Global Medical REIT Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Property Portfolio

Property Portfolio

6 Months Ended

Jun. 30, 2017

Property, Plant and Equipment [Abstract]

Property, Plant and Equipment Disclosure [Text Block]

Note 3 Property Portfolio

Summary of Properties Acquired During the Six Months Ended June 30, 2017

During the three months ended June 30, 2017, the Company completed four acquisitions. Including these four acquisitions the Company completed a total of 12 acquisitions during the six months ended June 30, 2017. A summary description of the completed acquisitions is as follows:

Sherman Facility

On June 30, 2017, the Company, as buyer, pursuant to a purchase and sale agreement with SDB Partners, LLC (“SDB Partners”), as seller, closed on the acquisition of a hospital building located in Sherman, Texas for a purchase price of $26 million. Upon closing of this acquisition, the Company leased the property back to SDB Partners by entering into a new triple-net lease with SDB Partners with an initial term of twenty years and two ten-year extension options. The Company funded this acquisition using borrowings from its revolving credit facility.

Flower Mound Facility

On June 27, 2017, the Company, as buyer, pursuant to a purchase and sale agreement with Spelunker Properties V, LLC (“Spelunker”), as seller, closed on the acquisition of a medical office building located in Flower Mound, Texas (the “Flower Mound Facility”) for a purchase price of $4.05 million. Upon the closing of this acquisition, the Company assumed Spelunker’s interest, as lessor, in the lease of the Flower Mound Facility to Lone Star Endoscopy Center, LLC. The lease has a remaining lease term of approximately nine years. The Company funded this acquisition using borrowings from its revolving credit facility.

Accounting Treatment

The Company accounted for the acquisition of the Flower Mound Facility as a business combination in accordance with the provisions of ASC Topic 805 - Business Combinations. The following table presents the preliminary purchase price allocation for the assets acquired as part of the acquisition:

Land and site improvements	$	729,632
Building and tenant improvements		3,155,154
In place leases		222,334
Leasing costs		184,423
Below market lease intangible		(241,543)
Total purchase price	$	4,050,000

The above allocation is preliminary and subject to revision within the measurement period, not to exceed one year from the date of the acquisition.

Brockport Facility

On June 27, 2017, the Company, as buyer, pursuant to a purchase and sale agreement with South Pointe Landing, LLC (“South Pointe”), as seller, closed on the acquisition of a medical office building located in Brockport, New York (the “Brockport Facility”) for a purchase price of $8.67 million. Upon the closing of this acquisition, the Company assumed South Pointe’s interest, as lessor, in the lease of the Brockport Facility to The Unity Hospital of Rochester. The lease has a remaining lease term of approximately 10 years. The Company funded this acquisition using borrowings from its revolving credit facility.

Accounting Treatment

The Company accounted for the acquisition of the Brockport Facility as a business combination in accordance with the provisions of ASC Topic 805. The following table presents the preliminary purchase price allocation for the assets acquired as part of the acquisition:

Land and site improvements	$	693,042
Building and tenant improvements		7,096,700
In place leases		840,832
Leasing costs		453,931
Below market lease intangible		(414,505)
Total purchase price	$	8,670,000

The above allocation is preliminary and subject to revision within the measurement period, not to exceed one year from the date of the acquisition.

Sandusky Facility (One Property)

On April 21, 2017, the Company completed the acquisition of one remaining medical property (out of a total portfolio of seven medical properties in Sandusky, Ohio (the “Sandusky properties”)) for which the Company assumed the original buyer’s interest in an asset purchase agreement effective September 29, 2016, for a purchase price of approximately $1.1 million. The Company funded this acquisition using borrowings from its revolving credit facility. The acquisitions of the other six of the seven medical properties were completed on October 7, 2016 (five properties) and March 10, 2017 (one property).

Oklahoma City Facilities

On March 31, 2017, the Company closed on an purchase contract with CRUSE-TWO, L.L.C., an Oklahoma limited liability company (“Cruse-Two”), and CRUSE-SIX, L.L.C., an Oklahoma limited liability company (“Cruse-Six”) to acquire a surgical hospital (the “Hospital”), a physical therapy center (the “PT Center,” together with the Hospital, “OCOM South”), and an outpatient ambulatory surgery center (“OCOM North”) located in Oklahoma City, Oklahoma from Cruse-Two and Cruse-Six for an aggregate purchase price of $49.5 million. The purchase price consisted of $44.4 million for OCOM South and $5.1 million for OCOM North.

Upon closing of the acquisition of OCOM South, the Company assumed the existing absolute triple-net lease agreement (the “OCOM South Lease”), pursuant to which OCOM South is leased from Cruse-Two to Oklahoma Center for Orthopedic & Multi-Specialty Surgery, LLC (“OCOM”) with a remaining initial lease term expiring August 31, 2034, subject to three consecutive five-year renewal options by the tenant. A portion of the rent is guaranteed by United Surgical Partners International, Inc. (“USPI”) and INTEGRIS Health, Inc. (“INTEGRIS”).

Upon closing of the acquisition of OCOM South, the Company, through a subsidiary of the Operating Partnership, entered into a new absolute triple-net lease agreement (the “Master Lease”), pursuant to which the subsidiary, as master landlord, leased OCOM South to Cruse-Two, as master tenant. The Master Lease has a five-year term. The OCOM South Lease became a sublease under the Master Lease upon commencement of the Master Lease. USPI and INTEGRIS continue to serve as guarantors of the OCOM South Lease, while the Master Lease has no lease guarantees. Upon expiration of the Master Lease, the OCOM South Lease will become a direct lease with the Company.

Under the Master Lease, OCOM continues to be responsible for all lease payments due under the OCOM South Lease, which amounts will be paid directly to the Master Tenant, while Cruse-Two will be responsible for payment of the additional rent amounts payable under the Master Lease. GMR Oklahoma City, LLC (“GMR Oklahoma City”), Cruse-Two, and Raymond James & Associates, Inc. (the “Broker”) have entered into a Securities Account Control Agreement, dated March 31, 2017, pursuant to which Cruse-Two has granted GMR Oklahoma City a first priority secured interest in the securities account maintained by the Broker for Cruse-Two.

Upon closing of the acquisition of OCOM North, the Company assumed the existing absolute triple-net lease agreement (the “OCOM North Lease”) pursuant to which OCOM North is leased from Cruse-Six, as landlord, to OCOM, as tenant, with a remaining initial lease term expiring on July 31, 2022, subject to two consecutive five-year renewal options by the tenant. The annual rent under the OCOM North Lease for OCOM North is subject to annual increases equal to the consumer price index (“CPI”) (never to decrease and not to exceed 4.0% over the prior year’s rent and not to exceed an overall increase of 2.5% per year, compounded annually). The Company funded the acquisition using funds from its revolving credit facility.

Accounting Treatment

The Company accounted for the acquisition of OCOM North and OCOM South as a business combination in accordance with the provisions of ASC Topic 805. The following table presents the preliminary purchase price allocation for the assets acquired as part of the acquisition:

Land and site improvements	$	2,953,291
Building and tenant improvements		38,724,033
Above market lease intangibles		758,852
In place leases		4,391,750
Leasing costs		2,672,074
Total purchase price	$	49,500,000

The above allocation is preliminary and subject to revision within the measurement period, not to exceed one year from the date of the acquisition.

Great Bend Facility

On March 31, 2017, the Company closed on a purchase contract with Great Bend Surgical Properties, LLC (“GB Seller”) to acquire, through a wholly-owned subsidiary of the Operating Partnership, the buildings and land known as Great Bend Regional Hospital (the “GB Property”) located in Great Bend, Kansas for a purchase price of $24.5 million.

The GB Property is operated by Great Bend Regional Hospital, LLC (“GB Tenant”), a physician-owned group. Upon the closing of the acquisition of the GB Property, the Company leased the GB Property back to GB Tenant under a 15-year triple-net lease (the “GB Lease”), with two ten-year renewal options. The GB Lease is guaranteed by the physician owners of the GB Tenant. Eventually the GB Lease will also be guaranteed by an employee stock ownership plan (“ESOP”). When the Company determines that the creditworthiness, operating history, and financial results of the ESOP are acceptable, the physicians will be released from the lease guarantee, and the ESOP will become the sole guarantor. The annual rent under the GB Lease is $2,143,750, subject to annual rent escalations equal to the greater of 2% or CPI, with a maximum increase of 10%. The Company funded the acquisition using borrowings from its revolving credit facility.

Sandusky Facility (one property)

On March 10, 2017, the Company closed on the acquisition of one, out of a total of seven, Sandusky properties, for a purchase price of approximately $4.3 million. The Company is leasing this property to the NOMS Tenant using a triple-net lease structure with an initial term of 11 years with four additional five-year renewal options. The Company funded the acquisition using borrowings from its revolving credit facility.

Clermont Facility

On March 1, 2017, the Company, as buyer, pursuant to a purchase agreement with HVI, LLC (the “HVI Seller”), acquired HVI Seller’s interest, as ground lessee, in the ground lease (the “Clermont Ground Lease”) that covers and affects certain real property located in Clermont, Florida (the “Land”), along with HVI Seller’s right, title and interest arising under the Ground Lease in and to the medical building located upon the Land (the “Clermont Facility”), for a purchase price of $5.23 million. The Ground Lease commenced in 2012 and has an initial term of 75 years. Upon closing of this acquisition, the Company assumed the HVI Seller’s interest, as sublessor, in four subleases affecting the Clermont Facility (collectively, the “Subleases”): two Subleases with South Lake Hospital, Inc. and one Sublease with each of Orlando Health, Inc. and Vascular Specialists of Central Florida. The Company funded the acquisition using funds from its revolving credit facility.

Accounting Treatment

The Company accounted for the acquisition of the Clermont Ground Lease as a business combination in accordance with the provisions of ASC Topic 805. The following table presents the preliminary purchase price allocation for the assets acquired as part of the acquisition:

Site improvements	$	144,498
Building and tenant improvements		4,422,452
In place leases		254,515
Above market lease intangibles		487,978
Leasing costs		125,185
Below market lease intangibles		(209,628)
Total purchase price	$	5,225,000

The above allocation is preliminary and subject to revision within the measurement period, not to exceed one year from the date of the acquisition.

Prescott Facility

On February 9, 2017, the Company, as buyer, pursuant to a purchase and sale agreement with Hosn Hojatollah Askari, as seller (“Hosn”), acquired a medical office building (the “Prescott Facility”) located in Prescott, Arizona, for a purchase price of $4.5 million. The acquisition included the Prescott Facility, together with the real property, the improvements, and all appurtenances thereto owned by Hosn. Upon the closing of this acquisition, the Company executed a new 10-year triple-net lease for the Prescott Facility with Thumb Butte Medical Center, PLLC with a personal guaranty by Hosn. The Company funded the acquisition using funds from its revolving credit facility.

Las Cruces Facility

On February 1, 2017, the Company, as buyer, pursuant to a purchase and sale agreement with Medical Realty Limited Liability Co., as seller (“Medical Realty”), acquired a medical office building (the “Las Cruces Facility”) located in Las Cruces, New Mexico for a purchase price of $4.88 million. The acquisition included the Las Cruces Facility, together with the real property, the improvements, and all appurtenances thereto owned by Medical Realty. Upon closing of this acquisition, the Company entered into a new 12-year, triple-net lease with four five-year extension options with Las Cruces Orthopedic Associates, as tenant. The Company funded the acquisition using borrowings from its revolving credit facility and available cash.

Cape Coral Facility

On January 10, 2017, pursuant to the terms of a purchase and sale agreement between the Company, as purchaser, and Del Prado North, LLP, as seller (“Del Prado”), the Company acquired a medical office building (the “Cape Coral Facility”) located in Cape Coral, Florida, for a purchase price of $7.25 million. The acquisition included the Cape Coral Facility, together with the real property, the improvements, and all appurtenances thereto owned by Del Prado. Upon the closing of the transaction, the Company entered into a new 10-year, triple-net lease with The Sypert Institute, P.A. (the “Sypert Tenant”), effective as of January 17, 2017, and expiring in 2027. The lease provides for three additional five-year renewal options. The Cape Coral Facility is operated by the Sypert Tenant. The acquisition was funded using proceeds from the Company’s revolving credit facility.

Lewisburg Facility

On January 12, 2017, pursuant to the terms of an asset purchase agreement between the Company, as purchaser, and W 148, LLC, as seller (“W 148”), the Company acquired a medical office building (the “Lewisburg Facility”), located in Lewisburg, Pennsylvania, for a purchase price of $7.3 million. The acquisition included the Lewisburg Facility, together with the real property, the improvements, and all appurtenances thereto owned by W 148. The Lewisburg Facility is operated by Geisinger Medical Center (“GMC”) and Geisinger System Services (“GSS”), the existing tenants of the Lewisburg Facility. Upon the closing of the transaction, the Company assumed the GMC lease and the GSS lease, which are both triple-net leases. The GMC lease, dated effective as of April 15, 2008, and expiring in 2023, has a fifteen-year initial term and two five-year optional extension terms. The GSS lease, dated effective as of August 1, 2011, and expiring in 2023, has an initial term of 11 years and 9 months and two five-year optional extension terms. The acquisition was funded using proceeds from the Company’s revolving credit facility.

Accounting Treatment

The Company accounted for the acquisition of the Lewisburg Facility as a business combination in accordance with the provisions of ASC Topic 805. The following table presents the preliminary purchase price allocation for the assets acquired as part of the acquisition:

Land and site improvements	$	681,223
Building and tenant improvements		6,113,824
In place leases		373,380
Leasing commissions and legal fees		131,573
Total purchase price	$	7,300,000

The above allocation is preliminary and subject to revision within the measurement period, not to exceed one year from the date of the acquisition.

A rollforward of the gross investment in land, building and improvements as of June 30, 2017, resulting from the 12 acquisitions completed during the six months ended June 30, 2017, is as follows:

	Land		Building		Site & Tenant Improvements		Investment Subtotal		Intangibles⁽¹⁾		Gross Investment
Balances as of January 1, 2017	$	17,785,001	$	179,253,398		2,651,287		199,689,686		6,907,687		206,597,373
Acquisitions:
Sherman facility		1,600,711		25,011,110		-		26,611,821		-		26,611,821
Flower Mound facility		580,763		2,922,164		381,859		3,884,786		165,214		4,050,000
Brockport facility		412,838		6,885,477		491,427		7,789,742		880,258		8,670,000
Sandusky facility (4/21/17)		97,804		978,035		-		1,075,839		-		1,075,839
Oklahoma City facilities		2,086,885		37,713,709		1,876,730		41,677,324		7,822,676		49,500,000
Great Bend facility		836,929		23,800,758		-		24,637,687		-		24,637,687
Sandusky facility (3/10/17)		409,204		3,997,607		-		4,406,811		-		4,406,811
Clermont facility		-		4,361,028		205,922		4,566,950		658,050		5,225,000
Prescott facility		790,637		3,821,417		-		4,612,054		-		4,612,054
Las Cruces facility		397,148		4,618,258		-		5,015,406		-		5,015,406
Cape Coral facility		353,349		7,016,511		-		7,369,860		-		7,369,860
Lewisburg facility		471,184		5,819,137		504,726		6,795,047		504,953		7,300,000
Total Additions:		8,037,452		126,945,211		3,460,664		138,443,327		10,031,151		148,474,478
Balances as of June 30, 2017	$	25,822,453		306,198,609		6,111,951		338,133,013		16,938,838		355,071,851

(1)

Represents intangible assets acquired net of intangible liabilities acquired.

Depreciation expense was $1,850,587 and $3,196,640 for the three and six months ended June 30, 2017, respectively, and $544,002 and $942,832 for the three and six months ended June 30, 2016, respectively.

Unaudited Pro Forma Financial Information for Business Combination Transactions Completed During the Three and Six Months Ended June 30, 2017

The following table illustrates the unaudited pro forma consolidated revenue, net loss, and loss per share as if the five facilities that the Company acquired during the six months ended June 30, 2017 that were accounted for as business combinations (the Flower Mound, Brockport, OCOM, Clermont and Lewisburg facilities) had occurred as of January 1, 2016:

The following is a summary of the pro forma financial information for the three and six months ended June 30, 2017 and 2016:

	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
	(unaudited)				(unaudited)

Revenue	$	7,641,035	$	3,335,802	$	13,847,870	$	6,188,509
Net loss	$	(762,297)	$	(1,280,701)	$	(1,943,257)	$	(3,922,046)
Loss per share	$	(0.04)	$	(0.90)	$	(0.11)	$	(3.82)
Weighted average shares outstanding		17,644,137		1,426,656		17,624,906		1,025,821

Intangible Assets and Liabilities

The following is a summary of the carrying amount of intangible assets and liabilities as of June 30, 2017:

	As of June 30, 2017
			Accumulated
	Cost		Amortization		Net
Assets
In-place leases	$	11,909,367	$	(668,574)	$	11,240,793
Above market ground lease		487,978		(2,270)		485,708
Above market leases		832,948		(18,154)		814,794
Leasing costs		4,853,575		(176,656)		4,676,919
	$	18,083,868	$	(865,654)	$	17,218,214

Liabilities
Below market leases	$	1,145,030	$	(32,464)	$	1,112,566

The following is a summary of the carrying amount of intangible assets and liabilities as of December 31, 2016:

	As of December 31, 2016
			Accumulated
	Cost		Amortization		Net
Assets
In-place leases	$	5,826,556	$	(34,789)	$	5,791,767
Above market leases		74,096		(443)		73,653
Leasing costs		1,286,389		(7,533)		1,278,856
	$	7,187,041	$	(42,765)	$	7,144,276

Liabilities
Below market leases	$	279,354	$	(1,437)	$	277,917

The following is a summary of the acquired lease intangible amortization for the three and six months ended June 30, 2017. The Company had no intangible assets or liabilities as of June 30, 2016 and therefore no amortization was incurred during the three and six months ended June 30, 2016.

	Three Months Ended June 30, 2017		Six Months Ended June 30, 2017
Amortization expense related to in-place leases	$	353,263	$	633,785
Amortization expense related to leasing costs	$	106,045	$	169,123
Decrease of rental revenue related to above market ground lease	$	1,703	$	2,270
Decrease of rental revenue related to above market leases	$	14,276	$	17,711
Increase of rental revenue related to below market leases	$	18,825	$	31,027

As of June 30, 2017, scheduled future aggregate net amortization of acquired lease intangible assets and liabilities for each fiscal year ended December 31 are listed below:

	Net Increase (Decrease) in Revenue		Net Increase in Expenses
2017	$	32,931	$	985,736
2018		65,862		1,971,472
2019		65,862		1,971,472
2020		65,862		1,971,472
2021		63,017		1,356,859
Thereafter		(481,470)		7,660,701
Total	$	(187,936)	$	15,917,712

As of June 30, 2017, the weighted average amortization period for asset lease intangibles and liability lease intangibles are 8.46 years and 8.57 years, respectively.