UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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:
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or |
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(Address of principal executive offices) |
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Registrant’s telephone number, including area code: ( |
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N/A |
(Former name, former address and former fiscal year, if changed since last report) |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: |
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Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
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 | ◻ | þ | |
Non-accelerated filer | ◻ | Smaller reporting company | |
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| 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
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
The number of shares of the registrant’s common stock outstanding at November 1, 2020 was
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
-2-
GLOBAL MEDICAL REIT INC.
Condensed Consolidated Balance Sheets
(unaudited and in thousands, except par values)
As of | |||||||
| September 30, 2020 |
| December 31, 2019 |
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Assets | |||||||
Investment in real estate: | |||||||
Land | $ | | $ | | |||
Building |
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Site improvements |
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Tenant improvements |
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Acquired lease intangible assets |
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Less: accumulated depreciation and amortization |
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Investment in real estate, net |
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Cash and cash equivalents |
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Restricted cash |
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Tenant receivables |
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Due from related parties | | | |||||
Escrow deposits |
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Deferred assets |
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Derivative asset | — | | |||||
Goodwill | | — | |||||
Other assets |
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Total assets | $ | | $ | | |||
Liabilities and Equity | |||||||
Liabilities: | |||||||
Credit Facility, net of unamortized debt issuance costs of $ | $ | | $ | | |||
Notes payable, net of unamortized debt issuance costs of $ |
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Accounts payable and accrued expenses |
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Dividends payable |
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Security deposits and other |
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Due to related party |
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Derivative liability |
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Other liability |
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Acquired lease intangible liability, net |
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Total liabilities |
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Commitments and Contingencies | |||||||
Equity: | |||||||
Preferred stock, $ |
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Common stock, $ |
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Additional paid-in capital |
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Accumulated deficit |
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Accumulated other comprehensive loss |
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Total Global Medical REIT Inc. stockholders' equity |
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Noncontrolling interest |
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Total equity |
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Total liabilities and equity | $ | | $ | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
-3-
GLOBAL MEDICAL REIT INC.
Condensed Consolidated Statements of Operations
(unaudited and in thousands, except per share amounts)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
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| 2020 |
| 2019 |
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| 2019 |
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Revenue | |||||||||||||
Rental revenue | $ | | $ | | $ | | $ | | |||||
Other income |
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Total revenue |
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Expenses | |||||||||||||
General and administrative |
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Operating expenses |
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Management fees – related party |
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Depreciation expense |
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Amortization expense |
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Interest expense |
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Management internalization expense | | — | | — | |||||||||
Preacquisition expense |
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Total expenses |
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Net (loss) income | $ | ( | $ | | $ | ( | $ | | |||||
Less: Preferred stock dividends |
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Less: Net loss (income) attributable to noncontrolling interest |
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Net (loss) income attributable to common stockholders | $ | ( | $ | | $ | ( | $ | | |||||
Net (loss) income attributable to common stockholders per share – basic and diluted | $ | ( | $ | | $ | ( | $ | | |||||
Weighted average shares outstanding – basic and diluted |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
-4-
GLOBAL MEDICAL REIT INC.
Condensed Consolidated Statements of Comprehensive (Loss) Income
(unaudited and in thousands)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
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| 2020 |
| 2019 |
| 2020 |
| 2019 |
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Net (loss) income | $ | ( | $ | | $ | ( | $ | | |||||
Other comprehensive income (loss): | |||||||||||||
Increase (decrease) in fair value of interest rate swap agreements |
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Total other comprehensive income (loss) |
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Comprehensive (loss) income |
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Less: Preferred stock dividends |
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Less: Comprehensive loss attributable to noncontrolling interest |
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Comprehensive loss attributable to common stockholders | $ | ( | $ | ( | $ | ( | $ | ( |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
-5-
GLOBAL MEDICAL REIT INC.
Condensed Consolidated Statements of Equity
(unaudited and in thousands)
For the Nine Months Ended September 30, 2020:
Global | ||||||||||||||||||||||||||||
Accumulated | Medical | |||||||||||||||||||||||||||
Additional | Other | REIT Inc. | Non- | |||||||||||||||||||||||||
Common Stock | Preferred Stock | Paid-in | Accumulated | Comprehensive | Stockholders’ | controlling | Total | |||||||||||||||||||||
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Deficit |
| Loss |
| Equity |
| Interest |
| Equity | |||||||||
Balances, December 31, 2019 |
| | $ | |
| | $ | | $ | | $ | ( | $ | ( | $ | | $ | | $ | | ||||||||
Net loss |
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Issuance of shares of common stock, net |
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LTIP Units and OP Units redeemed for common stock |
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Change in fair value of interest rate swap agreements |
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Stock-based compensation expense |
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Dividends to common stockholders ($ |
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Dividends to preferred stockholders ($ |
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Dividends to noncontrolling interest |
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Balances, September 30, 2020 |
| | $ | |
| | $ | | $ | | $ | ( | $ | ( | $ | | $ | | $ | |
For the Three Months Ended September 30, 2020:
Global | ||||||||||||||||||||||||||||
Accumulated | Medical | |||||||||||||||||||||||||||
Additional | Other | REIT Inc. | Non- | |||||||||||||||||||||||||
Common Stock | Preferred Stock | Paid-in | Accumulated | Comprehensive | Stockholders’ | controlling | Total | |||||||||||||||||||||
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Deficit |
| Loss |
| Equity |
| Interest |
| Equity | |||||||||
Balances, June 30, 2020 |
| | $ | |
| | $ | | $ | | $ | ( | $ | ( | $ | | $ | | $ | | ||||||||
Net loss |
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Issuance of shares of common stock, net | | | | | | | | | | | ||||||||||||||||||
LTIP Units and OP Units redeemed for common stock | | | | | | | | | ( | | ||||||||||||||||||
Change in fair value of interest rate swap agreements | | | | | | | | | | | ||||||||||||||||||
Stock-based compensation expense |
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Dividends to common stockholders ($ |
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Dividends to preferred stockholders ($ |
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Dividends to noncontrolling interest |
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Balances, September 30, 2020 |
| | $ | |
| | $ | | $ | | $ | ( | $ | ( | $ | | $ | | $ | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
-6-
GLOBAL MEDICAL REIT INC.
Condensed Consolidated Statement of Equity - Continued
(unaudited and in thousands)
For the Nine Months Ended September 30, 2019:
Global | ||||||||||||||||||||||||||||
Accumulated | Medical | |||||||||||||||||||||||||||
Additional | Other | REIT Inc. | Non- | |||||||||||||||||||||||||
Common Stock | Preferred Stock | Paid-in | Accumulated | Comprehensive | Stockholders’ | controlling | Total | |||||||||||||||||||||
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| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Deficit |
| Loss |
| Equity |
| Interest |
| Equity | ||||||||
Balances, December 31, 2018 |
| | $ | |
| | $ | | $ | | $ | ( | $ | ( | $ | | $ | | $ | | ||||||||
Net income |
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Issuance of shares of common stock, net | | | | | | | | | | | ||||||||||||||||||
LTIP Units and OP Units redeemed for common stock | | | | | | | | | ( | | ||||||||||||||||||
Change in fair value of interest rate swap agreements |
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Stock-based compensation expense |
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Dividends to common stockholders ($ |
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Dividends to preferred stockholders ($ |
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Dividends to noncontrolling interest |
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OP Units issued to third parties | | | | | | | | | | | ||||||||||||||||||
Balances, September 30, 2019 |
| | $ | |
| | $ | | $ | | $ | ( | $ | ( | $ | | $ | | $ | |
For the Three Months Ended September 30, 2019:
Global | ||||||||||||||||||||||||||||
Accumulated | Medical | |||||||||||||||||||||||||||
Additional | Other | REIT Inc. | Non- | |||||||||||||||||||||||||
Common Stock | Preferred Stock | Paid-in | Accumulated | Comprehensive | Stockholders’ | controlling | Total | |||||||||||||||||||||
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Deficit |
| Loss |
| Equity |
| Interest |
| Equity | |||||||||
Balances, June 30, 2019 |
| | $ | |
| | $ | | $ | | $ | ( | $ | ( | $ | | $ | | $ | | ||||||||
Net income |
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Issuance of shares of common stock, net | | | | | | | | | | | ||||||||||||||||||
LTIP Units and OP Units redeemed for common stock | | | | | | | | | ( | | ||||||||||||||||||
Change in fair value of interest rate swap agreements | | | | | | | ( | ( | | ( | ||||||||||||||||||
Stock-based compensation expense |
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Dividends to common stockholders ($ |
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Dividends to preferred stockholders ($ |
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Dividends to noncontrolling interest |
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Balances, September 30, 2019 |
| | $ | |
| | $ | | $ | | $ | ( | $ | ( | $ | | $ | | $ | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
-7-
GLOBAL MEDICAL REIT INC.
Condensed Consolidated Statements of Cash Flows
(unaudited and in thousands)
Nine Months Ended September 30, | |||||||
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| 2020 |
| 2019 |
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Operating activities | |||||||
Net (loss) income | $ | ( | $ | | |||
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | |||||||
Depreciation expense |
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Amortization of acquired lease intangible assets |
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Amortization of above market leases, net |
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Amortization of debt issuance costs and other |
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Stock-based compensation expense |
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Capitalized preacquisition costs charged to expense | | | |||||
Reserve for uncollectible receivables | | — | |||||
Other |
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Changes in operating assets and liabilities: | |||||||
Tenant receivables |
| ( |
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Deferred assets |
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Other assets |
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Accounts payable and accrued expenses |
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Security deposits and other |
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Accrued management fees due to related party |
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Net cash provided by operating activities |
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Investing activities | |||||||
Purchase of land, buildings, and other tangible and intangible assets and liabilities |
| ( |
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Internalization - cash paid for acquisition of Former Advisor, net of cash acquired of $ | ( | — | |||||
Escrow deposits for purchase of properties |
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Loan repayments from related parties |
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Capital expenditures on existing real estate investments |
| ( |
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Net cash used in investing activities |
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Financing activities | |||||||
Net proceeds received from common equity offerings |
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Escrow deposits required by third party lenders |
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Proceeds from note payable | | — | |||||
Repayment of notes payable |
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Proceeds from Credit Facility |
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Repayment of Credit Facility |
| ( |
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Payment of debt issuance costs |
| ( |
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Dividends paid to common stockholders, and OP Unit and LTIP Unit holders |
| ( |
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Dividends paid to preferred stockholders |
| ( |
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Net cash provided by financing activities |
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Net increase in cash and cash equivalents and restricted cash |
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Cash and cash equivalents and restricted cash—beginning of period |
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Cash and cash equivalents and restricted cash—end of period | $ | | $ | | |||
Supplemental cash flow information: | |||||||
Cash payments for interest | $ | | $ | | |||
Noncash financing and investing activities: | |||||||
Accrued dividends payable | $ | | $ | | |||
Interest rate swap agreements fair value change recognized in other comprehensive loss | $ | | $ | | |||
OP Units and LTIP Units redeemed for common stock | $ | | $ | | |||
CMBS loan assumed in connection with a facility acquisition | $ | | $ | — | |||
Accrued common stock offering costs | $ | | $ | | |||
Recognition of lease liability related to right of use asset | $ | | $ | | |||
OP Units issued primarily for property acquisition | $ | — | $ | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
-8-
GLOBAL MEDICAL REIT INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
(in thousands, except per share amounts or as otherwise indicated)
Note 1 – Organization
Global Medical REIT Inc. (the “Company”) is a Maryland corporation engaged primarily in the acquisition of purpose-built healthcare facilities and the leasing of those facilities to strong healthcare systems and physician groups with leading market share. The Company holds its facilities and conducts its operations through a Delaware limited partnership subsidiary named Global Medical REIT L.P. (the “Operating Partnership”). The Company serves as the sole general partner of the Operating Partnership through a wholly owned subsidiary of the Company named Global Medical REIT GP LLC, a Delaware limited liability company. As of September 30, 2020, the Company was the
On July 9, 2020, the Company acquired all of the outstanding shares of capital stock of Inter-American Group Holdings Inc. (“IAGH”), the parent company of the Former Advisor, for total consideration, after a working capital adjustment, of $
A special committee (the "Special Committee") comprised entirely of independent and disinterested members of the Company’s board of directors (the "Board"), after consultation with its independent legal and financial advisors, determined that the Internalization was advisable to, and in the best interests of, the Company and the Company’s stockholders and recommended that the Board authorize and approve the Internalization. Upon such recommendation from the Special Committee, the Board authorized and approved the Internalization. Approval by the Company’s stockholders was not required.
Upon completion of the Internalization, the employees of the Former Advisor became employees of the Company and the functions previously performed by the Former Advisor were internalized by the Company. As an internally managed company, the Company will no longer pay the Former Advisor any fees arising from the Management Agreement (as defined in Note 6 – “Related Party Transactions”).
Note 2 – Summary of Significant Accounting Policies
Basis of presentation
The accompanying condensed consolidated financial statements are unaudited and include the accounts of the Company, including the Operating Partnership and its wholly owned subsidiaries. The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures required for annual consolidated financial statements have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, the accompanying condensed consolidated financial statements do not include all the information and footnotes required by GAAP for complete consolidated financial statements and should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2019. In the opinion of management, all adjustments of a normal and recurring nature necessary for a fair presentation of the condensed consolidated financial statements for the interim periods have been made.
Principles of Consolidation
The accompanying condensed 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 directors, officers and employees of the Company and the OP Units held by third parties. Refer to Note 5 – “Equity” and Note 7 – “Stock-Based Compensation” for additional information regarding the OP Units and LTIP Units.
-9-
The Company classifies noncontrolling interest as a component of consolidated equity on its Condensed Consolidated Balance Sheets, separate from the Company’s total equity. The Company’s net income or loss is allocated to noncontrolling interests based on the respective ownership percentage in the Operating Partnership associated with such noncontrolling interests and is removed from consolidated income or loss on the Condensed 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 by the total number of units and shares outstanding.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and footnotes. Actual results could differ from those estimates.
Investment in Real Estate
The Company determines when an acquisition meets the definition of a business or alternatively should be accounted for as an asset acquisition in accordance with Accounting Standard Codification (“ASC”) Topic 805 “Business Combinations” (“ASC Topic 805”), which 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 are capitalized for asset acquisitions and expensed as incurred for business combinations. All our facility acquisitions for the nine months ended September 30, 2020 and 2019 have been accounted for as asset acquisitions because substantially all the fair value of the gross assets the Company acquired were 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 that are 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. Fair value is determined based upon the guidance of ASC Topic 820, “Fair Value Measurements and Disclosures,” and generally are determined using Level 2 inputs, such as rent comparables, sales comparables, and broker indications. Although Level 3 Inputs are utilized, they are minor in comparison to the Level 2 data used for the primary assumptions. The determination of fair value involves the use of significant judgment and estimates. We make estimates to determine the fair value of the tangible and intangible assets acquired and liabilities assumed using information obtained from multiple sources, including preacquisition due diligence, and we routinely utilize the assistance of a third-party appraiser.
Revenue Recognition
The Company’s operations primarily consist of rental revenue earned from tenants under leasing arrangements which provide for minimum rent and escalations. The leases have been accounted for as operating leases. For operating leases with contingent rental escalators, revenue is recorded based on the contractual cash rental payments due during the period. Revenue from leases with fixed annual rental escalators are recognized on a straight-line basis over the initial lease term, subject to a collectability assessment, with the difference between the contractual rental receipts and the straight-line amounts recorded as a “deferred rent receivable.” Additionally, the Company recognizes “expense recoveries” revenue, which represents revenue recognized related to tenant reimbursement of real estate taxes, insurance, and certain other operating expenses (“tenant reimbursements”). The Company recognizes these reimbursements and related expenses on a gross basis in its Condensed Consolidated Statements of Operations.
-10-
Cash and Cash Equivalents and Restricted Cash
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 related to tenant reimbursements. 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 Condensed Consolidated Statements of Cash Flows:
As of September 30, | ||||||
| 2020 |
| 2019 | |||
Cash and cash equivalents |
| $ | |
| $ | |
Restricted cash | | | ||||
Total cash and cash equivalents and restricted cash |
| $ | |
| $ | |
Tenant Receivables
The tenant receivable balance as of September 30, 2020 and December 31, 2019 was $
The Company adopted the provisions of ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326)” (“ASU 2016-03”) effective January 1, 2020. Receivables arising from operating leases are not within the scope of Subtopic 326-20. Instead, impairment of these receivables should be accounted for in accordance with ASC Topic 842 “Leases” (“ASC Topic 842”). The adoption of ASU 2016-03 did not have a material impact on the Company’s condensed consolidated financial statements or related disclosures.
The Company assesses the likelihood of losses resulting from tenant defaults, or the inability of tenants to make contractual rent and tenant recovery payments at each reporting date. The Company also monitors the liquidity and creditworthiness of its tenants and operators on a continuous basis. If the likelihood of a tenant paying its lease payments is determined to no longer be probable, all tenant receivables, including deferred rent, are written off against revenue and any future revenue for that tenant is recognized only upon receipt of cash. In addition, a portfolio level reserve is established on those leases that are probable of collection to ensure that the tenant lease receivables are not overstated.
Escrow Deposits
The escrow balance as of September 30, 2020 and December 31, 2019 was $
Deferred Assets
The deferred assets balance as of September 30, 2020 and December 31, 2019 was $
Other Assets
The other assets balance as of September 30, 2020 and December 31, 2019 was $
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preacquisition costs, $
Security Deposits and Other
The security deposits and other liability balance as of September 30, 2020 and December 31, 2019 was $
Derivative Instruments - Interest Rate Swaps
As of September 30, 2020 and December 31, 2019, the Company’s liability balance related to interest rate swap derivative instruments that were designated as cash flow hedges of interest rate risk was $
Management Internalization Expense
As described in Note 1 – “Organization,” the Internalization transaction closed on
In accordance with ASC Topic 805, the portion of the consideration paid for the Internalization that was attributed to the settlement of a preexisting contractual relationship (the Management Agreement) of $
The table below presents the unaudited revenue and net income attributable to common stockholders on a pro forma basis as if the transaction occurred on January 1, 2019. Pro forma net income attributable to common stockholders for the nine months ended September 30, 2020, excludes non-recurring expenses incurred related to the settlement of the preexisting contractual agreement of $
Nine Months Ended | Nine Months Ended | |||||
| September 30, 2020 | September 30, 2019 | ||||
(unaudited, in thousands) | ||||||
Pro forma total revenue | $ | | $ | | ||
Pro forma net income attributable to common stockholders | $ | | $ | |
Goodwill
Goodwill represents the excess of consideration paid over the fair value of underlying identifiable net assets of businesses acquired. During the three months ended September 30, 2020, the Company recorded $
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changes in circumstances indicate that the asset might be impaired. The Company has one reporting unit. The following table summarizes the consideration paid, the fair value of the assets and liabilities assumed, and the resulting Goodwill balance:
Total consideration paid | $ | |
Internalization expense - settlement of a preexisting contractual relationship | | |
Recognized amounts of identifiable assets acquired and liabilities assumed: | ||
Cash | | |
Software intangible | | |
Fixed assets | | |
Prepaids and other assets | | |
Accrued wages and expenses | ( | |
Income tax liability | ( | |
Total identifiable net liabilities | ( | |
Goodwill | $ |
The amount attributable to the settlement of a preexisting contractual relationship was based on the fair value of the Management Agreement. The fair value was determined using the multi-period excess earnings method (“MPEEM”), a form of the income approach. The MPEEM is based on the principle that the value of an intangible asset is equal to the present value of the incremental after-tax cash flows attributable only to that asset. To quantify the cash flows attributable solely to the subject intangible asset, contributory asset charges are typically applied to account for the use of and/or required return on these assets. In applying the MPEEM, the earnings expected to be generated by the Management Agreement were forecasted over the estimated duration of the intangible asset. The earnings were then adjusted by taxes and the required return for the use of the contributory assets. The after-tax excess cash flows were then present valued to estimate the value of the Management Agreement as of July 9, 2020.
Cash paid for the acquisition of the Former Advisor, after consideration of the settlement of preexisting contractual relationship of $
Recent Accounting Pronouncements
Lease Modifications
Due to the business disruptions and challenges severely affecting the global economy caused by the COVID-19 pandemic, many lessors may be required to provide rent deferrals and other lease concessions to lessees. While the lease modification guidance in ASC Topic 842 addresses routine changes to lease terms resulting from negotiations between the lessee and the lessor, this guidance did not contemplate concessions being so rapidly executed to address the sudden liquidity constraints of some lessees arising from the COVID-19 pandemic. In April 2020, the Financial Accounting Standards Board (“FASB”) staff issued a question and answer document (the “Lease Modification Q&A”) focused on the application of lease accounting guidance to lease concessions provided as a result of the COVID-19 pandemic. Under existing lease guidance, the Company would have to determine, on a lease-by-lease basis, if a lease concession was the result of a new arrangement reached with the tenant (treated within the lease modification accounting framework) or if a lease concession was under the enforceable rights and obligations within the existing lease agreement (precluded from applying the lease modification accounting framework). The Lease Modification Q&A allows the Company, if certain criteria have been met, to bypass the lease-by-lease analysis, and instead elect to either apply the lease modification accounting framework or not, with such election applied consistently to leases with similar characteristics and similar circumstances. The Company has elected to apply such relief and will avail itself of the election to avoid performing a lease-by-lease analysis for the lease concessions that were (1) granted as relief due to the COVID-19 pandemic and (2) result in the cash flows remaining substantially the same or less. The Lease Modification Q&A has no material impact on the Company’s condensed consolidated financial statements as of and for the three and nine months ended September 30, 2020. However, its future impact on the Company is dependent upon the extent of lease concessions granted to tenants as a result of the COVID-19 pandemic in future periods and the elections made by the Company at the time of entering such concessions.
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Reference Rate Reform
During the nine months ended September 30, 2020, the FASB issued Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848) (“ASU 2020-04”). ASU 2020-04 contains practical expedients for reference rate reform-related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the nine months ended September 30, 2020, the Company has elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.
Note 3 – Property Portfolio
Summary of Properties Acquired During the Nine Months Ended September 30, 2020
During the nine months ended September 30, 2020 the Company completed
A rollforward of the gross investment in land, building, improvements, and acquired lease intangible assets as of September 30, 2020 resulting from these acquisitions is as follows:
|
| Site |
| Tenant |
| Acquired Lease |
| Gross Investment in | ||||||||||
| Land |
| Building |
| Improvements |
| Improvements |
| Intangible Assets |
| Real Estate | |||||||
Balances as of December 31, 2019 | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Facility Acquired – Date Acquired: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
High Point – 2/13/20 |
| |
| |
| |
| |
| |
| | ||||||
Clinton – 2/27/20 |
| |
| |
| |
| |
| |
| | ||||||
West Allis – 3/4/20 |
| |
| |
| |
| |
| |
| | ||||||
Grand Rapids – 3/20/20 |
| |
| |
| |
| |
| |
| | ||||||
Dumfries – 4/27/20 | | | | | | | ||||||||||||
Centerville – 7/16/20 | — | | | | | | ||||||||||||
Fairfax – 7/17/20 | | | | | | | ||||||||||||
Rosedale – 7/31/20 | | | | | | | ||||||||||||
Lancaster – 9/18/20 | | | | | | | ||||||||||||
Winston-Salem – 9/30/20 | | | | | | | ||||||||||||
Capitalized costs(1) | | | | | — | | ||||||||||||
Total Additions: |
| |
| |
| |
| |
| |
| | ||||||
Balances as of September 30, 2020 | $ | | $ | | $ | | $ | | $ | | $ | |
(1) | Represents capital projects that were completed and placed in service during the nine months ended September 30, 2020 related to the Company’s existing facilities. |
Depreciation expense was $
As of September 30, 2020, the Company had aggregate capital improvement commitments and obligations to improve, expand, and maintain the Company’s existing facilities of approximately $
The following is a summary of the acquisitions completed during the nine months ended September 30, 2020.
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High Point Facility
On February 13, 2020, the Company purchased a medical office building located in High Point, North Carolina (the “High Point Facility”) for a purchase price of approximately $
Land and site improvements |
| $ | |
Building and tenant improvements |
| | |
In-place leases |
| | |
Leasing costs |
| | |
Total purchase price | $ | |
Clinton Facility
On February 27, 2020, the Company purchased a medical office building located in Clinton, Iowa (the “Clinton Facility”) for a purchase price of approximately $
Land and site improvements |
| $ | |
Building and tenant improvements |
| | |
In-place leases |
| | |
Leasing costs |
| | |
Total purchase price | $ | |
West Allis Facility
On March 4, 2020, the Company purchased a medical office building located in West Allis, Wisconsin (the “West Allis Facility”) for a purchase price of approximately $
Land and site improvements |
| $ | |
Building and tenant improvements |
| | |
In-place leases |
| | |
Leasing costs |
| | |
Below-market lease intangibles |
| ( | |
Total purchase price | $ | |
Grand Rapids Facilities
On March 20, 2020, the Company purchased a four-building medical office portfolio located in the greater Grand Rapids, Michigan area (the “Grand Rapids Facilities”) for a total purchase price of approximately $
Land and site improvements |
| $ | |
Building and tenant improvements |
| | |
In-place leases |
| | |
Above-market lease intangibles |
| |
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Leasing costs |
| | |
Below-market lease intangibles |
| ( | |
Total purchase price | $ | |
Dumfries Facility
On April 27, 2020, the Company purchased a medical office building located in Dumfries, Virginia (the “Dumfries Facility”) for a purchase price of approximately $
Land and site improvements |
| $ | |
Building and tenant improvements |
| | |
In-place leases |
| | |
Leasing costs |
| | |
Below-market lease intangibles |
| ( | |
Total purchase price | $ | |
In connection with this acquisition, the Company assumed an existing $
Centerville Facility
On July 16, 2020, the Company purchased a medical office building located in Centerville, Iowa (the “Centerville Facility”) and the seller’s interest, as ground lessee, in an existing ground lease, for a purchase price of approximately $
Land and site improvements |
| $ | |
Building and tenant improvements |
| | |
In-place leases |
| | |
Leasing costs |
| | |
Total purchase price | $ | |
Fairfax Facility
On July 17, 2020, the Company purchased a medical office building located in Fairfax, Virginia (the “Fairfax Facility”) for a purchase price of approximately $
Land and site improvements |
| $ | |
Building and tenant improvements |
| | |
In-place leases |
| | |
Leasing costs |
| | |
Below-market lease intangibles |
| ( | |
Total purchase price | $ | |
-16-
Rosedale Facilities
On July 31, 2020, the Company purchased certain condominium units within a medical office building and a medical office building, both located in Rosedale, Maryland (the “Rosedale Facilities”) for a total purchase price of approximately $
Land and site improvements |
| $ | |
Building and tenant improvements |
| | |
In-place leases |
| | |
Leasing costs |
| | |
Above-market lease intangibles | | ||
Below-market lease intangibles |
| ( | |
Total purchase price | $ | |
In connection with this acquisition, the Company entered into a third-party loan in the amount of $
Lancaster Facility
On September 18, 2020, the Company purchased a medical office building located in Lancaster, Texas (the “Lancaster Facility”) for a purchase price of approximately $
Land and site improvements |
| $ | |
Building and tenant improvements |
| | |
In-place leases |
| | |
Leasing costs |
| | |
Above-market lease intangibles |
| | |
Total purchase price | $ | |
Winston-Salem Facility
On September 30, 2020, the Company purchased a medical office building located in Winston-Salem, North Carolina (the “Winston-Salem Facility”) for a total purchase price of approximately $
Land and site improvements |
| $ | |
Building and tenant improvements |
| | |
In-place leases |
| | |
Leasing costs |
| | |
Below-market lease intangibles |
| ( | |
Total purchase price | $ | |
Summary of Properties Acquired During the Year Ended December 31, 2019
During the year ended December 31, 2019 the Company completed
-17-
A rollforward of the gross investment in land, building, improvements, and acquired lease intangible assets as of December 31, 2019 resulting from these acquisitions is as follows:
Site | Tenant | Acquired Lease | Gross Investment in | |||||||||||||||
| Land |
| Building | Improvements |
| Improvements |
| Intangible Assets |
| Real Estate | ||||||||
Balances as of December 31, 2018 | $ | | $ | |
| $ | | $ | | $ | | $ | | |||||
Facility Acquired – Date Acquired: | ||||||||||||||||||
Zachary – 2/28/19 |
| |
| |
| | |
| |
| | |||||||
Gilbert and Chandler – 3/19/19 |
| |
| |
| | — |
| |
| | |||||||
Las Vegas – 4/15/19 | | | | | | | ||||||||||||
Oklahoma Northwest – 4/15/19 | | | | | | | ||||||||||||
Mishawaka – 4/15/19 | | | | | | | ||||||||||||
Surprise – 4/15/19 | | | | | | | ||||||||||||
San Marcos – 7/12/19 | | | | | | | ||||||||||||
Lansing – 8/1/19 | | | | | | | ||||||||||||
Bannockburn – 8/5/19 | | | | | | | ||||||||||||
Aurora – 8/6/19 | | | | | | | ||||||||||||
Livonia – 8/14/19 | | | | | | | ||||||||||||
Gilbert – 8/23/19 | | | | | | | ||||||||||||
Morgantown – 9/26/19 | | | | | | | ||||||||||||
Beaumont – 10/1/19 | | | | | | | ||||||||||||
Bastrop – 10/25/19 | | | | | | | ||||||||||||
Panama City – 10/31/19 | | | | | | | ||||||||||||
Jacksonville – 11/15/19 | | | | — | | | ||||||||||||
Greenwood – 12/17/19 | | | | — | | | ||||||||||||
ASC Topic 842 Reclassification | | | | — | ( | ( | ||||||||||||
Capitalized costs(1) | | | | | | | ||||||||||||
Total Additions: |
| |
| |
| | | |
| | ||||||||
Balances as of December 31, 2019 | $ | | $ | | $ | | $ | | $ | | $ | |
(1) | Represents capital projects that were completed and placed in service during the year ended December 31, 2019 related to the Company’s existing facilities. |
The following is a summary of the acquisitions completed during the year ended December 31, 2019.
Zachary Facility
On February 28, 2019, the Company assumed the following leasehold interests in the real property located in Zachary, Louisiana for a purchase price of approximately $
Land and site improvements |
| $ | |
Building and tenant improvements | | ||
In-place leases | | ||
Above-market lease intangibles | | ||
Leasing costs | | ||
Below-market lease intangibles | ( | ||
Total purchase price | $ | |
-18-
Gilbert and Chandler Facilities
On March 19, 2019, the Company purchased the following facilities located in Gilbert, Arizona and Chandler, Arizona for a total purchase price of approximately $
IRF Portfolio
On April 15, 2019, the Company purchased four in-patient rehabilitation facilities located in Las Vegas, Nevada; Surprise, Arizona; Oklahoma City, Oklahoma; and Mishawaka, Indiana (collectively, the “IRF Portfolio”) for a total purchase price of approximately $
|
|
| Oklahoma |
| ||||||||
Las Vegas | Surprise | City | Mishawaka | |||||||||
Land and site improvements | $ | | $ | | $ | | $ | | ||||
Building and tenant improvements |
| |
| |
| |
| | ||||
In-place leases |
| |
| |
| |
| | ||||
Above-market lease intangibles |
| |
| |
| |
| | ||||
Leasing costs |
| |
| |
| |
| | ||||
Below-market lease intangibles |
| ( |
| |
| |
| | ||||
Total purchase price | $ | | $ | | $ | | $ | |
San Marcos Facility
On July 12, 2019, the Company purchased a medical office building located in San Marcos, California (the “San Marcos Facility”) for a purchase price of approximately $
Land and site improvements |
| $ | |
Building and tenant improvements |
| | |
In-place leases |
| | |
Above-market lease intangibles |
| | |
Leasing costs |
| | |
Total purchase price | $ | |
-19-
Lansing Facilities
On August 1, 2019, the Company purchased the following real property and buildings thereon located in Lansing, Michigan for a total purchase price of approximately $
Land and site improvements |
| $ | |
Building and tenant improvements |
| | |
In-place leases |
| | |
Above-market lease intangibles |
| | |
Leasing costs |
| | |
Below-market lease intangibles |
| ( | |
Total purchase price | $ | |
Bannockburn Facility
On August 5, 2019, the Company purchased an office building located in Bannockburn, Illinois (the “Bannockburn Facility”) for a purchase price of approximately $
Land and site improvements |
| $ | |
Building and tenant improvements |
| | |
In-place leases |
| | |
Above-market lease intangibles |
| | |
Leasing costs |
| | |
Below-market lease intangibles |
| ( | |
Total purchase price | $ | |
Aurora Facility
On August 6, 2019, the Company purchased a medical office building located in Aurora, Illinois (the “Aurora Facility”) for a purchase price of approximately $
Land and site improvements |
| $ | |
Building and tenant improvements |
| | |
In-place leases |
| | |
Above-market lease intangibles |
| | |
Leasing costs |
| | |
Total purchase price | $ | |
-20-
Livonia Facility
On August 14, 2019, the Company purchased a medical office building located in Livonia, Michigan (the “Livonia Facility”) for a purchase price of approximately $
Land and site improvements |
| $ | |
Building and tenant improvements |
| | |
In-place leases |
| | |
Above-market lease intangibles |
| | |
Leasing costs |
| | |
Below-market lease intangibles |
| ( | |
Total purchase price | $ | |
Gilbert Facility
On August 23, 2019, the Company purchased certain condominium units within
Land and site improvements |
| $ | |
Building and tenant improvements |
| | |
In-place leases |
| | |
Above-market lease intangibles |
| | |
Leasing costs |
| | |
Total purchase price | $ | |
Morgantown Facility
On September 26, 2019, the Company purchased a parcel of land and an office building that is being constructed thereon located in Morgantown, West Virginia (the “Morgantown Facility”) for a total purchase price of approximately $
Land and site improvements |
| $ | |
Building and tenant improvements |
| | |
In-place leases |
| | |
Leasing costs |
| | |
Total purchase price | $ | |
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Beaumont Facility
On October 1, 2019, the Company purchased a medical office building located in Beaumont, Texas (the “Beaumont Facility”) for a total purchase price of approximately $
Land and site improvements |
| $ | |
Building and tenant improvements | | ||
In-place leases | | ||
Leasing costs | | ||
Total purchase price | $ | |
Bastrop Facility
On October 25, 2019, the Company purchased a medical emergency center located in Bastrop, Texas (the “Bastrop Facility”) for a total purchase price of approximately $
Land and site improvements |
| $ | |
Building and tenant improvements | | ||
In-place leases | | ||
Leasing costs | | ||
Total purchase price | $ | |
Panama City Facilities
On October 31, 2019, the Company purchased: (i) a medical office building located in Panama City, Florida (the “Panama City Facility”); (ii) a medical office building located in Panama City Beach, Florida (the “PCB Facility”); and (iii) a medical office building located in Chipley, Florida (the “Chipley Facility”) for a total purchase price of approximately $
Land and site improvements |
| $ | |
Building and tenant improvements |
| | |
In-place leases |
| | |
Leasing costs |
| | |
Total purchase price | $ | |
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Jacksonville Facilities
On November 15, 2019, the Company purchased a condominium unit located in Ponte Vedra, Florida (the “Ponte Vedra Facility”) and a medical office building located in Jacksonville, Florida (the “Riverside Facility”) for a total purchase price of approximately $
Land and site improvements |
| $ | |
Building and tenant improvements | | ||
Total purchase price | $ | |
Greenwood Facility
On December 17, 2019, the Company purchased a medical office building located in Greenwood, Indiana (the “Greenwood Facility”) for a purchase price of approximately $
Land and site improvements |
| $ | |
Building and tenant improvements | | ||
Total purchase price | $ | |
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 September 30, 2020 | |||||||||
Accumulated | |||||||||
| Cost |
| Amortization |
| Net | ||||
Assets | |||||||||
In-place leases | $ | | $ | ( | $ | | |||
Above market leases |
| |
| ( |
| | |||
Leasing costs |
| |
| ( |
| | |||
$ | | $ | ( | $ | | ||||
Liability | |||||||||
Below market leases | $ | | $ | ( | $ | |
As of December 31, 2019 | |||||||||
|
| Accumulated |
| ||||||
Cost | Amortization | Net | |||||||
Assets |
|
|
|
|
|
| |||
In-place leases | $ | | $ | ( | $ | | |||
Above market leases |
| |
| ( |
| | |||
Leasing costs |
| |
| ( |
| | |||
$ | | $ | ( | $ | | ||||
Liability |
|
|
| ||||||
Below market leases | $ | | $ | ( | $ | |
-23-
The following is a summary of the acquired lease intangible amortization:
Three Months Ended | Nine Months Ended | ||||||||||||
September 30, | September 30, | ||||||||||||
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| |||||
Amortization expense related to in-place leases | $ | | $ | | $ | | $ | | |||||
Amortization expense related to leasing costs | $ | | $ | | $ | | $ | | |||||
Decrease in rental revenue related to above market leases | $ | | $ | | $ | | $ | | |||||
Increase in rental revenue related to below market leases | $ | | $ | | $ | | $ | |
As of September 30, 2020, scheduled future aggregate net amortization of the acquired lease intangible assets and liabilities for each year ended December 31 is listed below:
| Net (Decrease) |
| ||||
Increase | Net Increase | |||||
in Revenue | in Expenses | |||||
2020 (three months remaining) | $ | ( | $ | | ||
2021 |
| ( |
| | ||
2022 |
| ( |
| | ||
2023 |
| ( |
| | ||
2024 |
| |
| | ||
Thereafter |
| ( |
| | ||
Total | $ | ( | $ | |
As of September 30, 2020, the weighted average amortization periods for asset lease intangibles and liability lease intangibles were
Note 4 – Credit Facility, Notes Payable and Derivative Instruments
Credit Facility
The Company, the Operating Partnership, as borrower, and certain of its subsidiaries (such subsidiaries, the “Subsidiary Guarantors”) are parties to a $
The Subsidiary Guarantors and the Company are guarantors of the obligations under the Credit Facility. The amount available to borrow from time to time under the Credit Facility is limited according to a quarterly borrowing base valuation of certain properties owned by the Subsidiary Guarantors.
-24-
During the nine months ended September 30, 2020, the Company borrowed $
As of September 30, 2020 and December 31, 2019, the Company had the following outstanding borrowings under the Credit Facility:
|
| September 30, 2020 |
| December 31, 2019 | ||
Revolver | $ | | $ | | ||
Term Loan |
| |
| | ||
Less: Unamortized debt issuance costs |
| ( |
| ( | ||
Credit Facility, net | $ | | $ | |
Costs incurred related to the Credit Facility, net of accumulated amortization, are netted against the Company’s “Credit Facility, net of unamortized debt issuance costs” balance in the accompanying Condensed Consolidated Balance Sheets. The Company paid $
In July 2017, the Financial Conduct Authority (the “FCA”), which regulates LIBOR, announced its intention to stop compelling banks to submit rates for the calculation of LIBOR after 2021. As a result, the Federal Reserve Board and the Federal Reserve Bank of New York organized the Alternative Reference Rates Committee (the “ARRC”), which identified the Secured Overnight Financing Rate (the “SOFR”) as its preferred alternative to USD-LIBOR in derivatives and other financial contracts. The Credit Facility provides that, on or about the LIBOR cessation date (subject to an early opt-in election), LIBOR shall be replaced as a benchmark rate in the Credit Facility with a new benchmark rate to be agreed upon by the Company and BMO, with such adjustments to cause the new benchmark rate to be economically equivalent to LIBOR. The Company is not able to predict when LIBOR will cease to be available or when there will be sufficient liquidity in the SOFR markets.
The Company has interest rate swap agreements that are indexed to LIBOR and is monitoring and evaluating the related risks. These risks arise in connection with transitioning contracts to a new alternative rate, including any resulting value transfer that may occur. The value of loans, securities, or derivative instruments tied to LIBOR could also be impacted if LIBOR is limited or discontinued. For some instruments, the method of transitioning to an alternative rate may be challenging, as they may require negotiation with the respective counterparty.
If a contract is not transitioned to an alternative rate and LIBOR is discontinued, the impact on our interest rate swap agreements is likely to vary by agreement. If LIBOR is discontinued or if the methods of calculating LIBOR change from their current form, interest rates on our current or future indebtedness may be adversely affected.
While the Company expects LIBOR to be available in substantially its current form until the end of 2021, it is possible that LIBOR will become unavailable prior to that point. This could result, for example, if sufficient banks decline to make submissions to the LIBOR administrator. In that case, the risks associated with the transition to an alternative reference rate will be accelerated and potentially magnified.
-25-
Notes Payable, Net of Debt Issuance Costs
The Company’s notes payable, net, includes four loans: (1) the Rosedale Loan, (2) the Dumfries Loan, (3) the Cantor Loan, and (4) the West Mifflin Note, described in detail below. The following table sets forth the balances of these loans as of September 30, 2020 and December 31, 2019.
| September 30, 2020 |
| December 31, 2019 | |||
Notes payable, gross | $ | | $ | | ||
Less: Unamortized debt issuance costs |
| ( |
| ( | ||
Cumulative principal repayments |
| ( |
| ( | ||
Notes payable, net | $ | | $ | |
The Company paid $
Rosedale Loan
On July 31, 2020, in connection with its acquisition of the Rosedale Facilities, the Company, through certain of its wholly-owned subsidiaries, as borrowers, entered into a commercial term loan with a principal balance of $
The Company made principal payments of $
As of September 30, 2020, scheduled principal payments due for each year ended December 31 were as follows:
2020 (three months remaining) |
| $ | |
2021 |
| | |
2022 |
| | |
2023 |
| | |
2024 | | ||
Thereafter |
| | |
Total | $ | |
Dumfries Loan
On April 27, 2020, in connection with its acquisition of the Dumfries Facility, the Company, through a wholly-owned subsidiary, assumed a CMBS loan with a principal amount of $
The Company made principal payments of $
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As of September 30, 2020, scheduled principal payments due for each year ended December 31 were as follows:
2020 (three months remaining) |
| $ | |
2021 |
| | |
2022 |
| | |
2023 |
| | |
2024 |
| | |
Total | $ | |
Cantor Loan
On March 31, 2016, through certain of its wholly owned subsidiaries (the “GMR Loan Subsidiaries”), the Company entered into a $
The Cantor Loan is secured by the assets of the GMR Loan Subsidiaries and such subsidiaries are required to maintain a monthly debt service coverage ratio of
The note balance as of September 30, 2020 and December 31, 2019 was $
As of September 30, 2020, scheduled principal payments due for each year ended December 31 were as follows:
2020 (three months remaining) |
| $ | — |
2021 |
|
| |
2022 |
| | |
2023 |
| | |
2024 |
| | |
Thereafter |
| | |
Total | $ | |
West Mifflin Note
On September 25, 2015, the Company, through a wholly-owned subsidiary, as borrower, entered into a $
The Company made principal payments of $
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Derivative Instruments - Interest Rate Swaps
As of September 30, 2020, the Company had the following
Counterparty |
| Notional Amount |
| Fixed LIBOR Rate |
| Maturity | |
Wells Fargo Bank, N.A. | $ | | August 2023 | ||||
BMO | August 2023 | ||||||
BMO | |
| August 2024 | ||||
Truist Bank | |
| August 2024 | ||||
Truist Bank | |
| August 2024 | ||||
Citizens Bank, National Association | |
| August 2024 | ||||
Total/Weighted Average | $ |
|
|
In accordance with the provisions of ASC Topic 815, the Company records the swaps either as an asset or a liability measured at its fair value at each reporting period. When hedge accounting is applied, the change in the fair value of derivatives designated and that qualify as cash flow hedges is (i) recorded in accumulated other comprehensive loss in the equity section of the Company’s Condensed Consolidated Balance Sheets and (ii) subsequently reclassified into earnings as interest expense for the period that the hedged forecasted transactions affect earnings. If specific hedge accounting criteria are not met, changes in the Company’s derivative instruments’ fair value are recognized currently as an adjustment to net income.
The Company’s interest rate swaps are not traded on an exchange. The Company’s interest rate swaps are recorded at fair value based on a variety of observable inputs including contractual terms, interest rate curves, yield curves, measure of volatility, and correlations of such inputs. The Company measures its derivatives at fair value on a recurring basis based on the expected size of future cash flows on a discounted basis and incorporating a measure of non-performance risk. The fair values are based on Level 2 inputs within the framework of ASC Topic 820, “Fair Value Measurement.” The Company considers its own credit risk, as well as the credit risk of its counterparties, when evaluating the fair value of its derivative instruments.
The fair value of the Company’s interest rate swaps was a net liability of $
The table below details the components of the loss presented on the accompanying Condensed Consolidated Statements of Comprehensive (Loss) Income recognized on the Company’s interest rate swaps designated as cash flow hedges for the three and nine months ended September 30, 2020 and 2019:
Three Months Ended September 30, | Nine Months Ended September 30, |
| |||||||||||
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| |||||
| |||||||||||||
Amount of (gain) loss recognized in other comprehensive loss | $ | ( | $ | | $ | | $ | | |||||
Amount of loss reclassified from accumulated other comprehensive (loss) income into interest expense |
| ( |
| ( |
| ( |
| ( | |||||
Total change in accumulated other comprehensive loss | $ | ( | $ | | $ | | $ | |
During the next twelve months, the Company estimates that an additional $
Weighted-Average Interest Rate and Term
The weighted average interest rate and term of the Company’s debt was
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Note 5 – Equity
Preferred Stock
The Company’s charter authorizes the issuance of
Preferred stock dividend activity for the nine months ended September 30, 2020 is summarized in the following table:
|
| Applicable |
|
| Quarterly |
| Dividends | |||||
Date Announced | Record Date | Quarter | Payment Date | Dividend | per Share | |||||||
| ||||||||||||
|
| Q4 2019 |
| $ | | $ | | |||||
|
| Q1 2020 |
| $ | | $ | | |||||
|
| Q2 2020 |
| $ | | $ | | |||||
|
| Q3 2020 |
| $ | | (1) | $ | |
(1) | Two months of this amount, equal to $ |
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
Common Stock
The Company has
On August 17, 2020, the Company and the Operating Partnership entered into a Sales Agreement with certain sales agents, pursuant to which the Company may offer and sell, from time to time, up to $
Common stock dividend activity for the nine months ended September 30, 2020 is summarized in the following table:
|
| Applicable |
|
| Dividend |
| Dividends | |||||
Date Announced | Record Date | Quarter | Payment Date | Amount(1) | per Share | |||||||
| ||||||||||||
|
| Q4 2019 |
| $ | | $ | | |||||
|
| Q1 2020 |
| $ | | $ | | |||||
|
| Q2 2020 |
| $ | | $ | | |||||
|
| Q3 2020 |
| $ | | $ | |
(1) | Includes distributions on granted LTIP Units and OP Units. |
During the nine months ended September 30, 2020 and 2019, the Company paid total dividends on its common stock, LTIP Units and OP Units in the aggregate amount of $
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As of September 30, 2020 and December 31, 2019, the Company had an accrued dividend balance of $
The amount of the dividends paid to the Company’s stockholders is determined by the 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 nine months ended September 30, 2020, three OP Unit holders redeemed an aggregate of
Note 6 – Related Party Transactions
Management Agreement
Prior to the Internalization, the Company was subject to the Management Agreement, the material terms of which 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, 2019 filed with the SEC on March 9, 2020.
Management Fees and Accrued Management Fees
For the three months ended September 30, 2020 no management fees were incurred and expensed by the Company. For the nine months ended September 30, 2020, and prior to the Internalization, management fees of $
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Related Party Balances
A rollforward of the due from related parties and due to related party balance, net, as of September 30, 2020 is as follows:
|
| Due From |
|
|
| |||||||
Related Parties | Due to Related Party, Net | |||||||||||
Other | ||||||||||||
Funds for | Management | Funds due | Due to | |||||||||
Various | Fees due to | from | Related | |||||||||
Purposes | Advisor | Advisor | Party, net | |||||||||
Balance as of January 1, 2020 | $ | |
| $ | ( |
| | $ | ( | |||
Management fee expense incurred |
| — |
|
| ( |
|
| — |
| ( | ||
Management fees paid to Advisor |
| — |
|
| |
|
| — |
| | ||
Loans to Advisor |
| — |
|
| — |
|
| ( |
| ( | ||
Loan to related parties |
| |
|
| — |
|
| — |
| — | ||
Balance as of September 30, 2020 | $ | |
| $ | |
| | $ | |
Note 7 – Stock-Based Compensation
2016 Equity Incentive Plan
The 2016 Equity Incentive Plan, as amended (the “Plan”), is intended to assist the Company and its affiliates in recruiting and retaining employees, members of the Board, executive officers of the Company, and individuals who provide services to the Company and its affiliates.
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). Based on the grants outstanding as of September 30, 2020, there are
Time-Based Grants
During the nine months ended September 30, 2020, pursuant to the recommendation of the Compensation Committee of the Board (the “Compensation Committee”), the Board approved the following LTIP Unit activity:
● | On March 3, 2020, determined that |
Ø | On March 3, 2020, there were |
Ø | On May 12, 2020, there were |
Ø | On August 23, 2020, there were |
● | On March 3, 2020, determined that |
● | On March 3, 2020, granted |
● | On July 9, 2020, granted |
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● | On July 24, 2020, granted |
● | On September 2, 2020, granted |
Additionally, during the nine months ended September 30, 2020, there were
A detail of the Company’s outstanding time based LTIP Units as of September 30, 2020 is as follows:
Vested units |
| |
Unvested units |
| |
LTIP Units outstanding as of September 30, 2020 |
| |
Performance Based Awards
The Board has approved annual performance-based LTIP awards (“Annual Awards”) and long-term performance-based LTIP awards (“Long-Term Awards”) to the executive officers and other employees of the Company. As described below, the Annual Awards have one-year performance periods and the Long-Term Awards have three-year performance periods. In addition to meeting specified performance metrics, vesting in both the Annual Awards and the Long-Term Awards is subject to service requirements.
A detail of the Company’s Long-Term Awards under the 2017, 2018 and 2019 programs, and the Annual Awards and Long-Term Awards under the 2020 program as of September 30, 2020 is as follows:
2018 Long-Term Awards |
| |
2019 Long-Term Awards |
| |
2020 Annual Awards (1) |
| |
2020 Long-Term Awards (2) |
| |
Total target performance awards as of September 30, 2020 |
| |
(1) |
(2) | Approved by the Board on March 3, 2020. The number of target LTIP Units was based on the fair value of the Long-Term Awards as determined by an independent valuation consultant. |
Annual Awards. The Annual Awards are subject to the terms and conditions of LTIP Annual Award Agreements (“LTIP Annual Award Agreements”) between the Company and each grantee.
The Compensation Committee and Board established performance goals for the year ended December 31, 2020, as set forth in the 2020 LTIP Annual Award Agreements (the “Performance Goals”) that will be used to determine the number of LTIP Units earned by each grantee. As of September 30, 2020, management estimated that the Performance Goals would be met at a
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:
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vesting date. Vesting may be accelerated under certain circumstances such as a “change-in-control” transaction or a “qualified termination” event.
Distributions. Distributions equal to the dividends declared and paid by the Company will accrue during the applicable performance period on the maximum number of LTIP Units that the grantee could earn and will be 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 their related 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
Vesting. LTIP Units that are earned as of the end of the applicable three-year performance period will be subject to forfeiture restrictions that will lapse (“vesting”), subject to continued employment through each vesting date as follows;
Distributions. Pursuant to the LTIP Long-Term Award Agreements, distributions equal to the dividends declared and paid by the Company will accrue during the applicable performance period on the maximum number of LTIP Units that the grantee could earn and will be paid with respect to all of the earned LTIP Units at the conclusion of the applicable performance period, in cash or by the issuance of additional LTIP Units at the discretion of the Compensation Committee.
Stock-Based Compensation Expense
Under the provisions of ASU 2018-07, the Company’s prospective compensation expense for all unvested LTIP Units, Annual Awards, and Long-Term Awards is recognized using the adoption date fair value of the awards, with no remeasurement required. Compensation expense for future LTIP Unit grants, Annual Awards, and Long-Term Awards is based on the grant date fair value of the units/awards, with no subsequent remeasurement required.
As the Long-Term Awards involve market-based performance conditions, the Company utilizes a Monte Carlo simulation to provide a grant date fair value for expense recognition. The Monte Carlo simulation is a generally accepted statistical technique used, in this instance, to simulate a range of possible future stock prices for the Company and the members of the SNL Healthcare REIT Index (the “Index”) over the Performance Periods. The purpose of this modeling is to use a probabilistic approach for estimating the fair value of the performance share award for purposes of accounting under ASC Topic 718.
The assumptions used in the Monte Carlo simulation include beginning average stock price, valuation date stock price, expected volatilities, correlation coefficients, risk-free rate of interest, and expected dividend yield. The beginning average stock price is the beginning average stock price for the Company and each member of the Index for the five trading days leading up to the grant date of the Long-Term Award. The valuation date stock price is the average closing stock price for the Company and each member of the Index for the 15 trading days leading up to the valuation date. The expected volatilities are modeled using the historical volatilities for the Company and the members of the Index. The correlation coefficients are calculated using the same data as the historical volatilities. The risk-free rate of interest is taken from the U.S. Treasury website and relates to the expected life of the remaining performance period on valuation or revaluation. Lastly, the dividend yield assumption is
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Below are details regarding certain of the assumptions for the Long-Term Awards using Monte Carlo simulations:
2020 Long-Term | 2019 Long-Term | 2018 Long-Term | 2017 Long-Term | |||||||||
| Awards |
| Awards |
| Awards |
| Awards | |||||
Fair value | $ | | $ | | $ | |
| $ | | |||
Target awards |
| |
| |
| |
| | ||||
Volatility |
| | % |
| | % |
| | % | |||
Risk-free rate |
| | % |
| | % |
| | % | |||
Dividend assumption |
|
|
|
| ||||||||
Expected term in years |
|
|
|
|
The Company incurred stock compensation expense of $
As of September 30, 2020, total unamortized compensation expense related to these awards of approximately $
Note 8 – Leases
The Company operates as both a lessor and a lessee. As a lessor, the Company is required under ASC Topic 842 to account for leases using an approach that is substantially similar to ASC Topic 840’s guidance for operating leases and other leases such as sales-type leases and direct financing leases. In addition, ASC Topic 842 requires lessors to capitalize and amortize only incremental direct leasing costs. As a lessee, the Company is required under the new standard to apply a dual approach, classifying leases, such as ground leases, as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase. This classification determines whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. ASC Topic 842 also requires lessees to record a right of use asset and a lease liability for all leases with an initial term of greater than a year regardless of their classification. The Company has also elected the practical expedient not to recognize right of use assets and lease liabilities for leases with a term of a year or less.
Information as Lessor Under ASC Topic 842
To generate positive cash flow, as a lessor, the Company leases its facilities to tenants in exchange for fixed monthly payments that cover rent, property taxes, insurance and certain cost recoveries, primarily common area maintenance (“CAM”). The Company’s leases were determined to be operating leases and have a portfolio-average-lease-years remaining of approximately
Some of the Company’s leases are subject to annual changes in the Consumer Price Index (“CPI”). Although increases in CPI are not estimated as part of the Company’s measurement of straight-line rental revenue, for leases with base rent increases based on CPI, the amount of rent revenue recognized is adjusted in the period the changes in CPI are measured and effective. Additionally, some of the Company’s leases have extension options.
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Initial direct costs, primarily commissions, related to the leasing of our facilities are capitalized when material as incurred. Capitalized leasing costs are amortized on a straight-line basis over the remaining useful life of the respective leases. All other costs to negotiate or arrange a lease are expensed as incurred.
Lease-related receivables, which include accounts receivable and accrued straight-line rents receivable, are reduced for credit losses, if applicable. To date the Company’s receivables have not had any credit losses. Such amounts would be recognized as a reduction to rental and other revenues. The Company regularly evaluates the collectability of its lease-related receivables. The Company’s evaluation of collectability primarily consists of reviewing past due account balances and considering such factors as the credit quality of our tenant, historical trends of the tenant and changes in tenant payment terms. If the Company’s assumptions regarding the collectability of lease-related receivables prove incorrect, the Company could experience credit losses in excess of what was recognized in rental and other revenues.
The Company recognized $
2020 (three months remaining) |
| $ | |
2021 |
|
| |
2022 |
| | |
2023 |
| | |
2024 |
| | |
Thereafter |
| | |
Total | $ | |
Information as Lessee Under ASC Topic 842
The Company has seven buildings located on land that is subject to operating ground leases with a weighted average remaining term of approximately
The following table sets forth the undiscounted cash flows of our scheduled obligations for future lease payments on operating ground leases at September 30, 2020, and a reconciliation of those cash flows to the operating lease liability at September 30, 2020:
2020 (three months remaining) |
| $ | |
2021 |
|
| |
2022 |
| | |
2023 |
| | |
2024 |
| | |
Thereafter |
| | |
Total | | ||
Discount |
| ( | |
Lease liability | $ | |
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Note 9 – Rent Concentration
The Company’s facilities with a concentration of rental revenue of
| Three Months Ended |
| Nine Months Ended |
| |||||
September 30, |
| September 30, |
| ||||||
Facility |
| 2020 |
| 2019 |
| 2020 |
| 2019 |
|
| |||||||||
Encompass |
| | % | | % | | % | | % |
Belpre |
| |
| | |
| | ||
OCOM |
| |
| | |
| | ||
Sherman |
| |
| | |
| | ||
Austin |
| |
| | |
| | ||
Aggregate of all other facilities |
| |
| | |
| | ||
Total |
| | % | | % | | % | | % |
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.
Note 11 – Subsequent Events
Subsequent events have been evaluated through November 6, 2020, the date the financial statements were issued.
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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, including the notes to those financial statements, included elsewhere in this Quarterly Report on Form 10-Q (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 “Special Note Regarding Forward-Looking Statements.” Certain risk factors may cause actual results, performance or achievements to differ materially from those expressed or implied by the following discussion. For a discussion of such risk factors, see Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2019, that was filed with the U.S. Securities and Exchange Commission (the “SEC” or the “Commission”) on March 9, 2020 and Item 1A. Risk Factors in this Quarterly Report on Form 10-Q. Unless otherwise indicated, all dollar and share amounts in the following discussion are presented in thousands.
Special Note Regarding Forward-Looking Statements
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, and the healthcare industry and healthcare real estate opportunity, 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:
● | the effects of the ongoing novel coronavirus (“COVID-19”) pandemic, which are highly uncertain, cannot be predicted and will depend upon future developments, including the severity of COVID-19, the duration of the outbreak and potential resurgences, the duration of existing or new social distancing and shelter-in-place orders, further mitigation strategies taken by applicable government authorities, the availability of a vaccine, adequate testing and treatments and the prevalence of widespread immunity to COVID-19; |
● | defaults on or non-renewal of leases by tenants; |
● | our ability to collect rental revenue, expected rent deferral amounts and expected repayment periods; |
● | our ability to satisfy the covenants in our existing and any future debt agreements, including the $600 million syndicated credit facility with BMO Harris Bank N.A. (“BMO”), as administrative agent (the “Credit Facility”); |
● | decreased rental rates or increased vacancy rates, including expected rent levels on acquired properties; |
● | 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; |
● | changes in our business or our investment or financing strategy; |
● | our dependence upon key personnel whose continued service is not guaranteed; |
● | our ability to identify, hire and retain highly qualified personnel in the future; |
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● | 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”); |
● | 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; |
● | our ability to qualify for the safe harbors from the “100% Prohibited Transactions Tax” under the REIT rules with respect to our property dispositions; 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 in our Annual Report on Form 10-K for the year ended December 31, 2019 and Item 1A. Risk Factors in this Report 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 a Maryland corporation engaged primarily in the acquisition of purpose-built healthcare facilities and the leasing of those facilities to strong healthcare systems and physician groups with leading market share. As described below, until July 9, 2020, the Company was externally managed and advised by Inter-American Management LLC (the “Former Advisor”).
On July 9, 2020, the Company acquired all of the outstanding shares of capital stock of Inter-American Group Holdings Inc. (“IAGH”), the parent company of the Former Advisor for a cash purchase price of $18.1 million, subject to a working capital adjustment (the “Internalization”). The Internalization was completed pursuant to a stock purchase agreement, dated as of July 9, 2020 (the "Stock Purchase Agreement"), by and among the Company, Zensun Enterprises Limited (“Zensun”) and Mr. Jeffrey Busch. Prior to the Internalization, IAGH was owned by Zensun (85%) and Mr. Busch (15%) (collectively, the “Sellers”).
A special committee (the "Special Committee") comprised entirely of independent and disinterested members of the Company’s board of directors (the "Board"), after consultation with its independent legal and financial advisors, determined that the Internalization was advisable to, and in the best interests of, the Company and the Company’s stockholders and recommended that the Board authorize and approve the Internalization. Upon such recommendation from the Special Committee, the Board authorized and approved the Internalization. Approval by the Company’s stockholders was not required.
Upon completion of the Internalization, the employees of the Former Advisor became employees of the Company and the functions previously performed by the Former Advisor were internalized by the Company. As an internally managed company, the Company will no longer pay the Former Advisor any fees arising from the Management Agreement (as defined in Note 6 – “Related Party Transactions”).
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
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properties are owned by wholly owned subsidiaries of our operating partnership, Global Medical REIT L.P. (the “Operating Partnership”). Our wholly owned subsidiary, Global Medical REIT GP, LLC, is the sole general partner of our Operating Partnership and, as of September 30, 2020, we owned 93.05% of the outstanding common operating partnership units (“OP Units”) of our Operating Partnership.
Impact of COVID-19 and Business Outlook
The COVID-19 pandemic did not have a material impact on our results of operations, liquidity and capital resources as of and for the three and nine months ended September 30, 2020. While we are still navigating the actual and potential impacts the pandemic will have on our tenants and our business, the sections below summarize management’s view of the potential impacts the COVID-19 pandemic may have on our future results of operations, liquidity and capital resources, and other various company-specific matters.
The COVID-19 outbreak and the measures taken by governmental authorities to contain its spread have resulted in substantial adverse effects on the U.S. economy, and specifically the healthcare industry. The full impact of COVID-19 on the U.S. economy and our tenants’ businesses and operations remains unknown, as the velocity of this economic slowdown and the subsequent job losses are unique and historical in many ways. While these events have already had a significant impact on the healthcare industry, we cannot reasonably estimate the duration and severity of such impact. However, at the onset of the outbreak, we began working with certain of our tenants that were experiencing significant disruptions in their businesses to help them navigate these uncertain times, including assisting our tenants in applying for government financial relief and, in certain limited circumstances, entering into rent deferral agreements. The aggregate amount of such rent deferrals equaled $1.1 million and, as of September 30, 2020, we have collected $0.6 million of this amount. Because the extent of the impact of COVID-19 on our tenants will depend on future developments, including a resurgence of COVID-19, there can be no assurance that our tenants will continue to be able meet the requirements of these agreements, or that these tenants, or other tenants, may not seek additional relief in the future. The extent of the impact of COVID-19 on our liquidity and operational and financial performance will depend on, among other things, the ability of our tenants to return to normal patient volumes and whether a resurgence of COVID-19 causes further shutdowns or disruptions in our tenants’ businesses.
At the onset of the outbreak, many states banned elective and non-urgent medical procedures. Many states have since lifted these bans; however, the recent resurgence of COVID-19 cases in many states, including many states in which our facilities are located, may cause such states to reinstitute these bans. Certain localities, such as El Paso, Lubbock and Amarillo, Texas, have already reinstituted bans on elective surgeries due to a resurgence in COVID-19. Given that many of our tenants depend on elective and non-urgent medical procedures as a major source of revenue, a reinstituted ban on these procedures may have a material adverse effect on our tenants’ businesses. In addition, in response to the recent resurgence of the COVID-19 pandemic, local, state and federal agencies have or may reinstitute stay-at-home or shelter-in-place orders, which may result in many of our tenants experiencing significantly reduced patient volumes and, when such bans and restrictions are lifted, patients may be reluctant to undertake certain medical procedures and our tenants may institute social distancing measures, each of which may cause our tenants to experience decreased patient volumes for an extended period of time. In addition, if additional government funding is not provided under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act") or new legislation, our tenants may not be able to rely on future government assistance programs to withstand the current or another downturn in their businesses.
Although we believe our acquisition pipeline has normalized since the onset of the COVID-19 pandemic, a resurgence of COVID-19 could cause another disruption in the medical real estate acquisition market that could have a material adverse effect on our acquisition growth.
To date, the COVID-19 pandemic has not had a material adverse effect on our liquidity, with our cash balances and available capacity under our Credit Facility equaling approximately $112 million as of October 31, 2020. However, a resurgence of COVID-19 that affects our tenants’ ability to pay rent to us, our lenders ability to lend to us, or our ability to raise equity capital could have a material adverse effect on our liquidity.
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Our Business Objectives and Investment Strategy
Our principal business objective is to provide attractive, risk-adjusted returns to our stockholders through a combination of (i) reliable dividends and (ii) long-term capital appreciation. Our primary strategies to achieve our business objective are to:
● | construct a property portfolio that consists substantially of medical office buildings (MOBs), specialty hospitals, in-patient rehabilitation facilities (IRFs) and ambulatory surgery centers (ASCs), that are primarily located in secondary markets and are situated to take advantage of the aging of the U.S. population and the decentralization of healthcare; |
● | focus on practice types that will be utilized by an aging population and are highly dependent on their purpose-built real estate to deliver core medical procedures, such as cardiovascular treatment, rehabilitation, eye surgery, gastroenterology, oncology treatment and orthopedics; |
● | set aside a portion of our property portfolio for opportunistic acquisitions, including (i) certain acute-care hospitals and long-term acute care facilities (LTACs), that we believe provide premium, risk-adjusted returns and (ii) health system corporate office and administrative buildings, which we believe will help us develop relationships with larger health systems; |
● | lease our facilities under long-term, triple-net leases with contractual annual rent escalations; |
● | lease each facility to medical providers with a track record of successfully managing excellent clinical and profitable practices; and |
● | receive credit protections from our tenants or their affiliates, including personal and corporate guarantees, rent reserves and rent coverage requirements. |
Executive Summary
The following table summarizes the material changes in our business and operations during the periods presented, which includes a one-time charge related to the portion of consideration paid for the Internalization that was attributed to the settlement of a preexisting contractual relationship of $12.1 million, as well as related expenses incurred associated with the Internalization. Additionally, the remaining excess consideration paid for the Internalization over the fair value of underlying identifiable net liabilities of the business acquired of $5.9 million was recorded as “Goodwill” on the accompanying Condensed Consolidated Balance Sheets:
| Three Months Ended September 30, |
| Nine Months Ended September 30, | |||||||||
| 2020 | 2019 |
| 2020 |
| 2019 | ||||||
(in thousands, except per share amounts) | ||||||||||||
Rental revenue | $ | 25,055 | $ | 18,117 | $ | 68,623 | $ | 50,093 | ||||
Depreciation and amortization expense | $ | 9,517 | $ | 6,506 | $ | 26,215 | $ | 17,238 | ||||
Interest expense | $ | 4,864 | $ | 4,549 | $ | 13,616 | $ | 12,707 | ||||
General and administrative expense | $ | 4,027 | $ | 1,681 | $ | 7,509 | $ | 4,928 | ||||
Management internalization expense | $ | 12,580 | $ | — | $ | 14,005 | $ | — | ||||
Net (loss) income attributable to common stockholders per share | $ | (0.22) | $ | 0.02 | $ | (0.19) | $ | 0.07 | ||||
FFO per share and unit(1) | $ | (0.03) | $ | 0.19 | $ | 0.34 | $ | 0.54 | ||||
AFFO per share and unit(1) | $ | 0.23 | $ | 0.19 | $ | 0.65 | $ | 0.54 | ||||
Dividends per share of common stock | $ | 0.20 | $ | 0.20 | $ | 0.60 | $ | 0.60 | ||||
Weighted average common stock outstanding | 46,908 | 35,512 |
| 45,503 |
| 32,514 | ||||||
Weighted average OP Units outstanding | 1,958 | 3,143 |
| 2,250 |
| 3,144 | ||||||
Weighted average LTIP Units outstanding | 1,367 | 794 |
| 1,143 |
| 737 | ||||||
Total weighted average shares and units outstanding | 50,233 | 39,449 |
| 48,896 |
| 36,395 |
(1) | See “—Non-GAAP Financial Measures,” for a description of our non-GAAP financial measures and a reconciliation of our non-GAAP financial measures. |
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| As of |
|
| |||||
September 30, | December 31, |
| ||||||
| 2020 |
| 2019 |
|
| |||
(dollars in thousands) |
| |||||||
Total investment in real estate, gross | $ | 1,061,380 | $ | 905,529 | ||||
Total debt, net | $ | 519,385 | $ | 386,168 | ||||
Weighted average interest rate |
| 3.34 | % |
| 3.90 | % | ||
Total equity (including noncontrolling interest) | $ | 449,207 | $ | 460,353 | ||||
Net rentable square feet |
| 3,465,312 |
| 2,780,851 |
Our Properties
As of September 30, 2020, our portfolio consisted of gross investment in real estate of $1,061.4 million, which was comprised of 78 facilities with an aggregate of approximately 3.5 million rentable square feet and approximately $81.9 million of annualized base rent.
Capital Raising Activity
During the nine months ended September 30, 2020, we generated gross proceeds of $39.2 million through at-the-market ("ATM") equity issuances of 3.2 million shares of our common stock at an average offering price of $12.37 per share.
Debt Activity
On July 24, 2020, the Company received aggregate commitments of up to $100 million from certain of its lenders pursuant to the accordion feature (the “Accordion”) under its Credit Facility. With the closing of the Accordion, the borrowing capacity under the Company’s Credit Facility was increased to $600 million, consisting of a $250 million capacity revolver (the “Revolver”), a $350 million term loan (the “Term Loan”), and a remaining $50 million accordion. The remaining terms of the Credit Facility were unchanged. In connection with the closing of the Accordion, on July 27, 2020, the Company entered into an interest rate swap with Wells Fargo Bank, N.A. with a notional amount of $50 million (the term component of the Accordion), a fixed interest rate of 0.16% and a maturity date of August 8, 2023.
During the nine months ended September 30, 2020, we borrowed $158.4 million under our Credit Facility and repaid $51.6 million, for a net amount borrowed of $106.8 million. As of September 30, 2020, the net outstanding Credit Facility balance was $454.3 million.
In connection with the acquisition of the Dumfries Facility in April 2020, we assumed a CMBS loan with an outstanding balance of approximately $12.1 million, an interest rate of 4.68% and a remaining term of four years. In connection with the acquisition of the Rosedale Facilities in July 2020, we entered into a third-party loan in the amount of $14.8 million with an annual interest rate of 3.85% and a term of five years.
Recent Developments
Completed Acquisitions
Since September 30, 2020, we have closed on the following properties:
|
| Rentable |
| Purchase |
| Annualized |
|
| |||||
Square Feet | Price(1) | Base Rent(2) | Capitalization |
| |||||||||
Property |
| City |
| (RSF) |
| (in thousands) |
| (in thousands) |
| Rate(3) |
| ||
DaVita Portfolio | Decatur, GA / Jackson, TN | 36,092 | $ | 10,775 | $ | 755 | 7.0% | ||||||
Prevea Portfolio | Sheboygan / Plymouth, WI | 40,250 | 13,700 | 1,016 | 7.4% | ||||||||
Totals/Weighted Average |
|
| 76,342 | $ | 24,475 | $ | 1,771 |
| 7.2% |
(1) | Represents contractual purchase price. |
(2) | October 2020 base rent multiplied by 12. |
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(3) | Capitalization rates are calculated based on current lease terms and do not give effect to future rent escalations. |
Properties Under Contract
We have eight properties under contract for an aggregate purchase price of approximately $72 million. We are currently in the due diligence period for our properties under contract. If we identify problems with any of these properties or the operators of any properties during our due diligence review, we may not close the transactions on a timely basis or we may terminate the purchase agreements and not close the transactions.
Trends Which May Influence Our Results of Operations
We believe the following trends may negatively impact our results of operations:
● | Decreases in our tenants’ patient volumes and revenues due to the COVID-19 pandemic – In March 2020, the World Health Organization declared the outbreak of COVID-19, a novel strain of coronavirus, a pandemic. This outbreak, which has spread widely throughout the U.S. and nearly all other regions of the world, prompted federal, state and local governmental authorities in the U.S. to declare states of emergency and institute preventative measures to contain and/or mitigate the public health effects. Many states initially banned elective and non-urgent medical procedures and have since lifted such bans; however, the recent resurgence of COVID-19 cases in many states, including many states in which our facilities are located, may cause such states to reinstitute these bans. Certain localities, such as El Paso, Lubbock and Amarillo, Texas, have already reinstituted bans on elective surgeries due to a resurgence in COVID-19. Given that many of our tenants depend on elective and non-urgent medical procedures as a major source of revenue, a reinstituted ban on these procedures may have a material adverse effect on our tenants’ businesses. In addition, in response to the recent resurgence of the COVID-19 pandemic, local, state and federal agencies have reinstituted or may reinstitute stay-at-home or shelter-in-place orders, which may result in many of our tenants experiencing significantly reduced patient volumes and, even upon the lifting of such bans and restrictions, patients may be reluctant to undertake certain medical procedures and our tenants may institute social distancing measures, each of which may cause our tenants to experience decreased patient volumes for an extended period of time. |
The COVID-19 pandemic has also caused historically high unemployment rates in the United States. Many unemployed workers have also lost their employer-based health insurance, which is a primary payor for our tenants. Even though our tenants have been able to operate during most of the pandemic, the extraordinarily high levels of U.S. unemployment and loss of health insurance may cause people to cancel or delay medical procedures, and it is unclear when, if ever, these workers will be able to regain employment or private health insurance. An extended period of high unemployment and loss of benefits could materially adversely affect our tenants’ businesses and thus our ability to collect rent from our tenants.
At the onset of the outbreak, we began working with certain of our tenants that were experiencing significant disruptions in their businesses to help them navigate these uncertain times, including assisting them in applying for government financial relief and, in certain limited circumstances, entering into rent deferral agreements. The aggregate amount of such rent deferrals equaled $1.1 million and, as of September 30, 2020, we have collected $0.6 million of this amount. Because the extent of the impact of COVID-19 on the Company’s tenants will depend on future developments, including a resurgence of COVID-19, there can be no assurance that the Company’s tenants will be able to continue to meet the requirements of these agreements, or that these tenants, or other tenants, may not seek additional relief in the future.
● | Changes in third party reimbursement methods and policies. Even prior to the COVID-19 pandemic, the price of healthcare services was increasing, and we believed that third-party payors, such as Medicare and commercial insurance companies, would 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 were continuing to increase the percentage of insurance premiums for which covered individuals are responsible. We expect these trends will only be exacerbated by the COVID-19 pandemic, as federal and state budgets are likely to be under tremendous stress due to the pandemic and private insurers are likely to incur substantial losses due to COVID-19-related claims and the downturn in the financial and credit markets. If these trends continue, our tenants’ businesses will continue to be negatively affected, which may impact their ability to pay rent to us. |
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Prior to the COVID-19 pandemic, we believed the following trends may positively impact our 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 5.5% per year through 2027. We believe the long-term growth in healthcare expenditures will 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 provided 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 outpatient facilities will benefit our tenants as most of our properties consist of outpatient facilities. |
● | 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. |
After the COVID-19 pandemic, it is unclear whether the above-listed positive trends will be reinstated or, if so, how such trends may be affected by the long-term effects of the COVID-19 pandemic.
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 Policy
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, 2019, filed with the Commission on March 9, 2020, for further information regarding the critical accounting policies that affect our more significant estimates and judgments used in the preparation of our condensed consolidated financial statements included in Part I, Item 1 of this Report.
Consolidated Results of Operations
The major factors that resulted in variances in our results of operations for each revenue and expense category for the three and nine months ended September 30, 2020 compared to the same periods in 2019 were (i) the increase in the size of our property portfolio and (ii) expenses related to the Internalization. Our total investments in real estate, net of accumulated depreciation and amortization, was $977.5 million and $781.7 million as of September 30, 2020 and 2019, respectively.
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Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019
Three Months Ended September 30, | ||||||||||
| 2020 |
| 2019 |
| $ Change |
| ||||
(in thousands) | ||||||||||
Revenue |
|
|
|
|
|
|
| |||
Rental revenue | $ | 25,055 | $ | 18,117 | $ | 6,938 | ||||
Other income |
| 42 |
| 78 |
| (36) | ||||
Total revenue |
| 25,097 |
| 18,195 |
| 6,902 | ||||
Expenses | ||||||||||
General and administrative |
| 4,027 |
| 1,681 |
| 2,346 | ||||
Operating expenses |
| 3,619 |
| 1,362 |
| 2,257 | ||||
Management fees – related party |
| — |
| 1,621 |
| (1,621) | ||||
Depreciation expense |
| 6,954 |
| 5,006 |
| 1,948 | ||||
Amortization expense |
| 2,563 |
| 1,500 |
| 1,063 | ||||
Interest expense |
| 4,864 |
| 4,549 |
| 315 | ||||
Management internalization expense |
| 12,580 |
| — |
| 12,580 | ||||
Preacquisition expense |
| 70 |
| 168 |
| (98) | ||||
Total expenses |
| 34,677 |
| 15,887 |
| 18,790 | ||||
Net (loss) income | $ | (9,580) | $ | 2,308 | $ | (11,888) |
Revenue
Total Revenue
Total revenue for the three months ended September 30, 2020 was $25.1 million, compared to $18.2 million for the same period in 2019, an increase of $6.9 million. The increase was primarily the result of rental revenue earned from the facilities that we acquired subsequent to September 30, 2019, as well as from the recognition of a full three months of rental revenue in 2020 from acquisitions that were completed during the three months ended September 30, 2019. Additionally, $3.9 million in revenue was recognized from expense recoveries during the three months ended September 30, 2020, compared to $1.2 million for the same period in 2019.
Expenses
General and Administrative
General and administrative expenses for the three months ended September 30, 2020 were $4.0 million, compared to $1.7 million for the same period in 2019, an increase of $2.3 million. The increase was primarily driven by the impact of the Internalization and our recognition of $1.7 million of compensation related costs and other administrative expenses that prior to the Internalization were the obligation of our Former Advisor. In addition, reflecting the impact of long-term incentive plan (“LTIP”) unit grants made in connection with the Internalization, this increase was also due to an increase in non-cash LTIP compensation expense which was $1.6 million for the three months ended September 30, 2020, compared to $0.9 million for the same period in 2019.
Operating Expenses
Operating expenses for the three months ended September 30, 2020 were $3.6 million, compared to $1.4 million for the same period in 2019, an increase of $2.2 million. The increase resulted from $3.9 million of reimbursable property operating expenses incurred during the three months ended September 30, 2020, compared to $1.2 million for the same period in 2019, and $0.5 million of expense from properties that include tenants with gross leases.
Management Fee Expense – related party
As a result of the Internalization, we incurred no management fee expense for the three months ended September 30, 2020. Management fee expense was $1.6 million for the three months ended September 30, 2019, and was calculated based on our stockholders’ equity balance.
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Depreciation Expense
Depreciation expense for the three months ended September 30, 2020 was $7.0 million, compared to $5.0 million for the same period in 2019, an increase of $2.0 million. The increase resulted primarily from depreciation expense incurred on the facilities that we acquired subsequent to September 30, 2019, as well as from the recognition of a full three months of depreciation expense in 2020 from acquisitions that were completed during the three months ended September 30, 2019.
Amortization Expense
Amortization expense for the three months ended September 30, 2020 was $2.6 million, compared to $1.5 million for the same period in 2019, an increase of $1.1 million. The increase resulted primarily from amortization expense incurred on intangible assets acquired subsequent September 30, 2019, as well as from the recognition of a full three months of amortization expense in 2020 from intangible assets recorded during the three months ended September 30, 2019.
Interest Expense
Interest expense for the three months ended September 30, 2020 was $4.9 million, compared to $4.5 million for the same period in 2019, an increase of $0.4 million. This increase was primarily due to higher average borrowings during the three months ended September 30, 2020, compared to the same period last year, the proceeds of which were used to partially finance our property acquisitions during that time period.
The weighted average interest rate of our debt for the three months ended September 30, 2020 was 3.32%. Additionally, the weighted average interest rate and term of our debt was 3.34% and 3.06 years at September 30, 2020.
Management Internalization Expense
Management internalization expense for the three months ended September 30, 2020 was $12.6 million, compared to zero for the same period in 2019. This expense represents a one-time expense of $12.1 million related to the settlement of a preexisting contractual relationship and $0.5 million of professional fees associated with the Internalization.
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Net (Loss) Income
Net loss for the nine months ended September 30, 2020 was $(9.6) million, compared to net income of $2.3 million for the same period in 2019, a decrease of $11.9 million. The decrease resulted primarily from the recognition of $12.6 million of management internalization expense and the increase in expenses for the current three-month period, partially offset from an increase in rental revenue over the period.
Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019
Nine Months Ended September 30, | |||||||||
2020 | 2019 | $ Change | |||||||
(in thousands) | |||||||||
Revenue |
|
|
|
|
|
| |||
Rental revenue | $ | 68,623 | $ | 50,093 | $ | 18,530 | |||
Other income |
| 178 |
| 182 |
| (4) | |||
Total revenue |
| 68,801 |
| 50,275 |
| 18,526 | |||
Expenses |
|
|
|
|
|
| |||
General and administrative |
| 7,509 |
| 4,928 |
| 2,581 | |||
Operating expenses |
| 8,256 |
| 3,826 |
| 4,430 | |||
Management fees – related party |
| 4,024 |
| 4,539 |
| (515) | |||
Depreciation expense |
| 19,383 |
| 13,481 |
| 5,902 | |||
Amortization expense |
| 6,832 |
| 3,757 |
| 3,075 | |||
Interest expense |
| 13,616 |
| 12,707 |
| 909 | |||
Management internalization expense |
| 14,005 |
| — |
| 14,005 | |||
Preacquisition expense |
| 267 |
| 224 |
| 43 | |||
Total expenses |
| 73,892 |
| 43,462 |
| 30,430 | |||
Net (loss) income | $ | (5,091) | $ | 6,813 | $ | (11,904) |
Revenue
Total Revenue
Total revenue for the nine months ended September 30, 2020 was $68.8 million, compared to $50.3 million for the same period in 2019, an increase of $18.5 million. The increase was primarily the result of rental revenue earned from the facilities we acquired subsequent to September 30, 2019, as well as from the recognition of a full nine months of rental revenue in 2020 from acquisitions that were completed during the nine months ended September 30, 2019. Additionally, $7.7 million in revenue was recognized from expense recoveries during the nine months ended September 30, 2020, compared to $3.6 million for the same period in 2019. The increase was partially offset by the recognition of reserves for approximately $1.1 million of rent, including approximately $0.4 million of deferred rent, that was primarily related to one tenant.
Expenses
General and Administrative
General and administrative expenses for the nine months ended September 30, 2020 were $7.5 million, compared to $4.9 million for the same period in 2019, an increase of $2.6 million. The increase was primarily driven by the impact of the Internalization and our recognition of compensation related costs and other administrative expenses that prior to the Internalization were the obligation of our Former Advisor. In addition, reflecting the impact of LTIP unit grants made in connection with the Internalization, this increase was also due to an increase in non-cash LTIP compensation expense which was $3.4 million for the nine months ended September 30, 2020, compared to $2.5 million for the same period in 2019.
Operating Expenses
Operating expenses for the nine months ended September 30, 2020 were $8.3 million, compared to $3.8 million for the same period in 2019, an increase of $4.5 million. The increase results from $7.7 million of reimbursable property operating expenses incurred
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during the nine months ended September 30, 2020, compared to $3.6 million for the same period in 2019, and $1.2 million of expense from properties that include tenants with gross leases.
Management Fees Expense - related party
Management fee expense for the nine months ended September 30, 2020 was $4.0 million, compared to $4.5 million for the same period in 2019, a decrease of $0.5 million. As a result of the Internalization, management fee expense was incurred for the first six months of the current nine-month period compared to a full nine months during the same period in 2019. This fee was calculated based on our stockholders’ equity balance.
Depreciation Expense
Depreciation expense for the nine months ended September 30, 2020 was $19.4 million, compared to $13.5 million for the same period in 2019, an increase of $5.9 million. The increase results primarily from depreciation expense incurred on the facilities we acquired subsequent to September 30, 2019, as well as from the recognition of a full nine months of depreciation expense in 2020 from acquisitions that were completed during the nine months ended September 30, 2019.
Amortization Expense
Amortization expense for the nine months ended September 30, 2020 was $6.8 million, compared to $3.8 million for the same period in 2019, an increase of $3.0 million. The increase results primarily from amortization expense incurred on intangible assets recorded subsequent to September 30, 2019, as well as from the recognition of a full nine months of amortization expense in 2020 from intangible assets recorded during the nine months ended September 30, 2019.
Interest Expense
Interest expense for the nine months ended September 30, 2020 was $13.6 million, compared to $12.7 million for the same period in 2019, an increase of $0.9 million. This increase was primarily due to higher average borrowings during the nine months ended September 30, 2020, compared to the same period last year, the proceeds of which were used to partially finance our property acquisitions during that time period.
The weighted average interest rate of our debt for the nine months ended September 30, 2020 was 3.48%. Additionally, the weighted average interest rate and term of our debt was 3.34% and 3.06 years at September 30, 2020.
Management Internalization Expense
Management internalization expense for the nine months ended September 30, 2020 was $14.0 million, compared to zero for the same period in 2019. This expense represents a one-time expense of $12.1 million related to the settlement of a preexisting contractual relationship and $1.9 million of professional fees associated with the Internalization.
Net (Loss) Income
Net loss for the nine months ended September 30, 2020 was $(5.1) million compared to net income of $6.8 million for the same period in 2019, a decrease of $11.9 million. The decrease resulted primarily from the recognition of $14.0 million of management internalization expense and the increase in expenses for the current nine-month period, partially offset from an increase in rental revenue over the period.
Assets and Liabilities
As of September 30, 2020 and December 31, 2019, our principal assets consisted of investments in real estate, net, of $977.5 million and $849.0 million, respectively. Our liquid assets consisted primarily of cash and cash equivalents and restricted cash of $7.3 million and $7.2 million, as of September 30, 2020 and December 31, 2019, respectively.
The increase in our investments in real estate, net, to $977.5 million as of September 30, 2020 compared to $849.0 million as of December 31, 2019, was the result of the 10 acquisitions that we completed during the nine months ended September 30, 2020.
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The increase in our cash and cash equivalents and restricted cash balances to $7.3 million as of September 30, 2020, compared to $7.2 million as of December 31, 2019, was primarily due to cash inflows from net borrowings on our Credit Facility and additional borrowings, and net proceeds from common equity offerings. These cash inflows were partially offset by funds used to acquire real estate, pay the Internalization consideration, and dividends paid to our common and preferred stockholders.
The increase in our total liabilities to $576.3 million as of September 30, 2020 compared to $424.6 million as of December 31, 2019, was primarily the result of higher net borrowings outstanding from our Credit Facility during the current period, additional borrowings related to acquisitions, an increase in our derivative liability balance, and an increase in our 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; and |
● | Property acquisitions and tenant improvements. |
In addition, we require funds for future distributions expected to be paid to our common and preferred stockholders and OP Unit and LTIP Unit holders in our Operating Partnership.
As of October 31, 2020, we had cash balances and available capacity under our Credit Facility of approximately $112 million. Our primary sources of cash include rent and reimbursements we collect from our tenants, borrowings under our Credit Facility, secured term loans, net proceeds received from equity issuances (including OP Unit transactions), and select property dispositions.
Assuming our current level of COVID-19-related rent deferrals, we believe we will be able to satisfy our short-term liquidity requirements through our existing cash and cash equivalents and cash flow from operations. In order to continue acquiring healthcare properties, we will need to continue to have access to debt and equity financing.
We are subject to a number of financial covenants under our Credit Facility, including, among other things, (i) a maximum consolidated leverage ratio as of the end of each fiscal quarter of less than 0.60:1.00, (ii) a minimum fixed charge coverage ratio of 1.50:1.00, (iii) a minimum net worth of $203.8 million plus 75% of all net proceeds raised through equity offerings subsequent to March 31, 2018 and (iv) a ratio of total secured recourse debt to total asset value of not greater than 0.10:1.00. Additionally, beginning at the end of fourth quarter of 2020, our distributions to common stockholders will be limited to an amount equal to 95% of our AFFO (our AFFO payout ratio). As of September 30, 2020, we were in compliance with all of the financial covenants contained in the Credit Facility, and we do not believe our current level of COVID-19-related rent deferrals affect our ability to comply with such covenants. However, if the amounts of our rent deferrals exceed our expectations or our tenants default on their rent deferral agreements with us, our ability to satisfy our Credit Facility covenants may be adversely affected.
We have entered into six interest rate swaps with four counterparties to hedge the LIBOR component of our interest rate risk related to the Term Loan. Together, these swaps fix the LIBOR component of the entire $350 million term loan on a weighted average basis at 1.91%. An aggregate of $200 million of the swaps mature in August 2024 and an additional $150 million matures in August 2023.
In July 2017, the FCA that regulates LIBOR announced its intention to stop compelling banks to submit rates for the calculation of LIBOR after 2021. As a result, the Federal Reserve Board and the Federal Reserve Bank of New York organized the ARRC which identified the SOFR as its preferred alternative to USD-LIBOR in derivatives and other financial contracts. The Credit Facility provides that, on or about the LIBOR cessation date (subject to an early opt-in election), LIBOR shall be replaced as a benchmark rate in the Credit Facility with a new benchmark rate to be agreed upon by the Company and BMO, with such adjustments to cause the new benchmark rate to be economically equivalent to LIBOR. We are not able to predict when LIBOR will cease to be available or when there will be enough liquidity in the SOFR markets.
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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, and distributions. We expect to satisfy our long-term liquidity needs through cash flow from operations, debt financing, sales of additional equity securities, the issuance of OP Units in connection with acquisitions of additional properties, proceeds from select property dispositions and joint venture transactions.
Cash Flow Information
Net cash provided by operating activities for the nine months ended September 30, 2020 was $18.4 million, compared with $26.7 million for the same period in 2019. The decrease during the 2020 period was primarily due to the net loss for the nine-month period. The net loss was primarily the result of a one-time expense of $12.1 million related to the settlement of a preexisting contractual relationship.
Net cash used in investing activities for the nine months ended September 30, 2020 was $141.6 million, compared with $182.7 million for the same period in 2019. The decrease during the 2020 period was primarily the result of less real estate investment activity in the 2020 period compared to the same period in 2019, partially offset by cash paid during the current nine-month period to acquire our Former Advisor in connection with the Internalization.
Net cash provided by financing activities for the nine months ended September 30, 2020 was $123.3 million, compared with $157.0 million for the same period in 2019. The decrease during the 2020 period was primarily due to the fact that the current period had lower net proceeds from common equity offerings and higher dividends paid to our common stockholders, partially offset by higher net borrowings on the Credit Facility, and additional borrowings.
Common Stock Dividends
Common stock dividend activity for the nine months ended September 30, 2020 is summarized in the following table:
|
| Applicable |
|
| Dividend |
| Dividends | |||||
Date Announced | Record Date | Quarter | Payment Date | Amount(1) | per Share | |||||||
December 13, 2019 | December 26, 2019 |
| Q4 2019 | January 9, 2020 | $ | 9,541 | $ | 0.20 | ||||
March 4, 2020 | March 25, 2020 | Q1 2020 | April 9, 2020 | $ | 9,610 | $ | 0.20 | |||||
June 12, 2020 | June 25, 2020 |
| Q2 2020 | July 9, 2020 | $ | 9,861 | $ | 0.20 | ||||
September 3, 2020 |
| September 24, 2020 |
| Q3 2020 |
| October 8, 2020 | $ | 10,357 | $ | 0.20 |
(1) | Includes distributions on granted LTIP Units and OP Units. |
During the nine months ended September 30, 2020 and 2019, the Company paid total dividends on its common stock, LTIP Units and OP Units in the aggregate amount of $29.6 million and $21.2 million, respectively.
The amount of the dividends paid to the Company’s stockholders is determined by the 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 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 $25.00 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 or (iii) those dividends are declared by the Board.
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The quarterly dividend payment dates on the Series A Preferred Stock are January 31, April 30, July 31 and October 31 of each year. During each of the nine-month periods ended September 30, 2020 and 2019, the Company paid preferred dividends of $4.4 million.
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 noncontrolling interests of holders of OP Units and LTIP Units, excluding gains (or losses) from sales of property and extraordinary items, less preferred stock dividends, plus real estate-related depreciation and amortization (excluding amortization of debt issuance costs and the amortization of above and below market leases), and after adjustments for unconsolidated partnerships and joint ventures. The Company did not record any adjustments for unconsolidated partnerships and joint ventures during the three or nine months ended September 30, 2020 and 2019. Because FFO excludes real estate-related depreciation and amortization (other than amortization of debt issuance costs and above and below market lease amortization expense), the Company believes that FFO provides a performance measure that, when compared period-over-period, reflects the impact to operations from trends in occupancy rates, rental rates, operating costs, development activities and interest costs, providing perspective not immediately apparent from the closest GAAP measurement, net income or loss.
AFFO is a non-GAAP measure used by many investors and analysts to measure a real estate company’s operating performance by removing the effect of items that do not reflect ongoing property operations. Management calculates AFFO by modifying the NAREIT computation of FFO by adjusting it for certain cash and non-cash items and certain recurring and non-recurring items. For the Company these items include management internalization costs (including a one-time expense related to the settlement of a preexisting contractual relationship), 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 above and below market leases, recurring amortization of debt issuance costs, recurring lease commissions, and other items.
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.
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A reconciliation of FFO and AFFO for the three and nine months ended September 30, 2020 and 2019 is as follows:
|
| ||||||||||||
Three Months Ended September 30, |
| Nine Months Ended September 30, | |||||||||||
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| |||||
(unaudited, in thousands except per share amounts) | |||||||||||||
Net (loss) income | $ | (9,580) | $ | 2,308 | $ | (5,091) | $ | 6,813 | |||||
Less: Preferred stock dividends |
| (1,455) |
| (1,455) |
| (4,366) |
| (4,366) | |||||
Depreciation and amortization expense |
| 9,517 |
| 6,506 |
| 26,215 |
| 17,238 | |||||
FFO | $ | (1,518) | $ | 7,359 | $ | 16,758 | $ | 19,685 | |||||
Internalization expense - settlement of a preexisting contractual relationship | 12,094 | — | 12,094 | — | |||||||||
Internalization expense - other transaction costs | 486 | — | 1,911 | — | |||||||||
Amortization of above market leases, net |
| 69 |
| 229 |
| 472 |
| 634 | |||||
Straight line deferred rental revenue |
| (1,520) |
| (1,476) |
| (4,336) |
| (4,314) | |||||
Stock-based compensation expense |
| 1,572 |
| 868 |
| 3,391 |
| 2,493 | |||||
Amortization of debt issuance costs and other |
| 396 |
| 350 |
| 1,030 |
| 1,000 | |||||
Preacquisition expense |
| 70 |
| 168 |
| 267 |
| 223 | |||||
AFFO | $ | 11,649 | $ | 7,498 | $ | 31,587 | $ | 19,721 | |||||
Net (loss) income attributable to common stockholders per share – basic and diluted | $ | (0.22) | $ | 0.02 | $ | (0.19) | $ | 0.07 | |||||
FFO per share and unit | $ | (0.03) | $ | 0.19 | $ | 0.34 | $ | 0.54 | |||||
AFFO per share and unit | $ | 0.23 | $ | 0.19 | $ | 0.65 | $ | 0.54 | |||||
Weighted Average Shares and Units Outstanding – basic and diluted |
| 50,233 |
| 39,449 |
| 48,896 |
| 36,395 | |||||
Weighted Average Shares and Units Outstanding: | |||||||||||||
Weighted Average Common Shares |
| 46,908 |
| 35,512 |
| 45,503 |
| 32,514 | |||||
Weighted Average OP Units |
| 1,958 |
| 3,143 |
| 2,250 |
| 3,144 | |||||
Weighted Average LTIP Units |
| 1,367 |
| 794 |
| 1,143 |
| 737 | |||||
Weighted Average Shares and Units Outstanding – basic and diluted |
| 50,233 |
| 39,449 |
| 48,896 |
| 36,395 |
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 CPI 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 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 September 30, 2020, we had $108.2 million of unhedged borrowings outstanding under the Revolver (before the netting of unamortized debt issuance costs) that bears interest at a variable rate. See the “Management’s Discussion and Analysis of Financial Condition and Results of Operation — Liquidity and Capital Resources” for a detailed discussion of our Credit Facility. At September 30, 2020, LIBOR on our outstanding floating-rate borrowings was 0.18%. 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 $1.1 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 $1.1 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. As of September 30, 2020, in total we had entered into six interest rate swaps with four counterparties to hedge the LIBOR component of our interest rate risk related to the Term Loan. Together, these swaps fix the LIBOR component of the entire $350 million Term Loan on a weighted average basis at 1.91%. See Note 4 – “Credit Facility, Notes Payable and Derivative Instruments” for further details on our interest rate swaps. We may enter into additional derivative financial instruments, including interest rate swaps and caps, in order to mitigate our interest rate risk on our future borrowings. 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 September 30, 2020 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.
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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.
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
Risks Related to Our Business
Our and our tenants’ businesses have been and may continue to be materially and adversely affected by the ongoing COVID-19 pandemic.
In March 2020, the World Health Organization declared the outbreak of COVID-19, a novel strain of coronavirus, a pandemic. This outbreak, which has spread widely throughout the U.S. and nearly all other regions of the world, prompted federal, state and local governmental authorities in the U.S. to declare states of emergency and institute preventative measures to contain and/or mitigate the public health effects of COVID-19. These preventative measures, which include quarantines, shelter-in-place orders and similar mandates that substantially restricted daily activities for many individuals, as well as orders calling for the closure and/or curtailment of operations for many businesses, have caused and continue to cause significant disruption to businesses in affected areas, as well as the financial markets both globally and in the U.S. Although many of these restrictions have been lifted, a resurgence of COVID-19 has caused and could cause governmental authorities to reimplement preventive measures. For example, certain localities, such as El Paso, Lubbock and Amarillo, Texas, have already reinstituted bans on elective surgeries due to a resurgence in COVID-19. Reinstitution of COVID-19-related restrictions could cause additional significant disruptions to businesses and global and U.S. financial markets.
Effect of the COVID-19 Pandemic on Our Operations
In response to the COVID-19 pandemic and measures taken by applicable governmental authorities, we have been encouraging all of our employees at our corporate office to work remotely until further notice. While we believe these measures are advisable and in the best interests of our employees and communities, such measures, in combination with other factors, have caused disruptions to our normal operations and may continue to do so during the pendency of such measures. Additionally, certain of our service providers have instituted or may institute similar preventative measures, which could result in reductions in the availability, capacity and/or efficiency of the services upon which we depend for our operations. Further, in the event any of our employees, and/or employees of our service providers, contract COVID-19 or are otherwise compelled to self-quarantine, we may experience shortages in labor and services that we require for our operations. Also, remote work arrangements may increase the risk of cybersecurity incidents, data breaches or cyber-attacks, which could have a material adverse effect on our business and results of operations, due to, among other things, the loss of proprietary data, interruptions or delays in the operation of our business and damage to our reputation.
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Effect of COVID-19 Pandemic on Our and Our Tenants’ Businesses.
We and our tenants have been, and may continue to be, materially and adversely affected by the disruptions to U.S. and local economies that result from the COVID-19 pandemic, including due to reduced volumes at our healthcare facilities. Many states banned elective and non-urgent medical procedures during the first few months of the COVID-19 pandemic. Given that many of our tenants depend on elective and non-urgent medical procedures as a major source of revenue, the previous ban had a material adverse effect on our tenants’ businesses, and the previous ban, or a reinstitution of such ban, may continue to affect, many of our tenants’ ability to pay rent to us on a timely basis. For example, certain localities, such as El Paso, Lubbock and Amarillo, Texas, have already reinstituted bans on elective surgeries due to a resurgence in COVID-19. A reinstitution of the ban on elective medical procedures may have a material adverse effect on our and our tenants’ businesses and may lead to: (i) increased tenant rent deferrals, (ii) failure by tenants to comply with their current rent deferral agreements with us or (iii) tenant defaults. Also, even though most of these bans have currently been lifted, patients may be reluctant to undertake certain medical procedures and our tenants may institute social distancing measures, each of which may cause our tenants to experience decreased patient volumes for an extended period of time. Even with significant government financing programs available through the CARES Act, our tenants may not be eligible to participate in such programs or there may be insufficient funds available to withstand a prolonged downturn in their businesses.
The U.S. is currently experiencing historically high unemployment rates. Many of these unemployed workers have also lost their employer-based health insurance, which is a primary payor for our tenants. The extraordinarily high levels of U.S. unemployment and loss of health insurance may cause people to cancel or delay medical procedures even after the COVID-19 pandemic subsides, and it is unclear when, if ever, these workers will be able to regain employment or private health insurance. An extended period of high unemployment and loss of benefits could materially, adversely affect our tenants’ businesses and thus our ability to collect rent from our tenants.
Effect of the COVID-19 Pandemic on Our Access to Capital
The COVID-19 pandemic caused, and continues to cause, substantial volatility in U.S. and international debt and equity markets and caused, and continues to cause, significant decreases in the market prices of equity securities. Although equity security prices have generally stabilized, a resurgence of COVID-19 could cause U.S. and international debt and equity prices to fall and force liquidity constraints on our lenders, which could negatively affect our ability to access capital on commercially reasonable terms or at all.
Effect of the COVID-19 Pandemic on our Acquisition Pipeline
A resurgence of the COVID-19 pandemic could alter the market for healthcare real estate, which, in turn, could dramatically decrease our investment pipeline and cause us not to achieve our acquisition goals.
The declaration, amount and payment of future cash dividends are subject to uncertainty due to current market conditions.
All dividends will be declared at the discretion of our Board and will depend on our earnings, our financial condition, REIT distribution requirements, and other factors as our Board may deem relevant from time to time. A resurgence of the COVID-19 pandemic could adversely affect our ability to pay dividends. Our Board is under no obligation or requirement to declare a dividend distribution and will continue to assess our dividend rates on an ongoing basis, as market conditions and our financial position continue to evolve. We cannot assure you that we will achieve results that will allow us to pay dividends or that the level of dividends will be maintained to increased.
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Ultimately, the overall effects of the COVID-19 pandemic on our and our tenants’ businesses, which are highly uncertain and cannot be predicted, will depend upon future developments, including the severity of COVID-19 and the duration of the outbreak and potential resurgences; the duration of existing or future social distancing and shelter-in-place orders; further mitigation strategies taken by applicable government authorities; the availability of a vaccine, adequate testing and treatments and the prevalence of widespread immunity to COVID-19; the impacts on our tenants’ supply chain; the health of our and our tenants’ employees, service providers; and the reactions of U.S. and global markets and their effects on consumer confidence and spending. Such adverse effects, however, may include lower patient volumes or reduced revenues of our tenants, an increase in rent deferral requests, requests to extend the repayment periods for deferred rent, or a failure by our tenants to pay rent to us, which may materially impact our business, financial condition, results of operation, our ability to pay distributions on our common and preferred stock and the market prices of our common and preferred stock during the fourth quarter of 2020 and beyond, as well as our ability to satisfy the covenants in our existing and any future debt agreements, including the Credit Facility, and service our outstanding indebtedness. The impact of COVID-19 may also exacerbate other risks discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Commission on March 9, 2020, any of which could have a material effect on us.
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
None.
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Item 6. Exhibits
(a)Exhibits
Exhibit No. |
| Description |
2.1 | ||
3.1 | ||
3.2 | ||
4.1 | ||
4.2 | ||
10.1 | ||
10.2 | ||
10.3 | ||
10.4 | ||
10.5 | ||
10.6 | ||
10.7* | ||
10.8* | ||
31.1* | ||
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31.2* | ||
32.1* | ||
101.INS * | Inline 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 | |
104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
* | 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. | ||
Date: November 6, 2020 | By: | /s/ Jeffrey M. Busch |
Jeffrey M. Busch | ||
Chief Executive Officer (Principal Executive Officer) | ||
Date: November 6, 2020 | By: | /s/ Robert J. Kiernan |
Robert J. Kiernan | ||
Chief Financial Officer (Principal Financial and Accounting Officer) |
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