UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2018

 

OR

 

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

 

For the transition period from ___________ to ___________.

 

Commission file number: 001-37815

 

Global Medical REIT Inc.

(Exact name of registrant as specified in its charter)

 

Maryland   46-4757266
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
     

2 Bethesda Metro Center, Suite 440

Bethesda, MD

 

 

20814

(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code: (202) 524-6851
 
N/A
(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  þ Yes ¨ No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ   No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ¨ Accelerated filer þ
Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ¨
    Emerging growth company ¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act    ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

 

Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date.

 

Class   Outstanding August 3, 2018
Common Stock, $0.001 par value per share   21,630,675

 

 

 

 

 

 

TABLE OF CONTENTS

 

  PART I   FINANCIAL INFORMATION  
     
Item 1. Financial Statements  
  Consolidated Balance Sheets – June 30, 2018 (unaudited) and December 31, 2017 3
  Consolidated Statements of Operations (unaudited) – Three and Six Months Ended June 30, 2018 and 2017 4
  Consolidated Statement of Stockholders’ Equity (unaudited) – Six Months Ended June 30, 2018 5
  Consolidated Statements of Cash Flows (unaudited) – Six Months Ended June 30, 2018 and 2017 6
  Notes to the Unaudited Consolidated Financial Statements 7
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 23
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 35
     
Item 4. Controls and Procedures 35
 
PART II   OTHER INFORMATION
     
Item 1. Legal Proceedings 36
     
Item 1A. Risk Factors 36
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 36
     
Item 3. Defaults Upon Senior Securities 36
     
Item 4. Mine Safety Disclosures 36
     
Item 5. Other Information 36
     
Item 6. Exhibits 37
   
Signatures 38

 

- 2 -

 

 

GLOBAL MEDICAL REIT INC.

Consolidated Balance Sheets

(in thousands, except par values)

 

   As of 
  

June 30,

2018

  

December 31,

2017

 
   (unaudited)     
Assets          
Investment in real estate:          
Land  $55,330   $42,701 
Building   486,766    384,338 
Site improvements   6,562    4,808 
Tenant improvements   12,189    8,010 
Acquired lease intangible assets   41,162    31,650 
    602,009    471,507 
Less: accumulated depreciation and amortization   (22,026)   (13,594)
Investment in real estate, net   579,983    457,913 
Cash and cash equivalents   4,755    5,109 
Restricted cash   1,432    2,005 
Tenant receivables   1,339    704 
Escrow deposits   2,080    1,638 
Deferred assets   7,200    3,993 
Deferred financing costs, net   2,955    2,750 
Other assets   2,283    459 
Total assets  $602,027   $474,571 
           
Liabilities and Stockholders’ Equity          
Liabilities:          
Revolving credit facility  $288,350   $164,900 
Notes payable, net of unamortized discount of $865 and $930 at June 30, 2018 and December 31, 2017, respectively   38,610    38,545 
Accounts payable and accrued expenses   5,494    2,020 
Dividends payable   5,940    5,638 
Security deposits and other   5,052    2,128 
Due to related parties, net   987    1,036 
Acquired lease intangible liability, net   2,081    1,291 
Total liabilities   346,514    215,558 
Stockholders' equity:          
Preferred stock, $0.001 par value, 10,000 shares authorized; 3,105 issued and outstanding at June 30, 2018 and December 31, 2017 (liquidation preference of $77,625 at June 30, 2018 and December 31, 2017)   74,959    74,959 
Common stock, $0.001 par value, 500,000 shares authorized; 21,631 shares issued and outstanding at June 30, 2018 and December 31, 2017   22    22 
Additional paid-in capital   205,788    205,788 
Accumulated deficit   (42,739)   (34,434)
Total Global Medical REIT Inc. stockholders' equity   238,030    246,335 
Noncontrolling interest   17,483    12,678 
Total stockholders’ equity   255,513    259,013 
Total liabilities and stockholders' equity  $602,027   $474,571 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

- 3 -

 

 

GLOBAL MEDICAL REIT INC.

Consolidated Statements of Operations

(unaudited and in thousands, except per share amounts)

 

  

Three Months Ended

June 30,

  

Six Months Ended

June 30,

 
   2018   2017   2018   2017 
                 
Revenue                    
Rental revenue  $12,581   $6,667   $23,069   $11,296 
Expense recoveries   659    698    1,727    698 
Other income   9    58    18    88 
   Total revenue   13,249    7,423    24,814    12,082 
                     
Expenses                    
General and administrative   1,768    1,835    2,774    3,427 
Operating expenses   680    747    1,784    770 
Management fees – related party   1,095    628    2,176    1,256 
Depreciation expense   3,445    1,851    6,351    3,197 
Amortization expense   926    459    1,691    803 
Interest expense   3,942    1,990    6,627    3,091 
Acquisition fees   9    536    126    1,479 
Total expenses   11,865    8,046    21,529    14,023 
                     
Net income (loss)  $1,384   $(623)  $3,285   $(1,941)
Less: Preferred stock dividends   (1,455)   -    (2,911)   - 
Less: Net loss (income) attributable to noncontrolling interest   7    -    (28)   - 
Net (loss) income attributable to common stockholders  $(64)  $(623)  $346   $(1,941)
                     
Net (loss) income attributable to common stockholders per share – basic and diluted  $(0.00)  $(0.04)  $0.02   $(0.11)
                     
Weighted average shares outstanding – basic and diluted   21,631    17,644    21,631    17,625 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

- 4 -

 

 

GLOBAL MEDICAL REIT INC.

Consolidated Statement of Stockholders’ Equity

(unaudited and in thousands)

 

   Common Stock   Preferred Stock           Global         
   Shares   $
Amount
   Shares   $
Amount
  

Additional
Paid-in

Capital

  

Accumulated

Deficit

   Medial REIT
Inc.
Stockholders’
Equity
  

Non-

controlling
Interest

   Total
Stockholders’
Equity
 
                                     
Balances, December 31, 2017   21,631   $22    3,105   $74,959   $205,788   $(34,434)  $246,335   $12,678   $259,013 
                                              
Net income   -    -    -    -    -    3,257    3,257    28    3,285 
                                              
Stock-based compensation expense   -    -    -    -    -    -    -    1,237    1,237 
                                              
Dividends to common stockholders   -    -    -    -    -    (8,651)   (8,651)   -    (8,651)
                                              
Dividends to preferred stockholders   -    -    -    -    -    (2,911)   (2,911)   -    (2,911)
                                              
Dividends to noncontrolling interest   -    -    -    -    -    -    -    (939)   (939)
                                              
OP Units issued to third parties   -    -    -    -    -    -    -    4,742    4,742 
                                              
LTIP Units redeemed in cash   -    -    -    -    -    -    -    (263)   (263)
Balances, June 30, 2018   21,631   $22    3,105   $74,959   $205,788   $(42,739)  $238,030   $17,483   $255,513 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

- 5 -

 

 

GLOBAL MEDICAL REIT INC.

Consolidated Statements of Cash Flows

(unaudited and in thousands)

 

   Six Months Ended June 30, 
   2018   2017 
Operating activities          
Net income (loss)  $3,285   $(1,941)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:          
Depreciation expense   6,351    3,197 
Amortization of acquired lease intangible assets   1,691    803 
Amortization of above (below) market leases, net   294    (11)
Amortization of deferred financing costs   983    500 
Stock-based compensation expense   1,237    1,140 
Capitalized pre-acquisition costs charged to expense   46    5 
Changes in operating assets and liabilities:          
Tenant receivables   (635)   (322)
Deferred assets   (2,635)   (1,162)
Other assets   97    - 
Accounts payable and accrued expenses   1,254    1,395 
Security deposits and other   2,924    1,725 
Accrued management fees due to related party   31    8 
Net cash provided by operating activities   14,923    5,337 
           
Investing activities          
Purchase of land, buildings, and other tangible and intangible assets and liabilities   (124,874)   (148,474)
Escrow deposits for purchase of properties   (298)   249 
(Loans to) repayments from related parties   (80)   40 
Payments for tenant improvements   (437)   - 
Pre-acquisition costs for purchase of properties   118    121 
Net cash used in investing activities   (125,571)   (148,064)
           
Financing activities          
Net proceeds received from follow-on offering   -    29,553 
Escrow deposits required by third party lenders   (144)   (17)
Borrowings from related parties   -    10 
Repayment of note payable from related party   -    (421)
Proceeds from revolving credit facility   129,950    141,800 
Repayment of revolving credit facility   (6,500)   (25,000)
Payments of deferred financing costs   (1,123)   (2,277)
Redemption of LTIP Units   (263)   - 
Dividends paid to common stockholders, and OP Unit and LTIP Unit holders   (9,288)   (7,208)
Dividends paid to preferred stockholders   (2,911)   - 
Net cash provided by financing activities   109,721    136,440 
Net decrease in cash and cash equivalents and restricted cash   (927)   (6,287)
Cash and cash equivalents and restricted cash—beginning of period   7,114    20,612 
Cash and cash equivalents and restricted cash—end of period  $6,187   $14,325 
           
Supplemental cash flow information:          
Cash payments for interest  $5,592   $2,480 
           
Noncash financing and investing activities:          
Accrued dividends payable  $5,826   $3,701 
Accrued pre-acquisition costs for purchase of properties and tenant improvements  $1,647   $74 
Accrued deferred asset costs  $572   $- 
Accrued deferred public offering costs  $-   $174 
Reclassification of deferred follow-on offering costs to additional paid-in capital  $-   $394 
OP Units issued for noncash transaction  $4,742   $- 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

- 6 -

 

 

GLOBAL MEDICAL REIT INC.

Notes to the Unaudited Consolidated Financial Statements

(in thousands, except per share amounts)

 

Note 1 – Organization

 

Global Medical REIT Inc. (the “Company”) is a Maryland corporation engaged primarily in the acquisition of licensed, state-of-the-art, purpose-built healthcare facilities and the leasing of these facilities to strong clinical operators with leading market share. The Company is externally managed and advised by Inter-American Management, LLC (the “Advisor”).

 

The Company holds its facilities and conducts its operations through a Delaware limited partnership subsidiary named Global Medical REIT L.P. (the “Operating Partnership”) and the Operating Partnership’s wholly-owned subsidiaries. The Company, through a wholly-owned subsidiary, serves as the sole general partner of the Operating Partnership. As of June 30, 2018, the Company was the 89.85% limited partner of the Operating Partnership, with an aggregate of 10.15% owned by holders of long-term incentive plan (“LTIP”) units and third-party holders of Operating Partnership units (“OP Units”).

 

Note 2 – Summary of Significant Accounting Policies

 

Basis of presentation

 

The accompanying financial statements are unaudited and include the accounts of the Company, including the Operating Partnership and its wholly-owned subsidiaries. The accompanying financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and the rules and regulations of the United States Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures required for annual financial statements have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, the accompanying financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the audited financial statements and notes thereto for the fiscal year ended December 31, 2017. In the opinion of management, all adjustments of a normal and recurring nature necessary for a fair presentation of the financial statements for the interim periods have been made.

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of the Company, including the Operating Partnership and its wholly-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 units that have been granted to the Company’s and Advisor’s directors, officers and employees and the OP Units held by third parties. Refer to Note 5 – “Stockholders’ Equity” and Note 7 – “Stock-Based Compensation” for additional information regarding the LTIP units and OP 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 units and OP Units held by the total number of shares of common stock and units 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 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.

 

Cash and Cash Equivalents and Restricted Cash

 

On January 1, 2018 the Company adopted the provisions of Accounting Standards Update (“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 and cash equivalents and amounts generally described as restricted cash. In accordance with the requirements of ASU 2016-18, the following table provides a reconciliation of the Company’s cash and cash equivalents and restricted cash that sums to the total of those amounts at the end of the periods presented on the Company’s accompanying Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017:

 

- 7 -

 

 

   As of June 30, 
   2018   2017 
Cash and cash equivalents  $4,755   $12,034 
Restricted cash  $1,432   $2,291 
Total cash and cash equivalents and restricted cash(1)  $6,187   $14,325 

 

(1) Represents the total of the amounts at the end of the periods presented on the Consolidated Statements of Cash Flows as required by ASU 2016-18. The cash and cash equivalents and restricted cash balance as of December 31, 2017 and December 31, 2016 (the beginning of the periods presented) was $7,114 and $20,612, respectively.

 

The Company considers all demand deposits, cashier’s checks, money market accounts, and certificates of deposit with a maturity of three months or less to be cash equivalents. Amounts included in restricted cash represent (1) certain security deposits received from tenants at the inception of their leases; (2) cash required to be held by a third-party lender as a reserve for debt service; and (3) funds held by the Company that were received from certain tenants that the Company collected to pay specific tenant expenses, such as real estate taxes and insurance, on the tenant’s behalf.

 

Tenant Receivables

 

The tenant receivable balance as of June 30, 2018 and December 31, 2017 was $1,339 and $704, respectively. The balance as of June 30, 2018 consisted of $209 in funds owed from the Company’s tenants for rent that the Company had earned but had not yet received and $1,084 in funds owed by certain 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. Additionally, as of June 30, 2018 the balance included $46 in miscellaneous receivables. The balance as of December 31, 2017 consisted of $125 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 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.

 

Escrow Deposits

 

The escrow balance as of June 30, 2018 and December 31, 2017 was $2,080 and $1,638, 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 amounts as stipulated by the Company’s Cantor Loan, as hereinafter defined.

 

Deferred Assets

 

The deferred assets balance as of June 30, 2018 and December 31, 2017 was $7,200 and $3,993, respectively. The balance as of June 30, 2018 consisted of $6,396 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 of $804 represented other deferred costs. The balance as of December 31, 2017 consisted of $3,842 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 of $151 represented other deferred costs.

 

Other Assets

 

The other assets balance as of June 30, 2018 and December 31, 2017 was $2,283 and $459, respectively. The balance as of June 30, 2018 consisted primarily of $2,036 in construction-in-process related to tenant improvements (of which $1,599 was accrued and not paid as of June 30, 2018). Additionally, the balance consisted of $200 in capitalized costs related to property acquisitions and $47 in a prepaid asset. The balance as of December 31, 2017 consisted of $316 in capitalized costs related to property acquisitions and $143 in a prepaid asset.

 

Security Deposits and Other

 

The security deposits and other liability balance as of June 30, 2018 and December 31, 2017 was $5,052 and $2,128, respectively. The balance as of June 30, 2018 consisted of security deposits of $4,209 and a tenant impound liability of $843 related to amounts owed for specific tenant expenses, such as real estate taxes and insurance. The balance as of December 31, 2017 consisted of security deposits of $1,620 and a tenant impound liability of $508 related to amounts owed for specific tenant expenses.

 

- 8 -

 

 

Reclassification

 

The Company’s Consolidated Statements of Operations for the three and six months ended June 30, 2018 and 2017 includes the expense line item “Operating Expenses.” For the three and six months ended June 30, 2018 this line item primarily included reimbursable property operating expenses that the Company pays on behalf of certain of its tenants, including real estate taxes and insurance as well as non-reimbursable property operating expenses. During the three and six months ended June 30, 2017, the Company recorded property operating expenses in the “General and Administrative” expense line item. Accordingly, for the three and six months ended June 30, 2017 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.

 

New Accounting Pronouncements

 

Leases and Revenue Recognition

 

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02 “Leases” (“ASU 2016-02”). This standard created Topic 842, Leases, and superseded FASB ASC 840, “Leases.” ASU 2016-02 requires a lessee to recognize the assets and liabilities that arise from leases (both operating and finance leases). However, for leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and lease liabilities. The main difference between the existing guidance on accounting for leases and the new standard is that operating leases will now be recorded as assets and liabilities. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for operating leases. ASU 2016-02 is expected to impact the Company’s consolidated financial statements as the Company has certain operating ground lease arrangements for which it is the lessee and therefore will be required to recognize right of use assets and related lease liabilities on its consolidated balance sheets upon adoption of this new standard. Current GAAP requires only capital leases to be recognized in the balance sheet, and amounts related to operating leases largely are reflected in the financial statements as rent expense on the income statement and in disclosures to the financial statements. ASU 2016-02 is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2018. Early adoption is permitted. Based on its anticipated election of the practical expedients, the Company anticipates that its leases where it is the lessor and several ground leases where the Company is the lessee will continue to be accounted for as operating leases under the new standard.  Therefore, as of January 1, 2019, the Company does not currently anticipate significant changes in the accounting for its lease revenues and expenses.  For the Company’s ground leases where it is the lessee, the Company will be required to recognize right of use assets and related lease liabilities on its consolidated balance sheets upon adoption. The Company would not be required to reassess the classification of existing leases where it is the lessor or existing ground leases where it is the lessee and therefore the leases would continue to be accounted for as operating leases. However, in the event the Company modifies existing leases or enters into new leases after adoption of the new standard, such leases may be classified as finance leases. The Company will continue to evaluate the impact of adopting the new leases standard on its consolidated statements of income and comprehensive income and consolidated balance sheets.

 

In May 2014, with subsequent updates issued in August 2015 and March, April and May 2016, the FASB issued ASU 2014-09 “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). ASU 2014-09 was developed to enable financial statement users to better understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The update’s core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Companies are to use a five-step contract review model to ensure revenue is recognized, measured and disclosed in accordance with this principle. Those steps include the following: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to each performance obligation in the contract, and (v) recognize revenue when or as the entity satisfies a performance obligation.

 

The Company has identified four main revenue streams, three of which originate from lease contracts and will be subject to Leases ASU 2016-02, Topic 842 (described above) effective for annual reporting periods (including interim periods) beginning after December 15, 2018. The Company’s revenue streams are:

 

Revenue Recognition (ASU 2014-09, Topic 610-20):

·Gain (loss) on sale of real estate properties

 

Leases (ASU 2016-02, Topic 842):

·Rental revenues
·Straight line rents
·Tenant recoveries

 

- 9 -

 

 

Management adopted the provisions of ASU 2014-09 effective January 1, 2018 and concluded that all of the Company’s material revenue streams fall outside of the scope of this guidance.  During the three and six months ended June 30, 2018 and 2017, the Company sold no real estate properties and therefore had no revenue streams from that source. The new standard may be applied retrospectively to each prior period presented or prospectively with the cumulative effect, if any, recognized as of the date of adoption.  The Company selected the modified retrospective transition method as of the date of adoption effective January 1, 2018.  Management concluded that the majority of total revenues consist of rental income from leasing arrangements, which is specifically excluded from the standard.  The Company analyzed its remaining revenue streams and concluded there are no changes in revenue recognition with the adoption of the new standard.  As such, adoption of ASU 2014-09 did not result in a cumulative adjustment recognized as of January 1, 2018, and the standard did not have a material impact on the Company’s consolidated financial statements or disclosures.

 

Nonemployee Share-Based Payment Accounting

 

In June 2018, the FASB issued ASU 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting” (“ASU 2018-07”). ASU 2018-07 stipulates that the existing accounting guidance for share-based payments to employees will also apply to nonemployee share-based transactions, with the exception of a few transactions that are outlined in the standard. ASU 2018-07 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The Company is evaluating the impact of the adoption of ASU 2018-07 on its consolidated financial statements and related disclosures as well as the timing of adopting the standard.

 

Note 3 – Property Portfolio

 

Implementation of New Business Combination Accounting Standard

 

Effective January 1, 2018, the Company adopted the provisions of ASU 2017-01 – “Business Combinations (Topic 805): Clarifying the Definition of a Business” (“ASU 2017-01”). ASU 2017-01 provides revised guidance to determine when an acquisition meets the definition of a business or alternatively 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 will result in most, if not all, of the Company’s post January 1, 2018 acquisitions being accounted for as asset acquisitions because 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. For asset acquisitions that are “owner occupied” (meaning that the seller either is the tenant or controls the tenant) the purchase price, including capitalized acquisition costs, will be allocated to land and building based on their relative fair values with no value allocated to intangible assets or liabilities. For asset acquisitions where there is a lease in place but not “owner occupied,” the Company will allocate the purchase price to tangible assets and any intangible assets acquired or liabilities assumed based on their relative fair values.

 

Summary of Properties Acquired During the Six Months Ended June 30, 2018

 

During the six months ended June 30, 2018, the Company completed six acquisitions. For all six acquisitions, substantially all of the fair value of the acquisitions was concentrated in a single identifiable asset or group of similar identifiable assets and therefore all of the acquisitions represent asset acquisitions under the guidance provided by ASU 2017-01. Accordingly, transaction costs for these acquisitions were capitalized.

 

- 10 -

 

 

A rollforward of the gross investment in land, building and improvements as of June 30, 2018, 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, 2018  $42,701   $384,338   $12,818   $31,650   $471,507 
Facility Acquired – Date Acquired:                         
Moline / Silvis – 1/24/18   -    4,895    1,216    989    7,100 
Freemont – 2/9/18   162    8,335    -    -    8,497 
Gainesville – 2/23/18   625    9,885    -    -    10,510 
Dallas – 3/1/18   6,272    17,012    -    -    23,284 
Orlando – 3/22/18   2,543    11,720    756    1,395    16,414 
Belpre – 4/19/18   3,027    50,581    3,961    7,128    64,697 
Total Additions(1):   12,629    102,428    5,933    9,512    130,502 
Balances as of June 30, 2018  $55,330   $486,766   $18,751   $41,162   $602,009 

 

(1) The Belpre acquisition included $4,742 of OP Units issued as part of the total consideration. An aggregate of $886 of intangible liabilities were acquired from the acquisitions that occurred during the six months ended June 30, 2018, resulting in total gross investments funded using cash of $124,874.

 

Depreciation expense was $3,445 and $6,351 for the three and six months ended June 30, 2018, respectively, and $1,851 and $3,197 for the three and six months ended June 30, 2017, respectively.

 

As of June 30, 2018, the Company had aggregate capital improvement commitments to improve or expand existing tenant space of $19,036.  Many of these allowances are subject to contingencies that make it difficult to predict when such allowances will be utilized, if at all.  However, the Company expects to be obligated to spend approximately $2,954 in tenant improvements during 2018 (of which $2,036 was incurred as of June 30, 2018) in connection with its Sherman, Silvis, and Gainesville facilities.

 

The following is a summary of the acquisitions completed during the six months ended June 30, 2018. Each acquisition was accounted for as an asset acquisition in accordance with the provisions of ASU 2017-01:

 

Moline / Silvis Facilities

 

Moline Facility - On January 24, 2018, the Company purchased a medical office building located in Moline, Illinois, which included the seller’s interest, as ground lessee, in an existing ground lease. The ground lease has approximately 10 years remaining in the initial term, with 12 consecutive five-year renewal options. Upon the closing of this acquisition, the Company assumed two subleases: one sublease with Fresenius Medical Care Quad Cities, LLC (“Fresenius”) with approximately 13 years remaining in the initial term, with three consecutive five-year renewal options; and one sublease with Quad Cities Nephrology Associates, P.L.C. with approximately 15 years remaining in the initial term, with three consecutive five-year renewal options. 

 

Silvis Facility - On January 24, 2018, the Company purchased a medical office building located in Silvis, Illinois from the same seller as the Moline facility, which included the seller’s interest, as ground lessee, in an existing ground lease. The ground lease has approximately 67 years remaining in the initial term, with no renewal options. Upon the closing of this acquisition, the Company assumed one sublease with Fresenius with approximately 13 years remaining in the initial term, with three consecutive 5-year renewal options.

 

The aggregate purchase price for the Moline/Silvis facilities was $6.9 million. The following table presents the details of the tangible and intangible assets acquired and liabilities assumed for this acquisition:

 

Site improvements  $249 
Building and tenant improvements   5,862 
In-place leases   343 
Above market ground lease intangibles   219 
Leasing costs   427 
Below market lease intangibles   (229)
Total purchase price  $6,871 

 

Fremont Facility - On February 9, 2018, the Company purchased a medical office building located in Fremont, Ohio for a purchase price of approximately $8.5 million. Upon the closing of this acquisition, the Company entered into a new 12-year lease with Northern Ohio Medical Specialists, LLC (NOMS) with four consecutive five-year renewal options.

 

Gainesville Facility - On February 23, 2018, the Company purchased a medical office building and ambulatory surgery center located in Gainesville, Georgia for a purchase price of approximately $10.5 million. Upon the closing of this acquisition, the Company entered into a new 12-year lease with SCP Eye Care Services, LLC with four consecutive five-year renewal options.

 

- 11 -

 

 

Dallas Facility - On March 1, 2018, the Company purchased a hospital, a three-story parking garage, and land all located in Dallas, Texas for an aggregate purchase price of $23.3 million. In addition to the hospital and the parking garage, the land underlays two medical office buildings that are not owned by the Company, each of which is ground leased to the hospital. Upon the closing of this acquisition, the Company entered into two leases with Pipeline East Dallas, LLC, with one lease relating to the hospital and the other lease relating to the underlying land and parking garage.

 

Orlando Facilities - On March 22, 2018, the Company purchased five medical office buildings from five affiliated sellers for an aggregate purchase price of $16.4 million. Upon the closing of this acquisition, the Company assumed five existing leases with Orlando Health, Inc. One lease has approximately one year remaining in its initial term, with one 10-year renewal option; one lease has approximately six years remaining in its initial term, with three consecutive five-year renewal options; one lease has approximately six years remaining in its initial term, with four consecutive five-year renewal options; one lease has approximately six years remaining in its initial term, with three consecutive five-year renewal options; and one lease was amended at closing to extend the remaining term to five years with four consecutive five-year renewal options. The following table presents the details of the tangible and intangible assets acquired and liabilities assumed:

 

Land and site improvements  $3,075 
Building and tenant improvements   11,944 
In-place leases   808 
Above market lease intangibles   229 
Leasing costs   358 
Below market lease intangibles   (10)
Total purchase price  $16,404 

 

Belpre Portfolio - On April 19, 2018, the Company purchased a portfolio of four medical office buildings and a right of first refusal to purchase a fifth, yet to be built, medical office building on the same campus, for an aggregate purchase price of $64.1 million. Upon the closing of the acquisition the Company assumed the existing leases with Marietta Memorial Hospital, a subsidiary of Memorial Health System. Upon the closing of the acquisition, the leases had a weighted average remaining lease term of approximately 11.35 years, each with three consecutive five-year tenant renewal options. The following table presents the details of the tangible and intangible assets acquired and liabilities assumed:

 

Land and site improvements  $4,000 
Building and tenant improvements   53,569 
In-place leases   2,666 
Above market lease intangibles   2,494 
Leasing costs   1,968 
Below market lease intangibles   (646)
Total purchase price  $64,051 

 

Intangible Assets and Liabilities

 

The following is a summary of the carrying amount of intangible assets and liabilities as of the dates presented:

 

   As of June 30, 2018 
   Cost  

Accumulated

Amortization

   Net 
Assets               
In-place leases  $20,878   $(2,727)  $18,151 
Above market ground lease   707    (16)   691 
Above market leases   7,348    (600)   6,748 
Leasing costs   12,229    (1,079)   11,150 
   $41,162   $(4,422)  $36,740 
Liabilities               
Below market leases  $2,275   $(194)  $2,081 

 

   As of 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 

 

- 12 -

 

 

The following is a summary of the acquired lease intangible amortization:

 

  

Three Months Ended

June 30,

  

Six Months Ended

June 30,

 
   2018   2017   2018   2017 
Amortization expense related to in-place leases  $629   $353   $1,150   $634 
Amortization expense related to leasing costs  $297   $106   $541   $169 
Decrease in rental revenue related to above market ground lease  $6   $2   $10   $2 
Decrease in rental revenue related to above market leases  $229   $14   $380   $18 
Increase in rental revenue related to below market leases  $54   $19   $96   $31 

 

As of June 30, 2018, scheduled future aggregate net amortization of the acquired lease intangible assets and liabilities for each fiscal year ended December 31 is listed below:

 

   Net Decrease
in Revenue
   Net Increase
in Expenses
 
2018 (six months remaining)  $(377)  $1,889 
2019   (653)   3,669 
2020   (602)   3,615 
2021   (605)   3,001 
2022   (606)   2,691 
Thereafter   (2,515)   14,436 
Total  $(5,358)  $29,301 

 

As of June 30, 2018, the weighted average amortization periods for asset lease intangibles and liability lease intangibles were 7.73 years and 9.31 years, respectively.

 

Note 4 – Notes Payable and Revolving Credit Facility

 

Summary of Notes Payable, Net of Discount

 

The Company’s notes payable, net, includes two loans: (1) the Cantor Loan and (2) the West Mifflin Note, described below. The following table sets forth the aggregate balances of these loans as of the dates presented:

 

   June 30, 2018   December 31, 2017 
Notes payable, gross  $39,475   $39,475 
Less: Unamortized debt discount   (865)   (930)
Notes payable, net  $38,610   $38,545 

 

Costs incurred related to securing these debt instruments were capitalized as a debt discount, net of accumulated amortization, and are netted against the Company’s Notes Payable balance in the accompanying Consolidated Balance Sheets. Amortization expense incurred related to the debt discount was $33 and $65 for the three and six months ended June 30, 2018, respectively, and $33 and $66 for the three and six months ended June 30, 2017, respectively, and is included in the “Interest Expense” line item in the accompanying Consolidated Statements of Operations.

 

- 13 -

 

 

Cantor Loan

 

On March 31, 2016, through certain 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 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 thereafter 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) two 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 secured 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.

 

The note balance as of June 30, 2018 and December 31, 2017 was $32,097. Interest expense incurred on this note was $423 and $843 for the three and six months ended June 30, 2018, respectively, and $423 and $842 for the three and six months ended June 30, 2017, respectively.

 

As of June 30, 2018, scheduled principal payments due for each fiscal year ended December 31 are listed below as follows:

 

2018  $- 
2019   - 
2020   - 
2021   315 
2022   449 
Thereafter   31,333 
Total  $32,097 

 

West Mifflin Note

 

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 began on November 1, 2015, and on the first day 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 remaining 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) with advanced written notice. The note has an early termination fee of two percent if prepaid prior to September 25, 2018. The West Mifflin 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 (as defined in the note) measured on a quarterly basis of not less than $6,000. The Operator is Associates in Ophthalmology, Ltd. and Associates Surgery Centers, LLC. The note balance as of June 30, 2018 and December 31, 2017 was $7,378. Interest expense incurred on this note was $70 and $139 for the three and six months ended June 30, 2018, respectively, and $70 and $139 for the three and six months ended June 30, 2017, respectively.

 

As of June 30, 2018, scheduled principal payments due for each fiscal year ended December 31 are listed below as follows:

 

2018 (six months remaining  $22 
2019   136 
2020   7,220 
Total  $7,378 

 

Revolving Credit Facility

 

The Company, the Operating Partnership, as borrower, and certain of its subsidiaries (such subsidiaries, the “Subsidiary Guarantors”) are parties to a syndicated revolving credit facility with BMO Harris Bank N.A. (“BMO”), as Administrative Agent (the “Revolving Credit Facility”). On March 6, 2018, the Revolving Credit Facility was amended to increase its aggregate capacity by $90,000 to $340,000. In accordance with ASC Topic 470, Debt, the Company capitalized the costs incurred related to this amendment as all of the syndicates’ capacity was increased with the modification. On August 7, 2018, the Company entered into an amended and restated Credit Facility that amended many of the material terms described in this section. See Note 11 “Subsequent Events” for a description of the material terms of such amendment.

 

- 14 -

 

 

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 as of the end of each fiscal quarter 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 six months ended June 30, 2018 the Company borrowed $129,950 under the Revolving Credit Facility and repaid $6,500 for a net amount borrowed of $123,450. During the six months ended June 30, 2017 the Company borrowed $141,800 under the Revolving Credit Facility and repaid $25,000 for a net amount borrowed of $116,800. Interest expense incurred on the Revolving Credit Facility was $2,896 and $4,662 for the three and six months ended June 30, 2018, respectively and $1,156 and $1,610 for the three and six months ended June 30, 2017, respectively.

 

As of June 30, 2018 and December 31, 2017, the Company had $288,350 and $164,900 of outstanding borrowings under the Revolving Credit Facility, respectively.

 

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 June 30, 2018, is as follows:

 

Balance as of January 1, 2018, net  $2,750 
Additions – Revolving Credit Facility   1,123 
Deferred financing cost amortization expense   (918)
Balance as of June 30, 2018, net  $2,955 

 

Amortization expense incurred related to the Revolving Credit Facility deferred financing costs was $520 and $918 for the three and six months ended June 30, 2018, respectively, and $308 and $434 for the three and six months ended June 30, 2017, respectively, and is included in the “Interest Expense” line item in the accompanying Consolidated Statements of Operations.

 

Weighted-Average Interest Rate and Term

 

The weighted average interest rate and term of our debt was 4.38% and 2.05 years, respectively, at June 30, 2018, compared to 3.72% and 2.94 years, respectively, as of December 31, 2017.

 

Note 5 – Stockholders’ Equity

 

Preferred Stock

 

The Company’s charter authorizes the issuance of 10,000 shares of preferred stock, par value $0.001 per share. As of June 30, 2018 and December 31, 2017, there were 3,105 shares of Series A Cumulative Redeemable Preferred Stock (“Series A Preferred Stock”), issued and outstanding. The Series A Preferred Stock has a liquidation preference of $25 per share.

 

- 15 -

 

 

Dividend activity on our preferred stock for the six months ended June 30, 2018 is summarized in the following table:

 

Date Announced  Record Date 

Applicable

Quarter

  Payment Date  Quarterly
Dividend
   Amount
Accrued
   Dividends
per Share
 
                      
December 15, 2017  January 15, 2018  Q4 2017  January 31, 2018  $1,455   $-   $0.46875 
March 7, 2018  April 15, 2018  Q1 2018  April 30, 2018  $1,456   $-   $0.46875 
June 15, 2018  July 15, 2018  Q2 2018  July 31, 2018  $1,455   $9701  $0.46875 

 

1Represents the accrued portion of the second quarter 2018 dividend as of June 30, 2018.

 

The holders of the Series A Preferred Stock are entitled to receive dividend payments only when, as and if declared by 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 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 (i) funds are legally available for the payment of those dividends, (ii) the Company has earnings and (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, which commenced on October 31, 2017. During the six months ended June 30, 2018, the Company paid preferred dividends of $2,911. No preferred dividends were paid during the three and six months ended June 30, 2017.

 

Common Stock

 

The Company has 500,000 authorized shares of common stock, $0.001 par value. As of June 30, 2018 and December 31, 2017, there were 21,631 outstanding shares of common stock.

 

Common stock dividend activity for the six months ended June 30, 2018 is summarized in the following table:

 

Date Announced  Record Date 

Applicable

Quarter

  Payment Date  Dividend
Amount(1)
   Dividends
per Share
 
                  
December 15, 2017  December 26, 2017  Q4 2017  January 10, 2018  $4,552   $0.20 
March 7, 2018  March 22, 2018  Q1 2018  April 10, 2018  $4,691   $0.20 
June 15, 2018  June 26, 2018  Q2 2018  July 11, 2018  $4,786   $0.20 

 

(1)Includes distributions on granted LTIP units and OP Units issued to third parties.

 

During the six months ended June 30, 2018 and 2017, the Company paid total dividends on its common stock, LTIP units and OP Units in the aggregate amount of $9,288 and $7,208, respectively.

 

As of June 30, 2018 and December 31, 2017, the Company had an accrued dividend balance of $184 and $116 for dividends payable on the aggregate annual and long-term LTIP units that are subject to retroactive receipt of dividends on the amount of LTIP units ultimately earned. During the six months ended June 30, 2018, $113 of dividends were accrued and $45 of dividends were paid. During the six months ended June 30, 2017, $96 of dividends were accrued and zero was paid. See Note 7 – Stock-Based Compensation for additional information.

 

The amount of the dividends paid to the Company’s stockholders is determined by the Company’s 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.

 

OP Units

 

During the six months ended June 30, 2018, the Company issued 611 OP Units with a value of $4,742 in connection with a facility acquisition. During the year ended December 31, 2017, the Company issued 1,246 OP Units with a value of $11,532 primarily in connection with two facility acquisitions. As of June 30, 2018 and December 31, 2017, there were 1,857 and 1,246 OP Units issued, respectively, with an aggregate value of $16,274 and $11,532, respectively. The OP Unit value is included as a component of noncontrolling interest equity in the Company’s Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017.

 

- 16 -

 

 

Note 6 – Related Party Transactions

 

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 “Management Agreement”). Certain material terms of the Management Agreement are summarized in the section titled “Business — Our Advisor and our Management Agreement,” contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on March 12, 2018.

 

Management Fees and Accrued Management Fees

 

The Company’s management fee to the Advisor is calculated in accordance with the terms of the Management Agreement which requires an annual base management fee equal to 1.5% of our stockholders’ equity (as defined in the Management Agreement). For the three and six months ended June 30, 2018, management fees of $1,095 and $2,176, respectively, were incurred and expensed by the Company and during the six months ended June 30, 2018, the Company paid management fees to the Advisor in the amount of $2,145. For the three and six months ended June 30, 2017, management fees of $628 and $1,256, respectively, were incurred and expensed by the Company and during the six months ended June 30, 2017, the Company paid management fees to the Advisor in the amount of $1,248. Accrued management fees due to the Advisor were $1,095 and $1,064 as of June 30, 2018 and December 31, 2017, respectively. No incentive management fee was incurred by the Company during the three and six months ended June 30, 2018 or June 30, 2017.

 

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. This agreement expired in May 2018 and was not renewed. 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 three and six months ended June 30, 2018 and 2017.

 

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 June 30, 2018, 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, 2018  $(1,064)   9    19   $(1,036)
Management fee expense incurred (1)   (2,176)   -    -    (2,176)
Management fees paid to Advisor (1)   2,145    -    -    2,145 
Loans to Advisor (2)   -    33    -    33 
Loans to other related parties (2)   -    -    47    47 
Balance as of June 30, 2018  $(1,095)   42    66   $(987)

 

(1)Net amount accrued of $31 consists of $2,176 in management fee expense incurred, net of $2,145 of accrued management fees that were paid to the Advisor. This represents a cash flow operating activity.

(2)Aggregate amount of $80 represents amounts paid by the Company on behalf of several related party entities for miscellaneous purposes. This represents a cash flow investing activity.

 

Note 7 – Stock-Based Compensation

 

2016 Equity Incentive Plan

 

The 2016 Equity Incentive Plan (the “Plan”) is intended to assist the Company and its affiliates in recruiting and retaining employees of the Manager, members of the Board, executive officers of the Company, and individuals who provide services to those entities or affiliates of those entities.

 

- 17 -

 

 

The Plan is intended to permit the grant of both qualifying 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. Based on the grants outstanding as of June 30, 2018, there are 277 units that remain available to be granted under the Plan. Units 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 unit activity under the Plan during the six months ended June 30, 2018 was as follows:

 

Net LTIP units outstanding as of December 31, 2017   436 
LTIP units granted (1)   57 
LTIP units earned and granted via the 2017 performance program – Annual Awards (2)   57 
LTIP units granted as 2018 time-based awards (3)   73 
LTIP units redeemed in cash or forfeited (4)   (35)
Net LTIP units outstanding as of June 30, 2018   588 

 

(1)The 57 LTIP units are comprised of the following: on March 5, 2018, the Board approved grants of an aggregate of 36 LTIP Units to employees of the Advisor, which vest 50% on March 5, 2020 and 50% on March 5, 2021; on May 30, 2018 and June 14, 2018 the Board approved grants of an aggregate of 21 LTIP Units to independent directors of the Board, which vest on May 30, 2019 and June 14, 2019, respectively.
(2)The 57 LTIP units represents grants from the previously disclosed 2017 annual awards. On March 5, 2018 the Compensation Committee of the Board (the “Compensation Committee”) determined the extent to which the Company achieved the performance goals related to the 2017 Annual Awards and determined the number of LTIP units that each grantee was entitled to receive. These grants vested 50% on March 5, 2018, the determination date, and 50% vest on December 31, 2018.
(3)The 73 LTIP units represent grants approved by the Board on March 5, 2018 and are subject to the terms and conditions of the 2018 LTIP Unit Award Agreements between the Company and each grantee. These grants vest in equal one-third increments on each of March 5, 2019, March 5, 2020, and March 5, 2021.
(4)The 35 LTIP units is comprised of 34 vested units that the Company elected to redeem in cash for $263, and one unvested unit that was forfeited.

 

A detail of the vested and unvested LTIP units outstanding as of June 30, 2018 is as follows:

 

Total vested units   283 
Unvested units:     
Granted to employees of the Advisor   284 
Granted to the Company’s independent directors   21 
Total unvested units   305 
Net LTIP units outstanding as of June 30, 2018   588 

 

The Company expenses the fair value of all time-based LTIP unit grants 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.”

 

Performance Based Awards

 

During 2017, the Board approved the 2017 annual performance-based equity incentive award targets in the form of LTIP units and long-term performance-based LTIP awards to the executive officers of the Company and other employees of the Advisor who perform services for the Company (the “2017 Program”). During the six months ended June 30, 2018, the Board approved the 2018 annual performance-based equity incentive award targets in the form of LTIP units and long-term performance-based LTIP awards to the executive officers of the Company and other employees of the Advisor who perform services for the Company (the “2018 Program”). None of the long-term LTIP unit award targets units under the 2017 Program and none of the annual or long-term LTIP unit award targets under the 2018 Program had been earned by the participants as of June 30, 2018.

 

- 18 -

 

 

A detail of the annual awards (the “Annual Awards”) and the long-term awards (the “Long-Term Awards”) under the 2017 Program and the 2018 Program is as follows:

 

   2017 Program   2018 Program     
   Annual   Long-
Term
   Annual   Long-
Term
   Total 
                     
Net 2017 Program LTIP awards as of December 31, 2017   84    98    -    -    182 
LTIP unit target grants via the 2018 Performance Program – Long-Term Awards (1)   -    -    -    110    110 
LTIP unit target grants via the 2018 Performance Program – Annual Awards (2)   -    -    163    -    163 
LTIP units granted via the 2017 Performance Program – Annual Awards (3)   (57)   -    -    -    (57)
LTIP units not earned under the 2017 Performance Program – Annual Awards (4)   (27)   -    -    -    (27)
LTIP unit forfeitures (5)        (2)   (2)        (4)
Net annual and long-term LTIP awards as of June 30, 2018   -    96    161    110    367 

 

(1)These target Long-Term Awards were approved by the Board on March 5, 2018 and are subject to the terms and conditions of the 2018 LTIP Unit Award Agreements between the Company and each grantee.
(2)These target Annual Awards were approved by the Board on April 9, 2018 and are subject to the terms and conditions of the 2018 LTIP Unit Award Agreements between the Company and each grantee.
(3)This amount represents grants from the 2017 Program Annual Awards. Refer to the “Time-Based Grants” table above which presents these grants as earned and time-based.
(4)On March 5, 2018 the Compensation Committee determined the extent to which the Company achieved the performance goals and concluded that these target awards were not earned.
(5)Represents LTIP units forfeited from grantees no longer with the Company.

 

The number of target LTIP units comprising each 2018 Program Annual Award target grant 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. The number of target LTIP units comprising each Long-Term Award target grant 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.

 

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 Compensation Committee and Board established performance goals for calendar year 2018, as set forth in Exhibit A to the 2018 LTIP Annual Award Agreements (the “Performance Goals”) that will be used to determine the number of LTIP units earned by each grantee. As of June 30, 2018, management estimated that the Performance Goals would be met at a 75% level, and accordingly, applied 75% to the net target 2018 Program Annual Awards to estimate the 2018 Program Annual Awards expected to be earned at the end of the performance period. Cumulative stock-based compensation expense during the six months ended June 30, 2018 reflects management’s estimate that 75% of these awards will vest. As soon as reasonably practicable following the last day of the 2018 fiscal year, 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 units that each grantee is entitled to receive. Each grantee may earn up to 150% of the number of his/her target LTIP units. Any 2018 Annual Award LTIP units that are not earned will be forfeited and cancelled.

 

Vesting. LTIP units that are earned as of the end of the applicable performance period will be subject to vesting, subject to continued employment through each vesting date, in two installments as follows: 50% of the earned LTIP units will become vested as of the earlier of (a) the date in 2019 that the Board approves the number of LTIP units to be awarded pursuant to the performance components set forth in the 2018 LTIP Annual Award Agreements, or (b) the date upon which a change of control occurs; and 50% of the Earned LTIP Units become vested on the one year anniversary of the initial vesting date.

 

- 19 -

 

 

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 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 Awards. The Long-Term Awards are subject to the terms and conditions of 2017 and 2018 LTIP Long-Term Award Agreements (collectively the “LTIP Long-Term 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 Award Agreements will be determined following the conclusion of a three-year performance period based on the Company’s total stockholder return (“TSR”), which is determined based on a combination of appreciation in stock price and dividends paid during the performance period. Each grantee may earn up to 200% of the number of target LTIP units covered by the grantee’s Long-Term Award. Any target LTIP units that are not earned will be forfeited and cancelled. The number of LTIP units earned under the Long-Term Awards will be determined as soon as reasonably practicable following the end of the three-year performance period (2020 or 2021 depending on the program) based on the Company’s TSR on an absolute basis (as to 75% of the Long-Term Award) and relative to the SNL Healthcare REIT Index (as to 25% of the Long-Term Award).

 

As the Long-Term Awards were granted to non-employees and involved market-based performance conditions, in accordance with the provisions of ASC Topic 505, the Long-Term Awards utilize 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. 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 over the performance period.

 

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 as follows; for the 2017 Program units: 50% of the earned LTIP units will vest upon being earned as of February 27, 2020, or the date of a change of control, and the remaining 50% will vest on February 27, 2021; for the 2018 Program units: 50% of the earned LTIP units will vest upon being earned as of March 4, 2021, or the date of a change of control, and the remaining 50% will vest on March 4, 2022.

 

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 Compensation Expense

 

The Company incurred stock compensation expense of $1,055 and $1,237 for the three and six months ended June 30, 2018, respectively, and $721 and $1,140 for the three and six months ended June 30, 2017, 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.

 

As of June 30, 2018, total unamortized compensation expense related to these awards of approximately $4,310 is expected to be recognized over a weighted average remaining period of 2.22 years.

 

Note 8 – Rental Revenue

 

The aggregate annual minimum cash to be received by the Company on the noncancelable operating leases related to its portfolio of facilities in effect as of June 30, 2018, is as follows for the subsequent years ended December 31; as listed below.

 

2018 (six months remaining)  $23,415 
2019   47,299 
2020   48,155 
2021   46,556 
2022   45,488 
Thereafter   347,800 
Total  $558,713 

 

- 20 -

 

 

For the three months ended June 30, 2018, the Encompass (formerly HealthSouth) facilities constituted approximately 11% of the Company’s rental revenue, the OCOM facilities constituted approximately 9% of the Company’s rental revenue, the Belpre facilities constituted approximately 9% of the Company’s rental revenue, the Austin facility constituted approximately 7% of the Company’s rental revenue, the Sherman facility constituted approximately 6% of the Company’s rental revenue, the Dallas facility constituted approximately 6% of the Company’s rental revenue, and the Great Bend facility constituted approximately 5% of the Company’s rental revenue. All other facilities in the Company’s portfolio constituted the remaining 47% of the total rental revenue with no individual facility constituting greater than approximately 4% of total rental revenue.

 

For the six months ended June 30, 2018, the Encompass facilities constituted approximately 12% of the Company’s rental revenue, the OCOM facilities constituted approximately 10% of the Company’s rental revenue, the Austin facility constituted approximately 7% of the Company’s rental revenue, the Sherman facility constituted approximately 7% of the Company’s rental revenue, the Great Bend facility constituted approximately 5% of the Company’s rental revenue, and the Belpre facilities constituted approximately 5% of the Company’s rental revenue. All other facilities in the Company’s portfolio constituted the remaining 54% of the total rental revenue with no individual facility constituting greater than approximately 4% of total rental revenue.

 

For the three months ended June 30, 2017, the Encompass facilities constituted approximately 21% of the Company’s rental revenue, the OCOM facilities constituted approximately 17% of the Company’s rental revenue, the Great Bend facility constituted approximately 9% of the Company’s rental revenue, the Omaha and Plano facilities each constituted approximately 6% of the Company’s rental revenue, and the Tennessee facilities constituted approximately 5% of the Company’s rental revenue. All other facilities in the Company’s portfolio constituted the remaining 36% of the total rental revenue with no individual facility constituting greater than approximately 4% of total rental revenue.

 

For the six months ended June 30, 2017, the Encompass facilities constituted approximately 25% of the Company’s rental revenue, the OCOM facilities constituted approximately 10% of the Company’s rental revenue, the Omaha facility constituted approximately 8% of the Company’s rental revenue, the Plano facility constituted approximately 7% of the Company’s rental revenue, the Tennessee and Great Bend facilities each constituted approximately 6% of the Company’s rental revenue, and the Marina Towers facility constituted approximately 5% of the Company’s rental revenue. All other facilities in the Company’s portfolio constituted the remaining 33% of the total rental revenue with no individual facility constituting greater than approximately 4% of total rental revenue.

 

Note 9 – Land Leases

 

The Company acquired an interest, as ground lessee, in the ground lease related to the Omaha and Clermont facilities at their dates of acquisition. In connection with the acquisitions of the Moline facility on January 24, 2018, the Company acquired the seller’s interest, as ground lessee, in an existing ground lease that has approximately 10 years remaining in the initial term, with 12 consecutive five-year renewal options. Additionally, in connection with the acquisition of the Silvis facility on January 24, 2018, the Company acquired the seller’s interest, as ground lessee, in an existing ground lease that has approximately 67 years remaining in the initial term, with no renewal options.

 

The aggregate minimum cash payments to be made by the Company on these land leases in effect as of June 30, 2018, are as follows for the subsequent years ended December 31; as listed below.

 

2018 (six months remaining)  $53 
2019   109 
2020   109 
2021   109 
2022   109 
Thereafter   2,234 
Total  $2,723 

 

Note 10 – Commitments and Contingencies

 

Litigation

 

The 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.

 

- 21 -

 

 

Note 11 – Subsequent Events

 

Amendment to Revolving Credit Facility

 

On August 7, 2018, the Company amended and restated its Revolving Credit Facility to (i) increase the overall capacity of the facility from $340 million to $350 million, consisting of a $250 million revolving credit facility (the “Revolver”) and a $100 million, five-year term loan (the “Term Loan”), (ii) extend the term of the Revolver to August 2022, with a one-year extension option, and (iii) implement a new pricing matrix. The facility includes an accordion feature to increase the capacity to an aggregate of $500 million. Additionally, the Company hedged its interest rate risk on the Term Loan by entering into an interest rate swap agreement, with a notional amount of $100 million and a term of five years, which will effectively fix the LIBOR component on the Term Loan at 2.88%.

 

- 22 -

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion should be read in conjunction with our financial statements included herein, including the notes to those financial statements, included elsewhere in this report. Some of the comments 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 below entitled “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 Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2017, that was filed with the United States Securities and Exchange Commission (the “SEC” or the “Commission”) on March 12, 2018 and Item 1A. Risk Factors contained in this Quarterly Report on Form 10-Q. Unless otherwise indicated all dollar and share amounts in the following discussion are presented in thousands.

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q (this “Report”) contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). In particular, statements pertaining to our trends, liquidity, capital resources, dividends, and the healthcare industry and healthcare real estate opportunities, among others, contain forward-looking statements. You can identify forward-looking statements by the use of forward-looking terminology including, but not limited to, “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates” or “anticipates” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans or intentions.

 

Forward-looking statements involve numerous risks and uncertainties and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise and we may not be able to realize them. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:

 

·defaults on or non-renewal of leases by tenants;
·decreased rental rates or increased vacancy rates;
·difficulties in identifying healthcare facilities to acquire and completing such acquisitions;
·adverse economic or real estate conditions or developments, either nationally or in the markets in which our facilities are located;
·our failure to generate sufficient cash flows to service our outstanding obligations;
·fluctuations in interest rates and increased operating costs;
·our failure to effectively hedge our interest rate risk;
·our ability to satisfy our short and long-term liquidity requirements;
·our ability to deploy the debt and equity capital we raise;
·our ability to raise additional equity and debt capital on terms that are attractive or at all;
·our ability to make distributions on shares of our common and preferred stock;
·expectations regarding the timing and/or completion of any acquisition;
·general volatility of the market price of our common and preferred stock;
·our lack of a significant operating history;
·changes in our business or our investment or financing strategy;
·changes in our management internalization plans;
·our dependence upon key personnel whose continued service is not guaranteed;
·the ability of our external manager, Inter-American Management, LLC’s (the “Advisor”), to identify, hire and retain highly qualified personnel in the future;
·the degree and nature of our competition;
·changes in healthcare laws, governmental regulations, tax rates and similar matters;
·changes in current healthcare and healthcare real estate trends;
·changes in expected trends in Medicare, Medicaid and commercial insurance reimbursement trends;
·competition for investment opportunities;
·our failure to successfully integrate acquired healthcare facilities;
·our expected tenant improvement expenditures;
·changes in accounting policies generally accepted in the United States of America (“GAAP”);

 

- 23 -

 

 

·lack of or insufficient amounts of insurance;
·other factors affecting the real estate industry generally;
·changes in the tax treatment of our distributions;
·our failure to qualify and maintain our qualification as a real estate investment trust (“REIT”) for U.S. federal income tax purposes; and
·limitations imposed on our business and our ability to satisfy complex rules relating to REIT qualification for U.S. federal income tax purposes.

 

 

See Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2017, that was filed with the SEC on March 12, 2018 and Item 1A Risk Factors in this Quarterly Report on Form 10-Q, for further discussion of these and other risks, as well as the risks, uncertainties and other factors discussed in this Report and identified in other documents we may file with the SEC from time to time. You should carefully consider these risks before making any investment decisions in our company. New risks and uncertainties may also emerge from time to time that could materially and adversely affect us. While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We disclaim any obligation to update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events or other changes after the date of this Report, except as required by applicable law. You should not place undue reliance on any forward-looking statements that are based on information currently available to us or the third parties making the forward-looking statements.

 

Overview

 

Global Medical REIT Inc. (the “Company,” “us,” “we,” or “our”) is an externally-managed, Maryland corporation engaged primarily in the acquisition of licensed, state-of-the-art, purpose-built healthcare facilities and the leasing of these facilities to strong clinical operators with leading market share. The Company is externally managed and advised by the Advisor.

  

We elected to be taxed as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2016. We conduct our business through an umbrella partnership real estate investment trust, or UPREIT, structure in which our properties are owned by wholly-owned subsidiaries of our operating partnership, Global Medical REIT L.P. (the “Operating Partnership”). We, through a wholly-owned subsidiary, are the sole general partner of our Operating Partnership and, as of June 30, 2018, we owned approximately 89.85% of the outstanding common operating partnership units (“OP Units”) of our Operating Partnership.

 

Executive Summary

 

The following table summarizes the material changes in our business and operations for the periods presented:

 

  

Three Months Ended

June 30,

   Six Months Ended
June 30,
 
   2018   2017   2018   2017 
   (in thousands, except per share amounts) 
                 
Rental revenue  $12,581   $6,667   $23,069   $11,296 
Interest expense  $3,942   $1,990   $6,627   $3,091 
General and administrative expense  $1,768   $1,835   $2,774   $3,427 
Preferred stock dividends  $1,455   $-   $2,911   $- 
                     
Net (loss) income attributable to common stockholders per share  $(0.00)  $(0.04)  $0.02   $(0.11)
FFO per share(1)  $0.19   $0.10   $0.37   $0.12 
AFFO per share(1)  $0.20   $0.14   $0.36   $0.23 
                     
Dividends per common share  $0.20   $0.20   $0.20   $0.20 
Weighted average common shares outstanding   21,631    17,644    21,631    17,625 
Weighted average OP Units outstanding   1,736    -    1,492    - 
Weighted average LTIP units outstanding   584    -    512    - 

 

(1)See “—Non-GAAP Financial Measures,” for a description of our non-GAAP financial measures and a reconciliation of our non-GAAP financial measures.

 

- 24 -

 

 

   As of 
   June 30, 2018   December 31, 2017 
   (dollars in thousands) 
         
Total investment in real estate, gross  $602,009   $471,507 
Total debt, net of unamortized discount  $326,960   $203,445 
Weighted average interest rate   4.38%   3.72%
Total stockholders’ equity  $255,513   $259,013 
Net leasable square feet   1,869,830    1,331,186 

 

Our Properties

 

As of June 30, 2018, our portfolio consisted of 70 buildings with an aggregate of (i) approximately 1.9 million leasable square feet, (ii) approximately $46.6 million of annualized base rent, (iii) an approximate weighted average capitalization rate of 7.8% and (iv) approximately 10.4 weighted average lease years remaining. The table below summarizes our portfolio as of June 30, 2018:

 

Property  Location  Leasable
Square Feet
(LSF)
   % of
Portfolio
LSF
   Annualized
Base Rent (in
thousands)(1)
   % of
Portfolio
Annualized
Base Rent
   Cap. Rate(2)   Lease Years
Remaining(3)
 
Select Medical Hospital  Omaha, NE   41,113    2.2%  $1,763    3.8%   8.1%   5.1 
Orthopedic Surgery Center of Asheville  Asheville, NC   8,840    0.5%   245    0.5%   10.1%   3.7 
Associates in Ophthalmology  West Mifflin, PA   27,193    1.5%   784    1.7%   6.9%   12.2 
Gastro One  Memphis, TN   52,266    2.8%   1,323    2.8%   6.6%   9.5 
Star Medical Center  Plano, TX   24,000    1.3%   1,278    2.7%   7.3%   17.6 
Surgical Institute of Michigan  Westland, MI   15,018    0.8%   399    0.9%   8.4%   7.8 
Marina Towers  Melbourne, FL   75,899    4.1%   1,127    2.4%   7.3%   7.8 
Berks Eye Physicians & Surgeons  Wyomissing, PA   17,000    0.9%   449    0.9%   7.5%   8.1 
Berkshire Eye Surgery Center  Reading, PA   6,500    0.3%   241    0.5%   7.5%   8.1 
East Orange General Hospital  East Orange, NJ   60,442    3.2%   962    2.1%   8.1%   8.3 
Brown Clinic  Watertown, SD   48,132    2.6%   721    1.5%   8.0%   13.3 
Northern Ohio Medical Specialists (NOMS)  Sandusky, OH   55,760    3.0%   864    1.9%   7.7%   9.3 
Carson Medical Group Clinic  Carson City, NV   20,632    1.1%   354    0.8%   9.4%   5.3 
Piedmont Healthcare  Ellijay, GA   44,162    2.4%   364    0.8%   7.4%   8.0 
Encompass (Mesa)  Mesa, AZ   51,903    2.8%   1,762    3.8%   7.9%   6.3 
Encompass (Altoona)  Altoona, PA   70,007    3.7%   1,713    3.7%   8.0%   2.9 
Encompass (Mechanicsburg)  Mechanicsburg, PA   78,836    4.2%   1,923    4.1%   7.9%   2.9 
Southwest Florida Neurological & Rehab  Cape Coral, FL   25,814    1.4%   540    1.2%   7.4%   8.6 
Geisinger Specialty Care  Lewisburg, PA   28,480    1.5%   544    1.2%   7.5%   4.8 
Las Cruces Orthopedic  Las Cruces, NM   15,761    0.8%   362    0.8%   7.4%   10.6 
Thumb Butte Medical Center  Prescott, AZ   12,000    0.6%   371    0.8%   8.2%   8.7 
Southlake Heart & Vascular Institute  Clermont, FL   18,152    1.0%   369    0.8%   7.1%   4.4 
Oklahoma Center for Orthopedic & Multi-specialty Surgery (OCOM)  Oklahoma City, OK   97,406    5.2%   3,561    7.6%   7.2%   14.9 
Great Bend Regional Hospital  Great Bend, KS   63,978    3.4%   2,198    4.7%   9.0%   13.8 
Unity Family Medicine  Brockport, NY   29,497    1.6%   621    1.3%   7.2%   12.4 
Lonestar Endoscopy  Flower Mound, TX   10,062    0.5%   294    0.6%   7.3%   8.3 
Texas Digestive  Fort Worth, TX   18,084    1.0%   431    0.9%   6.9%   10.0 
Carrus Specialty Hospital  Sherman, TX   69,352    3.7%   2,346    5.0%   9.0%   19.0 
Cardiologists of Lubbock  Lubbock, TX   27,280    1.5%   600    1.3%   7.3%   11.2 
Conrad Pearson Clinic  Germantown, TN   33,777    1.8%   1,488    3.2%   9.3%   5.9 
Central Texas Rehabilitation Clinic  Austin, TX   59,258    3.2%   2,971    6.3%   7.3%   8.8 
Heartland Clinic  Moline, IL   34,020    1.8%   892    1.9%   7.7%   15.0 
Albertville Medical Building  Albertville, MN   21,486    1.1%   481    1.0%   7.1%   10.5 
Amarillo Bone & Joint Clinic  Amarillo, TX   23,298    1.2%   594    1.3%   6.9%   11.5 
Kansas City Cardiology  Lee’s Summit, MO   12,180    0.7%   275    0.6%   7.2%   6.5 
Zion Eye Institute  St. George, UT   16,000    0.9%   400    0.9%   7.0%   11.5 
Respiratory Specialists  Wyomissing, PA   17,598    0.9%   405    0.9%   7.2%   9.5 
Quad City Kidney Center  Moline, IL   27,173    1.5%   548    1.2%   8.2%   12.8 
Northern Ohio Medical Specialists (NOMS)  Fremont, OH   25,893    1.4%   608    1.3%   7.3%   11.6 
Gainesville Eye  Gainesville, GA   34,020    1.8%   776    1.7%   7.5%   11.7 
City Hospital of White Rock  Dallas, TX   236,314    12.6%   2,230    4.7%   9.7%   19.7 
Orlando Health  Orlando, FL   59,644    3.2%   1,346    2.9%   8.3%   4.4 
Memorial Health  Belpre, OH   155,600    8.3%   5,087    10.9%   7.9%   10.8 
Totals / Weighted Average      1,869,830    100.0%  $46,610    100.0%   7.8%   10.4 

 

 

(1) Monthly base rent for June 2018 multiplied by 12.

(2) Annualized base rent for June 2018 divided by contractual purchase price.

(3) Does not include tenant renewal options.

 

- 25 -

 

 

Recent Developments

 

On August 7, 2018, the Company entered into an amended and restated Revolving Credit Facility to (i) increase the overall capacity of the facility from $340 million to $350 million, consisting of a $250 million revolving credit facility (the “Revolver”) and a $100 million, five-year term loan (the “Term Loan”), (ii) extend the term of the Revolver to August 2022, with a one-year extension option, and (iii) implement a new pricing matrix. The facility includes an accordion feature to increase the capacity to an aggregate of $500 million. Additionally, the Company hedged its interest rate risk on the Term Loan by entering into an interest rate swap agreement, with a notional amount of $100 million and a term of five years, which will effectively fix the LIBOR component on the Term Loan at 2.88%.

 

 

Trends Which May Influence Results of Operations

 

We believe the following trends may positively impact our business and results of operations:

 

·growing healthcare expenditures – According to the U.S. Department of Health and Human Services, overall healthcare expenditures are expected to grow at an average rate of 5.6% per year from 2016 through 2025.  We believe the long-term growth in healthcare expenditures will correlate with the long-term leases at our properties and help maintain or increase the value of our healthcare real estate portfolio;
·an aging population – according to the 2010 U.S. Census, the segment of the population consisting of people 65 years or older comprise the fastest growing segment of the overall U.S. population.  We believe this segment of the U.S. population will utilize many of the services provide at our healthcare facilities such as orthopedics, cardiac, gastroenterology and rehabilitation;
·a continuing shift towards outpatient care – according to the American Hospital Association, patients are demanding more outpatient operations.  We believe this shift in patient preference from inpatient to out-patient facilities will benefit our tenants as most of our properties consists of medical office buildings, ambulatory surgery centers and specialty hospitals that provide an alternative to inpatient facilities such as acute-care hospitals;

 

- 26 -

 

 

·physician practice group and hospital consolidation – We believe the trend towards physician group consolidation will serve to strengthen the credit quality of our tenants if our tenants merge or are consolidated with larger health systems;
·a highly fragmented healthcare real estate market – Despite the move toward consolidation with respect to healthcare services, we believe the healthcare real estate market continues to be highly fragmented, which will provide us with significant acquisition opportunities; and
·Increased supply of attractive acute-care hospital acquisition opportunities – We believe many hospital systems are moving towards investing more in out-patient facilities and divesting acute-care hospitals. Although not the primary focus of our investment strategy, we believe that the current supply and demand forces in the hospital market could provide opportunities to purchase high-quality, acute-care hospitals in desirable markets at attractive, risk-adjusted returns.

 

We believe the following trends may negatively impact our business and results of operations:

 

·Increasing Market Volatility – To date in 2018, the stock markets have experienced volatility. If markets continue to experience volatility, or healthcare REIT stocks continue to decline, we could have difficulty raising equity capital at attractive prices or at all, which could inhibit our ability to grow our portfolio;
·Increases in short-term interest rates – During 2018, the market interest rates on which our credit facility interest rate is based have increased.  If this trend continues and we are unable to hedge our interest rate exposure, our interest rate expense will increase, which would negatively affect our results of operations;
·Leverage restrictions – Pursuant to our revolving credit facility, our consolidated leverage ratio, defined as the ratio of our total debts to total assets, cannot exceed 0.65:1 and our minimum fixed charge coverage ratio, defined as the ratio of Adjusted EBITDA and Fixed Charges, must be at least 1.50:1.  As of June 30, 2018, our total debt was approximately $327.0 million and our total interest expense plus preferred dividends for the six months ended June 30, 2018 was approximately $9.5 million, and our consolidated leverage and fixed charge coverage ratios were 0.53:1 and 2.01:1, respectively.  Due to our leverage limitations, if we are unable to raise equity capital in sufficient amounts or at all in order to pay down our indebtedness, we will be limited in the amount of properties we may acquire;
·Changes in third party reimbursement methods and policies – As the price of healthcare services continues to increase, we believe third-party payors, such as Medicare and commercial insurance companies, will continue to scrutinize and reduce the types of healthcare services eligible for, and the amounts of, reimbursement under their health insurance plans.  Additionally, many employer-based insurance plans have continued to increase the percentage of insurance premiums for which covered individuals are responsible.  If these trends continue, our tenants may experience lower patient volumes as well as higher patient credit risks, which could negatively impact their business as well as their ability to pay rent to us.

 

Qualification as a REIT

 

We elected to be taxed as REIT commencing with our taxable year ended December 31, 2016. Subject to a number of significant exceptions, a corporation that qualifies as a REIT generally is not subject to U.S. federal corporate income taxes on income and gains that it distributes to its stockholders, thereby reducing its corporate level taxes. In order to qualify as a REIT, a substantial percentage of our assets must be qualifying real estate assets and a substantial percentage of our income must be rental revenue from real property or interest on mortgage loans. We believe that we have organized and have operated in such a manner as to qualify for taxation as a REIT, and we intend to continue to operate in such a manner. However, we cannot provide assurances that we will continue to operate in a manner so as to qualify or remain qualified as a REIT.

 

Critical Accounting Policies

 

The preparation of financial statements in conformity with GAAP requires us 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. Please refer to our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the Commission on March 12, 2018, for further information regarding the critical accounting policies that affect our more significant estimates and judgments used in the preparation of our consolidated financial statements included in Part I, Item 1 of this Report.

 

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Consolidated Results of Operations

 

The major factor that resulted in variances in our results of operations for each revenue and expense category for the three and six months ended June 30, 2018, compared to the three and six months ended June 30, 2017 was the increase in the size of our property portfolio. Our total investments in real estate, net of accumulated depreciation and amortization, was $580.0 million and $348.8 million as of June 30, 2018 and 2017, respectively.

 

Three Months Ended June 30, 2018 Compared to Three Months Ended June 30, 2017

 

   Three Months Ended June 30,     
   2018   2017   $ Change 
   (in thousands)     
Revenue               
Rental revenue  $12,581   $6,667   $5,914 
Expense recoveries   659    698    (39)
Other income   9    58    (49)
Total revenue   13,249    7,423    5,826 
                
Expenses               
General and administrative   1,768    1,835    (67)
Operating expenses   680    747    (67)
Management fees – related party   1,095    628    467 
Depreciation expense   3,445    1,851    1,594 
Amortization expense   926    459    467 
Interest expense   3,942    1,990    1,952 
Acquisition fees   9    536    (527)
Total expenses   11,865    8,046    3,819 
Net income (loss)  $1,384   $(623)  $2,007 

Revenue

 

Total Revenue

 

Total revenue for the three months ended June 30, 2018 was $13.2 million, compared to $7.4 million for the same period in 2017, an increase of $5.8 million. The increase is primarily the result of rental revenue earned from the facilities we acquired subsequent to June 30, 2017, as well as from the recognition of a full three months of rental revenue in 2018 from acquisitions that were completed during the three months ended June 30, 2017. Additionally, total revenue in both periods includes $0.7 million in revenue that was recognized from expense recoveries. Expense recoveries are 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)).

  

Expenses

 

 General and Administrative

 

General and administrative expenses for the three months ended June 30, 2018 were $1.8 million, which was unchanged compared to the same period in 2017. During the three months ended June 30, 2018, an increase in non-cash LTIP compensation expense was offset by a decrease in Sarbanes-Oxley implementation costs and other professional fees.

 

Operating expenses

 

Operating expenses for the three months ended June 30, 2018 were $0.7 million, which was unchanged compared to the same period in 2017. Operating expenses included $0.7 million of reimbursable property operating expenses incurred during both the current and prior periods that we paid on behalf of certain of our tenants but for which we receive reimbursement from the tenant under the applicable lease.

 

- 28 -

 

 

Management Fees – related party

 

Management fees for the three months ended June 30, 2018 were $1.1 million, compared to $0.6 million for the same period in 2017, an increase of $0.5 million. The increase results from our larger stockholders’ equity balance as of June 30, 2018, which is used to calculate the management fee, resulting from our preferred stock and OP Unit issuances that were completed subsequent to June 30, 2017.

 

Depreciation Expense

 

Depreciation expense for the three months ended June 30, 2018 was $3.4 million, compared to $1.9 million for the same period in 2017, an increase of $1.5 million. The increase results primarily from depreciation expense incurred on the facilities we acquired subsequent to June 30, 2017, as well as from the recognition of a full three months of depreciation expense in 2018 from acquisitions that were completed during the three months ended June 30, 2017. 

 

Amortization Expense

 

Amortization expense for the three months ended June 30, 2018 was $0.9 million, compared to $0.5 million for the same period in 2017, an increase of $0.4 million. The increase results primarily from amortization expense incurred on intangible assets recorded subsequent to June 30, 2017, as well as from the recognition of a full three months of amortization expense in 2018 from intangible assets recorded during the three months ended June 30, 2017. 

 

Interest Expense

 

Interest expense for the three months ended June 30, 2018 was $3.9 million, compared to $2.0 million for the same period in 2017, an increase of $1.9 million. This increase is primarily due to higher average borrowings during the three months ended June 30, 2018 compared to the same period last year reflecting interest incurred on the outstanding borrowings from our revolving credit facility as well as amortization of the deferred financing costs that were incurred to procure debt, which is recorded as interest expense.

 

The weighted average interest rate of our debt for the three months ended June 30, 2018 was 4.18%. Additionally, the weighted average interest rate and term of our debt was 4.38% and 2.05 years, respectively, at June 30, 2018.

 

Acquisition Fees

 

Acquisition fees for the three months ended June 30, 2018 were $0.01 million, compared to $0.5 million for the same period in 2017, a decrease of $0.49 million. The decrease was primarily the result of our January 1, 2018 implementation of ASU 2017-01 which resulted in all of our post implementation acquisitions, including the acquisition of the Belpre portfolio during the three months ended June 30, 2018, being accounted for as an asset acquisition and, therefore, all acquisition-related costs were capitalized. Accordingly, acquisition fees for the three months ended June 30, 2018 represent costs associated with acquisitions the Company does not expect to complete and therefore were expensed. In comparison, acquisition fees for the three months ended June 30, 2017 primarily represented transaction costs that were expensed related to acquisitions that were accounted for as business combinations.

 

Net Income (Loss)

 

Net income for the three months ended June 30, 2018 was $1.4 million, compared to a $(0.6) million net loss for the same period in 2017, an increase of $2.0 million. The increase resulted primarily from an increase in rental revenue over the current three-month period partially offset by the net increase in expenses during the period.

 

Six Months Ended June 30, 2018 Compared to Six Months Ended June 30, 2017

 

   Six Months Ended June 30,     
   2018   2017   $ Change 
   (in thousands)     
Revenue               
Rental revenue  $23,069   $11,296   $11,773 
Expense recoveries   1,727    698    1,029 
Other income   18    88    (70)
Total revenue   24,814    12,082    12,732 
                
Expenses               
General and administrative   2,774    3,427    (653)
Operating expenses   1,784    770    1,014 
Management fees – related party   2,176    1,256    920 
Depreciation expense   6,351    3,197    3,154 
Amortization expense   1,691    803    888 
Interest expense   6,627    3,091    3,536 
Acquisition fees   126    1,479    (1,353)
Total expenses   21,529    14,023    7,506 
Net income (loss)  $3,285   $(1,941)  $5,226 

 

- 29 -

 

 

Revenue

 

Total Revenue

 

Total revenue for the six months ended June 30, 2018 was $24.8 million, compared to $12.1 million for the same period in 2017, an increase of $12.7 million. The increase is primarily the result of rental revenue earned from the facilities we acquired subsequent to June 30, 2017, as well as from the recognition of a full six months of rental revenue in 2018 from acquisitions that were completed during the six months ended June 30, 2017. Additionally, $1.7 million in revenue was recognized from expense recoveries during the six months ended June 30, 2018, compared to $0.7 million for the same period in 2017.

  

Expenses

 

 General and Administrative

 

General and administrative expenses for the six months ended June 30, 2018 were $2.8 million, compared to $3.4 million for the same period in 2017, a decrease of $0.6 million. The decrease primarily relates to a decrease in Sarbanes-Oxley implementation costs and other professional fees, partially offset by an increase in non-cash LTIP compensation expense.

 

Operating Expenses

 

Operating expenses for the six months ended June 30, 2018 were $1.8 million, compared to $0.8 million for the same period in 2017, an increase of $1.0 million. The increase results from $1.7 million of reimbursable property operating expenses incurred during the six months ended June 30, 2018 that we paid on behalf of certain of our tenants but for which we receive reimbursement from the tenant under the applicable lease, compared to $0.7 million for the same period in 2017.

 

Management Fees – related party

 

Management fees for the six months ended June 30, 2018 were $2.2 million, compared to $1.3 million for the same period in 2017, an increase of $0.9 million. The increase results from our larger stockholders’ equity balance as of June 30, 2018, which is used to calculate the management fee, resulting from our preferred stock and OP Unit issuances that were completed subsequent to June 30, 2017.

 

Depreciation Expense

 

Depreciation expense for the six months ended June 30, 2018 was $6.4 million, compared to $3.2 million for the same period in 2017, an increase of $3.2 million. The increase results primarily from depreciation expense incurred on the facilities we acquired subsequent to June 30, 2017, as well as from the recognition of a full six months of depreciation expense in 2018 from acquisitions that were completed during the six months ended June 30, 2017. 

 

Amortization Expense

 

Amortization expense for the six months ended June 30, 2018 was $1.7 million, compared to $0.8 million for the same period in 2017, an increase of $0.9 million. The increase results primarily from amortization expense incurred on intangible assets recorded subsequent to June 30, 2017, as well as from the recognition of a full six months of amortization expense in 2018 from intangible assets recorded during the six months ended June 30, 2017. 

 

Interest Expense

 

Interest expense for the six months ended June 30, 2018 was $6.6 million, compared to $3.1 million for the same period in 2017, an increase of $3.5 million. This increase is primarily due to higher average borrowings during the 2018 period compared to the same period last year reflecting interest incurred on the outstanding borrowings from our revolving credit facility (the “Revolving Credit Facility”) as well as amortization of the deferred financing costs incurred to procure debt, which is recorded as interest expense.

 

- 30 -

 

 

The weighted average interest rate of our debt for the six months ended June 30, 2018 was 4.03%. The weighted average interest rate and term of our debt was 4.38% and 2.05 years, respectively, at June 30, 2018.

 

Acquisition Fees

 

Acquisition fees for the six months ended June 30, 2018 were $0.1 million, compared to $1.5 million for the same period in 2017, a decrease of $1.4 million. The decrease was primarily the result of our January 1, 2018 implementation of ASU 2017-01 and the fact that all of our acquisitions for the six months ended June 30, 2018 were accounted for as asset acquisitions and, therefore, all acquisition-related costs of completed acquisitions were capitalized. Accordingly, acquisition fees for the six months ended June 30, 2018 represent costs associated with acquisitions the Company does not expect to complete and therefore were expensed. In comparison, acquisition fees for the six months ended June 30, 2017 primarily represent transaction costs that were expensed related to acquisitions that were accounted for as business combinations.

 

Net Income (Loss)

 

Net income for the six months ended June 30, 2018 was $3.3 million, compared to a $(1.9) million net loss for the same period in 2017, an increase of $5.2 million. The increase resulted primarily from an increase in rental revenue over the current six-month period partially offset by the net increase in expenses for that period.

 

Assets and Liabilities

 

As of June 30, 2018 and December 31, 2017, our principal assets consisted of investments in real estate, net, of $580.0 million and $457.9 million, respectively, and our liquid assets consisted primarily of cash and cash equivalents and restricted cash of $6.2 million and $7.1 million, respectively.

 

 The increase in our investments in real estate, net, to $580.0 million as of June 30, 2018 compared to $457.9 million as of December 31, 2017, was the result of the six acquisitions that we completed during the six months ended June 30, 2018.

 

The decrease in our cash and cash equivalents and restricted cash balance to $6.2 million as of June 30, 2018, compared to $7.1 million as of December 31, 2017, was primarily due to $124.9 million of cash used for the acquisitions that we completed during the six-month period, $12.2 million of dividends paid during the six-month period, and $1.1 million of cash paid for deferred financing costs during the six-month period related to the revolving credit facility. These cash outflows were partially offset by net borrowings from the revolving credit facility in the amount of $123.5 million and an increase in cash provided by operating activities of $14.9 million.

 

 The increase in our total liabilities to $346.5 million as of June 30, 2018 compared to $215.6 million as of December 31, 2017, was primarily the result of net borrowings from the revolving credit facility in the amount of $123.5 million as well as from increases in the security deposit liability balance, the accounts payable and accrued expenses balance, and the acquired lease intangible liability balance.

 

Liquidity and Capital Resources

 

General

 

Our short-term liquidity requirements include:

 

  · Interest expense and scheduled principal payments on outstanding indebtedness;
  · General and administrative expenses;
  · Operating expenses;
  · Management fees;
 

·

·

Property acquisitions; and

Capital and tenant improvements at our properties.

 

In addition, we require funds for future distributions expected to be paid to our common and preferred stockholders and OP and LTIP unit holders in our Operating Partnership.

 

- 31 -

 

 

As of June 30, 2018, we had $4.8 million of cash and cash equivalents and had borrowing capacity under our revolving credit facility as described below. Our primary sources of cash include rent and reimbursements we collect from our tenants, borrowings under our revolving credit facility, secured term loans and net proceeds received from equity issuances.

 

On March 6, 2018, the Company, the Operating Partnership, as borrower, and the subsidiary guarantors of the Operating Partnership amended our Revolving Credit Facility with BMO Harris Bank N.A., as Administrative Agent, which increased the commitment amount by $90 million to $340 million. 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. Our Operating Partnership is subject to ongoing compliance with a number of customary affirmative and negative covenants under the Revolving Credit Facility, 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, 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. As of June 30, 2018 and December 31, 2017, the outstanding Revolving Credit Facility balance was $288.4 and $164.9 million, respectively.

 

On August 7, 2018, the Company amended its Revolving Credit Facility to (i) increase the overall capacity of the facility from $340 million to $350 million, consisting of a $250 million revolving credit facility (the “Revolver”) and a $100 million, five-year term loan (the “Term Loan”), (ii) extend the term of the Revolver to August 2022, with a one-year extension option, and (iii) implement a new pricing matrix. The facility includes an accordion feature to increase the capacity to an aggregate of $500 million. Additionally, the Company hedged its interest rate risk on the Term Loan by entering into an interest rate swap agreement, with a notional amount of $100 million and a term of five years, which will effectively fix the LIBOR component on the Term Loan at 2.88%. The new pricing matrix is as follows:

 

Total Leverage
Ratio
  Revolver LIBOR
Margin
  Term Loan LIBOR
Margin
≤ 45%  1.40%  1.35%
› 45% and ≤50%  1.65%  1.60%
› 50% and ≤55%  1.90%  1.85%
› 55%  2.15%  2.10%

 

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 June 30, 2018, we had not made any sales of our common shares through the ATM Program.

 

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 or have the ability to issue OP Units.

 

 Our long-term liquidity needs consist primarily of funds necessary to pay for acquisitions, capital and tenant improvements at our properties, scheduled debt maturities, general and administrative expenses, operating expenses, management fees, and distributions. We expect to satisfy our long-term liquidity needs through cash flow from operations, debt financing, sales of additional equity securities, and, in connection with acquisitions of additional properties, the issuance of OP Units, and proceeds from select property dispositions and joint venture transactions. We currently do not expect to sell any of our properties to meet our liquidity needs, although we may do so in the future.

 

Cash Flow Information

 

 Net cash provided by operating activities for the six months ended June 30, 2018 was $14.9 million, compared with $5.3 million for the same period in 2017. The increase during the 2018 period compared to the same period last year was primarily due to the increase in the size of our property portfolio at June 30, 2018 compared to June 30, 2017.

 

Net cash used in investing activities for the six months ended June 30, 2018 was $125.6 million, compared with $148.1 million for the same period in 2017. The decrease during the 2018 period compared to the same period last year was primarily the result of less real estate investment activity in the 2018 period compared to the same period in 2017.

 

Net cash provided by financing activities for the six months ended June 30, 2018 was $109.7 million, compared with $136.4 million for the same period in 2017. The decrease during the 2018 period compared to the same period last year was primarily the result of higher dividends paid during the 2018 period and the fact that the same period last year included net proceeds from the follow-on common stock offering, partially offset by higher net draws on the Revolving Credit Facility during the 2018 period.

 

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Common Stock Dividends

 

Dividend activity for the six months ended June 30, 2018 is summarized in the following table:

 

Date Announced  Record Date 

Applicable

Quarter

  Payment Date  Dividend
Amount(1)
   Dividends
per Share
 
                  
December 15, 2017  December 26, 2017  Q4 2017  January 10, 2018  $4,552   $0.20 
March 7, 2018  March 22, 2018  Q1 2018  April 10, 2018  $4,691   $0.20 
June 15, 2018  June 26, 2018  Q2 2018  July 11, 2018  $4,786   $0.20 

 

(1)Includes dividends on granted LTIP units and OP Units issued to third parties.

 

During the six months ended June 30, 2018 and 2017, the Company paid total dividends on its common stock, LTIP units and OP Units in the amount of $9,288 and $7,208, respectively.

 

The amount of the dividends paid to the Company’s stockholders is determined by our 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.

 

Preferred Stock Dividends

 

The holders of 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 cash 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 six months ended June 30, 2018 and 2017, we paid preferred dividends of $2,911 and zero, respectively.

 

Non-GAAP Financial Measures

 

Funds from operations (“FFO”) and Adjusted funds from operations (“AFFO”) are non-GAAP financial measures within the meaning of the rules of the SEC. The Company considers FFO and 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-controlling interests of holders of operating partnership units and LTIP units, excluding gains (or losses) from sales of property and extraordinary items, plus real estate related depreciation and amortization (excluding amortization of deferred financing costs), 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 three and six months ended June 30, 2018 and 2017. Because FFO excludes real estate related depreciation and amortization (other than amortization of deferred financing costs), 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 financing costs, recurring capital expenditures, recurring lease commissions, recurring tenant improvements, and other items.

 

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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. The Company’s FFO and AFFO computations may not be comparable to FFO and AFFO reported by other REITs that do not compute FFO in accordance with the NAREIT definition, that interpret the NAREIT definition differently than the Company does or that compute FFO and AFFO in a different manner. 

 

A reconciliation of FFO and AFFO for the three and six months ended June 30, 2018 and 2017 is as follows:

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2018   2017   2018   2017 
   (unaudited, in thousands except per share amounts) 
                 
Net income (loss)  $1,384   $(623)  $3,285   $(1,941)
Less: Preferred stock dividends   (1,455)   -    (2,911)   - 
Depreciation and amortization expense   4,371    2,310    8,042    4,000 
Amortization of above (below) market leases   181    (3)   294    (11)
FFO  $4,481   $1,684   $8,710   $2,048 
Acquisition fees   9    536    126    1,479 
Straight line deferred rental revenue   (1,382)   (747)   (2,554)   (1,130)
Stock-based compensation expense   1,055    721    1,237    1,140 
Amortization of deferred financing costs   553    341    983    500 
AFFO  $4,716   $2,535   $8,502   $4,037 
                     
Net income (loss) attributable to common stockholders per share – basic and diluted  $0.00   $(0.04)  $0.02   $(0.11)
FFO per share  $0.19   $0.10   $0.37   $0.12 
AFFO per share  $0.20   $0.14   $0.36   $0.23 
                     
Weighted Average Shares and Units Outstanding – basic and diluted   23,951    17,644    23,635    17,625 
                     
Reconciliation of Weighted Average Shares and Units Outstanding:                    
                     
Weighted Average Common Shares   21,631    17,644    21,631    17,625 
Weighted Average OP Units   1,736    -    1,492    - 
Weighted Average LTIP Units   584    -    512    - 
Weighted Average Shares and Units Outstanding – basic and diluted   23,951    17,644    23,635    17,625 

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements that have or are reasonably likely 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 material 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.

 

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 taxes and insurance. This requirement reduces our exposure to increases in these costs and operating expenses resulting from inflation.

 

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Item 3.  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 Revolving Credit Facility. The analysis below presents the sensitivity of the market value of our financial instruments 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 June 30, 2018, we had $288.4 million outstanding under the Revolving Credit Facility, which bears interest at a variable rate, and $38.6 million outstanding, net of unamortized debt discount of $0.9 million, on our third-party debt. See the “Liquidity and Capital Resources” section of our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section for a detailed discussion of our Revolving Credit Facility. At June 30, 2018, LIBOR on our outstanding borrowings was 2.06%. Assuming no increase in the amount of our variable interest rate debt, if LIBOR increased 100 basis points, our cash flow would decrease by approximately $2.9 million annually. Assuming no increase in the amount of our variable rate debt, if LIBOR were reduced 100 basis points, our cash flow would increase by approximately $2.9 million annually. 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 variable rates. We also may enter into derivative financial instruments such as interest rate swaps and caps in order to mitigate our interest rate risk on a related financial instrument. We will not enter into derivative transactions for speculative purposes.

 

In addition to changes in interest rates, the value of our 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.

 

Item 4.  Controls and Procedures.

 

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 Exchange Act that are designed to ensure that 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 and financial officer as appropriate, to allow timely decisions regarding required disclosures. Our principal executive officer and principal financial officer evaluated the effectiveness of disclosure controls and procedures as of June 30, 2018 pursuant to Rule 13a-15(b) under the Exchange Act. Based on that evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered by this Report, the Company’s disclosure controls and procedures were effective to ensure that information required to be included in our periodic SEC filings is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms.

 

Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected.

 

Changes in Internal Control over Financial Reporting

 

No changes were made to our internal control over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II OTHER INFORMATION

 

Item 1. Legal Proceedings

 

 We are not involved in any pending legal proceeding or litigation and, to the best of our knowledge, no governmental authority is contemplating any proceeding to which we are 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. From time to time, we may become involved in litigation relating to claims arising out of our operations in the normal course of business. There can be no assurance that these matters that arise in the future, individually or in the aggregate, will not have a material adverse effect on our financial condition or results of operations in any future period.

 

Item 1A. Risk Factors

 

During the six months ended June 30, 2018, except as provided below, there were no material changes to the risk factors that were disclosed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the United States Securities and Exchange Commission on March 12, 2018.

 

 The derivative instruments that we use to hedge against interest rate fluctuations may not be successful in mitigating our risks associated with interest rates and could reduce the overall stockholder returns.

 

We use derivative instruments to hedge exposure to changes in interest rates on certain of our variable rate loans, but no hedging strategy can protect us completely. We cannot assure our stockholders that our hedging strategy and the derivatives that we use will adequately offset the risk of interest rate volatility or that our hedging of these transactions will not result in losses. Additionally, a counterparty may fail to honor its obligations under an arrangement or a court could rule that such an agreement is not legally enforceable. Any settlement charges incurred to terminate unused derivative instruments may result in increased interest expense, which may reduce the overall return on our investments. These instruments may also generate income that may not be treated as qualifying REIT income for purposes of the 75% or 95% REIT income tests.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

The following disclosure would have otherwise been filed on a Current Report on Form 8-K under Item 1.01 Entry into a Material Definitive Agreement and Item 2.03 Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant.

 

On August 7, 2018, the Company, the Operating Partnership, as borrower, and certain subsidiaries of the Operating Partnership (such subsidiaries, the “Subsidiary Guarantors”) entered into an amended and restated credit facility (the “A&R Credit Facility”) with BMO Harris Bank N.A., as Administrative Agent, which contains the following material amendments to the Company’s previous Revolving Credit Facility:

 

·increased the aggregate capacity of the facility from $340 million to $350 million, consisting of a $250 million, four-year revolving credit facility, with a one-year extension option (the “Revolver”) and a $100 million, five-year term loan (the “Term Loan”); and

 

·implemented the following LIBOR margins for the Revolver and Term Loan:

 

Total Leverage

Ratio

Revolver LIBOR

Margin

Revolver Base

Rate Margin

Term Loan

LIBOR Margin

Term Loan Base

Rate Margin

≤ 45% 1.40% 0.40% 1.35% 0.35%
> 45% and ≤50% 1.65% 0.65% 1.60% 0.60%
> 50% and ≤55% 1.90% 0.90% 1.85% 0.85%
> 55% 2.15% 1.15% 2.10% 1.10%

 

The A&R Credit Facility includes an accordion feature to increase the capacity to an aggregate of $500 million.  The Subsidiary Guarantors and the Company are guarantors of the obligations under the A&R Credit Facility. The amount available to borrow from time to time under the A&R Credit Facility is limited according to a quarterly borrowing base valuation of certain properties owned by the Subsidiary Guarantors.

  

The above description of the terms and conditions of the A&R Credit Facility is only a summary of the material amendments to the Company’s prior senior Revolving Credit Facility and is not intended to be a complete description of the terms and conditions. All of the terms and conditions of the A&R Credit Facility are set forth in the A&R Credit Facility, which is filed as an exhibit to this Quarterly Report on Form 10-Q.

 

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Item 6. Exhibits

 

(a)Exhibits

 

Exhibit
No.
  Description
     
3.1*   Restated Articles of Incorporation of Global Medical REIT, Inc.
     
10.1   Lease Agreement, dated December 27, 2010, by and between 601 Plaza L.L.C. and Marietta Memorial Hospital and amendments and addendums (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K as filed with the Commission on April 24, 2018).
     
10.2   Lease Agreement, dated December 19, 2012, by and between Belpre II, LLC and Marietta Memorial Hospital and addendums (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K as filed with the Commission on April 24, 2018).
     
10.3   Lease Agreement, dated March 16, 2015, by and between Belpre III, LLC and Marietta Memorial Hospital and amendment (incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K as filed with the Commission on April 24, 2018).
     
10.4   Lease Agreement, dated June 11, 2013, by and between Belpre IV, LLC and Marietta Memorial Hospital and amendment (incorporated herein by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K as filed with the Commission on April 24, 2018).
     
10.5*  

Amended and Restated Credit Facility Agreement, dated August 7, 2018 by and among Global Medical REIT L.P., Global Medical REIT Inc., the certain Subsidiaries from time to time party thereto as Guarantors, and BMO Harris Bank N.A., as Administrative Agent.

     
31.1*   Certification of Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2*   Certification of Principal Financial and Accounting Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1*   Certification of Principal Executive Officer and Principal Financial Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
99.1*   First Amendment and Addendum to Contribution and Sale Agreement, dated April 5, 2018 by and among MINNITE FAMILY, LLC, BELPRE I, LLC, BELPRE II, LLC, BELPRE III, LLC, and BELPRE IV, LLC, and GMR BELPRE, LLC.
     
101.INS *   XBRL Instance Document
     
101.SCH *   XBRL Taxonomy Schema
     
101.CAL *   XBRL Taxonomy Calculation Linkbase
     
101.DEF *   XBRL Taxonomy Definition Linkbase
     
101.LAB *   XBRL Taxonomy Label Linkbase
     
101.PRE *  

XBRL Taxonomy Presentation Linkbase

 

 

The Restated Articles of Incorporation reflect all articles of amendment, articles supplementary and certificates of correction to the Articles of Incorporation previously filed.

* Filed herewith

 

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SIGNATURES

 

Pursuant to the requirements 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.

 

      GLOBAL MEDICAL REIT INC.
       
Dated: August 8, 2018 By:   /s/ Jeffrey M. Busch
       Jeffrey M. Busch
       Chief Executive Officer (Principal Executive Officer)
       
       
Dated: August 8, 2018 By:   /s/ Robert J. Kiernan
      Robert J. Kiernan
      Chief Financial Officer (Principal Financial and Accounting Officer)

 

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