| Debt | Note 4 – Debt The table below details the Company’s debt balance at September 30, 2018 and December 31, 2017 (in thousands):
September 30, 2018
December 31, 2017
Term loan- secured
$
125,000
$
125,000
Revolving credit facility- secured
146,000
91,200
Unamortized deferred financing costs
(553
)
(677
)
$
270,447
$
215,523
The Company’s Second Amended and Restated Credit Agreement (as amended, the “Credit Agreement”) provides for a $300 million revolving credit facility that matures in February 2021 and a $125 million term loan that matures in February 2022. The revolving credit facility has one 12-month extension option, subject to certain conditions, including the payment of a 0.15% extension fee. At September 30, 2018 and 2017, the weighted-average interest rate under the Credit Agreement was 4.0% and 3.4%, respectively. Total costs related to the revolving credit facility at September 30, 2018 were $3.7 million, gross ($2.3 million, net). These costs are included in Other assets, net on the consolidated balance sheet at September 30, 2018 and will be amortized to interest expense through February 2021, the maturity date of the revolving credit facility. The total amount of deferred financing costs associated with the term loan at September 30, 2018 was $0.8 million, gross ($0.6 million, net). These costs are netted against the balance outstanding under the term loan on the Company’s consolidated balance sheet and will be amortized to interest expense through February 2022, the maturity date of the term loan. The Company recognized amortization expense of deferred financing costs, included in interest expense on the consolidated statements of operations, of $0.3 million and $0.8 million for the three and nine months ended September 30, 2018, respectively. Amortization expense of deferred financing costs was $0.2 million and $0.8 million for the three and nine months ended September 30, 2017, respectively. Second Amendment to Credit Agreement On October 9, 2018, the Company entered into the Second Amendment (the “Credit Amendment”) to the Credit Agreement. The Credit Amendment amends certain terms, covenants and conditions of the Credit Agreement, including, but not limited to the following:
•
increases the applicable margin from pre-amendment of 1.75% to 3.00% for LIBOR-rate loans and 0.75% to 2.00% for base-rate loans to post-amendment of 2.00% and 3.50% for LIBOR-rate loans and 1.00% and 2.50% for base-rate loans, in each case depending on the Company’s leverage ratio, until the Performance Hurdle has occurred, at which time, subject to certain conditions, the applicable margins will revert to those in effect prior to the Credit Amendment;
•
temporarily increases the borrowing base availability attributable to the Company’s borrowing base assets, other than the Texas Ten Portfolio, until December 31, 2018;
•
reduces the borrowing base availability attributable to the Texas Ten Portfolio until the earlier to occur of the Texas Ten Revaluation Date and December 31, 2018; provided, that the borrowing base availability attributable to the Texas Ten Portfolio will be reduced to zero and the Texas Ten Portfolio will be excluded as a borrowing base asset if the Texas Ten Revaluation Date does not occur on or prior to December 31, 2018;
•
until the Performance Hurdle has occurred, restricts the Company’s use of proceeds from borrowings under the Credit Agreement unless approved by lenders representing two-thirds of the outstanding commitments under the Credit Agreement. Proceeds totaling approximately $20.4 million have been pre-approved for specific uses, comprised primarily of the remaining funding obligations for the expansion at Mountain’s Edge Hospital and under the Company’s construction mortgage loan to Haven Healthcare;
•
provides that the covenants relating to (i) the minimum aggregate occupancy rate for borrowing base properties and (ii) the maximum adjusted net operating income attributable to a tenant or group of affiliated tenants, shall not apply on or before March 31, 2019; and
•
does not place additional limitations regarding dividends and distributions prior to December 31, 2018; however, if a default or event of default has occurred as a result, in whole or in part, of the failure of the Texas Ten Revaluation Date to occur on or before December 31, 2018, prohibits the Company from making any dividends or distributions unless approved by lenders representing two-thirds of the outstanding commitments under the Credit Agreement. Under the Credit Amendment, the “Texas Ten Revaluation Date” is defined as the occurrence of all of the following: (i) the written approval by the administrative agent and lenders representing 60.0% of the outstanding commitments under the Credit Agreement of a tenant for the Texas Ten Portfolio pursuant to a lease approved in writing by the administrative agent (the “Replacement Texas Ten Lease”) and a termination of the existing lease for the Texas Ten Portfolio, all pursuant to agreements approved in writing by the administrative agent; (ii) delivery to the administrative agent of a new appraisal of, and the determination of a new appraised value for, the Texas Ten Portfolio based upon the Replacement Texas Ten Lease; and (iii) compliance with each other provision of the Credit Agreement relating to the inclusion of borrowing base assets in the determination of borrowing base availability under the Credit Agreement. Under the Credit Amendment, the “Performance Hurdle” is defined as the occurrence of all of the following: (i) the Texas Ten Revaluation Date shall have occurred on or before December 31, 2018; (ii) the completion of the expansion at Mountain’s Edge Hospital in accordance with the terms of the Fundamental Master Lease, subject to certain other conditions; (iii) the obligations of the tenant under the Fundamental Master Lease to pay full rent and of the tenant under the Replacement Texas Ten Lease to pay rent shall have commenced; (iv) no default or event of default under the Fundamental Master Lease or the Replacement Texas Ten Lease shall have occurred; (v) the tenants under the Fundamental Master Lease and the Replacement Texas Ten Lease shall have not less than one full quarter history of paying rent and reserves with no payment defaults, late payments or delinquencies; (vi) the Company’s operating partnership shall have delivered to the administrative agent a written request to return to the original pricing spreads in effect prior to the Credit Amendment (which request may not be delivered prior to July 1, 2019), together with a written certification that the foregoing conditions have been satisfied; and (vii) lenders representing two-thirds of the outstanding commitments under the Credit Agreement shall have approved the return to the original pricing spreads in effect prior to the Credit Amendment. The Company incurred fees associated with the Credit Amendment of approximately $0.7 million. These costs will be amortized to interest expense through July 1, 2019. The maximum available capacity under the Credit Agreement, after giving effect to the Credit Amendment, was $287.9 Management’s Assessment of Future Borrowing Base Availability and Future Plans Management currently estimates borrowings outstanding under the Credit Agreement would exceed the borrowing base availability as of January 1, 2019 by approximately $60 million if the Texas Ten Portfolio is not re-leased on or prior to December 31, 2018, in accordance with the terms of the Credit Amendment. Management expects to obtain the necessary bank group approvals for a new lease for the entire Texas Ten Portfolio prior to the expiration of the borrowing base terms in the Credit Amendment. Discussions are in advanced stages with multiple parties that have expressed interest in the portfolio. At this time, management expects any new lease would be a triple-net lease providing for annual base rents to the Company of approximately $7.7 million with tenant responsible for property taxes, utilities, maintenance, and other operating expenses. The terms of the new lease are expected to allow the Texas Ten Portfolio to satisfy the borrowing base eligibility requirements included in the Credit Agreement and reset the borrowing base availability to a minimum of approximately $264.5 million. Management also believes that borrowings outstanding on the Credit Agreement will be reduced by December 31, 2018. The Company has one mortgage note receivable and one note receivable that mature on December 31, 2018 with aggregate outstanding principal and interest of approximately $18.6 million. Proceeds from the repayment of these loans will be applied to amounts outstanding on the credit facility, which would reduce borrowings below the revised borrowing base availability noted above. The two events described above along with the Company’s current cash on hand and expected monthly net cash flows are expected to provide sufficient liquidity for the Company to satisfy the remaining funding obligations under the Haven construction mortgage loan and Mountain’s Edge expansion project as well as ongoing operating expenses, including interest payments under the Credit Agreement throughout the remainder of 2018 and all of 2019. If the Company does not satisfy the Texas Ten Revaluation Date criteria by December 31, 2018 or collect the principal and interest on the one mortgage note receivable and one note receivable that mature on December 31, 2018, management expects the Company’s borrowings under the Credit Agreement will exceed borrowing base availability. The Company would seek an additional modification of its Credit Agreement to remedy any over-advanced position, which may include, but is not limited to, granting the lenders a first mortgage interest in its real estate portfolio in order to secure all amounts outstanding under the Credit Agreement. Based upon preliminary discussions with the lead agent under the Credit Agreement, management believes that a conversion to a mortgaged-back facility is executable and the value of the Company’s real estate investments is sufficient to cover amounts outstanding on the facility. The Company has been in compliance with all financial covenants included in the Credit Agreement and management expects to remain in compliance with the financial covenants over the next twelve months. Interest Rate Swap Agreements To mitigate exposure to interest rate risk, on February 10, 2017, the Company entered into four interest rate swap agreements, effective April 10, 2017, on the full $125 million term loan to fix the variable LIBOR interest rate at 1.84%, plus the LIBOR spread under the Credit Agreement, which was The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The changes in the fair value of derivatives designated and that qualify as cash flow hedges are recorded in accumulated other comprehensive income. Those amounts reported in accumulated other comprehensive income related to these interest rate swaps will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the next 12 months, the Company estimates that an additional $1.0 million will be reclassified from other comprehensive income as a decrease to interest expense. The fair value of the Company’s derivative financial instruments at September 30, 2018 and December 31, 2017 was an asset of $ 4.2 The table below details the location in the consolidated financial statements of the gain (loss) recognized on interest rate derivatives designated as cash flow hedges for the three and nine months ended September 30, 2018 and 2017 (dollars in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
2018
2017
2018
2017
Amount of gain (loss) recognized in other comprehensive income (loss)
$
509
$
(85
)
$
2,979
$
(441
)
Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into interest expense
78
(200
)
26
(433
)
Total change in accumulated other comprehensive income (loss)
$
431
$
115
$
2,953
$
(8
) As of September 30, 2018, the Company did not have any derivatives in a net liability position including accrued interest but excluding any adjustments for nonperformance risk. Covenants The Credit Agreement contains customary financial and operating covenants, including covenants relating to the Company’s total leverage ratio, fixed charge coverage ratio, tangible net worth, maximum distribution/payout ratio and restrictions on recourse debt, secured debt and certain investments. The Credit Agreement also contains customary events of default, in certain cases subject to customary cure periods, including among others, nonpayment of principal or interest, material breach of representations and warranties, and failure to comply with covenants. Any event of default, if not cured or waived, could result in the acceleration of any outstanding indebtedness under the Credit Agreement. The Company was in compliance with all financial covenants as of September 30, 2018. |
