied at the closing of the transaction. Any continuing involvement is analyzed as a separate performance obligation in the contract, and a portion of the sales price is allocated to each performance obligation. There is significant judgment applied to estimate the amount of variable consideration, if any, identified within the sales price and assess its probability of occurrence based on current market information, historical transactions, and forecasted information that is reasonably available.
For sales of real estate (or assets classified as held for sale), the Company evaluates whether the disposition is a strategic shift that will have a major effect on the Company’s operations and financial results, and, if so, it will be classified as discontinued operations in the Company’s consolidated financial statements for all periods presented.
Impairment of Long LivedLong-Lived Assets
The Company evaluates its real estate assets for impairment periodicallyat each reporting date or whenever events or circumstances indicate that its carrying amount may not be recoverable. If an impairment indicator exists, the Company compares the expected future undiscounted cash flows against the carrying amount of the asset. If the sum of the estimated undiscounted cash flows is less than the carrying amount of the asset, the Company would record an impairment loss for the difference between the estimated fair value and the carrying amount of the asset.
Cash and Cash Equivalents
and Restricted Cash
The Company considers all demand deposits, cashier’s checks, money market accounts, and certificates of depositsdeposit with a maturity of three months or less to be cash equivalents. The Company maintains its cash and cash equivalents and escrow deposits at financial institutions. The combined account balances may exceed the Federal Depository Insurance Corporation insurance coverage, and, as a result, there may be a concentration of credit risk related to amounts on deposit. The Company does not believe that this risk is significant.
Restricted Cash
TheAmounts included in restricted cash balance as of December 31, 2017 and 2016 was $2,005 and $941, respectively. The restricted cash balance as of December 31, 2017 consisted of $454 of cash required by a third-party lender to be held by the Company as a reserve for debt service and $1,620 inrepresent certain security deposits received from facility tenants at the inception of their leases net of $69 in funds the Company paid for specific tenant expenses, such as real estate taxes and insurance, on the tenant’s behalf. The restricted cash balance as of December 31, 2016 consisted of $383 of cash required by a third-party lender to be held by the Company as a reserve for debt service, a security deposit of $320, and $238 in funds held by the Company from certainrelated to tenant reimbursements. The following table provides a reconciliation of its tenantsthe Company’s cash and cash equivalents and restricted cash that sums to the Company collected to pay specific tenant expenses, such as real estate taxes and insurance.total of those amounts at the end of the periods presented on the Company’s accompanying Consolidated Statements of Cash Flows:
| | | | | | |
| | As of December 31, | ||||
|
| 2023 |
| 2022 | ||
Cash and cash equivalents |
| $ | 1,278 |
| $ | 4,016 |
Restricted cash | | | 5,446 | | | 10,439 |
Total cash and cash equivalents and restricted cash |
| $ | 6,724 |
| $ | 14,455 |
Tenant Receivables,
Net
The tenant receivable balance as of December 31, 20172023 and 20162022 was $704$6,762 and $212,$8,040, respectively. The balance as of December 31, 20172023 consisted of $125$2,062 in funds owed from the Company’s tenants for rent that the Company had earned but had not yet received, and $579 in funds owed by certain$4,372 of tenant reimbursements, $131 for a loan that was made to one of the Company’s tenants, for amounts the Company collects to pay specific tenant expenses, such as real estate taxes and insurance, on the tenants’ behalf.$197 of miscellaneous receivables. The balance as of December 31, 20162022 consisted primarily of $51$1,348 in funds owed from the Company’s tenants for rent that the Company had earned but had not yet received, and $161 in funds owed by certain$5,520 of tenant reimbursements, $143 for a loan that was made to one of the Company’s tenants, and $1,029 of miscellaneous receivables.
Receivables arising from operating leases are accounted for amountsin accordance with ASC Topic 842 “Leases” (“ASC Topic 842”). The Company assesses the likelihood of losses resulting from tenant defaults, or the inability of tenants to make contractual rent and tenant reimbursements at each reporting date. The Company also monitors the liquidity and creditworthiness of its tenants and operators on a continuous basis. If the likelihood of a tenant paying its lease payments is determined to no longer be probable, all tenant receivables, including deferred rent, are written off against revenue and any future revenue for that tenant is recognized only upon receipt of cash. In addition, as of December 31, 2023 and 2022, the Company collectshad a portfolio level reserve of $350 on those leases that were probable of collection to pay specificensure that the tenant expenses, such as real estate taxes and insurance, on the tenants’ behalf.lease receivables were not overstated.
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Escrow Deposits
The escrow balance as of December 31, 2023 and 2022 was $673 and $7,833, respectively. Escrow deposits include funds held in escrow to be used for the acquisition of properties in the future and for the payment of taxes insurance, and other amountsinsurance. As a result of the defeasance of the Cantor Loan (hereinafter defined) in December 2023, $8,409 of cash that was held in escrow, as stipulated by the Company’s Cantor Loan, as hereinafter defined. Thewas returned to the Company. Refer to Note 4 – “Credit Facility, Notes Payable and Derivative Instruments” for additional details regarding the Cantor Loan and its defeasance. Additionally, in December 2023, $990 in funds withheld from the proceeds paid to the Company for the sale of a portfolio of four medical office buildings in Oklahoma City, Oklahoma, in June 2023 were released to the Company from escrow balance asin accordance with the terms of December 31, 2017 and 2016 was $1,638 and $1,212, respectively.
the purchase agreement.
Deferred Assets
The deferred assets balance as of December 31, 20172023 and 20162022 was $3,993$27,132 and $705,$29,616, respectively. The balance as of December 31, 20172023 consisted of $3,842$26,757 in deferred rent receivables resulting from the recognition of revenue from leases with fixed annual rental escalations on a straight-line basis and the balance$375 of $151 represented other deferred costs. The December 31, 2016 balance of $705 consisted of deferred rent receivables.
Other Assets
Other assets primarily consists of capitalized costs related to the Company’s property acquisitions. Costs that are incurred prior to the completion of the acquisition of a property are capitalized if all of the following conditions are met: (a) the costs are directly identifiable with the specific property, (b) the costs would be capitalized if the property were already acquired, and (c) acquisition of the property is probable. These costs are included with the value of the acquired property upon completion of the acquisition. The costs are charged to expense when it is probable that the acquisition will not be completed. The other assets balance was $459 as of December 31, 2017, which consisted of $316 in capitalized costs related to property acquisitions and $143 in a prepaid asset. The balance as of December 31, 2016 was $141,2022 consisted of $29,467 in deferred rent receivables resulting from the recognition of revenue from leases with fixed annual rental escalations on a straight-line basis and consisted solely$149 of capitalized costs related to property acquisitions.other deferred costs.
Security Deposits and Other
Assets
The security deposits and other liabilityassets balance as of December 31, 20172023 and 20162022 was $2,128$15,722 and $720,$6,550, respectively. The balance as of December 31, 20172023 consisted of security deposits$7,627 for right of $1,620use assets, $3,346 in capitalized construction in process costs, $1,379 in prepaid assets, $2,894 in net capitalized leasing commissions, and a tenant impound liability of $508 related to amounts owed$476 for specific tenant expenses, such as real estate taxesnet capitalized software costs and insurance.miscellaneous assets. The balance as of December 31, 20162022 consisted of security deposits$3,480 for right of $320use assets, $1,552 in capitalized construction in process costs, $1,380 in prepaid assets, and a tenant impound liability$138 for net capitalized software costs and miscellaneous assets. Refer to Note 8 – “Leases” for additional details on right of $400 relateduse assets.
Derivative Instruments - Interest Rate Swaps
The derivative asset balance as of December 31, 2023 and 2022 was $25,125 and $34,705, respectively. In accordance with the Company’s risk management strategy, the purpose of the interest rate swaps is to manage interest rate risk for certain of the Company’s variable-rate debt. The interest rate swaps involve the Company’s receipt of variable-rate amounts owedfrom the counterparties in exchange for specific tenant expenses, suchthe Company making fixed-rate payments over the life of the agreements. The Company accounts for derivative instruments in accordance with the provisions of ASC Topic 815, “Derivatives and Hedging.” Refer to Note 4 – “Credit Facility, Notes Payable and Derivative Instruments” for additional details.
Other Liabilities
The other liabilities balance as real estate taxesof December 31, 2023 and insurance.
2022 was $12,770 and $7,363, respectively. The balance as of December 31, 2023 consisted of $7,680 for right of use liabilities and $5,090 of prepaid rent. The balance as of December 31, 2022 consisted of $2,922 for right of use liabilities and $4,441 of prepaid rent. Refer to Note 8 – “Leases” for additional details on right of use liabilities.
Net LossIncome Attributable to Common Stockholders Per Share
The Company uses the treasury stock method to compute diluted net income or loss attributable to common stockholders per share. Basic net income or loss per share of common stock is computed by dividing net income or loss attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted net income or loss per share of common stock is computed by dividing net income or loss attributable to common stockholders by the sum of the weighted average number of shares of common stock outstanding plus any potential dilutive shares for the period. As of December 31, 2017, 267 LTIP units had vested, none of which were converted into OP units, and there were 1,246 outstanding OP Units held by third parties. As of December 31, 2016, 137 LTIP units had vested, none of which were converted into OP Units and there were no outstanding OPLTIP Units held by third parties. The effectare not reflected in the diluted per share calculation because the exchange of the conversion of the vested LTIP units into OP Units and the conversion of OPLTIP Units into common stock is not reflected in the computation of basic and diluted earnings per share, as all units are exchangeable for common stock on a one-for-one basis, and both are anti-dilutiveallocated net income on a per share basis equal to the Company’scommon stock. Accordingly, any exchange would not have any effect on diluted net loss for the years ended December 31, 2017 and 2016. The Company had no LTIP units or OP Units during the year ended December 31, 2015.income available to common stockholders per share. The Company considered the requirements of the two-classtwo-
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class method when computing earnings per share and determined that there would be no difference in its reported results if the two-classthat method was utilized.
Debt Issuance Costs
Debt issuancecosts include amounts paid to lenders and other third parties to obtain financingboth fixed term and revolving debt and are amortized to interest expense on a straight-line basis over the term of the related loan. Debt issuance costs related to a fixed term debt liability are presented as a debt discount in the Consolidated Balance Sheets and presented as a direct reduction from the carrying amount of that debt. Debt issuance costs incurred related to securing and modifying the Company’s revolving credit facility are recorded as an asset, net of accumulated amortization, entitled “deferred financing costs, net” in the Consolidated Balance Sheets. Refer to Note 4 – “Notes“Credit Facility, Notes Payable and Revolving Credit Facility”Derivative Instruments” for additional details.
Related Party Disclosures
The Company enters into transactions with affiliated entities, or “related parties,” which are recorded net as “Due to Related Parties”receivables or payables in the accompanying Consolidated Balance Sheets. Related party disclosures are governed by ASC Topic 850, Related“Related Party Disclosures.” Refer to Note 6 – “Related Party Transactions” for additional information regarding the Company’s related party transactions.
Stock-Based Compensation
As disclosed in Note 7 – “Stock Based Compensation,” theThe Company grants LTIP unitUnit awards, including awards that vest over time and awards that vest based on achievement of specified performance criteria, to employees of its Advisoremployees and its affiliates, and to the Company’s independent directors. The Company expenses the fair value ofaccounts for all LTIP units in accordance with the fair value recognition requirements ofawards under ASC Topic 718, Compensation-Stock Compensation, and ASC Topic 505, Equity.
"Compensation-Stock Compensation." Refer to Note 7 – “Stock Based Compensation” for additional details.
Depreciation and Amortization Expense
Real estate and related assets are stated net of accumulated depreciation. Renovations, replacements and other expenditures that improve or extend the life of assets are capitalized and depreciated over their estimated useful lives. Expenditures for ordinary maintenance and repairs are charged to expense as incurred. Depreciation expense is computed using the straight-line method over the estimated remaining useful liveslife of the buildings, which are generally between 20and 52 years, tenant improvements, which are generally between 4one and 4019 years, and site improvements, which are generally between three and 15 years. Values assigned to in-place lease and leasing costs intangible assets are charged as amortization expense using the straight-line method over the remaining term of the respective leases.
Goodwill
As of December 31, 2023 and 2022, the Company’s goodwill balance was $5,903. Goodwill represents the excess of consideration paid over the fair value of underlying identifiable net assets of businesses acquired. The Company’s goodwill balance was derived from the management internalization transaction. Goodwill has an indefinite life and is not amortized, but is tested for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The Company’s policy is to perform its annual goodwill impairment evaluation as of the first day of the fourth quarter of its fiscal year. The Company has one reporting unit.
Goodwill is evaluated for impairment either under a qualitative assessment option or a quantitative approach depending on the facts and circumstances of the reporting unit, consideration of the excess of the reporting unit's fair value over its carrying amount in previous assessments and changes in business environment.
When performing a qualitative assessment, the Company considers factors including, but not limited to, current macroeconomic conditions, industry and market conditions, cost factors, financial performance and other events relevant to the entity or the reporting unit to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If the Company determines that it is more likely than not that the reporting unit's fair value is less than its carrying amount, a quantitative goodwill impairment test is performed.
When performing a quantitative goodwill impairment test, the reporting unit carrying value is compared to its fair value. Goodwill is deemed impaired if, and the impairment loss is recognized for the amount by which, the reporting unit carrying value exceeds its fair value.
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Estimating the fair value of a reporting unit requires the exercise of significant judgment and assumptions including judgments about expected future cash flows, weighted-average cost of capital, discount rates and expected long-term growth rates. A significant change to these estimates and assumptions could cause the estimated fair values of our reporting unit to decline and increase the risk of an impairment charge to earnings.
The Company performed a qualitative analysis during the fourth quarter of the current fiscal year and determined that it was more likely than not that the fair value of the reporting unit was in excess of the reporting units carrying value, and as a result, a quantitative step one analysis was not necessary.
Income Taxes
The Company elected to be taxed as a REIT for U.S. federal income tax purposes commencing with its taxable year ended December 31, 2016. REITs areA REIT is generally not subject to U.S. federal income taxes if the Companyit can meet many specific requirements. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to U.S. federal and state income tax (including for 2017 and prior taxable years only, any applicable alternative minimum tax) on its taxable income at regular corporate tax rates, and the Company may be ineligiblecould not re-elect REIT status until the fifth calendar year after the year in which the failure occurred. Even if the Company continues to qualify as a REIT for subsequent tax years. Although the Company qualifies as a REIT, it may be subject to certain state or local income taxes, and if the Company creates a TaxableCompany’s taxable REIT Subsidiary (“TRS”), the TRSsubsidiary will be subject to U.S. federal, state, and local taxes on its income at regular corporate rates. The Company recognizes the tax effects of uncertain tax positions only if the position is more likely than not to be sustained upon audit, based on the technical merits of the position. The Company has not identified any material uncertain tax positions and recognizes interest and penalties in income tax expense, if applicable. The Company is currently not under examination by any income tax jurisdiction.
Fair Value of Financial Instruments
Fair value is a market-based measurement and should be determined based on the assumptions that market participants would use in pricing an asset or liability. In accordance with ASC Topic 820, the valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels are defined as follows:
| ● | Level | 1 - Inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets; |
| ● | ||
| 2 - Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument; and |
| ● | ||
| 3 - Inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
The Company considers the carrying values of cash and cash equivalents, escrow deposits, accounts and other receivables, and accounts payable and accrued expenses to approximate the fair value for these financial instruments because of the short period of time since origination or the short period of time between origination of the instruments and their expected realization. Due to the short-term nature of these instruments, Level 1 and Level 2 inputs are utilized to estimate the fair value of these financial instruments. The Company considers the carrying value of its debt to approximate fair value. The fair values determined related to the Company’s interest rate swap transactions that are accounted for as business combinationsutilize Level 2 inputs, since there is heavy reliance on a variety of inputs including contractual terms, interest rate curves, yield curves, measure of volatility, and correlations of such inputs. The fair values determined related to the Company’s acquisitions of real estate where the identification and recording of intangible assets and liabilities is required primarily utilize Level 2 inputs since there is heavy reliance on market observable data such as rent comparables, sales comparables, and broker indications. Although some Level 3 inputs are utilized, they are minor in comparison to the Level 2 date used for the primary assumptions as it relates to business combination valuations.
acquisitions of real estate.
Segment Reporting
ASC Topic 280, Segment“Segment Reporting,” establishes standards for reporting financial and descriptive information about a public entity'sentity’s reportable segments. The Company has determined that it has one reportable segment, with activities related to investing in medical properties. The Company evaluates the operating performance of its investments on an individual asset level basis.
Recent Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business.” ASU 2017-01 provides revised guidance to determine when an acquisition meets the definition of a business or should be accounted for as an asset acquisition. ASU 2017-01 requires that, when substantially all of the fair value of an acquisition is concentrated in a single identifiable asset or a group of similar identifiable assets, the asset or group of similar identifiable assets does not meet the definition of a business and therefore is required to be accounted for as an asset acquisition. Transaction costs will continue to be capitalized for asset acquisitions and expensed as incurred for business combinations. ASU 2017-01 likely will result in substantially all of the Company’s prospective acquisitions being accounted for as asset acquisitions due to the fact that substantially all of the fair value of the gross assets the Company acquires are concentrated in a single asset or group of similar identifiable assets. ASU 2017-01 is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. The Company will adopt ASU 2017-01 effective January 1, 2018.
In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230) Restricted Cash” (“ASU 2016-18”),which requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash. Therefore, amounts generally described as restricted cash will be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for annual and interim periods beginning after December 15, 2017 and early adoption is permitted using a retrospective transition method to each period presented. The Company does not expect the adoption of ASU 2016-18 to have a material impact on its consolidated statements of cash flows.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments.” ASU 2016-15 will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. The Company does not expect the adoption of this standard to have a significant impact on its consolidated statements of cash flows and related disclosures.
In February 2016, the FASB issued ASU 2016-02, “Leases.” ASU 2016-02 amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. The standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. As a result of adopting ASU 2016-02, the Company will recognize all of its operating leases for which it is the lessee, currently consisting of only ground leases, on its consolidated balance sheets. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018. Early adoption is permitted. The Company is evaluating the impact of the adoption of ASU 2016-02 on its consolidated financial statements and related disclosures as well as the timing of adopting the standard.
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In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” ASU 2014-09 creates a new Topic, ASC Topic 606, which is principle-based and provides a five-step model to determine when and how revenue is recognized. The core principle in ASU 2014-09 is that a company should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017, and allows for either full retrospective or modified retrospective adoption. Under the full retrospective method, the standard would be applied retrospectively to all reporting periods represented on the financial statements. The modified retrospective approach applies the standard in the yearTable of initial application and presents the cumulative effect of prior periods with an adjustment to beginning retained earnings, with no restatement of comparative periods. The Company intends to implement the standard using the modified retrospective approach. As leasing arrangements, which are excluded from ASU 2014-09, represent the primary source of revenue for the Company, the impact of adopting this standard will be limited to the Company’s recognition and presentation of non-lease revenues. Accordingly, the Company does not expect the adoption of this standard to have a significant impact on its consolidated financial statements and related disclosures.Contents
Reclassifications
The Company reclassified the line item “Acquired Lease Intangible Assets, Net” on its Consolidated Balance Sheets as of December 31, 2016, to present the gross intangible assets acquired as part of its business combination transactions as a separate line item within the category “Investment in Real Estate” and also reclassified the related accumulated amortization balance on the intangible assets acquired to the line item “Accumulated Depreciation and Amortization.” This reclassification was made to conform to the Company’s presentation of those balances as of December 31, 2017.
The Company’s Consolidated Statements of Operations for the years ended December 31, 2017, 2016, and 2015 include the expense line item “Operating Expenses” which primarily includes both reimbursable property operating expenses that the Company pays on behalf of certain of its tenants, including real estate taxes and insurance, non-reimbursable property operating expenses, and other operating expenses. Reimbursements of tenant operating expenses are recorded on a gross basis, i.e., the Company recognizes an equivalent increase in revenue (expense recoveries) and expense (operating expenses). Prior to the year ended December 31, 2017, the Company recorded property operating expenses in the “General and Administrative” expense line item. Accordingly for prior years these expenses have been reclassified from the “General and Administrative” expense line item into the “Operating Expenses” line item within the Company’s Consolidated Statements of Operations.
Note 3 – Property Portfolio
Summary of Properties Acquired and Sold During the Year Ended December 31, 2017
2023
During the year ended December 31, 2017,2023 the Company completed 23 acquisitions. one acquisition. For this acquisition, substantially all of the fair value was concentrated in a single identifiable asset or group of similar identifiable assets and, therefore, the acquisition represents an asset acquisition. Accordingly, transaction costs for this acquisition were capitalized.
During the year ended December 31, 2023, the Company completed three dispositions. In March 2023, the Company sold a medical office building located in Jacksonville, Florida receiving gross proceeds of $4.4 million, resulting in a gain of $0.5 million. In June 2023 the Company sold a portfolio of four medical office buildings located in Oklahoma City, Oklahoma receiving gross proceeds of $66.0 million, resulting in a gain of $12.8 million. In August 2023, the Company sold a medical office building located in North Charleston, South Carolina receiving gross proceeds of $10.1 million, resulting in a gain of $2.3 million.
A rollforward of the gross investment in land, building, improvements, and improvementsacquired lease intangible assets as of December 31, 2017,2023 resulting from these acquisitions is as follows:
| Land | Building | Site & Tenant Improvements | Acquired Lease Intangibles | Gross Investment in Real Estate | ||||||||||||||||
| Balances as of January 1, 2017 | $ | 17,786 | $ | 179,253 | $ | 2,651 | $ | 7,187 | $ | 206,877 | ||||||||||
| Facility Acquired – Date Acquired: | ||||||||||||||||||||
| Cape Coral – 1/10/17 | 352 | 7,017 | - | - | 7,369 | |||||||||||||||
| Lewisburg – 1/12/17 | 471 | 5,819 | 505 | 505 | 7,300 | |||||||||||||||
| Las Cruces – 2/1/17 | 396 | 4,618 | - | - | 5,014 | |||||||||||||||
| Prescott – 2/9/17 | 791 | 3,821 | - | - | 4,612 | |||||||||||||||
| Clermont – 3/1/17 | - | 4,361 | 206 | 868 | 5,435 | |||||||||||||||
| Sandusky – 3/10/17 | 409 | 3,998 | - | - | 4,407 | |||||||||||||||
| Great Bend – 3/31/17 | 837 | 23,801 | - | - | 24,638 | |||||||||||||||
| Oklahoma City – 3/31/17 | 2,087 | 37,714 | 1,876 | 7,823 | 49,500 | |||||||||||||||
| Sandusky – 4/21/17 | 98 | 978 | - | - | 1,076 | |||||||||||||||
| Brockport – 6/27/17 | 413 | 6,885 | 492 | 1,295 | 9,085 | |||||||||||||||
| Flower Mound – 6/27/17 | 581 | 2,922 | 382 | 407 | 4,292 | |||||||||||||||
| Sherman facility – 6/30/17 | 1,601 | 25,011 | - | - | 26,612 | |||||||||||||||
| Sandusky facility – 8/15/17 | 56 | 1,215 | - | - | 1,271 | |||||||||||||||
| Lubbock facility – 8/18/17 | 1,303 | 5,042 | 947 | 908 | 8,200 | |||||||||||||||
| Germantown – 8/30/17 | 2,700 | 8,078 | 657 | 4,505 | 15,940 | |||||||||||||||
| Austin – 9/25/17 | 6,958 | 28,508 | 1,373 | 3,811 | 40,650 | |||||||||||||||
| Fort Worth – 11/10/17 | 1,487 | 3,334 | 643 | 786 | 6,250 | |||||||||||||||
| Albertville – 11/10/17 | 866 | 3,486 | 1,246 | 1,202 | 6,800 | |||||||||||||||
| Moline – 11/10/17 | 722 | 8,175 | 1,194 | 1,916 | 12,007 | |||||||||||||||
| Lee’s Summit – 12/18/17 | 428 | 2,426 | 646 | 437 | 3,937 | |||||||||||||||
| Amarillo – 12/20/17 | 1,437 | 7,254 | - | - | 8,691 | |||||||||||||||
| Wyomissing – 12/21/17 | 487 | 5,250 | - | - | 5,737 | |||||||||||||||
| Saint George – 12/22/17 | 435 | 5,372 | - | - | 5,807 | |||||||||||||||
| Total Additions1: | 24,915 | 205,085 | 10,167 | 24,463 | 264,630 | |||||||||||||||
| Balances as of December 31, 2017 | $ | 42,701 | $ | 384,338 | $ | 12,818 | $ | 31,650 | $ | 471,507 | ||||||||||
| | | | | | | | | | | | | | | | | | |
| | | | | | | | Site | | Tenant | | Acquired Lease | | Gross Investment in | ||||
|
| Land |
| Building |
| Improvements |
| Improvements |
| Intangible Assets |
| Real Estate | ||||||
Balances as of December 31, 2022 | | $ | 168,308 | | $ | 1,079,781 | | $ | 22,024 | | $ | 65,987 | | $ | 148,077 | | $ | 1,484,177 |
Facility Acquired – Date Acquired: | | | | | | | | | | | | | | | | | | |
Redding – 4/17/23 | | | 771 | | | 3,798 | | | 174 | | | 321 | | | 872 | | | 5,936 |
Capitalized costs(1) | |
| — | | | 3,146 | | | 1,009 | | | 2,356 | | | 172 | |
| 6,683 |
Total Additions: | | | 771 | | | 6,944 | | | 1,183 | | | 2,677 | | | 1,044 | | | 12,619 |
Disposition of Jacksonville – 3/9/2023 | | | (1,023) | | | (2,827) | | | — | | | — | | | — | | | (3,850) |
Disposition of Oklahoma City – 6/30/2023 | | | (2,814) | | | (43,553) | | | (1,127) | | | (1,505) | | | (9,406) | | | (58,405) |
Disposition of North Charleston – 8/1/2023 | | | (927) | | | (4,640) | | | (106) | | | (801) | | | (1,098) | | | (7,572) |
Total Dispositions: | | | (4,764) | | | (51,020) | | | (1,233) | | | (2,306) | | | (10,504) | | | (69,827) |
Balances as of December 31, 2023 | | $ | 164,315 | | $ | 1,035,705 | | $ | 21,974 | | $ | 66,358 | | $ | 138,617 | | $ | 1,426,969 |
| (1) |
Depreciation expense was $7,929, $2,335,$41,266, $40,008, and $660$33,825 for the years ended December 31, 2017, 2016,2023, 2022, and 2015,2021, respectively.
As of December 31, 2017,2023, the Company had tenantaggregate capital improvement allowancescommitments and obligations to improve, expand, and maintain the Company’s existing facilities of approximately $10 million,$18,300. Many of these amounts are subject to contingencies that make it difficult to predict when such allowancesthey will be utilized, if at all. In accordance with the terms of the Company’s leases, capital improvement obligations in the next twelve months are expected to total approximately $13,900.
Summary of Properties Acquired and Sold During the Year Ended December 31, 2022
The following acquisitions completed duringDuring the year ended December 31, 2017 were accounted for as business combinations under ASC Topic 805. The purchase price allocation for2022 the Company completed 14 acquisitions. For each acquisition, is preliminary and subject to revision within the measurement period, not to exceed one year from the datesubstantially all of the acquisition:fair value was concentrated in a single identifiable asset or group of similar identifiable assets and, therefore, each acquisition represents an asset acquisition. Accordingly, transaction costs for these acquisitions were capitalized.
Lewisburg Facility -On January 12, 2017,During the year ended December 31, 2022, the Company purchased a medical office building located in Lewisburg, Pennsylvania, for a purchase price of $7.3 million. Upon the closing of the transaction,completed one disposition. In July 2022, the Company assumed two leases. Both leases expire in 2023 and have two five-year tenant renewal options. The following table presents the preliminary purchase price allocation:
| Land and site improvements | $ | 681 | ||
| Building and tenant improvements | 6,114 | |||
| In place leases | 373 | |||
| Leasing costs | 132 | |||
| Total purchase price | $ | 7,300 |
Clermont Facility -On March 1, 2017, the Company purchased the seller’s interest, as ground lessee, in certain real property and a medical building located in Clermont, Florida., for a purchase price of $5.23 million. The ground lease has a remaining term of approximately 71 years. Upon closing of this acquisition, the Company assumed four subleases: two subleases with South Lake Hospital, Inc. each expiring in 2024, each with two, five-year tenant renewal options, one sublease with Orlando Health, Inc. expiring in 2021 with two, five-year renewal options, and one sublease with Vascular Specialists of Central Florida expiring in 2024 with two, five-year renewal options. The following table presents the preliminary purchase price allocation:
| Site improvements | $ | 145 | ||
| Building and tenant improvements | 4,422 | |||
| In place leases | 255 | |||
| Above market lease intangibles | 488 | |||
| Leasing costs | 125 | |||
| Below market lease intangibles | (210 | ) | ||
| Total purchase price | $ | 5,225 |
Oklahoma City Facilities -On March 31, 2017, the Company purchased a surgical hospital, a physical therapy center (together with the hospital, “OCOM South”), and an outpatient ambulatory surgery center (“OCOM North”) located in Oklahoma City, Oklahoma for an aggregate purchase price of $49.5 million. The purchase price consisted of $44.4 million for OCOM South and $5.1 million for OCOM North.
Upon closing of the acquisition of OCOM South, the Company entered into a new lease (the “Master Lease”) with the seller that expires in 2022 and assumed, as a sublease to the Master Lease, the existing absolute triple-net lease (the “OCOM South Lease”) with Oklahoma Center for Orthopedic & Multi-Specialty Surgery, LLC (“OCOM”) with a remaining term expiring in 2034, subject to three consecutive five-year tenant renewal options. Upon the expiration of the Master Lease, the OCOM South Lease will become a direct lease with the Company. A portion of the rent under the OCOM South sublease is guaranteed by United Surgical Partners International, Inc. and INTEGRIS Health, Inc.
Upon closing of the acquisition of OCOM North, the Company assumed the existing lease. The lease has a remaining term expiring in 2022, with two consecutive five-year tenant renewal options. The following table presents the preliminary purchase price allocation:
| Land and site improvements | $ | 2,953 | ||
| Building and tenant improvements | 38,724 | |||
| Above market lease intangibles | 759 | |||
| In place leases | 4,392 | |||
| Leasing costs | 2,672 | |||
| Total purchase price | $ | 49,500 |
Brockport Facility -On June 27, 2017, the Company purchased a medical office building located in Brockport, New York for a purchase price of $8.67 million. Upon the closing of this acquisition, the Company assumed the existing lease with The Unity Hospital of Rochester. The lease has a remaining term expiring 2030, with three consecutive five-year tenant renewal options. The following table presents the preliminary purchase price allocation:
| Land and site improvements | $ | 693 | ||
| Building and tenant improvements | 7,097 | |||
| In place leases | 841 | |||
| Leasing costs | 454 | |||
| Below market lease intangible | (415 | ) | ||
| Total purchase price | $ | 8,670 |
Flower Mound Facility -On June 27, 2017, the Company purchased a medical office building located in Flower Mound, Texas for a purchase price of $4.1 million. Upon the closing of this acquisition, the Company assumed the existing lease with Lone Star Endoscopy Center, LLC. The lease has a remaining term expiring in 2026, with two consecutive five-year tenant renewal options. The following table presents the preliminary purchase price allocation:
| Land and site improvements | $ | 730 | ||
| Building and tenant improvements | 3,155 | |||
| In place leases | 222 | |||
| Leasing costs | 185 | |||
| Below market lease intangible | (242 | ) | ||
| Total purchase price | $ | 4,050 |
Lubbock Facility -On August 18, 2017, the Company purchased a medical office building located in Lubbock, Texas for a purchase price of $8.2 million. Upon the closing of this acquisition, the Company entered into a new lease with Lubbock Heart Hospital, LLC. The lease has a remaining term expiring 2029,with two consecutive five-year tenant renewal options. The following table presents the preliminary purchase price allocation:
| Land and site improvements | $ | 1,567 | ||
| Building and tenant improvements | 5,725 | |||
| In-place leases | 414 | |||
| Leasing costs | 494 | |||
| Total purchase price | $ | 8,200 |
Germantown Facility -On August 30, 2017, the Company purchasedsold a medical office building located in Germantown, Tennessee forreceiving gross proceeds of $17.9 million, resulting in a purchase price of $15.94 million. Upon the closing of this acquisition, the Company assumed three existing leases with the Urology Center of the South. The leases have remaining terms of approximately seven years and each lease has two consecutive five-year tenant renewal options. The following table presents the preliminary purchase price allocation:
| Land and site improvements | $ | 3,050 | ||
| Building and tenant improvements | 8,385 | |||
| Above market lease intangible | 3,284 | |||
| In-place leases | 587 | |||
| Leasing costs | 634 | |||
| Total purchase price | $ | 15,940 |
Austin Facility -On September 25, 2017, the Company purchased a rehabilitation hospital located in Austin, Texas and approximately 1.27 acres of land adjacent to the hospital that has been planned to accommodate the development of a long-term, acute care hospital for an aggregate purchase price of $40.65 million. Upon the closing of the acquisition of the facility, the Company assumed the existing lease with CTRH, LLC. The lease has a remaining term of approximately 9.6 years, with four consecutive five-year tenant renewal options, and 80% of the lease payments are guaranteed by Kindred Healthcare. The following table presents the preliminary purchase price allocation:
| Land and site improvements | $ | 7,223 | ||
| Building and tenant improvements | 29,616 | |||
| Above market lease intangible | 246 | |||
| In-place leases | 1,680 | |||
| Leasing costs | 1,885 | |||
| Total purchase price | $ | 40,650 |
Fort Worth Facility -On November 10, 2017, the Company purchased a medical office building located in Fort Worth, Texas for a purchase price of $6.25 million. Upon the closing of the acquisition, the Company assumed the existing lease with Texas Digestive Disease Consultants, PLLC. The lease has a remaining term of approximately 10 years with two consecutive five year tenant renewal options. The following table presents the preliminary purchase price allocation:
| Land and site improvements | $ | 1,738 | ||
| Building and tenant improvements | 3,726 | |||
| Above market lease intangible | 126 | |||
| In-place leases | 314 | |||
| Leasing costs | 346 | |||
| Total purchase price | $ | 6,250 |
Albertville Facility -On November 10, 2017, the Company purchased a medical office building located in Albertville, Minnesota for a purchase pricegain of $6.8 million. Upon the closing
64
| Land and site improvements | $ | 1,154 | ||
| Building and tenant improvements | 4,444 | |||
| Above market lease intangible | 103 | |||
| In-place leases | 802 | |||
| Leasing costs | 297 | |||
| Total purchase price | $ | 6,800 |
Moline Facility -On November 10, 2017, the Company purchased a medical office building located in Moline, Illinois for a purchase price of $11.9 million. Upon the closing of the acquisition, the Company assumed the existing leases with Heartland Clinic, LLC, RSC Illinois, LLC, and Valley Laboratories, L.L.C. Each lease has a remaining term of approximately 16 years with no tenant renewal options. The following table presents the preliminary purchase price allocation:
| Land and site improvements | $ | 854 | ||
| Building and tenant improvements | 9,237 | |||
| Above market lease intangible | 33 | |||
| In-place leases | 1,050 | |||
| Leasing costs | 833 | |||
| Below market lease intangible | (107 | ) | ||
| Total purchase price | $ | 11,900 |
Lee’s Summit Facility -On December 18, 2017, the Company purchased a medical office building located in Lee’s Summit, Missouri for a purchase price of $3.8 million. Upon the closing of the acquisition, the Company assumed the existing lease with Prime Healthcare Services Blue Springs, LLC. The lease has remaining term of approximately seven years remaining in its initial term, with two three-year extension options. The following table presents the preliminary purchase price allocation:
| Land and site improvements | $ | 571 | ||
| Building and tenant improvements | 2,929 | |||
| In-place leases | 303 | |||
| Leasing costs | 134 | |||
| Below market lease intangible | (137 | ) | ||
| Total purchase price | $ | 3,800 |
The following acquisitions completed during the year ended December 31, 2017 were accounted for as asset acquisitions:
Cape Coral Facility -On January 10, 2017, the Company purchased a medical office building located in Cape Coral, Florida, for a purchase price of $7.25 million. Upon the closing of the acquisition, the Company entered into a new 10-year lease with The Sypert Institute, P.A. with three consecutive five-year tenant renewal options.
Las Cruces Facility -On February 1, 2017, the Company purchased a medical office building located in Las Cruces, New Mexico for a purchase price of $4.88 million. Upon closing of this acquisition, the Company entered into a new 12-year lease with Las Cruces Orthopedic Associates with four consecutive five-year tenant renewal options.
Prescott Facility -On February 9, 2017, the Company purchased a medical office building located in Prescott, Arizona, for a purchase price of $4.5 million. Upon the closing of this acquisition, the Company entered into a new 10-year lease with Thumb Butte Medical Center, PLLC with two consecutive seven-year renewal options.
Sandusky Facility -On March 10, 2017, the Company purchased one, out of a total of seven, properties for a purchase price of approximately $4.3 million. Upon the closing of this acquisition, the Company entered into a new 11-year master lease with the Northern Ohio Medical Specialists (NOMS) with four consecutive five-year tenant renewal options.
Great Bend Facility -On March 31, 2017, the Company purchased an acute-care hospital located in Great Bend, Kansas for a purchase price of $24.5 million. Upon the closing of the acquisition, the Company entered into a new 15-year lease with Great Bend Regional Hospital with two consecutive ten-year renewal options.
Sandusky Facility -On April 21, 2017, the Company purchased a medical property (out of a total portfolio of seven medical properties) in Sandusky, Ohio for a purchase price of approximately $1.1 million. Upon the closing of this acquisition, the Company amended the existing master lease with NOMS to include the Sandusky facility
Sherman Facility -On June 30, 2017, the Company purchased a rehabilitation hospital and long-term acute care facility located in Sherman, Texas for a purchase price of $26 million. Upon closing of this acquisition, the Company entered into a new 20-year lease with SDB Partners, LLC. with two consecutive 10-year tenant renewal options.
Sandusky Facility (Ballville Facility) -On August 15, 2017, the Company purchased a medical office building located in Ballville, Ohio for a purchase price of $1.2 million. Upon the closing of this acquisition, the Company amended the existing master lease with NOMS to include the Ballville facility.
Amarillo Facility -On December 20, 2017, the Company purchased a medical office building located in Amarillo, Texas for a purchase price of $8.61 million. Upon the closing of this acquisition, the Company entered into a new 12-year lease with Amarillo Bone & Joint Clinic PLLC. with two consecutive 10-year tenant renewal options.
Wyomissing Facility -On December 21, 2017, the Company purchased a medical office building located in Wyomissing, Pennsylvania for a purchase price of $5.6 million. Upon the closing of this acquisition, the Company entered into a new 10-year lease with Berks-Schuylkill Respiratory Specialists, Ltd. with two consecutive five year tenant renewal options.
Saint George Facility -On December 22, 2017, the Company purchased a medical office building located in St. George, Utah for a purchase price of $5.715 million. Upon the closing of this acquisition, the Company entered into a new 12-year lease with Jason A. Ahee, M.D. P.C. doing business as Zion Eye Institute with four consecutive five-year tenant renewal options.
Summary of Properties Acquired During the Year Ended December 31, 2016
During the year ended December 31, 2016, the Company completed 10 acquisitions. A rollforward of the gross investment in land, building, improvements, and improvementsacquired lease intangible assets as of December 31, 2016,2022 resulting from these acquisitions is as follows:
| Land | Building | Site & Tenant Improvements | Acquired Lease Intangibles | Gross Investment in Real Estate | ||||||||||||||||
| Balances as of January 1, 2016 | $ | 4,564 | $ | 51,574 | $ | - | $ | - | $ | 56,138 | ||||||||||
| Facility Acquired – Date Acquired: | ||||||||||||||||||||
| Plano – 1/28/16 | 1,050 | 16,696 | - | - | 17,746 | |||||||||||||||
| Westland – 3/31/16 | 230 | 4,520 | - | - | 4,750 | |||||||||||||||
| Melbourne – 3/31/16 | 1,200 | 14,250 | - | - | 15,450 | |||||||||||||||
| Reading – 7/20/16 | 1,440 | 7,940 | - | - | 9,380 | |||||||||||||||
| East Orange – 9/29/16 | 2,150 | 10,112 | - | - | 12,262 | |||||||||||||||
| Watertown – 9/30/16 | 1,100 | 8,002 | - | - | 9,102 | |||||||||||||||
| Sandusky – 10/7/16 | 229 | 4,519 | - | - | 4,748 | |||||||||||||||
| Carson City – 10/31/16 | 761 | 3,268 | - | - | 4,029 | |||||||||||||||
| Ellijay – 12/16/16 | 777 | 2,929 | 544 | 870 | 5,120 | |||||||||||||||
| HealthSouth – 12/20/16 | 4,285 | 55,443 | 2,107 | 6,317 | 68,152 | |||||||||||||||
| Total Additions1: | 13,222 | 127,679 | 2,651 | 7,187 | 150,739 | |||||||||||||||
| Balances as of December 31, 2016 | $ | 17,786 | $ | 179,253 | $ | 2,651 | $ | 7,187 | $ | 206,877 | ||||||||||
| | | | | | | | | | | | | | | | | | |
|
| | |
| | | | Site |
| Tenant |
| Acquired Lease |
| Gross Investment in | ||||
|
| Land |
| Building |
| Improvements |
| Improvements |
| Intangible Assets |
| Real Estate | ||||||
Balances as of December 31, 2021 | | $ | 152,060 | | $ | 985,091 | | $ | 19,021 | | $ | 58,900 | | $ | 127,931 | | $ | 1,343,003 |
Facility Acquired – Date Acquired: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Gainesville – 2/4/22 | | | 555 | | | 3,899 | | | 76 | | | 199 | | | 575 | | | 5,304 |
Grand Rapids – 2/28/22 | | | 1,238 | | | 4,976 | | | 221 | | | 270 | | | 595 | | | 7,300 |
Sarasota – 3/29/22 | | | 747 | | | 3,703 | | | 84 | | | 331 | | | 1,263 | | | 6,128 |
Greenwood – 3/30/22 | | | 929 | | | 4,332 | | | 194 | | | 360 | | | 426 | | | 6,241 |
Fairbanks – 4/1/22 | | | 1,782 | | | 12,262 | | | 215 | | | 753 | | | 7,946 | | | 22,958 |
Rocky Point – 4/8/22 | | | 613 | | | 6,243 | | | 223 | | | 317 | | | 589 | | | 7,985 |
Fairfax – 5/11/22 | | | 4,012 | | | 13,238 | | | 399 | | | 310 | | | 3,304 | | | 21,263 |
Lee's Summit – 5/19/22 | | | 1,349 | | | 4,101 | | | 83 | | | 410 | | | 674 | | | 6,617 |
Lexington – 5/27/22 | | | 1,760 | | | 11,350 | | | 289 | | | 556 | | | 3,036 | | | 16,991 |
Toledo – 7/8/22 | | | 2,999 | | | 11,366 | | | 581 | | | 1,247 | | | 2,044 | | | 18,237 |
Lake Geneva – 7/26/22 | | | 444 | | | 4,612 | | | 141 | | | 230 | | | 725 | | | 6,152 |
Glenview – 9/1/22 | | | 1,448 | | | 6,258 | | | 241 | | | 279 | | | 912 | | | 9,138 |
Canandaigua – 9/16/22 | | | 578 | | | 11,118 | | | 370 | | | 489 | | | 1,493 | | | 14,048 |
Hermitage – 9/20/22 | | | 353 | | | 3,891 | | | 194 | | | 227 | | | 674 | | | 5,339 |
Capitalized costs(1) | | | 141 | | | 1,419 | | | 41 | | | 1,416 | | | 396 | | | 3,413 |
Total Additions: | |
| 18,948 | |
| 102,768 | |
| 3,352 | |
| 7,394 | |
| 24,652 | |
| 157,114 |
Disposition of Germantown – 7/1/22 | |
| (2,700) | |
| (8,078) | |
| (349) | |
| (307) | |
| (4,506) | |
| (15,940) |
Balances as of December 31, 2022 | | $ | 168,308 | | $ | 1,079,781 | | $ | 22,024 | | $ | 65,987 | | $ | 148,077 | | $ | 1,484,177 |
| (1) |
Additionally, during the year ended December 31, 2015 the Company funded acquisitions in the amount of $31,764.
The following acquisitions completed during the year ended December 31, 2016 were accounted for as business combinations under ASC Topic 805:
Westland Facility -On March 31, 2016, the Company purchased a medical office building and ambulatory surgery center located in Westland, Michigan for an aggregate purchase price of $4.75 million. Upon the closing of this acquisition, the Company entered into a new lease with The Surgical Institute of Michigan, LLC. The lease has a remaining term expiring in 2026, with two consecutive 10-year tenant renewal options. No intangible assets or liabilities were identified in connection with this acquisition and accordingly the purchase price was allocated entirely to land and building.
Ellijay Facilities -On December 16, 2016, the Company purchased one medical office building and two ancillary healthcare-related buildings, located in Ellijay, Georgia, for a purchase price of $4.9 million. Upon the closing of this acquisition, the Company assumed the existing lease with Piedmont Mountainside Hospital, Inc. The lease has a remaining term expiring in 2026, with two consecutive five-year tenant renewal options. The following table presents the preliminary purchase price allocation:
| Land and site improvements | $ | 913 | ||
| Building and tenant improvements | 3,337 | |||
| In place leases | 672 | |||
| Leasing commissions and legal fees | 198 | |||
| Below market lease intangibles | (220 | ) | ||
| Total purchase price | $ | 4,900 |
Encompass (formerly HealthSouth) Facilities -Encompass East Valley Rehabilitation Hospital – Mesa, AZ- On December 20, 2016, the Company purchased a rehabilitation hospital located in Mesa, Arizona for a purchase price of $22.4 million. Upon the closing of this acquisition, the Company assumed the existing lease with Encompass Mesa Rehabilitation Hospital, LLC. The lease has a remaining term expiring in 2024 with four consecutive five-year tenant renewal options.
Encompass Rehabilitation Hospital of Altoona – Altoona, PA - On December 20, 2016, the Company purchased the a rehabilitation hospital located in Altoona, Pennsylvania for a purchase price of $21.5 million. Upon the closing of this acquisition, the Company assumed from existing lease with Encompass. The lease has a remaining term expiring in 2021 with two consecutive five-year tenant renewal options.
Encompass Rehabilitation Hospital of Mechanicsburg – Mechanicsburg, PA - On December 20, 2016, the Company (i) purchased a rehabilitation hospital in Mechanicsburg, Pennsylvania for a purchase price of $24.2 million; and (ii) accepted an assignment of the ground lessee’s interest in the ground lease dated May 1, 1996 from the assignor, whereby PENNSYLVANIA HRT, INC. ground leased the property to HR ACQUISITION OF PENNSYLVANIA, INC. Upon the closing of this acquisition, the Company assumed the existing lease with Encompass. The lease has a remaining term expiring in 2021 with two consecutive five-year tenant renewal options. Encompass has the option under the lease to purchase the property at the end of the initial lease term and at the end of each renewal term thereof, if any, upon the terms and conditions set forth in the lease. The following table presents the preliminary purchase price allocation:
| Land and site improvements | $ | 5,615 | ||
| Building and tenant improvements | 56,221 | |||
| In place leases | 5,154 | |||
| Above market lease intangibles | 74 | |||
| Leasing costs | 1,088 | |||
| Below market lease intangibles | (59 | ) | ||
| Total purchase price | $ | 68,093 |
The following acquisitions completed during the year ended December 31, 2016 were accounted for as asset acquisitions:
Plano Facility -On January 28, 2016, the Company purchased a surgical hospital located in Plano, Texas for $17.5 million. Upon the closing of this acquisition, the Company entered into a new 20-year lease with Star Medical Center, LLC. with two consecutive ten-year tenant renewal options.
Also on January 28, 2016, the Company entered into a Promissory Note and Deed of Trust with East West Bank to borrow a total of $9.2 million. Deferred financing costs of $53 were incurred and capitalized by the Company in securing this loan. The loan was scheduled to mature on January 28, 2021, five years from the closing date. At closing the Company paid the lender a non-refundable deposit of $50 and a non-refundable commitment fee of $46. Interest expense of $65 was incurred on this note for the year ended December 31, 2016, prior to its repayment. As discussed in Note 4 – “Notes Payable and Revolving Credit Facility,” the Company used a portion of the proceeds from another third party loan to repay the $9.2 million principal balance of the note with East West Bank in full as of December 31, 2016. The Company also wrote off the deferred financing costs of $53 as of December 31, 2016 related to this note.
Additional funding for this transaction was received from ZH USA, LLC during the year ended December 31, 2015 in the amount of $9.4 million (consisting of $9.0 million funded directly for this transaction and $344 that was held in escrow from previous funding from ZH USA, LLC). The $9.4 million was recorded by the Company as unsecured Convertible Debentures due to related party on demand, bearing interest at eight percent per annum. ZH USA, LLC may elect to convert all or a portion of the outstanding principal amount of the Convertible Debenture into shares of the Company’s common stock in an amount equal to the principal amount of the Convertible Debenture, together with accrued but unpaid interest, divided by $12.748. Refer to Note 6 – “Related Party Transactions” for details regarding the conversion to common stock or pay-off of the Convertible Debentures balance as of December 31, 2016.
Melbourne Facility -On March 31, 2016, the Company purchased a medical office building located in Melbourne, Florida for a purchase price of $15.45 million. Upon the closing of this acquisition, the Company entered into a new 10-year lease with Marina Towers, LLC with two consecutive five-year tenant renewal options.
Reading Facilities -On July 20, 2016, the Company purchased a medical office building and eye surgery center located in Wyomissing, Pennsylvania for a combined purchase price of $9.20 million. Upon the closing of the transaction, the Company entered into two new 10-year leases for the medical office building with Berks Eye Physicians & Surgeons, Ltd., and the surgery center with Ridgewood Surgery Associates, LLC both with two consecutive five-year tenant renewal options.
East Orange Facility -On September 29, 2016, the Company purchased a medical office building in East Orange, New Jersey for a purchase price of $11.86 million. Upon the closing of this acquisition, the Company entered into a new 10-year lease with Prospect Medical Holdings, Inc. with four consecutive five-year tenant renewal options
Watertown Facilities -On September 30, 2016, the Company purchased a clinic, an administration building, and a medical office building located in Watertown South Dakota for a purchase price of $9.0 million. Upon the closing of the acquisition, the Company entered into a new 15-year lease with the Brown Clinic with two consecutive five-year tenant renewal options.
Sandusky Facilities -On September 29, 2016, the Company purchased a portfolio of five of the seven medical office buildings located in or near Sandusky, Ohio for a purchase price of $4.6 million. Upon the closing of this acquisition, the Company entered into a new 11-year lease with the Northern Ohio Medical Specialists, LLC with four consecutive five-year tenant renewal options.
Carson City Facilities -On October 31, 2016, the Company purchased two medical office buildings located in Carson City, Nevada for a purchase price of $3.8 million. Upon the closing of the acquisition, the Company assumed the existing lease with the Carson Medical Group. The lease has a remaining term expiring in 2023, with one five-year tenant renewal option.
Unaudited Pro Forma Financial Information
The businesses acquired in 2017 and 2016 that were accounted for as business combinations were included in our results of operations from the dates of acquisition. The following table provides summary unaudited pro forma information as if the Company’s acquisitions during the years ended December 31, 2017 and 2016 that were accounted for as business combinations had occurred as of January 1, 2016:
| Year Ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| (unaudited) | ||||||||
| Revenue | $ | 38,140 | $ | 28,559 | ||||
| Net income (loss) | $ | 1,828 | $ | (1,191 | ) | |||
| Net income (loss) attributable to common stockholders | $ | 41 | $ | (1,191 | ) | |||
| Income (loss) attributable to common stockholders per share – basic and diluted | $ | - | $ | (0.13 | ) | |||
| Weighted average shares outstanding – basic and diluted | $ | 19,617 | $ | 9,302 | ||||
Lease Intangible Assets and Liabilities
The following is a summary of the carrying amount of lease intangible assets and liabilities as of December 31, 20172023 and 2016:2022:
| | | | | | | | | |
| | As of December 31, 2023 | |||||||
| | | | | Accumulated | | | | |
|
| Cost |
| Amortization |
| Net | |||
Assets | | | | | | | | | |
In-place leases | | $ | 77,037 | | $ | (44,249) | | $ | 32,788 |
Above market leases | |
| 24,961 | |
| (10,318) | |
| 14,643 |
Leasing costs | |
| 36,619 | |
| (18,556) | |
| 18,063 |
| | $ | 138,617 | | $ | (73,123) | | $ | 65,494 |
Liability | | | | | | | | | |
Below market leases | | $ | 13,595 | | $ | (8,314) | | $ | 5,281 |
65
| Year Ended December 31, 2017 | ||||||||||||
| Cost | Accumulated Amortization | Net | ||||||||||
| Assets | ||||||||||||
| In-place leases | $ | 17,061 | $ | (1,577 | ) | $ | 15,484 | |||||
| Above market ground lease | 488 | (6 | ) | 482 | ||||||||
| Above market leases | 4,625 | (220 | ) | 4,405 | ||||||||
| Leasing costs | 9,476 | (538 | ) | 8,938 | ||||||||
| $ | 31,650 | $ | (2,341 | ) | $ | 29,309 | ||||||
| Liabilities | ||||||||||||
| Below market leases | $ | 1,389 | $ | (98 | ) | $ | 1,291 | |||||
| Year Ended December 31, 2016 | ||||||||||||
| Cost | Accumulated Amortization | Net | ||||||||||
| Assets | ||||||||||||
| In-place leases | $ | 5,827 | $ | (35 | ) | $ | 5,792 | |||||
| Above market leases | 74 | - | 74 | |||||||||
| Leasing costs | 1,286 | (8 | ) | 1,278 | ||||||||
| $ | 7,187 | $ | (43 | ) | $ | 7,144 | ||||||
| Liabilities | ||||||||||||
| Below market leases | $ | 279 | $ | (1 | ) | $ | 278 | |||||
| | | | | | | | | |
| | As of December 31, 2022 | |||||||
|
| | |
| Accumulated |
| | | |
| | Cost | | Amortization | | Net | |||
Assets |
| |
|
| |
|
| |
|
In-place leases | | $ | 82,374 | | $ | (34,898) | | $ | 47,476 |
Above market leases | |
| 26,054 | |
| (7,321) | |
| 18,733 |
Leasing costs | |
| 39,649 | |
| (14,683) | |
| 24,966 |
| | $ | 148,077 | | $ | (56,902) | | $ | 91,175 |
Liability | |
| | |
| | |
| |
Below market leases | | $ | 13,595 | | $ | (5,982) | | $ | 7,613 |
The following is a summary of the acquired lease intangible amortization:
| | | | | | | | | |
| | | | | | | | | |
| | Year Ended December 31, | |||||||
|
| 2023 |
| 2022 |
| 2021 | |||
Amortization expense related to in-place leases | | $ | 11,612 | | $ | 11,685 | | $ | 9,046 |
Amortization expense related to leasing costs | | $ | 5,079 | | $ | 4,942 | | $ | 3,917 |
Decrease in rental revenue related to above market leases | | $ | 3,384 | | $ | 3,295 | | $ | 2,384 |
Increase in rental revenue related to below market leases | | $ | (2,332) | | $ | (2,268) | | $ | (1,864) |
| Year Ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| Amortization expense related to in-place leases | $ | 1,542 | $ | 35 | ||||
| Amortization expense related to leasing costs | $ | 530 | $ | 8 | ||||
| Decrease in rental revenue related to above market ground lease | $ | 6 | $ | - | ||||
| Decrease in rental revenue related to above market leases | $ | 220 | $ | - | ||||
| Increase in rental revenue related to below market leases | $ | (97 | ) | $ | (1 | ) | ||
The Company had no intangible assets asAs of December 31, 2015 and therefore no amortization expense was incurred for the year ended December 31, 2015.
Future2023, scheduled future aggregate net amortization of the acquired lease intangible as ofassets and liabilities for each year ended December 31 2017, is as follows:listed below:
| | | | | | |
|
| |
| | | |
| | Net Decrease | | Net Increase | ||
| | in Revenue | | in Expenses | ||
2024 | | $ | (1,152) | | $ | 14,208 |
2025 | |
| (1,697) | |
| 10,525 |
2026 | |
| (1,803) | |
| 8,700 |
2027 | |
| (1,375) | |
| 6,115 |
2028 | | | (1,091) | | | 4,805 |
Thereafter | |
| (2,244) | |
| 6,498 |
Total | | $ | (9,362) | | $ | 50,851 |
| Net Decrease in Revenue | Net Increase in Expenses | |||||||
| 2018 | $ | (449 | ) | $ | 3,019 | |||
| 2019 | (449 | ) | 3,019 | |||||
| 2020 | (449 | ) | 3,019 | |||||
| 2021 | (452 | ) | 2,404 | |||||
| 2022 | (453 | ) | 2,096 | |||||
| Thereafter | (1,344 | ) | 10,865 | |||||
| Total | $ | (3,596 | ) | $ | 24,422 | |||
For the year ended December 31, 2017,2023, the weighted average amortization period for asset lease intangibles and liability lease intangibles are 8.093.5 years and 8.272.3 years, respectively.
Note 4 – Credit Facility, Notes Payable and Revolving Derivative Instruments
Credit Facility
Summary of Notes Payable, Net of Discount
The Company’s notes payable,Company, the Operating Partnership, as borrower, and certain of its subsidiaries (such subsidiaries, the “Subsidiary Guarantors”) are parties to an amended and restated $900 million unsecured syndicated credit facility with JPMorgan Chase Bank, N.A. (“JPMorgan”), as administrative agent (the “Credit Facility”). The Credit Facility consists of (i) $500 million of term loans, which include (a) a $350 million term loan (“Term Loan A”) and (b) a $150 million term loan (“Term Loan B,” and, together with Term Loan A, the “Term Loans”), and (ii) a $400 million revolver (the “Revolver”). The Credit Facility also includes a $500 million accordion feature. Term Loan A matures in May 2026, Term Loan B matures in February 2028, and the Revolver matures in August 2026, with two six-month extension options. Interest rates on amounts outstanding under the Credit Facility equal the term Secured Overnight Financing Rate (“SOFR”) plus a related spread adjustment of 10 basis points and a borrowing spread based on the current pricing grid in the Credit Facility. The Company may be entitled to a temporary reduction in the interest rate of two basis points provided it meets certain to be agreed upon sustainability goals.
66
The Operating Partnership is subject to a number of financial covenants under the Credit Facility, including, among other things, the following as of the end of each fiscal quarter, (i) a maximum consolidated unsecured leverage ratio of less than 60%, (ii) a maximum consolidated secured leverage ratio of less than 30%, (iii) a maximum consolidated secured recourse leverage ratio of less than 10%, (iv) a minimum fixed charge coverage ratio of 1.50:1.00, (v) a minimum unsecured interest coverage ratio of 1.50:1.00, (vi) a maximum consolidated leverage ratio of less than 60%, and (vii) a minimum net includes two loans: (1) the Cantor Loan and (2) the West Mifflin Note, described in detail below. The following table sets forth the aggregate balancesworth of these loans as$573 million plus 75% of all net proceeds raised through equity offerings subsequent to March 31, 2022. As of December 31, 20172023, management believed it complied with all of the financial and 2016.non-financial covenants contained in the Credit Facility.
The Company has entered into interest rate swaps to hedge its interest rate risk on the Term Loans through their respective maturities. For additional information related to the interest rate swaps, see the “Derivative Instruments - Interest Rate Swaps” section herein.
| December 31, 2017 | December 31, 2016 | |||||||
| Notes payable, gross | $ | 39,475 | $ | 39,475 | ||||
| Less: Unamortized debt discount | (930 | ) | (1,062 | ) | ||||
| Notes payable, net | $ | 38,545 | $ | 38,413 | ||||
During the year ended December 31, 2023, the Company borrowed $83,100 under the Credit Facility and repaid $136,400, for a net amount repaid of $53,300. During the year ended December 31, 2022, the Company borrowed $138,600 under the Credit Facility and repaid $15,500, for a net amount borrowed of $123,100. Interest expense incurred on the Credit Facility was $25,868, $20,274, and $14,705 for the years ended December 31, 2023, 2022, and 2021, respectively.
As of December 2023 and 2022, the Company had the following outstanding borrowings under the Credit Facility:
| | | | | | |
|
| December 31, 2023 |
| December 31, 2022 | ||
Revolver | | $ | 92,400 | | $ | 145,700 |
Term Loan A | | | 350,000 | | | 350,000 |
Term Loan B | |
| 150,000 | |
| 150,000 |
Less: Unamortized debt issuance costs | |
| (7,067) | |
| (9,253) |
Credit Facility, net | | $ | 585,333 | | $ | 636,447 |
Costs incurred related to securing the Company’s fixed-rate debt instruments have been capitalized as a debt discount,Credit Facility, net of accumulated amortization, and are netted against the Company’s Notes Payable“Credit Facility, net of unamortized debt issuance costs” balance in the accompanying Consolidated Balance Sheets. DuringThe Company paid $13 and $3,215 related to amendments and modifications to the Credit Facility during the years ended December 31, 20172023 and 2016, the Company incurred zero and $1,090 of financing costs capitalized as debt discount.2022, respectively. Amortization expense incurred related to the debt discount was $132, $331,$2,199, $1,995, and $127$1,703 for the years ended December 31, 2017, 2016,2023, 2022, and 2015,2021, respectively, and is included in the “Interest Expense” line item in the accompanying Consolidated Statements of Operations.
Cantor Loan
On March 31, 2016, through certainNotes Payable, Net of the Company’s wholly owned subsidiaries, the Company entered into a $32,097 portfolio commercial mortgage-backed securities loan (the “Cantor Loan”) with Cantor Commercial Real Estate Lending, LP (“CCRE”). The subsidiaries are GMR Melbourne, LLC, GMR Westland, LLC, GMR Memphis, LLC, and GMR Plano, LLC (“GMR Loan Subsidiaries”). The Cantor Loan has cross-default and cross-collateral terms. The Company used the proceeds of the Cantor Loan to acquire the Marina Towers (Melbourne, FL) and the Surgical Institute of Michigan (Westland, MI) properties and to refinance the Star Medical (Plano, TX) assets by paying off the existing principal amount of the loan with East West bank in the amount of $9,224, and the Company granted a security interest in the Gastro One (Memphis, TN) assets.
The Cantor Loan has a maturity date of April 6, 2026 and accrues annual interest at 5.22%. The first five years of the term require interest only payments and after that payments will include interest and principal, amortized over a 30-year schedule. Prepayment can only occur within four months prior to the maturity date, except that after the earlier of (a) 2 years after the loan is placed in a securitized mortgage pool, or (b) May 6, 2020, the Cantor Loan can be fully and partially defeased upon payment of amounts due under the Cantor Loan and payment of a defeasance amount that is sufficient to purchase U.S. government securities equal to the scheduled payments of principal, interest, fees, and any other amounts due related to a full or partial defeasance under the Cantor Loan.
The Company is securing the payment of the Cantor Loan with the assets, including property, facilities, and rents, held by the GMR Loan Subsidiaries and has agreed to guarantee certain customary recourse obligations, including findings of fraud, gross negligence, or breach of environmental covenants by the GMR Loan Subsidiaries. The GMR Loan Subsidiaries will be required to maintain a monthly debt service coverage ratio of 1.35:1.00 for all of the collateral properties in the aggregate.
No principal payments were made on this note for the years ended December 31, 2017 and 2016. The note balance as of December 31, 2017 and 2016 was $32,097. Interest expense incurred on this note was for the years ended December 31, 2017, 2016, and 2015 was $1,699, $1,280, and zero, respectively.
Debt Issuance Costs
As of December 31, 2017, scheduled principal payments due for each fiscal year ended2023, the Company’s notes payable, net, included three loans: (1) the Rosedale Loan, (2) the Dumfries Loan, and (3) the Toledo Loan. In December 31 are listed below as follows:
| 2018 | $ | - | ||
| 2019 | - | |||
| 2020 | - | |||
| 2021 | 315 | |||
| 2022 | 449 | |||
| Thereafter | 31,333 | |||
| Total | $ | 32,097 |
West Mifflin Note
In order to finance a portion2023, the Company defeased the Cantor Loan. The three loans and the defeasance of the purchase price forCantor Loan are described in detail herein. The following table sets forth the West Mifflin facility, on September 25, 2015 the Company (through its wholly owned subsidiary GMR Pittsburgh LLC, as borrower) entered into a Term Loan and Security Agreement with Capital One to borrow $7,378. The note bears interest at 3.72% per annum and all unpaid interest and principal is due on September 25, 2020. Interest is paid in arrears and interest payments begin on November 1, 2015, and on the first daybalances of each calendar month thereafter. Principal payments begin on November 1, 2018 and on the first day of each calendar month thereafter based on an amortization schedule with the principal balance due on the maturity date. The Company, at its option, may prepay the note at any time, in whole (but not in part) on at least thirty calendar days but not more than sixty calendar days advance written notice. The note has an early termination fee of two percent if prepaid prior to September 25, 2018. The facility serves as collateral for the note. The note requires a quarterly fixed charge coverage ratio of at least 1:1, a quarterly minimum debt yield of 0.09:1.00, and annualized Operator EBITDAR measured on a quarterly basis of not less than $6,000. The Operator is Associates in Ophthalmology, Ltd. and Associates Surgery Centers, LLC. No principal payments were made on this note for the years ended December 31, 2017 and 2016. The note balancethese loans as of December 31, 20172023 and 2016 was $7,378.Interest expense incurred on this note was $278, $279, and $51 for the years ended December 31, 2017, 2016, and 2015, respectively.2022.
| | | | | | |
|
| December 31, 2023 |
| December 31, 2022 | ||
Notes payable | | $ | 25,965 | | $ | 58,124 |
Unamortized debt issuance costs | |
| (66) | |
| (452) |
Notes payable, net | | $ | 25,899 | | $ | 57,672 |
As of December 31, 2017, scheduled principal payments due for each fiscal year ended December 31 are listed below as follows:
| 2018 | $ | 22 | ||
| 2019 | 136 | |||
| 2020 | 7,220 | |||
| Total | $ | 7,378 |
Asheville Note Payable
In order to finance a portion of the purchase price of the Asheville facility, on September 15, 2014 the Company entered into a Promissory Note with the Bank of North Carolina to borrow $1,700 with interest on the outstanding principal balance at a fixed interest rate of 4.75% per annum. This note was paid in full on December 2, 2016 using proceeds from the Company’s senior revolving credit facility. In accordance with the terms of the note there was no prepayment penalty for the payoff of the note. The balance of the note was $1,662 as of December 31, 2015.Interest expense incurred on the note was zero, $76, and $81 for the years ended December 31, 2017, 2016, and 2015 respectively.
Omaha Note Payable
In order to finance a portion of the purchase price for the Omaha facility, on June 5, 2014 the Company entered into a Term Loan and Security Agreement with Capital One to borrow $15,060 with interest at 4.91% per annum. The note was paid in full on July 11, 2016 using the proceeds from the Company’s initial public offering. In accordance with the terms of the note the prepayment resulted in the Company being required to pay an early termination fee in the amount of $301 because the note was paid in full prior to its maturity date. This fee was also paid on July 11, 2016 and is recorded as “Interest Expense” in the accompanying Consolidated Statements of Operations for the year ended December 31, 2016. The balance of the note was $14,748 as of December 31, 2015.Interest expense incurred on this note was zero, $488 (excluding the $301 early termination fee amount disclosed above), and $680 for the years ended December 31, 2017, 2016, and 2015.
Revolving Credit Facility
As of December 31, 2017 and 2016, the Company had $164,900 and $27,700 of outstanding borrowings under its Revolving Credit Facility (as defined below), respectively. As described below, as of December 31, 2017, the maximum amount that the Company can borrow under the facility is $250,000.
On December 2, 2016, the Company, the Operating Partnership, as borrower, and certain subsidiaries, (such subsidiaries, the “Subsidiary Guarantors”) of the Operating Partnership entered into a senior revolving credit facility (the “Credit Facility”) with BMO Harris Bank N.A., as Administrative Agent (“BMO”), which initially provided up to $75,000 in revolving credit commitments for the Operating Partnership. The Credit Facility included an accordion feature that provided the Operating Partnership with additional capacity, subject to the satisfaction of customary terms and conditions, of up to $125,000, for a total initial facility size of up to $200,000. On March 3, 2017, the Company, the Operating Partnership, as borrower, and the Subsidiary Guarantors of the Operating Partnership entered into an amendment to the Credit Facility with BMO, which increased the commitment amount to $200,000 plus an accordion feature that allows for up to an additional $50,000 of principal amount subject to certain conditions, for a total facility size of $250,000 (the “Revolving Credit Facility”). On September 28, 2017, the Company obtained commitments from certain of its lenders on the Revolving Credit Facility for the entire $50,000 accordion. The Subsidiary Guarantors and the Company are guarantors of the obligations under the Revolving Credit Facility. The amount available to borrow from time to time under the Revolving Credit Facility is limited according to a quarterly borrowing base valuation of certain properties owned by the Subsidiary Guarantors. The initial termination date of the Revolving Credit Facility is December 2, 2019, which could be extended for one year in the case that no event of default occurs.
Amounts outstanding under the Revolving Credit Facility bear annual interest at a floating rate that is based, at the Operating Partnership’s option, on (i) adjusted LIBOR plus 2.00% to 3.00% or (ii) a base rate plus 1.00% to 2.00%, in each case, depending upon the Company’s consolidated leverage ratio. In addition, the Operating Partnership is obligated to pay a quarterly fee equal to a rate per annum equal to (x) 0.20% if the average daily unused commitments are less than 50% of the commitments then in effect and (y) 0.30% if the average daily unused commitments are greater than or equal to 50% of the commitments then in effect and determined based on the average daily unused commitments during such previous quarter.
The Operating Partnership is subject to ongoing compliance with a number of customary affirmative and negative covenants, including limitations with respect to liens, indebtedness, distributions, mergers, consolidations, investments, restricted payments and asset sales. The Operating Partnership must also maintain (i) a maximum consolidated leverage ratio, commencing with the fiscal quarter ending December 31, 2016 and as of the end of each fiscal quarter thereafter, of less than (y) 0.65:1.00 for each fiscal quarter ending prior to October 1, 2019 and (z) thereafter, 0.60:1.00, (ii) a minimum fixed charge coverage ratio of 1.50:1.00, (iii) a minimum net worth of $119,781 plus 75% of all net proceeds raised through subsequent equity offerings and (iv) a ratio of total secured recourse debt to total asset value of not greater than 0.10:1.00.
During the year ended December 31, 2017, the Company borrowed $244,200 under the Revolving Credit Facility and repaid $107,000 using funds primarily from the follow-on common stock offering and the preferred stock offering, for a net amount borrowed of $137,200. During the year ended December 31, 2016, the Company borrowed $27,700 under the Revolving Credit Facility and made no repayments. For the years ended December 31, 2017 and 2016, interest incurred on the Revolving Credit Facility was $4,234 and $46, respectively. No interest expense was incurred under the Revolving Credit Facility for the year ended December 31, 2015 as the Revolving Credit Facility was not in place. For a detail of the facilities that serve as collateral for the Revolving Credit Facility refer to Schedule III – “Consolidated Real Estate and Accumulated Depreciation,” within Item 15 – “Exhibits and Financial Statement Schedules.”
Deferred Financing Costs, Net
Costs incurred related to securing the Company’s Revolving Credit Facility have been capitalized as a deferred financing asset, net of accumulated amortization, in the accompanying Consolidated Balance Sheets.
A rollforward of the deferred financing cost balance as of December 31, 2017, is as follows:
| Balance as of January 1, 2017, net | $ | 927 | ||
| Additions – Revolving Credit Facility | 2,915 | |||
| Deferred financing cost amortization expense | (1,092 | ) | ||
| Balance as of December 31, 2017, net | $ | 2,750 |
A rollforward of the deferred financing cost balance as of December 31, 2016 is as follows:
| Balance as of January 1, 2016, net | $ | - | ||
| Additions – Revolving Credit Facility | 946 | |||
| Deferred financing cost amortization expense | (19 | ) | ||
| Balance as of December 31, 2016, net | $ | 927 |
Amortization expense incurred related to the Revolving Credit Facility deferred financingdebt issuance costs on these loans was $1,092, $19,$146, $155, and zero$228, for the years ended December 31, 2017, 2016,2023, 2022, and 2015,2021, respectively, and is included in the “Interest Expense” line item in the accompanying Consolidated Statements of Operations. Additionally, in connection with the Cantor Loan defeasance $240 of unamortized debt issuance costs were written off and included as a component of the “Loss on Extinguishment of Debt” line item in the accompanying Consolidated Statements of Operations.
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Rosedale Loan
On July 31, 2020, in connection with its acquisition of the Rosedale Facilities, the Company, through certain of its subsidiaries, as borrowers, entered into a loan with FVCbank with a principal balance of $14,800 (the “Rosedale Loan”). The Rosedale Loan has an annual interest rate of 3.85% and matures on July 31, 2025 with principal and interest payable monthly based on a 25-year amortization schedule. The Company, at its option, may prepay the loan.
The Company made principal payments of $391 and $376 during the years ended December 31, 2023 and 2022, respectively. The loan balance as of December 31, 2023 and 2022 was $13,563 and $13,954, respectively. Interest expense incurred on this loan was $536, $551, and $566 for the years ended December 31, 2023, 2022, and 2021, respectively.
As of December 31, 2023, scheduled principal payments due for each year ended December 31 were as follows:
| | | |
2024 | | $ | 405 |
2025 | | | 13,158 |
Total | | $ | 13,563 |
Dumfries Loan
On April 27, 2020, in connection with its acquisition of the Dumfries Facility, the Company, through a subsidiary, assumed a CMBS loan with a principal amount of $12,074 (the “Dumfries Loan”). The Dumfries Loan has an annual interest rate of 4.68% and matures on June 1, 2024 with principal and interest payable monthly based on a ten-year amortization schedule. Prepayment can occur only within three months prior to the maturity date and the loan can be defeased at any time prior to the prepayment period.
The Company made principal payments of $302 and $288 during the years ended December 31, 2023 and 2022, respectively. The loan balance as of December 31, 2023 and 2022 was $11,034 and $11,336, respectively. Interest expense incurred on this loan was $524, $537, and $550 for years ended December 31, 2023, 2022, and 2021, respectively.
Toledo Loan
On July 8, 2022, in connection with its acquisition of the Toledo Facility, the Company, through its subsidiary GMR Toledo LLC, assumed a loan with a principal amount of $1,513 (the “Toledo Loan”). The Toledo Loan has an annual interest rate of 5.0% with semi-annual principal and interest payments. The Company made principal payments of $98 and $47 during the years ended December 31, 2023 and 2022, respectively. The loan balance as of December 31, 2023 and 2022 was $1,368 and $1,466, respectively. Interest expense incurred on this loan was $88 and $45 for the years ended December 31, 2023 and 2022, respectively. The Toledo Loan matures on July 30, 2033.
Cantor Loan and Defeasance
On March 31, 2016, through certain of its subsidiaries (the “GMR Loan Subsidiaries”), the Company entered into a $32,097 CMBS loan (the “Cantor Loan”). The Cantor Loan was secured by the assets of the GMR Loan Subsidiaries. The Cantor Loan had a maturity date of April 6, 2026 and an annual interest rate of 5.22%. Prepayment could only occur within four months prior to the maturity date and the loan could be defeased at any time prior to the prepayment period. On December 6, 2023, the Company defeased the Cantor Loan in accordance with the provisions of the underlying loan agreement. The defeasance resulted in a total payment of $31,525, which consisted of the payment of the outstanding principal balance on December 6, 2023 of $30,897 and transaction costs of $628. The transaction costs are included as a component of the “Loss on Extinguishment of Debt” line item in the accompanying Consolidated Statements of Operations. The total loss on extinguishment of debt resulting from the defeasance was $868.
The Company made principal payments of $31,368, including the outstanding principal balance that was defeased, and $447 during the years ended December 31, 2023 and 2022, respectively. The loan balance as of December 31, 2022 was $31,368. Interest expense incurred on this note was $1,532, $1,673, and $1,695 for the years ended December 31, 2023, 2022, and 2021, respectively.
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Derivative Instruments - Interest Rate Swaps
The Company has ten interest rate swaps and three forward starting interest rate swaps that are used to manage its interest rate risk by fixing the SOFR component of the Term Loans through their maturities. A description of these swaps is below:
Term Loan A Swaps
As of December 31, 2023, six of the Company’s interest rate swaps related to Term Loan A. The combined notional value of these swaps is $350 million, with $200 million of the swaps maturing in August 2024 and the remaining $150 million maturing in April 2026. In addition, the Company has three forward starting interest rate swaps with a combined notional value of $200 million, each with a maturity date of April 2026, that will become effective on the August 2024 maturity date of the existing swaps noted above. Currently, the Term Loan A swaps fix the SOFR component of Term Loan A at a rate of 1.50% through August 2024. From August 2024 to April 2026 the SOFR component of Term Loan A will be fixed at 1.36%.
Term Loan B Swaps
As of December 31, 2023, four of the Company’s interest rate swaps related to Term Loan B with a combined notional value of $150 million that fix the SOFR component on Term Loan B through January 2028 at 2.54%.
The Company records the swaps either as an asset or a liability measured at its fair value at each reporting period. When hedge accounting is applied, the change in the fair value of derivatives designated and that qualify as cash flow hedges is (i) recorded in accumulated other comprehensive income in the equity section of the Company’s Consolidated Balance Sheets and (ii) subsequently reclassified into earnings as interest expense for the period that the hedged forecasted transactions affect earnings. If specific hedge accounting criteria are not met, changes in the Company’s derivative instruments’ fair value are recognized currently as an adjustment to net income.
The Company’s interest rate swaps are not traded on an exchange. The Company’s interest rate swaps are recorded at fair value based on a variety of observable inputs including contractual terms, interest rate curves, yield curves, measure of volatility, and correlations of such inputs. The Company measures its derivatives at fair value on a recurring basis based on the expected size of future cash flows on a discounted basis and incorporating a measure of non-performance risk. The fair values are based on Level 2 inputs within the framework of ASC Topic 820. The Company considers its own credit risk, as well as the credit risk of its counterparties, when evaluating the fair value of its derivative instruments.
The fair value of the Company’s interest rate swaps was an asset of $25,125 and $34,705 as of December 31, 2023 and 2022, respectively. The balances are included in the “Derivative Asset” line item on the Company’s Consolidated Balance Sheets as of December 31, 2023 and 2022, respectively.
The table below details the components of the amounts presented on the accompanying Consolidated Statements of Comprehensive Income recognized on the Company’s interest rate swap agreements designated as cash flow hedges for the years ended December 31, 2023, 2022, and 2021.
| | | | | | | | | |
| | Years Ended December 31, | |||||||
|
| 2023 |
| 2022 |
| 2021 | |||
| | | | | | | | | |
Amount of gain recognized in other comprehensive income | | $ | (6,056) | | $ | (41,068) | | $ | (5,220) |
Amount of gain (loss) reclassified from accumulated other comprehensive income into interest expense | |
| 15,605 | |
| (242) | |
| (6,363) |
Total change in accumulated other comprehensive income | | $ | 9,549 | | $ | (41,310) | | $ | (11,583) |
During the next twelve months, the Company estimates that an additional $14,194 will be reclassified as a decrease to interest expense. Additionally, during the years ended December 31, 2023, 2022, and 2021, the Company recorded total interest expense in its Consolidated Statements of Operations of $30,893, $25,230, and $19,696, respectively.
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Weighted-Average Interest Rate and Term
The weighted average interest rate and term of ourthe Company’s debt was 3.72%3.83% and 2.942.9 years, respectively, at December 31, 2017,2023, compared to 4.29%4.20% and 6.043.9 years, respectively, atas of December 31, 2016.2022.
Note 5 – Stockholders’ Equity
–Equity
Preferred Stock
General
The Company’s charter authorizes the issuance of 10,000 shares of preferred stock, par value $0.001 per share. As of December 31, 20172023 and December 31, 2016,2022, there were 3,105 and no shares of preferred stock, respectively, issued and outstanding.
On September 15, 2017, the Company closed on the issuance of 3,105 shares of its Series A Cumulative Redeemable Preferred Stock $0.001 par value per share, with an initial liquidation preference of $25 per share (“Series A Preferred Stock”), inclusive of 405 shares issued in connection with the underwriters’ exercise of their over-allotment option. The Company may, at its option, redeem the Series A Preferred Stock for cash in whole or in part, from time to time, at any time on or after September 15, 2022, at a cash redemption price of $25 per share.and outstanding. The Series A Preferred Stock has no voting rights, excepta liquidation preference of $25 per share.
Preferred stock dividend activity for limited voting rights if the Company fails to pay dividends for six quarterly periods. The issuance resulted in aggregate gross proceeds of $77,625. After deducting underwriting discounts and advisory fees of $2,445, and expenses paid by the Company that were directly attributable to the offering of $221 (which are both treated as a reduction of the “Preferred Stock” balance on the accompanying Consolidated Balance Sheets), the Company’s preferred stock balance as ofyears ended December 31, 2017 was $74,959. The net proceeds received from the transaction were primarily used to repay borrowings on the Company’s Revolving Credit Facility. The Company assessed the characteristics of the Series A Preferred Stock in accordance with the provisions of ASC Topic 480 – “Distinguishing Liabilities from Equity,”2023 and concluded that the Series A Preferred Stock2022 is classified as permanent equity.
Preferred Stock Dividends
Since September 2017, our Board has declared cash dividends on our preferred stock as summarized in the following table:
| Date Announced | Record Date | Applicable Quarter | Payment Date | Dividend Amount | Dividends per Share | |||||||||
| September 29, 2017 | October 15, 2017 | Q3 2017 | October 31, 2017 | $ | 745 | $ | 0.23960 | |||||||
| December 15, 2017 | January 15, 2018 | Q4 2017 | January 31, 2018 | 969 | 1 | $ | 0.46875 | |||||||
1Represents the November 2017 and December 2017 portion of the total $1,455 three month dividend amount.
| | | | | | | | | | | | |
|
| |
| Applicable |
| |
| Quarterly |
| Dividends | ||
Date Announced | | Record Date | | Quarter | | Payment Date | | Dividend | | per Share | ||
| | | | | | | | | | | | |
December 10, 2021 | | January 15, 2022 | | Q4 2021 | | January 31, 2022 | | $ | 1,455 | | $ | 0.46875 |
March 11, 2022 | | April 15, 2022 | | Q1 2022 | | May 2, 2022 | | $ | 1,455 | | $ | 0.46875 |
June 10, 2022 | | July 15, 2022 | | Q2 2022 | | August 1, 2022 | | $ | 1,455 | | $ | 0.46875 |
September 9, 2022 | | October 15, 2022 | | Q3 2022 | | October 31, 2022 | | $ | 1,455 | | $ | 0.46875 |
December 7, 2022 |
| January 15, 2023 |
| Q4 2022 |
| January 31, 2023 | | $ | 1,455 | | $ | 0.46875 |
March 10, 2023 |
| April 15, 2023 |
| Q1 2023 |
| May 1, 2023 | | $ | 1,455 | | $ | 0.46875 |
June 9, 2023 |
| July 15, 2023 |
| Q2 2023 |
| July 31, 2023 | | $ | 1,455 | | $ | 0.46875 |
September 8, 2023 |
| October 15, 2023 |
| Q3 2023 |
| October 31, 2023 | | $ | 1,455 | | $ | 0.46875 |
December 12, 2023 |
| January 15, 2024 |
| Q4 2023 |
| January 31, 2024 | | $ | 1,455 | (1) | $ | 0.46875 |
| (1) | Two months of this amount, equal to $970, was accrued at December 31, 2023. |
The holders of the Company’s Series A Preferred Stock are entitled to receive dividend payments only when, as and if declared by the BoardCompany’s board of directors (the “Board”) (or a duly authorized committee of the Board). Dividends will accrue or be payable in cash from the original issue date, on a cumulative basis, quarterly in arrears on each dividend payment date at a fixed rate per annum equal to 7.50% of the liquidation preference of $25$25.00 per share (equivalent to $1.875 per share on an annual basis). The Series A Preferred Stock may be partially or fully redeemed by the Company. Dividends on the Series A Preferred Stock will beare cumulative and will accrue whether or not (i) funds are legally available for the payment of those dividends, whether or not(ii) the Company has earnings and whether or not(iii) those dividends are declared by the Board. The quarterly dividend payment dates on the Series A Preferred Stock are January 31, April 30, July 31 and October 31 of each year, commencing on October 31, 2017.year. During each of the yearyears ended December 31, 20172023 and 2022, the Company paid preferred dividends of $745.
$5,822.
Common Stock
General
The Company has 500,000 of authorized shares of common stock, $0.001 par value. As of December 31, 20172023 and 2016,2022, there were 21,63165,565 and 17,60665,518 outstanding shares of common stock, respectively.
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Common Stock Dividends
Since July 2016, our Board has declared cash dividends on our common stock asdividend activity for the years ended December 31, 2023 and 2022 is summarized in the following table:
| | | | | | | | | | | | |
|
| |
| Applicable |
| |
| Dividend |
| Dividends | ||
Date Announced | | Record Date | | Quarter | | Payment Date | | Amount(1) | | per Share | ||
| | | | | | | | | | | | |
December 10, 2021 | | December 27, 2021 | | Q4 2021 | | January 10, 2022 | | $ | 14,055 | | $ | 0.205 |
March 11, 2022 | | March 25, 2022 | | Q1 2022 | | April 8, 2022 | | $ | 14,611 | | $ | 0.21 |
June 10, 2022 | | June 24, 2022 | | Q2 2022 | | July 8, 2022 | | $ | 14,642 | | $ | 0.21 |
September 9, 2022 | | September 23, 2022 | | Q3 2022 | | October 11, 2022 | | $ | 14,642 | | $ | 0.21 |
December 7, 2022 |
| December 22, 2022 |
| Q4 2022 |
| January 9, 2023 | | $ | 14,642 | | $ | 0.21 |
March 10, 2023 |
| March 24, 2023 |
| Q1 2023 |
| April 11, 2023 | | $ | 14,688 | | $ | 0.21 |
June 9, 2023 |
| June 23, 2023 |
| Q2 2023 |
| July 11, 2023 | | $ | 14,819 | | $ | 0.21 |
September 8, 2023 |
| September 22, 2023 |
| Q3 2023 |
| October 10, 2023 | | $ | 14,819 | | $ | 0.21 |
December 12, 2023 |
| December 27, 2023 |
| Q4 2023 |
| January 9, 2024 | | $ | 14,819 | | $ | 0.21 |
| (1) | Includes dividends on granted LTIP Units and OP Units issued to third parties. |
| Date Announced | Record Date | Applicable Quarter | Payment Date | Dividend Amount1 | Dividends per Share | |||||||||
| September 14, 2016 | September 27, 2016 | Q3 2016 | October 11, 2016 | $ | 3,593 | $ | 0.20 | |||||||
| December 14, 2016 | December 27, 2016 | Q4 2016 | January 10, 2017 | $ | 3,604 | $ | 0.20 | |||||||
| March 20, 2017 | March 27, 2017 | Q1 2017 | April 10, 2017 | $ | 3,603 | $ | 0.20 | |||||||
| June 16, 2017 | June 27, 2017 | Q2 2017 | July 10, 2017 | $ | 3,608 | $ | 0.20 | |||||||
| September 8, 2017 | September 26, 2017 | Q3 2017 | October 9, 2017 | $ | 4,416 | $ | 0.20 | |||||||
| December 15, 2017 | December 26, 2017 | Q4 2017 | January 10, 2018 | $ | 4,552 | $ | 0.20 | |||||||
1Includes dividends on granted LTIP units and OP Units issued to third parties.
During the yearyears ended December 31, 2017,2023 and 2022, the Company paid total dividends on its common stock, LTIP unitsUnits, and OP Units in the aggregate amount of $15,231, consisting of the dividends declared for the fourth quarter of 2016 through the third quarter of 2017. Additionally, during the year ended December 31, 2016, the Company paid total dividends on its common stock in the amount of $3,878,$59,025 and during the year ended December 31, 2015, the Company paid total dividends on its common stock in the amount of $256.
$58,420, respectively.
As of December 31, 2017,2023 and 2022, the Company had accrued $117dividend balances of $345 and $209 for dividends payable on the aggregate annual and long-term LTIP unitsUnits that are subject to retroactive receipt of dividends on the amount of LTIPsLTIP Units ultimately earned. See Note 7 – Stock-Based Compensation for additional information.
During the year ended December 31, 2023, $193 of dividends were accrued and 57 of dividends were paid related to these units. During the year ended December 31, 2022, $36 of dividends were accrued and $470 of dividends were paid related to these units.
The amount of the dividends paid to the Company’s stockholders is determined by ourthe Board and is dependent on a number of factors, including funds available for payment of dividends, the Company’s financial condition and capital expenditure requirements except that, in accordance with the Company’s organizational documents and Maryland law, the Company may not make dividend distributions that would: (i) cause it to be unable to pay its debts as they become due in the usual course of business; (ii) cause its total assets to be less than the sum of its total liabilities plus senior liquidation preferences; or (iii) jeopardize its ability to maintain its qualification as a REIT.
Other Common StockCapital Raising Activity
On June 30, 2017,In January 2024, the Company closed an underwritten publicand the Operating Partnership implemented a $300 million “at-the-market” equity offering of its common stock and on July 20, 2017program, pursuant to which the Company closed on the over-allotment option grantedmay offer and sell, from time to the underwriters. These transactions resulted in an aggregate of 4,025time, shares of its common stock being issued at a public offering price of $9 per share, resulting in aggregate gross proceeds of $36,225. After deducting underwriting discounts and advisory fees of $1,987, and expenses paid by(the “2024 ATM Program”). In March 2022, the Company that were directly attributableand the Operating Partnership implemented a $300 million “at-the-market” equity offering program, pursuant to the offering of $443 (both of which are treated as a reduction of the Company’s additional paid-in capital balance), the Company received net proceedscould offer and sell, from the transactions of $33,795.
On March 2, 2016, ZH USA, LLC converted $15,000 of principal under the Convertible Debenture into 1,177 shares of the Company’s then unregistered common stockbased on a conversion rate of $12.748 per share.
On July 1, 2016, the Company closed its initial public offering and issued 13,043time to time, shares of its common stock at a price of $10.00 per share resulting in gross(the “2022 ATM Program”). No shares were sold under the 2022 ATM Program during the year ended December 31, 2023. During the year ended December 31, 2022, the Company generated net proceeds of $130,435. After deducting underwriting discounts and commissions, advisory fees, and other offering expenses, the Company received net proceeds from the offering$10,104 through 2022 ATM Program equity issuances of $120,774. Additionally, on July 11, 2016, the underwriters exercised their over-allotment option in full, resulting in the issuance by the Company of an additional 1,957598 shares of the Company’s common stock at aan average offering price of $10.00$17.15 per shareshare. The 2022 ATM Program was terminated in connection with implementing the 2024 ATM Program.
OP Units
During the year ended December 31, 2023, the Operating Partnership issued 577 OP Units with a value of $5,482 in connection with a facility acquisition and did not redeem any OP Units. During the year ended December 31, 2022 the Operating Partnership did not issue any OP Units and redeemed 35 OP Units for gross proceeds of $19,565. After deducting underwriting discounts and expenses, advisory fees, and other offering expenses, the Company received net proceeds from the over-allotment option shares of $18,195. Total shares issued by the Company in the initial public offering, including over-allotment option shares, were 15,000 shares and the total net proceeds received were $137,288, which represented gross proceeds received of $138,969 net of $1,681 in costs directly attributable to the initial public offering that were deferred and paid.
On July 1, 2016, ZH USA, LLC converted $15,030 of the principal under the Convertible Debenture into 1,179 shares of the Company’s registered common stock based on a conversion rate of $12.748 per share.
In order to help the Company qualify as a REIT, among other purposes, the Company’s charter, subject to certain exceptions, restricts the number of shares of the Company’s common stock that a person may beneficially or constructively own. The Company’s charter provides that, subject to certain exceptions, no person may beneficially or constructively own more than 9.8%, inwith an aggregate redemption value or in number of shares, whichever is more restrictive, of the outstanding shares of any class or series of the Company’s capital stock. On June 27, 2016, the Board approved a waiver of the 9.8% ownership limit in the Company’s charter allowing ZH USA, LLC to own up to 16.9% of the Company’s outstanding shares of common stock.
OP Units
$600.
As of December 31, 2017,2023 and 2022, there were 1,2462,244 and 1,667 OP Units issued and held by third partiesoutstanding, respectively, with an aggregate value of $11,532. There were 1,221$13,962 and $8,480, respectively. The OP Units issued in connection with the acquisition of two separate facilities, which were valued in aggregateUnit value at $11,300 using the measurement date represented by the closing date of the respective acquisitions using the Company’s closing stock price on each respective measurement date. Additionally, 25 OP Units were issued pursuant to a third party advisory agreementissuance and were valued in aggregate at $232 using the three contractual installment dates of their issuanceredemption is based on the Company’s closing stockshare price on eachthe date of the respective installment / measurement dates.transaction and is included as a component of noncontrolling interest equity in the Company’s
71
Consolidated Balance Sheets as of December 31, 2023 and 2022. The Company has sufficient shares of common stock authorized pursuant to its charter to cover the redemption of outstanding OP Units.
Note 6 – Related–Related Party Transactions
Related Party Balances
Initial Management Agreement
On November 10, 2014,the Company entered into a management agreement, with an effective date of April 1, 2014, with the Advisor. Under the terms of this initial management agreement, the Advisor was responsible for designing and implementing the Company’s business strategy and administering its business activities and day-to-day operations. For performing these services, the Company was obligated to pay the Advisor a base management fee equal to the greater of (a) 2.0% per annum of the Company’s net asset value (the value of the Company’s assets less the value of the Company’s liabilities), or (b) $30 per calendar month.
In addition pursuant to the initial management agreement the Company owed the Advisor an acquisition fee computed at a rate of 2% of the purchase price of an acquired facility.
Amended Management Agreement
Upon completion of the Company’s initial public offering on July 1, 2016, the Company and the Advisor entered into an amended and restated management agreement (the “Amended Management Agreement”). Certain material terms of the Amended Management Agreement are summarized below:
Term and Termination
The Amended Management Agreement has an initial term of three years expiring on the third anniversary of the closing date of the initial public offering but will automatically renew for an unlimited number of successive one-year periods thereafter, unless the agreement is not renewed or is terminated in accordance with its terms. If the Board decides to terminate or not renew the Amended Management Agreement, the Company will generally be required to pay the Advisor a termination fee equal to three times the sum of the average annual base management fee and the average annual incentive compensation with respect to the previous eight fiscal quarters ending on the last day of the fiscal quarter prior to termination. Subsequent to the initial term, the Company may terminate the Amended Management Agreement only under certain circumstances.
Base Management Fee
The Company pays its Advisor a base management fee in an amount equal to 1.5% of its stockholders’ equity per annum, calculated quarterly for the most recently completed fiscal quarter and payable in quarterly installments in arrears in cash.
For purposes of calculating the base management fee, the Company’s stockholders’ equity means: (a) the sum of (1) the Company stockholders’ equitydue from related parties balance as of MarchDecember 31, 2016, (2) the aggregate amount2023 and 2022 was $193 and $200, respectively. These balances primarily consist of the conversion price (including interest) for the conversiontaxes paid on behalf of the Company’s outstanding convertible debentures into common stockLTIP Unit and OP Units upon completion of the initial public offering, and (3) the net proceeds from (or equity value assigned to) all issuances of equity and equity equivalent securities (including common stock, common stock equivalents, preferred stock, LTIP units and OP Units issued by the Company or the Operating Partnership) in the initial public offering, or in any subsequent offering (allocated on a pro rata daily basis for such issuances during the fiscal quarter of any such issuance), less (b) any amountUnit holders that the Company pays to repurchase shares of its common stock or equity securities of the Operating Partnership. Stockholders’ equity also excludes (1) any unrealized gains and losses and other non-cash items (including depreciation and amortization) that have impacted stockholders’ equity as reported in the Company’s financial statements prepared in accordance with GAAP, and (2) one-time events pursuant to changes in GAAP, and certain non-cash items not otherwise described above, in each case after discussions between the Advisor and its independent directors and approval by a majority of the Company’s independent directors. As a result, the Company’s stockholders’ equity, for purposes of calculating the base management fee, could be greater or less than the amount of stockholders’ equity shown on its financial statements.
The base management fee of the Advisor shall be calculated within 30 days after the end of each quarter and such calculation shall be promptly deliveredare reimbursable to the Company. The Company is obligated to pay the quarterly installment of the base management fee calculated for that quarter in cash within five business days after delivery to the Company of the written statement of the Advisor setting forth the computation of the base management fee for such quarter.
Incentive Fee
The Company pays its Advisor an incentive fee with respect to each calendar quarter (or part thereof that the management agreement is in effect) in arrears. The incentive fee is an amount, not less than zero, equal to the difference between (1) the product of (x) 20% and (y) the difference between (i) the Company’s AFFO (as defined below) for the previous 12-month period, and (ii) the product of (A) the weighted average of the issue price of equity securities issued in the initial public offering and in future offerings and transactions, multiplied by the weighted average number of all shares of common stock outstanding on a fully-diluted basis (including any restricted stock units, any restricted shares of common stock, OP Units, LTIP units, and shares of common stock underlying awards granted under the 2016 Equity Incentive Plan (the “2016 Equity Plan”) or any future plan in the previous 12-month period, and (B) 8%, and (2) the sum of any incentive fee paid to the Advisor with respect to the first three calendar quarters of such previous 12-month period; provided, however, thathad no incentive fee is payable with respect to any calendar quarter unless AFFO is greater than zero for the four most recently completed calendar quarters.
Per the terms of the Amended Management Agreement, AFFO is calculated by adjusting the Company’s funds from operations, or FFO, by adding back acquisition and disposition costs, stock-based compensation expenses, amortization of deferred financing costs and any other non-recurring or non-cash expenses, which are costs that do not relate to the operating performance of the Company’s properties, and subtracting loss on extinguishment of debt, straight line rent adjustment, recurring tenant improvements, recurring leasing commissions and recurring capital expenditures. To date the Company has not incurred or paid an incentive fee.
Management Fees, Acquisition Fees, and Accrued Management Fees
For the years ended December 31, 2017, 2016, and 2015 management fees of $3,123 and $1,434, and $360, respectively, were incurred and expensed by the Company. During the years ended December 31, 2017 and 2016 management fees of $2,680 and $1,443, respectively, were paid to the Advisor, resulting in accrued management feesamounts due to the Advisor of $1,064 and $621,related parties as of December 31, 20172023 and 2016, respectively.2022.
During the years ended December 31, 2016 and 2015, acquisition fees of $754 and $627, respectively were expensed and paid by the Company.
Allocated General and Administrative Expenses
Effective May 8, 2017, the Company and the Advisor entered into an agreement pursuant to which, for a period of one year commencing on May 8, 2017, the Company agreed to reimburse the Advisor for $125 of the annual salary of the General Counsel and Secretary of the Company for so long as he continues to be primarily dedicated to the Company in his capacity as its General Counsel and Secretary. In the future, the Company may receive additional allocations of general and administrative expenses from the Advisor that are either clearly applicable to or were reasonably allocated to the operations of the Company. Other than via the terms of the reimbursement agreement, there were no allocated general and administrative expenses from the Advisor for the years ended December 31, 2017 and 2016.
Due to Related Parties, Net
All related party balances are due on demand and non-interest-bearing.
A rollforward of the due (to) from related parties balance, net, as of December 31, 2017, is as follows:
| Due to Advisor – Mgmt. Fees | Due (to) from Advisor – Other Funds | Due (to) from Other Related Party | Total Due (To) From Related Parties, Net | |||||||||||||
| Balance as of January 1, 2017 | $ | (621 | ) | - | 40 | $ | (581 | ) | ||||||||
| Management fee expense incurred1 | (3,123 | ) | - | - | (3,123 | ) | ||||||||||
| Management fees paid to Advisor1 | 2,680 | - | - | 2,680 | ||||||||||||
| Loan repaid to Advisor2 | - | 9 | - | 9 | ||||||||||||
| Loan repaid by other related party3 | - | - | (21 | ) | (21 | ) | ||||||||||
| Balance as of December 31, 2017 | $ | (1,064 | ) | 9 | 19 | $ | (1,036 | ) | ||||||||
1Net amount accrued of $443 consists of $3,123 in management fee expense incurred, net of $2,680 of accrued management fees that were paid to the Advisor. This represents a cash flow operating activity.
2Amount represents the overpayment of expenses that were previously paid by the Advisor on the Company’s behalf. This represents a cash flow financing activity.
3Amount represents the net receipt by the Company of previous loans made by the Company to those related parties. This represents a cash flow investing activity.
A rollforward of the due (to) from related parties balance, net as of December 31, 2016 is as follows:
| Due from Advisor | Due to Advisor – Mgmt. Fees | Due to Advisor – Other Funds | Due (to) from Other Related Party | Total Due (To) From Related Parties, Net | ||||||||||||||||
| Balance as of January 1, 2016 | $ | 178 | (630 | ) | (240 | ) | (155 | ) | $ | (847 | ) | |||||||||
| Management fees incurred1 | (1,434 | ) | (1,434 | ) | ||||||||||||||||
| Management fees paid to Advisor1 | - | 1,443 | - | - | 1,443 | |||||||||||||||
| Funds repaid to Advisor2 | - | - | 240 | - | 240 | |||||||||||||||
| Funds repaid to Other Related Party2 | - | - | - | 155 | 155 | |||||||||||||||
| Funds loaned to Other Related Party3 | 1 | 1 | ||||||||||||||||||
| Funds repaid by Advisor3 | (178 | ) | (178 | ) | ||||||||||||||||
| Funds loaned to ZH USA, LLC3 | - | - | - | 39 | 39 | �� | ||||||||||||||
| Balance as of December 31, 2016 | $ | - | (621 | ) | - | 40 | $ | (581 | ) | |||||||||||
1Net amount repaid of $9 consists of $1,434 in management fee expense incurred, net of $1,443 of accrued management fees that were repaid to the Advisor. This is a cash flow operating activity.
2Total amount of $395 consists of $240 repaid by the Company to the Advisor and $155 repaid by the Company to another related party. This is a cash flow financing activity.
3Net amount of $138 consists of loan repaid by Advisor in the amount of $178, net of $39 that the Company loaned to a related party for its general use, and $1 in additional funds loaned to related party. This is a cash flow investing activity.
Convertible Debenture, due to Related Party
Prior to 2016, the Company received funds from its prior majority stockholder, ZH USA, LLC, in the form of a convertible interest-bearing notes (8% per annum, payable in arrears) which was due on demand unsecured debt.The Company had the option to prepay the note at any time, in whole or in part, and ZH USA, LLC had the ability to convert all or a portion of the outstanding principal amount of the note into shares of common stock in an amount equal to the principal amount of the note, together with accrued but unpaid interest, divided by $12.748. The outstanding balance on the convertible debenture was zero as of December 31, 2017 and 2016.
A rollforward of the funding from ZH USA, LLC classified as convertible debenture, due to related party as of December 31, 2016 is as follows:
| Balance as of January 1, 2016 | $ | 40,030 | ||
| Conversion of convertible debenture to common shares (March 2, 2016)1 | (15,000 | ) | ||
| Conversion of convertible debenture to common shares (July 1, 2016)1 | (15,030 | ) | ||
| Pay-off of remaining principal balance | (10,000 | ) | ||
| Balance as of December 31, 2016 | $ | - |
1 Total amount converted to common shares equals $30,030
On March 2, 2016, ZH USA, LLC converted $15,000 of principal under the Convertible Debenture into 1,177 shares of the Company’s then unregistered common stockbased on a conversion rate of $12.748 per share.
On June 15, 2016, in anticipation of its initial public offering, the Company entered into a Pay-Off Letter and Conversion Agreement (the “Pay-Off Letter and Conversion Agreement”) with ZH USA, LLC with regards to the Convertible Debentures loaned to the Company. Under the terms of the Pay-Off Letter and Conversion Agreement, upon the closing date of the initial public offering on July 1, 2016, ZH USA, LLC converted $15,030 of the principal under the Convertible Debenture into 1,179 shares of the Company’s registered common stock based on a conversion rate of $12.748 per share. Additionally, in accordance with the Pay-Off Letter and Conversion Agreement, on July 8, 2016 the Company paid off the remaining principal amount of $10,000 outstanding under the Convertible Debentures.
On July 8, 2016, also in accordance with the Pay-Off Letter and Conversion Agreement, the Company paid all accrued interest owed and outstanding on the Convertible Debentures in the amount of $1,717. Accrued interest was included in the line item “Accrued Expenses” in the accompanying Consolidated Balance Sheets.
Additionally, during the year ended December 31, 2015, the Company received aggregate funds in the amount of $34,584, which were accounted for as Convertible Debentures. The funds were received in four separate transactions as follows: $20,900 to acquire the Tennessee facilities, $4,546 for the West Mifflin acquisition, $9,000 for the Plano acquisition, and $138 held by the Company to be used for future acquisitions.
Interest expense on the Convertible Debentures was zero, $1,243, and $581 for the years ended December 31, 2017, 2016, and 2015, respectively.
Notes Payable to Related Parties
During the year ended December 31, 2016, the Company received $450 in the form of an interest bearing note payable from a related party. The note incurred interest at 4% per annum and was due on demand. Interest expense incurred on this note was $10 for the year ended December 31, 2016. This note was paid in full during the year ended December 31, 2016 and therefore had a zero balance as of December 31, 2017 and 2016, respectively.
Prior to 2016 the Company received funds from ZH USA, LLC in the form of a non-interest bearing, due on demand note payable. The Company repaid this loan in full during 2017 and accordingly the balance of this note was zero and $421 as of December 31, 2017 and 2016, respectively.
ZH USA, LLC Intercompany Loan
On June 7, 2016, the Company received an interest free intercompany loan from ZH USA, LLC in the principal amount of $1.5 million, which was repaid in full on July 8, 2016, using a portion of the proceeds from the initial public offering.
Note 7 – Stock-Based Compensation
2016 Equity Incentive Plan
The 2016 Equity Incentive Plan, as amended (the “Plan”), is intended to assist the Company and its affiliates in recruiting and retaining employees of the Company, members of the Board, executive officers of the Company, and other individuals who provide services to the Company the Manager, the Operating Partnership or an Affiliate of the Company, the Manager or the Operating Partnership.and its affiliates.
ThisThe Plan is intended to permit the grant of both options qualifyingqualified and non-qualified options and the grant of stock appreciation rights, restricted stock, unrestricted stock, awards of restricted stock units, performance awards and other equity-based awards (including LTIP units) for up to an aggregate of 1,232 shares of common stock, subject to increase under certain provisions of the plan. The Company’s executive officers, employees, employees of its Advisor and its affiliates, consultants and non-employee directors are eligible to participate in the Plan.
Units). Based on the grants outstanding as of December 31, 2017,2023, there are 614were 844 shares of common stock that remain available to be granted under the Plan. SharesUnits subject to awards under the Plan that are forfeited, cancelled, lapsed, settled in cash or otherwise expired (excluding shares withheld to satisfy exercise prices or tax withholding obligations) are available for grant.
Time-Based Grants
The time-based vesting LTIP units granted underDuring the Plan during the yearsyear ended December 31, 20162023, the following LTIP Units were issued by the Company:
| | | | | | |
| | | | Number of | | |
Date | | Description | | Units Issued | | Vesting Dates |
| | | | | | |
February 23, 2023 | | Final awards under the 2022 Annual Incentive Plan | | 68 | | 50% on February 23, 2023; and |
| | | | | | 50% on February 23, 2024 |
| | | | | | |
February 23, 2023 | | Time-based awards under the 2023 Long-Term Incentive Plan | | 165 | | 100% on February 23, 2026 |
| | | | | | |
May 10, 2023 | | Annual awards to independent directors | | 45 | | 100% on May 10, 2024 |
| | | | | | |
May 10, 2023 | | Discretionary awards | | 11 | | 33.33% on May 10, 2024; |
| | | | | | 33.33% on May 10, 2025; and |
| | | | | | 33.33% on May 10, 2026 |
During the year ended December 31, 2023, certain participants redeemed an aggregate of 47 vested LTIP Units for the Company’s common stock and 2017areforfeited an aggregate of 25 LTIP Units. A detail of the Company’s outstanding time-based LTIP Units as of December 31, 2023 is as follows:
| | | ||
Vested units | 2,270 | |||
Unvested units | 486 | |||
LTIP | ||||
2,756 |
72
Performance Based Awards
The Company expenses the fair value of all LTIP unit awards in accordance with the fair value recognition requirements of ASC Topic 718, Compensation-Stock Compensation, for “employees,” and ASC Topic 505, Equity, for “non-employees.”
For the time-based LTIP units granted to non-employees, in accordance with the provisions of ASC Topic 505, the grant date fair value is utilized for expense recognition; however, the accounting after the measurement date requires a fair value re-measurement each reporting period until the awards vest.
Performance Based Awards—2017 Program
During 2017, the Board has approved the 2017 annual performance-based equity incentive award targets in the form of LTIP units (the “Annualawards (“Annual Awards”) and long-term performance-based LTIP awards (the “Long-Term(“Long-Term Awards” and together with the Annual Awards, “Performance Awards”) to the executive officers of the Company and other employees of the Company’s external manager who perform services forCompany. As described below, the Company (togetherAnnual Awards have one-year performance periods and the “2017 Program”). None ofLong-Term Awards have three-year performance periods. In addition to meeting specified performance metrics, vesting in both the LTIP units awarded underAnnual Awards and the 2017 Program had been earned by the participants as of December 31, 2017.Long-Term Awards is subject to service requirements.
The LTIP unit awards under the 2017 Program and subsequent activity duringDuring the year ended December 31, 2017, are2023, certain participants forfeited an aggregate of 16 Performance Awards. Additionally, none of the 2020 Long-Term Awards were earned. A detail of the Performance Awards under the 2021, 2022 and 2023 programs as of December 31, 2023 is as follows:
| Annual | Long-Term | Total | ||||||||||
| Awards on February 28, 2017 | 97 | 147 | 244 | |||||||||
| Awards on August 23, 2017 and May 8, 2017 | 8 | 18 | 26 | |||||||||
| Total 2017 Program LTIP units awarded as of December 31, 2017 | 105 | 165 | 270 | |||||||||
| 2017 Program LTIP units forfeited | (21 | ) | (67 | ) | (88 | ) | ||||||
| Net 2017 Program LTIP awards as of December 31, 2017 | 84 | 98 | 182 | |||||||||
The number of target LTIP units comprising each Annual Award was based on the closing price of the Company’s common stock reported on the New York Stock Exchange (“NYSE”) on the dates of grant and the number of target LTIP units comprising each Long-Term Award was based on the fair value of the Long-Term Awards as determined by an independent valuation consultant, in each case rounded to the next whole LTIP unit in order to eliminate fractional units.
| | |
2021 Long-Term Awards |
| 67 |
2022 Long-Term Awards | | 96 |
2023 Annual Awards (1) | | 151 |
2023 Long-Term Awards (2) | | 154 |
Total target performance awards as of December 31, 2023 | 468 |
| (1) | Approved by the Board on May 10, 2023. The number of target LTIP Units was based on the average closing price of the Company’s common stock reported on the New York Stock Exchange (“NYSE”) over the 15 trading days preceding the award date. |
| (2) | Approved by the Board on February 23, 2023. The number of target LTIP Units was based on the fair value of the Long-Term Awards as determined by an independent valuation consultant. |
Annual Awards. The Annual Awards are subject to the terms and conditions of LTIP Annual Award Agreements (“LTIP Annual Award Agreements”) between the Company and each grantee.
The Company’s Compensation Committee of the Board (the “Compensation Committee”) and Board established various operating performance goals for calendarthe year 2017,ending December 31, 2023, as set forth in Exhibit A to the 2023 LTIP Annual Award Agreements (the “Performance Goals”), that will be used to determine the actual number of LTIP unitsUnits earned by each grantee under each LTIP Annual Award Agreement. As of December 31, 2017, management estimated that the Performance Goals would be met at a 55% level, and accordingly, applied 55% to the net target Annual Awards to estimate the Annual Awards expected to be earned at the end of the performance period.grantee. Cumulative stock basedstock-based compensation expense during the year ended December 31, 20172023 reflects management’s estimate that 55%of the probability of the number of these awards that will vest.be earned. As soon as reasonably practicable duringfollowing the first quarterend of 2018,the performance period, the Compensation Committee and Board will determine the extent to which the Company has achieved each of the Performance Goals (expressed as a percentage) and, based on such determination, will calculate the number of LTIP unitsUnits that each grantee is entitled to receive underreceive. Each grantee may earn up to 150% of the grantee’snumber of his/her target LTIP Units. Any 2023 Annual Award based on the performance percentages described in the grantee’s LTIP Annual Award Agreement. Any target LTIP unitsUnits that are not earned will be forfeited and cancelled.
AsVesting. LTIP Units that are earned as of the Annual Awards were granted to non-employees,end of the applicable performance period will vest in accordance withtwo installments as follows: 50% of the provisions of ASC Topic 505, the Annual Awards utilize the grant date fair value for expense recognition; however, the accounting after the measurement date requires a fair value re-measurement each reporting period until the awards vest. Since these are performance based awards with no market condition, the closing priceearned LTIP Units will become vested on the valuation date of the awards (which is expected to occur in February 2024) and revaluation date50% of the earned LTIP Units become vested on the one year anniversary of the initial vesting date. Vesting may be accelerated under certain circumstances such as a “change-in-control” transaction or a “qualified termination” event.
Distributions. Distributions equal to the dividends declared and paid by the Company will accrue during the applicable performance period on the maximum number of LTIP Units that the grantee could earn and will be used for expense recognition purposes.
paid with respect to all of the earned LTIP Units at the conclusion of the applicable performance period, in cash or by the issuance of additional LTIP Units at the discretion of the Compensation Committee.
Long-Term AwardsAwards.. The Long-Term Awards are subject to the terms and conditions of their related LTIP Long-Term Award Agreements (“LTIP(collectively the “LTIP Long-Term Award Agreements”) between the Company and each grantee. The number of LTIP unitsUnits that each grantee is entitled to earnearns under the LTIP Long-Term Award Agreements will be determined following the conclusion of a three-year performance period based on the Company’s total shareholderstockholder return (“TSR”), which is determined based on a combination of appreciation in stock price and dividends paid during the performance period (“TSR”).period. Each grantee may earn up to 200% of the number of target LTIP unitsUnits covered by the grantee’s Long-Term Award. Any target LTIP unitsUnits that are not earned will be forfeited and cancelled. The number of LTIP unitsUnits earned under the Long-Term Awards will be determined as soon as reasonably practicable following the end of the applicable three-year performance period based on the Company’s TSR on an absolute basis (as to 75%50% of the Long-Term Award) and relative to the SNL Healthcare REITcompanies that comprised the Dow Jones U.S. Real Estate Health Care Index (the “Index”) (as to 25%50% of the Long-Term Award).
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Vesting. LTIP Units that are earned as of the end of the applicable three-year performance period will vest in two installments as follows; 50% of the earned LTIP Units will vest upon the day prior to the third anniversary of the respective grant dates and the remaining 50% will vest on the one year anniversary of the initial vesting date. Vesting may be accelerated under certain circumstances such as a “change-in-control” transaction or a “qualified termination” event.
Distributions. Pursuant to the LTIP Long-Term Award Agreements, distributions equal to the dividends declared and paid by the Company will accrue during the applicable performance period on the maximum number of LTIP Units that the grantee could earn and will be paid with respect to all of the earned LTIP Units at the conclusion of the applicable performance period, in cash or by the issuance of additional LTIP Units at the discretion of the Compensation Committee.
Stock-Based Compensation Expense
Compensation expense for LTIP Unit grants, Annual Awards, and Long-Term Awards is based on the grant date fair value of the units/awards, with no subsequent remeasurement required.
As the Long-Term Awards were granted to non-employees and involvedinvolve market-based performance conditions, in accordance with the provisions of ASC Topic 505, the Long-Term Awards utilizeCompany utilizes a Monte Carlo simulation to provide a grant date fair value for expense recognition; however, the accounting after the measurement date requires a fair value re-measurement each reporting period until the awards vest. The fair value re-measurement will be performed by calculating a Monte Carlo produced fair value at the conclusion of each reporting period until vesting.
recognition. The Monte Carlo simulation is a generally accepted statistical technique used, in this instance, to simulate a range of possible future stock prices for the Company and the members of the SNL Healthcare REIT Index (the “Index”) over the Performance Period (February 28, 2017 to February 27, 2020; May 8, 2017 to May 7, 2020; and August 23, 2017 to August 22, 2020, respectively).Periods. The purpose of this modeling is to use a probabilistic approach for estimating the fair value of the performance share award for purposes of accounting under ASC Topic 718. ASC Topic 505 does not provide guidance on how to derive a fair value, so the valuation defaults to that described in ASC Topic 718.
award.
The assumptions used in the Monte Carlo simulation include beginning average stock price, valuation date stock price, expected volatilities, correlation coefficients, risk-free rate of interest, and expected dividend yield. The beginning average stock price is the beginning average stock price for the Company and each member of the Index for the five15 trading days leading up to the grant date.date of the Long-Term Award. The valuation date stock price is the closing stock price of the Company and each of the peer companies in the Index on the grant date fordates of the grant date fair value, and the closing stock price on December 31, 2017 for revaluation.Long-Term Awards. The expected volatilities are modeled using the historical volatilities for the Company and the members of the Index. The correlation coefficients are calculated using the same data as the historical volatilities. The risk-free rate of interest is taken from the U.S. Treasury website and relates to the expected life of the remaining performance period on valuation or revaluation. Lastly, the dividend yield assumption is 0.0%, which is mathematically equivalent to reinvesting dividends in the issuing entity, which is part of the Company’s award agreement assumptions.
Vesting.LTIP units thatBelow are earned asdetails regarding certain of the end ofassumptions for the applicable performance period will be subject to forfeiture restrictions that will lapse (“vesting”), subject to continued employment through each vesting date, in two installments as follows: 50% of the earned LTIP units will vest upon being earned as of the end of the applicable performance period and the remaining 50% will vest on the first anniversary of the date on which such LTIP units are earned.Long-Term Awards using Monte Carlo simulations:
| | | | | | | | | | |
| | 2023 Long-Term | | 2022 Long-Term | | 2021 Long-Term | | |||
|
| Awards |
| Awards |
| Awards |
| |||
| | | | | | | | | | |
Fair value | | $ | 11.67 | | $ | 16.39 | | $ | 14.86 |
|
Target awards | |
| 154 | |
| 96 | |
| 67 |
|
Volatility | |
| 43.54 | % |
| 41.65 | % |
| 42.37 | % |
Risk-free rate | |
| 4.35 | % |
| 1.72 | % |
| 0.26 | % |
Dividend assumption | |
| reinvested | |
| reinvested | |
| reinvested |
|
Expected term in years | |
| 3 | |
| 3 | |
| 3 |
|
Distributions.Pursuant to both the LTIP Annual Award Agreements and LTIP Long-Term Award Agreements, distributions equal to the dividends declared and paid by the Company will accrue during the applicable performance period on the maximum number of LTIP units that the grantee could earn and will be paid with respect to all of the earned LTIP units at the conclusion of the applicable performance period, in cash or by the issuance of additional LTIP units at the discretion of the Compensation Committee.
Stock Compensation Expense
The Company incurred stock compensation expense of $1,796$4,242, $4,681, and $1,685$5,810, for the years ended December 31, 20172023, 2022, and 2016,2021, respectively, related to the grants awarded under the Plan. Compensation expense is included within “General and Administrative” expense in the Company’s Consolidated Statements of Operations. A detail
As of compensation expense recognized during the years ended December 31, 2017 and 2016, is as follows:
| Year Ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| 2016 Plan – Time Based Grants: | ||||||||
| Service LTIPs – non-employee | $ | 1,111 | $ | 1,615 | ||||
| Service LTIPs – employee | 163 | 70 | ||||||
| 2017 Program – Performance Based Award Targets: | ||||||||
| Annual Awards – non-employee | 306 | - | ||||||
| Long-Term Awards – non-employee | 216 | - | ||||||
| Total compensation expense | $ | 1,796 | $ | 1,685 | ||||
Total2023, total unamortized compensation expense related to these awards of approximately $1.5$4.8 million is expected to be recognized subsequent to December 31, 2017 over a weighted average remaining period of 2.131.2 years.
Note 8 – Rental RevenueLeases
The Company operates as both a lessor and a lessee. As a lessor, the Company is required under ASC Topic 842 to account for leases using an approach that is substantially similar to ASC Topic 840’s guidance for operating leases and other leases such as sales-type leases and direct financing leases. In addition, ASC Topic 842 requires lessors to capitalize and amortize only incremental direct leasing costs. As a lessee, the Company is required under the new standard to apply a dual approach, classifying leases, such as ground
74
leases, as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase. This classification determines whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. ASC Topic 842 also requires lessees to record a right of use asset and a lease liability for all leases with an initial term of greater than a year regardless of their classification. The Company has also elected the practical expedient not to recognize right of use assets and lease liabilities for leases with a term of a year or less.
Information as Lessor
To generate positive cash flow, as a lessor, the Company leases its facilities to tenants in exchange for fixed monthly payments that cover rent, property taxes, insurance and certain cost recoveries, primarily common area maintenance (“CAM”). The Company’s leases were determined to be operating leases and have a portfolio-average-lease-years remaining of approximately 10 years. Payments from the Company’s tenants for CAM are considered nonlease components that are separated from lease components and are generally accounted for in accordance with the revenue recognition standard. However, the Company qualified for and elected the practical expedient related to combining the components because the lease component is classified as an operating lease and the timing and pattern of transfer of CAM income, which is not the predominant component, is the same as the lease component, for all asset classes. As such, consideration for CAM is accounted for as part of the overall consideration in the lease. Payments from customers for property taxes and insurance are considered non-components of the lease and therefore no consideration is allocated to them because they do not transfer a good or service to the customer. Fixed contractual payments from the Company’s leases are recognized on a straight-line basis over the terms of the respective leases. This means that, with respect to a particular lease, actual amounts billed in accordance with the lease during any given period may be higher or lower than the amount of rental revenue recognized for the period. Straight-line rental revenue is commenced when the tenant assumes control of the leased premises. Accrued straight-line rents receivable represents the amount by which straight-line rental revenue exceeds rents currently billed in accordance with lease agreements.
Some of the Company’s leases are subject to annual changes in the Consumer Price Index (“CPI”). Although increases in CPI are not estimated as part of the Company’s measurement of straight-line rental revenue, for leases with base rent increases based on CPI, the amount of rent revenue recognized is adjusted in the period the changes in CPI are measured and effective. Additionally, some of the Company’s leases have extension options.
Initial direct costs, primarily commissions related to the leasing of our facilities, are capitalized as incurred. Capitalized leasing costs are amortized on a straight-line basis over the remaining useful life of the respective leases. All other costs to negotiate or arrange a lease are expensed as incurred.
Lease-related receivables, which include accounts receivable and accrued straight-line rents receivable, are reduced for credit losses, if applicable. The Company regularly evaluates the collectability of its lease-related receivables. The Company’s evaluation of collectability primarily consists of reviewing past due account balances and considering such factors as the credit quality of our tenant, historical trends of the tenant and changes in tenant payment terms. If the Company’s assumptions regarding the collectability of lease-related receivables prove incorrect, the Company could experience credit losses in excess of what was recognized in rental and other revenues.
The Company recognized $140,934 and $137,167 of rental revenue related to operating lease payments for the years ended December 31, 2023 and 2022, respectively. Of these amounts $7,180 and $7,767, respectively, relate to variable rental revenue.
The aggregate annual minimum cash to be received by the Company on itsthe noncancelable operating leases related to its portfolio as of December 31, 20172023 is as follows for the subsequent years ended December 31:
| | | |
2024 |
| $ | 113,302 |
2025 | |
| 103,733 |
2026 | |
| 95,168 |
2027 | |
| 83,926 |
2028 | | | 73,601 |
Thereafter | |
| 274,744 |
Total | | $ | 744,474 |
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Information as Lessee
The Company entered into a new lease agreement for its corporate headquarters in Bethesda, Maryland. The lease had a commencement date of May 1, 2023 and expires on October 31, 2034. The Company’s total lease payment obligation over the life of the lease is approximately $7 million. The Company recorded a right of use asset and liability of $4,634 on May 1, 2023, the commencement date of the lease. The Company used a discount rate of approximately 6.5% which represented its incremental borrowing rate at the lease commencement date. Additionally, the Company has seven buildings located on land that is subject to operating ground leases with a weighted average remaining term of approximately 42 years. Rental payments on these leases are adjusted periodically based on either the CPI or on a pre-determined schedule. The monthly payments on a pre-determined schedule are recognized on a straight-line basis over the terms of the respective leases. Changes in the CPI are not estimated as follows:part of our measurement of straight-line rental expense. The Company used a weighted average discount rate of approximately 7.5% to record the right of use assets and liabilities, which was derived, using a portfolio approach, from our assessment of the credit quality of the Company and adjusted to reflect secured borrowing, estimated yield curves and long-term spread adjustments over appropriate tenors. Some of the Company’s ground leases contain extension options and, where we determined it was reasonably certain that an extension would occur, they were included in our calculation of the right of use asset and liability. The Company recognized approximately $326 and $154 of ground lease expense during the years ended December 31, 2023 and 2022, respectively, of which $185 and $154 was paid in cash.
| 2018 | $ | 36,005 | ||
| 2019 | 36,708 | |||
| 2020 | 37,412 | |||
| 2021 | 35,654 | |||
| 2022 | 34,446 | |||
| Thereafter | 247,065 | |||
| Total | $ | 427,290 |
The following table sets forth the undiscounted cash flows of our scheduled obligations for future lease payments on operating ground leases at December 31, 2023 and a reconciliation of those cash flows to the operating lease liability at December 31, 2023:
For
| | | |
2024 |
| $ | 679 |
2025 | |
| 740 |
2026 | |
| 757 |
2027 | |
| 772 |
2028 | | | 794 |
Thereafter | |
| 9,656 |
Total | | | 13,398 |
Discount | |
| (5,718) |
Lease liability | | $ | 7,680 |
Tenant Concentration
During the year ended December 31, 2017, the HealthSouth facilities constituted approximately 20% of2023, the Company’s rental revenue, the OCOM facilities constituted approximately 12% of the Company’revenues were derived from 269 tenants leasing 185 buildings. During this period there were no tenants with rental revenue the Great Bend facility constituted approximately 7% of the Company’s rental revenue, the Omaha and Plano facilities each constituted approximately 6% of the Company’s rental revenue, and the Tennessee and Sherman facilities each constituted approximately 5%that exceeded 10% of the Company’s rental revenue. All other facilities in the Company’s portfolio constituted the remaining 39% of the total rental revenue with no individual facility constituting greater than approximately 4% of total rental revenue.
For the year ended December 31, 2016, the Omaha facility constituted approximately 21% of the Company’s rental revenue, the Plano facility constituted approximately 18% of rental revenue, the Tennessee facilities constituted approximately 17% of rental revenue, the West Mifflin facility constituted approximately 11% of rental revenue, the Melbourne facility constituted approximately 11% of rental revenue, the Reading facility constituted approximately 4% of rental revenue, and the Westland facilities constituted approximately 4% of rental revenue. The Asheville, East Orange, and Watertown facilities constituted approximately 3% of rental revenue each. The remaining 5% of rental revenue was derived from the other facilities in the Company’s portfolio.
For the year ended December 31, 2015, the Omaha facility constituted approximately 80% of the Company’s rental revenue and the West Mifflin and Asheville facilities constituted approximately 10% each.
Note 9 – Omaha and Clermont Land Leases
In connection with its acquisition of the Omaha facility, the Company acquired an interest, as ground lessee, in the ground lease related to that facility. The Omaha ground lease expires in 2033, subject to future renewal options by the Company. The ground lease commenced in April 2017 and annual rents under the ground lease will increase by 12.5% beginning in June 2018, and will increase by 12.5% every fifth anniversary thereafter. During the years ended December 31, 2017, 2016, and 2015, the Company expensed $73, $73, and $80, respectively, related to the Omaha land lease.
In connection with its acquisition of the Clermont facility, the Company acquired an interest, as ground lessee, in the ground lease related to that facility. The Clermont ground lease commenced in 2013 and has an initial term of seventy-five years.
The aggregate minimum cash payments to be made by the Company on the Omaha land lease and the Clermont land lease as of December 31, 2017, are as follows:
| 2018 | $ | 78 | ||
| 2019 | 82 | |||
| 2020 | 82 | |||
| 2021 | 82 | |||
| 2022 | 82 | |||
| Thereafter | 1,796 | |||
| Total | $ | 2,202 |
Note 109 – Commitments and Contingencies
Litigation
TheThe Company is not presently subject to any material litigation nor, to its knowledge, is any material litigation threatened against the Company, which if determined unfavorably to the Company, would have a material adverse effect on the Company’s financial position, results of operations, or cash flows.
Environmental Matters
The Company follows a policy of monitoring its properties for the presence of hazardous or toxic substances. While there can be no assurance that a material environmental liability does not exist at its properties, the Company is not currently aware of any environmental liability with respect to its properties that would have a material effect on its financial position, results of operations, or cash flows. Additionally, the Company is not aware of any material environmental liability or any unasserted claim or assessment with respect to an environmental liability that management believes would require additional disclosure or the recording of a loss contingency.
Note 11 – Income Taxes
Beginning with the 2016 tax year, the Company has qualified as a REIT under the Internal Revenue Code. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement that the Company distribute at least 90% of its adjusted taxable income to its stockholders. It is management’s current intention to adhere to these requirements and be eligible to be a REIT for the year ended December 31, 2017. As a REIT, the Company generally will not be subject to corporate level federal income tax on taxable income currently distributed to stockholders. If the Company fails to qualify as a REIT for the 2017 tax year, it will be subject to federal and state income taxes at corporate tax rates. Even if the Company qualifies to be taxed as a REIT for 2017, it may be subject to federal and state taxes on any undistributed taxable income.
On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was enacted. The TCJA reduces the statutory federal tax rate from 35.0% to 21.0% effective for tax year 2018 in addition to various other tax law changes that affect the Company.
Potential benefits of income tax losses are not recognized in the accounts until realization is more likely than not. The Company had federal and state net operating loss carry forwards of approximately $3.7 million, which begin expiring in 2033. The Company has adopted ASC Topic 740, “Accounting for Income Taxes,” as of its inception. Pursuant to ASC Topic 740, the Company is required to compute tax asset benefits for non-capital losses carried forward. The potential benefit of the net operating loss has not been recognized in these financial statements because it cannot be assured it is more likely than not it will utilize the loss carried forward in future years.
Significant components of the deferred tax assets and liabilities as of December 31, 2017 and 2016, after applying enacted corporate income tax rates, are as follows:
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| Deferred income tax asset: | ||||||||
| Net operating and passive activity loss carry forward | $ | 778 | $ | 1,438 | ||||
| Valuation allowance | (778 | ) | (1,438 | ) | ||||
| Net deferred tax asset | $ | - | $ | - | ||||
The Company periodically assesses the likelihood that it will be able to recover its deferred tax assets. The Company considers all available evidence, both positive and negative, including expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible profits. As a result of this analysis of all available evidence, both positive and negative, the Company concluded that it is not likely that its net deferred tax assets will ultimately be recovered; as such, it recorded a valuation allowance for the net operating and passive activity losses and a reserve due to the anticipated REIT election for calendar year 2017.
The Company follows ASC Topic 740 to recognize, measure, present and disclose in its consolidated financial statements uncertain tax positions that it has taken or expects to take on a tax return. As of December 31, 2017 and December 31, 2016, the Company did not have any liabilities for uncertain tax positions that it believes should be recognized in its financial statements. The Company is no longer subject to U.S. federal, state or local income tax examinations by tax authorities for the years 2013 and earlier. The Company is not currently under examination by any taxing jurisdiction.
Note 12 – Subsequent Events
2018 Investment Activity
From January 1, 2018 through March 1, 2018, the Company purchased four facilities for an aggregate purchase price of $48.4 million.
On March 6, 2018, we entered into a purchase and sale agreement to purchase a portfolio of four medical office buildings located in Belpre, Ohio for $64.2 million. The portfolio is 100% leased to Memorial Health System pursuant to four, triple-net leases with aggregate annual base rent of approximately $5 million.
On January 24, 2018, we entered into a purchase and sale agreement to purchase a portfolio of five medical office buildings located in Orlando, Florida for $16.2 million. The portfolio is 100% leased to Orlando Health pursuant to five, triple-net leases with aggregate annual base rent of approximately $1.3 million.
Increase in Capacity of our Revolving Credit Facility
On March 6, 2018, the Company amended its revolving credit facility to increase the aggregate size of the facility by $90 million to $340 million. As of December 31, 2017, the Company had $164.9 million of outstanding borrowings under this facility.
Dividends
On March 7, 2018, the Company announced the declaration of a cash dividend for the first quarter of 2018 of $0.20 per share of common stock to stockholders of record as of March 22, 2018, to be paid on April 10, 2018.
On March 7, 2018, the Company announced the declaration of a cash dividend of $0.46875 per share to holders of its Series A Cumulative Redeemable Preferred Stock, $0.001 par value per share (the “Series A Preferred Stock”), of record as of April 15, 2018, to be paid on April 30, 2018. This dividend represents the Company’s quarterly dividend on its Series A Preferred Stock for the period from January 31, 2018 through April 29, 2018.
Equity Awards Approved in 2018
On March 5, 2018, the Board approved the recommendations of the Compensation Committee of the Board with respect to the granting of Long-Term Performance-Based Incentive LTIP Awards (the “Long-Term Performance Awards”) and Long-Term Time-Based Incentive LTIP Awards (the “Long-Term Time-Based Awards”) to certain executive officers of the Company and employees of the Advisor who perform services for the Company, both of which were granted pursuant to the Company’s 2016 Equity Incentive Plan.
Long-Term Performance-Based Awards
The Long-Term Performance-Based Awards are subject to the terms and conditions of LTIP Long-Term Performance-Based Award Agreements (“LTIP Long-Term Performance-Based Award Agreements”) between the Company and each grantee. The number of LTIP Units that each grantee is entitled to earn under the LTIP Long-Term Performance-Based Award Agreements will be determined following the conclusion of a three-year performance period based on the Company’s total shareholder return, which is determined based on a combination of appreciation in stock price and dividends paid during the performance period (“TSR”). Each grantee may earn up to 200% of the number of target LTIP units covered by the grantee’s Long-Term Performance-Based Award. Any target LTIP Units that are not earned will be forfeited and cancelled. The number of LTIP Units earned under the Long-Term Performance-Based Awards will be determined as soon as reasonably practicable following the end of the three-year performance period based on the Company’s TSR on an absolute basis (as to 75% of the Long-Term Performance-Based Award) and relative to the SNL Healthcare REIT Index (as to 25% of the Long-Term Performance-Based Award).
Vesting.LTIP units that are earned as of the end of the applicable performance period will be subject to forfeiture restrictions that will lapse (“vesting”), subject to continued employment through each vesting date, in two installments as follows: 50% of the earned LTIP units will vest upon being earned as of the end of the applicable performance period and the remaining 50% will vest on the first anniversary of the date on which such LTIP units are earned.
Distributions.Pursuant to the LTIP Long-Term Performance-Based Award Agreements, distributions equal to the dividends declared and paid by the Company will accrue during the applicable performance period on the maximum number of LTIP Units that the grantee could earn and will be paid with respect to all of the earned LTIP Units at the conclusion of the applicable performance period, in cash or by the issuance of additional LTIP Units at the discretion of the Compensation Committee of the Board.
Long-Term Time-Based Awards
The Long-Term Time-Based Awards will be subject to the terms and conditions of LTIP Unit Award Agreements between the Company and each grantee. Long-Term Time-Based Awards become vested, and cease to be subject to forfeiture, in equal one-third increments on each of the first, second and third anniversaries of the date of grant, which was March 5, 2018.
Note 13 – Selected Quarterly Financial Data (Unaudited)
The following unaudited quarterly data has been prepared on the basis of a December 31 year-end. As a result of acquisition activity and equity offerings throughout 2017 and 2016, the quarterly periods presented are not comparable quarter over quarter. The amounts below represent the Company’s actual quarterly results. For the pro forma impact of the Company’s acquisitions that were accounted for as business combination for the full years ended December 31, 2017 and 2016, refer to Note 3 – “Property Portfolio.” Amounts are in thousands except per share amounts.
| Year Ended December 31, 2017 | ||||||||||||||||
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |||||||||||||
| Total revenue | $ | 4,659 | $ | 7,423 | $ | 8,389 | $ | 9,874 | ||||||||
| Total expenses | 5,977 | 1 | 8,046 | 7,783 | 8,625 | |||||||||||
| Net (loss) income | (1,318 | )1 | (623 | ) | 606 | 1,249 | ||||||||||
| Less: Preferred stock dividends | - | - | (259 | ) | (1,456 | ) | ||||||||||
| Less: Net loss attributable to noncontrolling interest | - | - | 34 | 14 | ||||||||||||
| Net (loss) income attributable to common stockholders | $ | (1,318 | ) | $ | (623 | ) | $ | 381 | $ | (193 | ) | |||||
| Net (loss) income attributable to common stockholders per share – basic and diluted | $ | (0.07 | ) | $ | (0.04 | ) | $ | 0.02 | $ | (0.01 | ) | |||||
| Weighted average shares outstanding – basic and diluted | 17,606 | 17,644 | 21,523 | 21,631 | ||||||||||||
1In the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 that was filed with the SEC on May 11, 2017, $1.2 million of costs incurred in connection with the Company’s Revolving Credit Facility were erroneously expensed and included in the General and Administrative line item within the Company’s Consolidated Statement of Operations for the three months ended March 31, 2017. The Company corrected this error by removing the approximately $1.2 million from expense and capitalizing it as deferred financing costs on the Company’s Consolidated Balance Sheet as of June 30, 2017, which was included in the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017 that was filed with the SEC on August 10, 2017. Based upon evaluation and consideration of provisions under ASC Topic 250 – Accounting Changes and Error Corrections, that incorporates SEC Staff Accounting Bulletin (SAB) No. 99 - Materiality, the Company determined that the impact of the error and its subsequent correction as described above, did not have a material impact on previously issued financial statements for the quarter ended March 31, 2017. The total expense and net (loss) income lines in the table above properly reflect the adjusted amounts after correcting this item.
| Year Ended December 31, 2016 | ||||||||||||||||
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |||||||||||||
| Total revenue | $ | 1,314 | $ | 1,771 | $ | 2,002 | $ | 3,123 | ||||||||
| Total expenses | 3,261 | 2,265 | 3,985 | 5,053 | ||||||||||||
| Net loss | (1,947 | ) | (494 | ) | (1,983 | ) | (1,930 | ) | ||||||||
| Less: Preferred stock dividends | - | - | - | - | ||||||||||||
| Less: Net loss attributable to noncontrolling interest | - | - | - | - | ||||||||||||
| Net loss attributable to common stockholders | $ | (1,947 | ) | $ | (494 | ) | $ | (1,983 | ) | $ | (1,930 | ) | ||||
| Net loss attributable to common stockholders per share – basic and diluted | $ | (3.11 | ) | $ | (0.35 | ) | $ | (0.11 | ) | $ | (0.11 | ) | ||||
| Weighted average shares outstanding – basic and diluted | 625 | 1,427 | 17,372 | 17,606 | ||||||||||||
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to ensure that the information required to be disclosed in our reports filed or submitted to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and that information is accumulated and communicated to management, including the principal executive officer (our Chief Executive Officer) and principal financial officer (our Chief Financial Officer) as appropriate, to allow timely decisions regarding required disclosures. Our Chief Executive Officer (our “CEO”) and Chief Financial Officer (our “CFO”) evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2017.2023. Based on that evaluation, our CEO and CFO concluded that, as of the end of the period covered by this Report, the Company’s disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the fourth quarter of 2023 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for the preparation of our consolidated financial statements and related information. Management uses its best judgment to ensure that the consolidated financial statements present fairly, in all material respects, our financial position and results of operations in conformity with generally accepted accounting principles. Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in the Exchange Act. These internal controls are designed to provide reasonable assurance that the reported financial information is presented fairly, that disclosures are adequate and that the judgments inherent in the preparation of financial statements are reasonable. There are inherent limitations in the effectiveness of any system of internal controls including the possibility of human error and overriding of controls. Consequently, even an effective internal control system can only provide reasonable, not absolute, assurance with respect to reporting financial information.
Our internal control over financial reporting includes policies and procedures that: (i) pertain to maintaining records that, in reasonable detail, accurately and fairly reflect our transactions; (ii) provide reasonable assurance that transactions are recorded as necessary for preparation of our financial statements in accordance with generally accepted accounting principles and that the receipts and expenditures of company assets are made in accordance with our management and directors’ authorization; and (iii) provide reasonable assurance regarding the prevention of or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on our financial statements.
Under the supervision of management, including our CEO and CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, our management concluded that our internal controls over financial reporting were effective as of December 31, 2017. 2023.
Deloitte & Touche LLP, an independent registered public accounting firm, audited our consolidated financial statements included in this Annual Report on Form 10-K and our internal control over financial reporting, and that firm’s report on our internal control over financial reporting is set forth below.
The effectivenessFebruary 28, 2024
77
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Global Medical REIT Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Global Medical REIT Inc. and subsidiaries (the “Company”) as of December 31, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017 has been audited by MaloneBailey LLP, our independent registered public accounting firm, as stated2023, based on criteria established in their report included in Part II Item 8. of this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting— Integrated Framework (2013) issued by COSO.
In connectionWe have also audited, in accordance with our Annual Report on Form 10-Kthe standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2016,2023, of the Company and our report dated February 28, 2024, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management concluded that ouris responsible for maintaining effective internal controlscontrol over financial reporting were not effective asand for its assessment of December 31, 2016.the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our then CEOresponsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and CFO concludedare required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we hadplan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness due to lackexists, testing and evaluating the design and operating effectiveness of segregation of duties in multiple areas withininternal control based on the Company. Beginningassessed risk, and performing such other procedures as we considered necessary in the first quartercircumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of 2017,Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the Company beganreliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to undertake remedial measuresthe maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to addresspermit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material weaknesseffect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in its internal controls. To beginconditions, or that the remediation process, the Company engaged an independent consulting firm that specializes indegree of compliance with the Sarbanes Oxley Act to undertake a full review and evaluationpolicies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
McLean, VA
February 28, 2024
78
ADDITIONAL MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONSNone.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
The Tax Cuts and Jobs Act
Not Applicable.
Enactment of the TCJA
On December 22, 2017, President Trump signed into law H.R. 1, informally titled the Tax Cuts and Jobs Act, or the TCJA. The TCJA makes major changes to the Internal Revenue Code, as amended, or the Code, including several provisions of the Code that may affect the taxation of REITs and their security holders. The most significant of these provisions are described below. The individual and collective impact of these changes on REITs and their security holders is uncertain, and may not become evident for some period. Prospective investors should consult their tax advisors regarding the implications of the TCJA on their investment.
Revised Individual Tax Rates and Deductions
The TCJA creates seven income tax brackets for individuals ranging from 10% to 37% that generally apply at higher thresholds than current law. For example, the highest 37% rate applies to joint return filer incomes above $600,000, instead of the highest 39.6% rate that applies to incomes above $470,700 under pre-TCJA law. The maximum 20% rate that applies to long-term capital gains and qualified dividend income is unchanged, as is the 3.8% Medicare tax on net investment income.
The TCJA also eliminates personal exemptions, but nearly doubles the standard deduction for most individuals (for example, the standard deduction for joint return filers rises from $12,700 in 2017 to $24,000 upon the TCJA’s effectiveness). The TCJA also eliminates many itemized deductions, limits individual deductions for state and local income, property and sales taxes (other than those paid in a trade or business) to $10,000 collectively for joint return filers (with a special provision to prevent 2017 deductions for prepayment of 2018 taxes), and limits the amount of new acquisition indebtedness on principal or second residences for which mortgage interest deductions are available to $750,000. Interest deductions for new home equity debt are eliminated. Charitable deductions are generally preserved. The phaseout of itemized deductions based on income is eliminated.
The TCJA does not eliminate the individual alternative minimum tax, but it raises the exemption and exemption phaseout threshold for application of the tax.
These individual income tax changes are generally effective beginning in 2018, but without further legislation, they will sunset after 2025.
Pass-Through Business Income Tax Rate Lowered through Deduction
Under the TCJA, individuals, trusts, and estates generally may deduct 20% of “qualified business income” (generally, domestic trade or business income other than certain investment items) of a partnership, S corporation, or sole proprietorship. In addition, “qualified REIT dividends” (i.e., REIT dividends other than capital gain dividends and portions of REIT dividends designated as qualified dividend income, which in each case are already eligible for capital gain tax rates) and certain other income items are eligible for the deduction by the taxpayer. The overall deduction is limited to 20% of the sum of the taxpayer’s taxable income (less net capital gain) and certain cooperative dividends, subject to further limitations based on taxable income. In addition, for taxpayers with income above a certain threshold (e.g., $315,000 for joint return filers), the deduction for each trade or business is generally limited to no more than the greater of (i) 50% of the taxpayer’s proportionate share of total wages from a partnership, S corporation or sole proprietorship, or (ii) 25% of the taxpayer’s proportionate share of such total wages plus 2.5% of the unadjusted basis of acquired tangible depreciable property that is used to produce qualified business income and satisfies certain other requirements. The deduction for qualified REIT dividends is not subject to these wage and property basis limits. Consequently, the deduction equates to a maximum 29.6% tax rate on REIT dividends. As with the other individual income tax changes, the deduction provisions are effective beginning in 2018. Without further legislation, the deduction would sunset after 2025.
Net Operating Loss Modifications
Net operating loss (“NOL”) provisions are modified by the TCJA. The TCJA limits the NOL deduction to 80% of taxable income (before the deduction). It also generally eliminates NOL carrybacks for individuals and non-REIT corporations (NOL carrybacks did not apply to REITs under prior law), but allows indefinite NOL carryforwards. The new NOL rules apply to losses arising in taxable years beginning in 2018.
Maximum Corporate Tax Rate Lowered to 21%; Elimination of Corporate Alternative Minimum Tax
The TCJA reduces the 35% maximum corporate income tax rate to a maximum 21% corporate rate, and reduces the dividends-received deduction for certain corporate subsidiaries. The reduction of the corporate tax rate to 21% also results in the reduction of the maximum rate of withholding with respect to our distributions to non-U.S. stockholders that are treated as attributable to gains from the sale or exchange of U.S. real propertyinterestsfrom 35% to 21%. The TCJA also permanently eliminates the corporate alternative minimum tax. These provisions are effective beginning in 2018.
Limitations on Interest Deductibility; Real Property Trades or Businesses Can Elect Out Subject to Longer Asset Cost Recovery Periods
The TCJA limits a taxpayer’s net interest expense deduction to 30% of the sum of adjusted taxable income, business interest, and certain other amounts. Adjusted taxable income does not include items of income or expense not allocable to a trade or business, business interest or expense, the new deduction for qualified business income, NOLs, and for years prior to 2022, deductions for depreciation, amortization, or depletion. For partnerships, the interest deduction limit is applied at the partnership level, subject to certain adjustments to the partners for unused deduction limitation at the partnership level. The TCJA allows a real property trade or business to elect out of this interest limit so long as it uses a 40-year recovery period for nonresidential real property, a 30-year recovery period for residential rental property, and a 20-year recovery period for related improvements described below. For this purpose, a real property trade or business is any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operating, management, leasing, or brokerage trade or business. We believe this definition encompasses our business and thus will allow us the option of electing out of the limits on interest deductibility should we determine it is prudent to do so. Disallowed interest expense is carried forward indefinitely (subject to special rules for partnerships). The interest deduction limit applies beginning in 2018.
Maintains Cost Recovery Period for Buildings; Reduced Cost Recovery Periods for Tenant Improvements; Increased Expensing for Equipment
For taxpayers that do not use the TCJA’s real property trade or business exception to the business interest deduction limits, the TCJA maintains the current 39-year and 27.5-year straight line recovery periods for nonresidential real property and residential rental property, respectively, and provides that tenant improvements for such taxpayers are subject to a general 15-year recovery period. Also, the TCJA temporarily allows 100% expensing of certain new or used tangible property through 2022, phasing out at 20% for each following year (with an election available for 50% expensing of such property if placed in service during the first taxable year ending after September 27, 2017). The changes apply, generally, to property acquired after September 27, 2017 and placed in service after September 27, 2017.
Like Kind Exchanges Retained for Real Property, but Eliminated for Most Personal Property
The TCJA continues the deferral of gain from the like kind exchange of real property, but provides that foreign real property is no longer “like kind” to domestic real property. Furthermore, the TCJA eliminates like kind exchanges for most personal property. These changes are effective generally for exchanges completed after December 31, 2017, with a transition rule allowing such exchanges where one part of the exchange is completed prior to December 31, 2017.
International Provisions: Modified Territorial Tax Regime
The TCJA moves the United States from a worldwide to a modified territorial tax system, with provisions included to prevent corporate base erosion. We currently do not have any foreign subsidiaries or properties, but these provisions could affect any such future subsidiaries or properties.
Other Provisions
The TCJA makes other significant changes to the Code. These changes include provisions limiting the ability to offset dividend and interest income with partnership or S corporation net active business losses. These provisions are effective beginning in 2018, but without further legislation, will sunset after 2025.
PART III
| ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The information required by this Item is incorporated herein by reference to the Company’s definitive Proxy Statement to be filed with the SEC within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.10-K.
| ITEM 11.EXECUTIVE COMPENSATION |
The information required by this Item is incorporated herein by reference to the Company’s definitive Proxy Statement to be filed with the SEC within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.10-K.
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required by this Item is incorporated herein by reference to the Company’s definitive Proxy Statement to be filed with the SEC within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required by this Item is incorporated herein by reference to the Company’s definitive Proxy Statement to be filed with the SEC within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.10-K.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES |
The information required by this Item is incorporated herein by reference to the Company’s definitive Proxy Statement to be filed with the SEC within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.10-K.
79
ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) |
(a)(2) Financial Statement Schedule
(a)(2) | Financial Statement Schedule |
SCHEDULE III
CONSOLIDATED REAL ESTATE AND ACCUMULATED DEPRECIATION
(dollars and OP Units in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Costs Capitalized | | | | | | | | | | | | | | | | | | | ||||
| | | | | | | | | | Subsequent to | | | | | | | | | | | | | | | | | | | ||||
| | | | Initial Costs | | Acquisition | | Gross Value at Close of Period | | | | | | | | | | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Life on |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Which |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Depreciation |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | in Income |
| | Encumb- | | Land & | | Building | | Land & | | Building | | Land & | | Building | | Total | | Acc Depr | | Year Built | | Year | | Statement is | ||||||||
Description |
| rances |
| Improv |
| & Improv |
| Improv |
| & Improv |
| Improv |
| & Improv |
| Assets |
| 12.31.23 |
| / Renov |
| Acquired |
| Computed | ||||||||
Omaha-LTACH |
| | | $ | — | | $ | 21,867 | | $ | — | | $ | — | | $ | — | | $ | 21,867 | | $ | 21,867 | | $ | 5,233 |
| 2008 |
| 2014 |
| (1) |
Asheville-ASC |
| | |
| 572 | |
| 1,934 | |
| — | |
| — | |
| 572 | |
| 1,934 | |
| 2,506 | |
| 449 |
| 2002 |
| 2014 |
| (1) |
Pittsburgh-MOB/ASC |
| | |
| 1,287 | |
| 10,322 | |
| — | |
| — | |
| 1,287 | |
| 10,322 | |
| 11,609 | |
| 2,134 |
| 2006 |
| 2015 |
| (1) |
Memphis-MOB/ASC |
| | |
| 2,705 | |
| 17,451 | |
| — | |
| — | |
| 2,705 | |
| 17,451 | |
| 20,156 | |
| 3,475 |
| (6) |
| 2015 |
| (1) |
Plano-Surgical Hospital |
| | |
| 1,050 | |
| 16,696 | |
| — | |
| — | |
| 1,050 | |
| 16,696 | |
| 17,746 | |
| 3,309 |
| 2013 |
| 2016 |
| (1) |
Westland-MOB/ASC |
| | |
| 230 | |
| 4,520 | |
| — | |
| 83 | |
| 230 | |
| 4,603 | |
| 4,833 | |
| 876 |
| 2009 |
| 2016 |
| (1) |
Melbourne-MOB/ Imaging |
| | |
| 1,200 | |
| 14,250 | |
| 45 | |
| 1,330 | |
| 1,245 | |
| 15,580 | |
| 16,825 | |
| 2,836 |
| 2012 |
| 2016 |
| (1) |
Reading-MOB/ASC |
| | |
| 1,440 | |
| 7,940 | |
| — | |
| — | |
| 1,440 | |
| 7,940 | |
| 9,380 | |
| 1,479 |
| 1992/2002 |
| 2016 |
| (1) |
East Orange-MOB |
| | |
| 2,150 | |
| 10,112 | |
| — | |
| 510 | |
| 2,150 | |
| 10,622 | |
| 12,772 | |
| 1,869 |
| 1996 |
| 2016 |
| (1) |
Watertown- MOB/ Imaging | | | |
| 1,100 | |
| 8,002 | |
| 192 | | | 335 | |
| 1,292 | |
| 8,337 | |
| 9,629 | |
| 1,520 |
| 2011/2015 |
| 2016 |
| (1)(3) |
Sandusky-MOB |
| | |
| 791 | |
| 10,710 | |
| — | |
| — | |
| 791 | |
| 10,710 | |
| 11,501 | |
| 2,147 |
| (7) |
| 2016/2017 |
| (1) |
Carson City-MOB |
| | |
| 760 | |
| 3,268 | |
| — | |
| — | |
| 760 | |
| 3,268 | |
| 4,028 | |
| 586 |
| 1991 |
| 2016 |
| (1) |
Ellijay-MOB |
| | |
| 914 | |
| 3,337 | |
| — | | | — | |
| 914 | |
| 3,337 | |
| 4,251 | |
| 914 |
| 2015 |
| 2016 |
| (1)(2)(3) |
Altoona-IRF |
| | |
| 1,184 | |
| 18,505 | |
| — | |
| — | |
| 1,184 | |
| 18,505 | |
| 19,689 | |
| 3,653 |
| 2000 |
| 2016 |
| (1)(2)(3) |
Mechanicsburg-IRF |
| | |
| 810 | |
| 21,451 | |
| — | |
| — | |
| 810 | |
| 21,451 | |
| 22,261 | |
| 4,133 |
| 2011 |
| 2016 |
| (1)(2)(3) |
Mesa-IRF |
| | |
| 3,620 | |
| 16,265 | |
| — | |
| — | |
| 3,620 | |
| 16,265 | |
| 19,885 | |
| 3,732 |
| 2011 |
| 2016 |
| (1)(2)(3) |
Lewisburg-MOB/ Imaging |
| | |
| 681 | |
| 6,114 | |
| — | |
| — | |
| 681 | |
| 6,114 | |
| 6,795 | |
| 1,544 |
| 2006 |
| 2017 |
| (1)(2)(3) |
Cape Coral-MOB |
| | |
| 353 | |
| 7,017 | |
| — | |
| — | |
| 353 | |
| 7,017 | |
| 7,370 | |
| 977 |
| 2007 |
| 2017 |
| (1)(3) |
Las Cruces-MOB |
| | |
| 397 | |
| 4,618 | |
| 40 | |
| 32 | |
| 437 | |
| 4,650 | |
| 5,087 | |
| 926 |
| 2012 |
| 2017 |
| (1) |
Clermont-MOB |
| | |
| 145 | |
| 4,422 | |
| — | |
| — | |
| 145 | |
| 4,422 | |
| 4,567 | |
| 717 |
| 2014 |
| 2017 |
| (1)(2)(3) |
Brockport-MOB |
| | |
| 693 | |
| 7,097 | |
| — | |
| — | |
| 693 | |
| 7,097 | |
| 7,790 | |
| 1,566 |
| 2011 |
| 2017 |
| (1)(2)(3) |
Flower Mound-ASC |
| | |
| 730 | |
| 3,155 | |
| — | |
| — | |
| 730 | |
| 3,155 | |
| 3,885 | |
| 698 |
| 2014 |
| 2017 |
| (1)(2)(3) |
Sherman-IRF/ LTACH |
| | |
| 1,601 | |
| 25,011 | |
| — | |
| 2,447 | |
| 1,601 | |
| 27,458 | |
| 29,059 | |
| 4,566 |
| 2009 |
| 2017 |
| (1)(2) |
Lubbock-MOB |
| | |
| 1,566 | |
| 5,725 | |
| — | |
| — | |
| 1,566 | |
| 5,725 | |
| 7,291 | |
| 1,449 |
| 2004 |
| 2017 |
| (1)(2)(3) |
Austin-IRF |
| | |
| 7,223 | |
| 29,616 | |
| — | |
| — | |
| 7,223 | |
| 29,616 | |
| 36,839 | |
| 4,806 |
| 2012 |
| 2017 |
| (1)(2)(3) |
Fort Worth-MOB |
| | |
| 1,738 | |
| 3,726 | |
| — | |
| — | |
| 1,738 | |
| 3,726 | |
| 5,464 | |
| 801 |
| 2016 |
| 2017 |
| (1)(2)(3) |
Albertville-MOB |
| | |
| 1,154 | |
| 4,444 | |
| 193 | |
| 29 | |
| 1,347 | |
| 4,473 | |
| 5,820 | |
| 1,494 |
| 2007 |
| 2017 |
| (1)(2)(3) |
Moline-MOB/ASC |
| | |
| 854 | |
| 9,237 | |
| — | |
| — | |
| 854 | |
| 9,237 | |
| 10,091 | |
| 1,932 |
| 2004 |
| 2017 |
| (1)(2)(3) |
Lee’s Summit-MOB |
| | |
| 571 | |
| 2,929 | |
| — | |
| — | |
| 571 | |
| 2,929 | |
| 3,500 | |
| 933 |
| 2007 |
| 2017 |
| (1)(2)(3) |
Amarillo-MOB |
| | |
| 1,437 | |
| 7,254 | |
| — | |
| — | |
| 1,437 | |
| 7,254 | |
| 8,691 | |
| 989 |
| 2011 |
| 2017 |
| (1) |
Wyomissing-MOB |
| | |
| 487 | |
| 5,250 | |
| — | |
| — | |
| 487 | |
| 5,250 | |
| 5,737 | |
| 700 |
| 2004 |
| 2017 |
| (1) |
80
| Gross Amount Carried at December 31, 20171 | ||||||||||||||||||||||||||||
| Description | Encum- brances | Land and Improvements | Buildings and Improvements | Intangible Assets, Gross | Total | Accumulated Depreciation at 12/31/17 | Year Built / Renovated | Year Acquired | Life on Which Depreciation in Income Statement is Computed | |||||||||||||||||||
| Omaha-LTAC | (4) | $ | - | $ | 21,867 | $ | - | $ | 21,867 | $ | 1,952 | 2008 | 2014 | (1) | ||||||||||||||
| Asheville-ASC | (4) | 572 | 1,934 | - | 2,506 | 159 | 1981/2002 | 2014 | (1) | |||||||||||||||||||
| Pittsburgh-MOB/ASC | (5) | 1,287 | 10,322 | - | 11,609 | 585 | 2006 | 2015 | (1) | |||||||||||||||||||
| Memphis-MOB/ASC | (6)(7) | 2,705 | 17,451 | - | 20,156 | 874 | (9) | 2015 | (1) | |||||||||||||||||||
| Plano-Surgical Hospital | (6) | 1,050 | 16,696 | - | 17,746 | 804 | 2013 | 2016 | (1) | |||||||||||||||||||
| Westland-MOB/ASC | (6) | 230 | 4,520 | - | 4,750 | 198 | 1974/2002/2009 | 2016 | (1) | |||||||||||||||||||
| Melbourne-MOB/Imaging | (6) | 1,200 | 14,250 | - | 15,450 | 624 | 1994/2005 | 2016 | (1) | |||||||||||||||||||
| Reading-MOB/ASC | (4) | 1,440 | 7,940 | - | 9,380 | 287 | 1992/2001/2008 | 2016 | (1) | |||||||||||||||||||
| East Orange-MOB | (4) | 2,150 | 10,112 | - | 12,262 | 318 | 1996 | 2016 | (1) | |||||||||||||||||||
| Watertown-MOB/Imaging | (4) | 1,100 | 8,002 | - | 9,102 | 251 | 2011 | 2016 | (1) | |||||||||||||||||||
| Sandusky-MOB | (4)(7) | 791 | 10,710 | - | 11,501 | 278 | 1999/2015/2016/2017 | 2016/2017 | (1) | |||||||||||||||||||
| Carson City-MOB | (4) | 760 | 3,268 | - | 4,028 | 96 | 1991 | 2016 | (1) | |||||||||||||||||||
| Ellijay-MOB | (4) | 914 | 3,337 | 870 | 5,121 | 231 | 2005/2012/2015 | 2016 | (1)(2)(3) | |||||||||||||||||||
| Altoona-IRF | (4) | 1,184 | 18,505 | 1,856 | 21,545 | 991 | 1986 | 2016 | (1)(2)(3) | |||||||||||||||||||
| Mechanicsburg-IRF | (4) | 810 | 21,451 | 1,996 | 24,257 | 1,097 | 1986 | 2016 | (1)(2)(3) | |||||||||||||||||||
| Mesa-IRF | (4) | 3,620 | 16,265 | 2,465 | 22,350 | 872 | 2009 | 2016 | (1)(2)(3) | |||||||||||||||||||
| Lewisburg-MOB/Imaging | (4) | 681 | 6,114 | 505 | 7,300 | 310 | 2006 | 2017 | (1)(2)(3) | |||||||||||||||||||
| Cape Coral-MOB | (4) | 353 | 7,017 | - | 7,370 | 134 | 2007 | 2017 | (1) | |||||||||||||||||||
| Las Cruces-MOB | (4) | 397 | 4,618 | - | 5,015 | 121 | 1987/1992/2012 | 2017 | (1) | |||||||||||||||||||
| Prescott-MOB | (4) | 791 | 3,821 | - | 4,612 | 68 | 2016 | 2017 | (1) | |||||||||||||||||||
| Clermont-MOB | (4) | 145 | 4,422 | 868 | 5,435 | 149 | 2014 | 2017 | (1)(2)(3) | |||||||||||||||||||
| Great Bend-Hospital | (4) | 837 | 23,801 | - | 24,638 | 512 | 2001 | 2017 | (1) | |||||||||||||||||||
| Oklahoma City-Hospital/ASC | (4) | 2,953 | 38,724 | 7,823 | 49,500 | 1,232 | 2002 | 2017 | (1)(2)(3) | |||||||||||||||||||
| Brockport-MOB | (4) | 693 | 7,097 | 1,295 | 9,085 | 172 | 2011 | 2017 | (1)(2)(3) | |||||||||||||||||||
| Flower Mound-ASC | (4) | 730 | 3,155 | 407 | 4,292 | 77 | 2014 | 2017 | (1)(2)(3) | |||||||||||||||||||
| Sherman-IRF/LTAC | (4) | 1,601 | 25,011 | - | 26,612 | 299 | 2009 | 2017 | (1) | |||||||||||||||||||
| Lubbock-MOB | (4) | 1,566 | 5,725 | 908 | 8,199 | 112 | 2004 | 2017 | (1)(2)(3) | |||||||||||||||||||
| Germantown-MOB/ASC | (4) | 3,050 | 8,385 | 4,505 | 15,940 | 341 | 2002 | 2017 | (1)(2)(3) | |||||||||||||||||||
| Austin-Rehab Hospital | (4) | 7,223 | 29,616 | 3,811 | 40,650 | 311 | 2012 | 2017 | (1)(2)(3) | |||||||||||||||||||
| Fort Worth-MOB | (4) | 1,738 | 3,726 | 786 | 6,250 | 29 | 2016 | 2017 | (1)(2)(3) | |||||||||||||||||||
| Albertville-MOB | (4) | 1,154 | 4,444 | 1,202 | 6,800 | 48 | 2007 | 2017 | (1)(2)(3) | |||||||||||||||||||
| Moline-MOB/ASC | (4) | 854 | 9,237 | 1,916 | 12,007 | 62 | 1994/2004 | 2017 | (1)(2)(3) | |||||||||||||||||||
| Lee’s Summit-MOB | (8) | 571 | 2,929 | 437 | 3,937 | - | 2007 | 2017 | (1)(2)(3) | |||||||||||||||||||
| Amarillo-MOB | (8) | 1,437 | 7,254 | - | 8,691 | - | 2011 | 2017 | (1) | |||||||||||||||||||
| Wyomissing-MOB | (8) | 487 | 5,250 | - | 5,737 | - | 2001/2004 | 2017 | (1) | |||||||||||||||||||
| Saint George-MOB/ASC | (8) | 435 | 5,372 | - | 5,807 | - | 1997 | 2017 | (1) | |||||||||||||||||||
| Totals | $ | 47,509 | $ | 392,348 | $ | 31,650 | $ | 471,507 | $ | 13,594 | ||||||||||||||||||
Saint George-MOB/ASC |
| | |
| 435 | |
| 5,372 | |
| — | |
| 76 | |
| 435 | |
| 5,448 | |
| 5,883 | |
| 812 |
| 1997 |
| 2017 |
| (1) |
Silvis-MOB |
| | |
| 249 | |
| 5,862 | |
| 30 | |
| 716 | |
| 279 | |
| 6,578 | |
| 6,857 | |
| 1,625 |
| 1997/2006 |
| 2018 |
| (1)(2)(3) |
Fremont-MOB |
| | |
| 162 | |
| 8,335 | |
| — | |
| — | |
| 162 | |
| 8,335 | |
| 8,497 | |
| 1,170 |
| 2018 |
| 2018 |
| (1) |
Gainesville-MOB/ASC |
| | |
| 625 | |
| 9,885 | |
| — | |
| 724 | |
| 625 | |
| 10,609 | |
| 11,234 | |
| 1,537 |
| 2002 |
| 2018 |
| (1) |
East Dallas-Acute Hospital |
| | |
| 6,272 | |
| 17,012 | |
| — | |
| 1,450 | |
| 6,272 | |
| 18,462 | |
| 24,734 | |
| 3,610 |
| 1994 |
| 2018 |
| (1) |
Orlando-MOB |
| | |
| 3,075 | |
| 11,944 | |
| — | |
| 110 | |
| 3,075 | |
| 12,054 | |
| 15,129 | |
| 2,286 |
| 2007/2008/2009 |
| 2018 |
| (1)(2)(3) |
Belpre-MOB/ Imaging/ER/ ASC |
| | |
| 3,997 | |
| 53,520 | |
| — | |
| — | |
| 3,997 | |
| 53,520 | |
| 57,517 | |
| 8,352 |
| 2011/2013/2014/2017 |
| 2018 |
| (1)(2)(3) |
McAllen-MOB |
| | |
| 1,099 | |
| 4,296 | |
| — | |
| — | |
| 1,099 | |
| 4,296 | |
| 5,395 | |
| 787 |
| 2000 |
| 2018 |
| (1) |
Derby-ASC |
| | |
| 567 | |
| 2,585 | |
| — | |
| 55 | |
| 567 | |
| 2,640 | |
| 3,207 | |
| 597 |
| 2005 |
| 2018 |
| (1)(2)(3) |
Bountiful-MOB |
| | |
| 720 | |
| 4,185 | |
| — | |
| 109 | |
| 720 | |
| 4,294 | |
| 5,014 | |
| 599 |
| 2004 |
| 2018 |
| (1)(2) |
Cincinnati-MOB |
| | |
| 1,823 | |
| 1,811 | |
| 35 | |
| — | |
| 1,858 | |
| 1,811 | |
| 3,669 | |
| 676 |
| 2016 |
| 2018 |
| (1)(2)(3) |
Melbourne Pine-Cancer Center |
| | |
| 732 | |
| 5,980 | |
| — | |
| 649 | |
| 732 | |
| 6,629 | |
| 7,361 | |
| 1,015 |
| 1993 |
| 2018 |
| (1)(2)(3) |
Southern IL-MOB |
| | |
| 1,830 | |
| 12,660 | |
| — | |
| 176 | |
| 1,830 | |
| 12,836 | |
| 14,666 | |
| 1,879 |
| (8) |
| 2018 |
| (1) |
Vernon-MOB/ Dialysis/ Administrative |
| | |
| 1,166 | |
| 9,929 | |
| — | |
| — | |
| 1,166 | |
| 9,929 | |
| 11,095 | |
| 1,693 |
| 1993/1999 |
| 2018 |
| (1) |
Corona |
| | |
| 1,601 | |
| 14,689 | |
| — | |
| — | |
| 1,601 | |
| 14,689 | |
| 16,290 | |
| 1,837 |
| 2009 |
| 2018 |
| (1) |
Zachary-LTACH |
| | |
| 103 | |
| 3,745 | |
| — | |
| — | |
| 103 | |
| 3,745 | |
| 3,848 | |
| 553 |
| 2015 |
| 2019 |
| (1)(2)(3) |
Chandler -MOB/ASC |
| | |
| 4,616 | |
| 11,643 | |
| — | |
| 31 | |
| 4,616 | |
| 11,674 | |
| 16,290 | |
| 1,689 |
| 2004/2007/2015 |
| 2019 |
| (1) |
Surprise-IRF |
| | |
| 1,966 | |
| 22,856 | |
| 38 | |
| — | |
| 2,004 | |
| 22,856 | |
| 24,860 | |
| 3,705 |
| 2015 |
| 2019 |
| (1)(2)(3) |
South Bend-IRF |
| | |
| 1,998 | |
| 11,882 | |
| — | |
| — | |
| 1,998 | |
| 11,882 | |
| 13,880 | |
| 2,905 |
| 2009 |
| 2019 |
| (1)(2)(3) |
Las Vegas-IRF |
| | |
| 2,723 | |
| 17,482 | |
| — | |
| — | |
| 2,723 | |
| 17,482 | |
| 20,205 | |
| 3,794 |
| 2007 |
| 2019 |
| (1)(2)(3) |
Oklahoma Northwest-IRF |
| | |
| 2,507 | |
| 22,545 | |
| 122 | |
| 6,814 | |
| 2,629 | |
| 29,359 | |
| 31,988 | |
| 4,161 |
| 2012 |
| 2019 |
| (1)(2)(3) |
San Marcos-Cancer Center |
| | |
| 2,448 | |
| 7,338 | |
| — | |
| — | |
| 2,448 | |
| 7,338 | |
| 9,786 | |
| 1,090 |
| 2009 |
| 2019 |
| (1)(2)(3) |
Lansing Patient-MOB /ASC |
| | |
| 1,387 | |
| 8,348 | |
| 188 | |
| 280 | |
| 1,575 | |
| 8,628 | |
| 10,203 | |
| 1,746 |
| 1997/2000/2002 |
| 2019 |
| (1)(2)(3) |
Bannockburn-MOB |
| | |
| 895 | |
| 4,700 | |
| 123 | |
| 814 | |
| 1,018 | |
| 5,514 | |
| 6,532 | |
| 1,718 |
| 1999 |
| 2019 |
| (1)(2)(3) |
Aurora-Office |
| | |
| 1,829 | |
| 8,049 | |
| — | |
| — | |
| 1,829 | |
| 8,049 | |
| 9,878 | |
| 1,412 |
| 2015 |
| 2019 |
| (1)(2)(3) |
Livonia-MOB/Urgent Care |
| | |
| 1,181 | |
| 8,071 | |
| 45 | |
| 910 | |
| 1,226 | |
| 8,981 | |
| 10,207 | |
| 2,097 |
| 1995 |
| 2019 |
| (1)(2)(3) |
Gilbert-MOB/ASC |
| | |
| 2,470 | |
| 2,389 | |
| — | |
| — | |
| 2,470 | |
| 2,389 | |
| 4,859 | |
| 455 |
| 2006 |
| 2019 |
| (1)(2)(3) |
Morgantown-Office |
| | |
| 1,256 | |
| 5,792 | |
| — | |
| — | |
| 1,256 | |
| 5,792 | |
| 7,048 | |
| 881 |
| 2019 |
| 2019 |
| (1)(2)(3) |
Beaumont-Surgical Hospital |
| | |
| 3,421 | |
| 25,872 | |
| — | |
| — | |
| 3,421 | |
| 25,872 | |
| 29,293 | |
| 3,069 |
| 2013 |
| 2019 |
| (1)(2)(3) |
Bastrop-Freestanding ED |
| | |
| 2,039 | |
| 8,712 | |
| — | |
| — | |
| 2,039 | |
| 8,712 | |
| 10,751 | |
| 1,169 |
| 2012 |
| 2019 |
| (1)(2)(3) |
Panama City-MOB/ASC |
| | |
| 1,779 | |
| 9,718 | |
| — | |
| — | |
| 1,779 | |
| 9,718 | |
| 11,497 | |
| 1,511 |
| 2008/2009/2019 |
| 2019 |
| (1)(2)(3) |
Jacksonville-MOB |
| | |
| — | |
| 5,019 | |
| — | |
| — | |
| — | |
| 5,019 | |
| 5,019 | |
| 517 |
| 2003/2004 |
| 2019 |
| (1) |
Greenwood-MOB/ASC |
| | |
| 892 | |
| 4,956 | |
| — | |
| — | |
| 892 | |
| 4,956 | |
| 5,848 | |
| 793 |
| 1986 |
| 2019 |
| (1) |
Clinton-MOB/ASC | | | | | 1,006 | | | 8,129 | | | 293 | | | 1,175 | | | 1,299 | | | 9,304 | | | 10,603 | | | 3,055 | | 1964 | | 2020 | | (1)(2)(3) |
High Point-MOB | | | | | 2,189 | | | 21,236 | | | — | | | 31 | | | 2,189 | | | 21,267 | | | 23,456 | | | 3,111 | | 2007 | | 2020 | | (1)(2)(3) |
West Allis-MOB | | | | | 1,111 | | | 7,785 | | | — | | | — | | | 1,111 | | | 7,785 | | | 8,896 | | | 989 | | 1999 | | 2020 | | (1)(2)(3) |
Grand Rapids-MOB/ASC | | | | | 3,421 | | | 17,810 | | | 292 | | | 445 | | | 3,713 | | | 18,255 | | | 21,968 | | | 2,952 | | 1988/1992/2000/2006 | | 2020 | | (1)(2)(3) |
Dumfries-MOB | | (4) | | | 2,886 | | | 14,863 | | | — | | | — | | | 2,886 | | | 14,863 | | | 17,749 | | | 5,174 | | 2019 | | 2020 | | (1)(2)(3) |
Centerville -MOB | | | | | 160 | | | 4,410 | | | — | | | — | | | 160 | | | 4,410 | | | 4,570 | | | 441 | | 2018 | | 2020 | | (1)(2)(3) |
Fairfax-MOB | | | | | 7,112 | | | 9,621 | | | — | | | 925 | | | 7,112 | | | 10,546 | | | 17,658 | | | 2,070 | | 2019 | | 2020 | | (1)(2)(3) |
Rosedale-MOB | | (5) | | | 3,423 | | | 17,646 | | | — | | | 140 | | | 3,423 | | | 17,786 | | | 21,209 | | | 2,293 | | 2014/2017 | | 2020 | | (1)(2)(3) |
Lancaster-Plasma Center | | | | | 805 | | | 4,385 | | | — | | | — | | | 805 | | | 4,385 | | | 5,190 | | | 471 | | 2009 | | 2020 | | (1)(2)(3) |
Winston Salem-MOB | | | | | 1,778 | | | 6,714 | | | — | | | — | | | 1,778 | | | 6,714 | | | 8,492 | | | 904 | | 2009 | | 2020 | | (1)(2)(3) |
Decatur-MOB | | | | | 1,626 | | | 2,706 | | | — | | | — | | | 1,626 | | | 2,706 | | | 4,332 | | | 369 | | 2010 | | 2020 | | (1)(2)(3) |
Jackson-MOB | | | | | 895 | | | 4,730 | | | — | | | — | | | 895 | | | 4,730 | | | 5,625 | | | 498 | | 2009 | | 2020 | | (1)(2)(3) |
Sheboygan-MOB | | | | | 583 | | | 6,223 | | | — | | | — | | | 583 | | | 6,223 | | | 6,806 | | | 656 | | 2005 | | 2020 | | (1)(2)(3) |
Plymouth-MOB | | | | | 758 | | | 5,214 | | | — | | | — | | | 758 | | | 5,214 | | | 5,972 | | | 505 | | 2010 | | 2020 | | (1)(2)(3) |
Spring Hill-MOB/Img | | | | | 3,893 | | | 12,954 | | | 68 | | | 42 | | | 3,961 | | | 12,996 | | | 16,957 | | | 1,524 | | 2002/2013/2017/2019 | | 2020 | | (1)(2)(3) |
Cape Girardeau-ASC | | | | | 1,223 | | | 4,865 | | | — | | | — | | | 1,223 | | | 4,865 | | | 6,088 | | | 565 | | 2002 | | 2020 | | (1)(2)(3) |
Yuma-MOB | | | | | 1,349 | | | 4,989 | | | — | | | — | | | 1,349 | | | 4,989 | | | 6,338 | | | 653 | | 2013 | | 2020 | | (1)(2)(3) |
Las Vegas-MOB/ASC | | | | | 311 | | | 6,813 | | | — | | | — | | | 311 | | | 6,813 | | | 7,124 | | | 511 | | 2007/2015 | | 2020 | | (1) |
Pensacola-MOB/ASC | | | | | 2,118 | | | 6,153 | | | — | | | — | | | 2,118 | | | 6,153 | | | 8,271 | | | 858 | | 1985/1997 | | 2020 | | (1)(2)(3) |
Venice-MOB | | | | | 1,896 | | | 4,537 | | | — | | | — | | | 1,896 | | | 4,537 | | | 6,433 | | | 604 | | 2008 | | 2020 | | (1)(2)(3) |
El Paso-MOB | | | | | 970 | | | 7,709 | | | — | | | 150 | | | 970 | | | 7,859 | | | 8,829 | | | 757 | | 2008 | | 2021 | | (1)(2)(3) |
West El Paso-MOB/ASC | | | | | 995 | | | 7,727 | | | — | | | — | | | 995 | | | 7,727 | | | 8,722 | | | 697 | | 2015/2018 | | 2021 | | (1)(2)(3) |
Syracuse-MOB | | | | | 744 | | | 4,880 | | | 25 | | | 101 | | | 769 | | | 4,981 | | | 5,750 | | | 554 | | 2012 | | 2021 | | (1)(2)(3) |
Fort Worth-Behavioral Hospital | | | | | 1,960 | | | 13,453 | | | — | | | — | | | 1,960 | | | 13,453 | | | 15,413 | | | 1,063 | | 2013 | | 2021 | | (1)(2)(3) |
Coos Bay-MOB | | | | | 917 | | | 5,145 | | | — | | | — | | | 917 | | | 5,145 | | | 6,062 | | | 424 | | 2009 | | 2021 | | (1)(2)(3) |
Port Saint Lucie-MOB/ASC | | | | | 660 | | | 3,767 | | | — | | | 60 | | | 660 | | | 3,827 | | | 4,487 | | | 442 | | 1990 | | 2021 | | (1)(2)(3) |
Dallas-MOB/ASC | | | | | 3,165 | | | 3,062 | | | — | | | 161 | | | 3,165 | | | 3,223 | | | 6,388 | | | 427 | | 1989 | | 2021 | | (1)(2)(3) |
Cape Coral-MOB | | | | | 6,103 | | | 21,287 | | | — | | | — | | | 6,103 | | | 21,287 | | | 27,390 | | | 2,387 | | 1991/1999/2004/2007 | | 2021 | | (1)(2)(3) |
East Grand Forks-MOB | | | | | 1,123 | | | 7,063 | | | — | | | — | | | 1,123 | | | 7,063 | | | 8,186 | | | 1,090 | | 2004 | | 2021 | | (1)(2)(3) |
Tallahassee-MOB | | | | | 919 | | | 7,107 | | | — | | | — | | | 919 | | | 7,107 | | | 8,026 | | | 642 | | 2002 | | 2021 | | (1)(2)(3) |
Caledonia-MOB | | | | | 648 | | | 2,765 | | | — | | | — | | | 648 | | | 2,765 | | | 3,413 | | | 261 | | 2007 | | 2021 | | (1)(2)(3) |
Forsyth-MOB/Imaging | | | | | 1,902 | | | 10,083 | | | 85 | | | 33 | | | 1,987 | | | 10,116 | | | 12,103 | | | 1,001 | | 2003 | | 2021 | | (1)(2)(3) |
Munster-MOB/ASC | | | | | 941 | | | 4,842 | | | — | | | 30 | | | 941 | | | 4,872 | | | 5,813 | | | 523 | | 2005 | | 2021 | | (1)(2)(3) |
Athens-MOB | | | | | 622 | | | 4,169 | | | — | | | 20 | | | 622 | | | 4,189 | | | 4,811 | | | 344 | | 2003 | | 2021 | | (1)(2)(3) |
Hialeah-MOB | | | | | 264 | | | 10,349 | | | — | | | 414 | | | 264 | | | 10,763 | | | 11,027 | | | 1,708 | | 2019 | | 2021 | | (1)(2)(3) |
Mentor-MOB | | | | | 2,603 | | | 6,544 | | | — | | | 244 | | | 2,603 | | | 6,788 | | | 9,391 | | | 679 | | 1991 | | 2021 | | (1)(2)(3) |
Athens 200-MOB | | | | | 369 | | | 1,470 | | | — | | | — | | | 369 | | | 1,470 | | | 1,839 | | | 225 | | 2000 | | 2021 | | (1)(2)(3) |
Lemoyne-MOB/Imaging | | | | | 412 | | | 4,020 | | | — | | | — | | | 412 | | | 4,020 | | | 4,432 | | | 349 | | 1990/2000 | | 2021 | | (1)(2)(3) |
Gainesville-MOB | | | | | 631 | | | 4,098 | | | — | | | — | | | 631 | | | 4,098 | | | 4,729 | | | 409 | | 2006 | | 2022 | | (1)(2)(3) |
Grand Rapids Paris-MOB | | | | | 1,459 | | | 5,246 | | | — | | | 105 | | | 1,459 | | | 5,351 | | | 6,810 | | | 559 | | 2004 | | 2022 | | (1)(2)(3) |
Sarasota-MOB | | | | | 831 | | | 4,034 | | | — | | | — | | | 831 | | | 4,034 | | | 4,865 | | | 352 | | 2013 | | 2022 | | (1)(2)(3) |
81
Greenwood-MOB | | | | | 1,122 | | | 4,692 | | | 82 | | | 49 | | | 1,204 | | | 4,741 | | | 5,945 | | | 482 | | 2007 | | 2022 | | (1)(2)(3) |
Fairbanks-MOB/ASC | | | | | 1,997 | | | 13,015 | | | 38 | | | 141 | | | 2,035 | | | 13,156 | | | 15,191 | | | 828 | | 2010 | | 2022 | | (1)(2)(3) |
Rocky Point-MOB/ASC/Imaging | | | | | 836 | | | 6,534 | | | — | | | 26 | | | 836 | | | 6,560 | | | 7,396 | | | 476 | | 2006/2007 | | 2022 | | (1)(2)(3) |
Fairfax Hamaker-MOB | | | | | 4,410 | | | 13,548 | | | — | | | 396 | | | 4,410 | | | 13,944 | | | 18,354 | | | 1,148 | | 1986 | | 2022 | | (1)(2)(3) |
Lee's Summit-MOB/ASC | | | | | 1,431 | | | 4,512 | | | — | | | 138 | | | 1,431 | | | 4,650 | | | 6,081 | | | 365 | | 2003 | | 2022 | | (1)(2)(3) |
Lexington-MOB/Cancer Center | | | | | 2,049 | | | 11,905 | | | 61 | | | 137 | | | 2,110 | | | 12,042 | | | 14,152 | | | 720 | | 1996/2000/2006/2009 | | 2022 | | (1)(2)(3) |
Toledo Ohio-MOB/ASC | | | | | 3,581 | | | 12,613 | | | — | | | 622 | | | 3,581 | | | 13,235 | | | 16,816 | | | 1,184 | | 1997 | | 2022 | | (1)(2)(3) |
Lake Geneva-MOB | | | | | 585 | | | 4,842 | | | 68 | | | — | | | 653 | | | 4,842 | | | 5,495 | | | 290 | | 1999 | | 2022 | | (1)(2)(3) |
Glenview-MOB/Retail | | | | | 1,688 | | | 6,536 | | | — | | | 500 | | | 1,688 | | | 7,036 | | | 8,724 | | | 522 | | 2003 | | 2022 | | (1)(2)(3) |
Canandaigua-MOB | | | | | 948 | | | 11,606 | | | — | | | 203 | | | 948 | | | 11,809 | | | 12,757 | | | 670 | | 2010/2013 | | 2022 | | (1)(2)(3) |
Hermitage-MOB | | | | | 548 | | | 4,118 | | | — | | | 24 | | | 548 | | | 4,142 | | | 4,690 | | | 282 | | 2000 | | 2022 | | (1)(2)(3) |
Redding-MOB/ASC | | | | | 945 | | | 4,119 | | | — | | | — | | | 945 | | | 4,119 | | | 5,064 | | | 133 | | 1981 | | 2023 | | (1)(2)(3) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Totals |
|
| | $ | 184,227 | | $ | 1,078,070 | | $ | 2,063 | | $ | 23,992 | | $ | 186,290 | | $ | 1,102,062 | | $ | 1,288,352 | | $ | 174,379 |
|
|
|
|
|
|
1No costs have been capitalized subsequent to acquisitionThe cost basis for income tax purposes of aggregate gross land, building, site improvements, and therefore the gross amount that the investments are carried attenant improvements as of December 31, 2017 represents their initial cost to the Company.2023 was $1,397 million.
(1) Estimated remaining useful life for buildings is 309 to 5147 years.
(2) Estimated remaining useful life for tenant improvements is 31 to 1615 years.
(3) Estimated remaining useful life for site improvements is 41 to 15 years.
(4) The facility serves as collateral for the Revolving Credit Facility,Dumfries Loan, which had a balance of $164,900$11,034 as of December 31, 2017.2023.
(5) The facility serves as collateral for the West Mifflin note, which had a balance of $7,378 as of December 31, 2017
(6) The facility serves as collateral for the CantorRosedale Loan, which had a balance of $32,097$13,563 as of December 31, 2017.2023.
(7) One facility did not serve as collateral as of December 31, 2017.
(8) Was not collateral under the Revolving Credit Facility as of December 31, 2017 but became collateral during the first quarter of 2018.
(9)(6) Years of: 2001, 1984, 2001, 2003, 2006, 2009, 2011.
| Year Ended December 31, 2017 | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Real Estate Assets: | ||||||||||||
| Balance, beginning of period | $ | 206,877 | $ | 56,138 | $ | 24,373 | ||||||
| Additions through acquisitions | 264,630 | 150,739 | 31,765 | |||||||||
| Deductions | - | - | - | |||||||||
| Balance, end of period | $ | 471,507 | $ | 206,877 | $ | 56,138 | ||||||
| �� | ||||||||||||
| Accumulated Depreciation: | ||||||||||||
| Balance, beginning of period | $ | 3,367 | $ | 989 | $ | 329 | ||||||
| Additions through expense | 10,227 | 2,378 | 660 | |||||||||
| Deductions | - | - | - | |||||||||
| Balance, end of period | $ | 13,594 | $ | 3,367 | $ | 989 | ||||||
(7) Years of: 1953, 1982, 2000, 1998, 2017.
(8) Years of: 2002, 2006, 2012, 2014, 2015, 2016.
| | | | | | | | | |
|
| Year Ended December 31, | |||||||
|
| 2023 |
| 2022 |
| 2021 | |||
Real Estate Assets: |
| |
|
| |
|
| |
|
Balance, beginning of period | | $ | 1,336,100 | | $ | 1,215,072 | | $ | 1,044,671 |
Additions through acquisitions | |
| 11,575 | |
| 132,463 | |
| 175,013 |
Deductions | |
| (59,323) | |
| (11,435) | |
| (4,612) |
Balance, end of period | | $ | 1,288,352 | | $ | 1,336,100 | | $ | 1,215,072 |
| | | | | | | | | |
Accumulated Depreciation: | |
| | |
| | |
|
|
Balance, beginning of period | | $ | 141,317 | | $ | 103,010 | | $ | 69,563 |
Additions through expense | |
| 41,227 | |
| 39,984 | |
| 33,801 |
Deductions | |
| (8,165) | |
| (1,677) | |
| (354) |
Balance, end of period | | $ | 174,379 | | $ | 141,317 | | $ | 103,010 |
(a)(3) Exhibits
82
| | |
10.4† | | |
| | |
10.5† | | |
| | |
10.6† | | |
| | |
10.7† | | |
| | |
10.8† | | |
| | |
10.9† | ||
| | |
10.10† | | |
| | |
10.11† | | |
| | |
10.12† | | |
| | |
10.13† | | |
| | |
10.14† | | |
| | |
83
84
Exhibit | Description | |
|---|---|---|
| | |
101.DEF* | ||
Inline XBRL Taxonomy Definition Linkbase | ||
` | ||
101.LAB* | Inline XBRL Taxonomy Label Linkbase | |
101.PRE* | Inline XBRL Taxonomy Presentation Linkbase | |
| | |
104 | | Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101) |
† | Management contract or compensatory plan or arrangement. |
* | Filed herewith |
** | Furnished herewith. Such certification shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended. |
† Management contract or compensatory plan or arrangement.
* Filed herewith
| ITEM 16. FORM 10-K SUMMARY |
None.
85
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities indicated and on the date indicated.
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