The accompanying notes are an integral
part of these unaudited consolidated financial statements.
The accompanying notes are an integral
part of these unaudited consolidated financial statements.
The accompanying notes are an integral
part of these unaudited consolidated financial statements.
Notes to the Unaudited Consolidated
Financial Statements
Note 1 – Organization
Background
Global Medical REIT
Inc. (the “Company”) is a Maryland corporation engaged primarily in the acquisition of licensed, state-of-the-art,
purpose-built healthcare facilities and the leasing of these facilities to leading clinical operators with dominant market share.
The Company is externally managed and advised by Inter-American Management, LLC (the “Advisor”).
The Company holds
its facilities and conducts its operations through a Delaware limited partnership subsidiary called 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 called Global Medical REIT GP LLC (the “GP”), a Delaware limited liability company. As of
September 30, 2016, the Company was the 98.0% limited partner of the Operating Partnership, with the remaining 2% owned by the
holders of the Company’s long term incentive plan (“LTIP”) units. Refer to Note 7 – “2016 Equity
Incentive Plan” for additional information regarding the LTIP units. The Company intends to conduct all future acquisition
activity and operations through the Operating Partnership. As of September 30, 2016, the Operating Partnership had the following
subsidiaries, all of which are wholly-owned: GMR Watertown, LLC; GMR East Orange, LLC; GMR Reading, LLC; GMR Sandusky, LLC; GMR
Melbourne, LLC; GMR Westland, LLC; GMR Plano, LLC; GMR Memphis Exeter, LLC; GMR Memphis, LLC; GMR Pittsburgh, LLC; GMR Asheville,
LLC, and GMR Omaha, LLC. Delaware limited liability company subsidiaries.
Completed Initial Public Offering Related
Events
On June 13, 2016,
in anticipation of the Company’s initial public offering that closed on July 1, 2016, the board of directors of the Company
approved an amendment and restatement of the Company’s Amended and Restated Bylaws (as amended and restated, the “Bylaws”),
effective on that date. The following is a summary of the amendments to the Bylaws. In addition to the amendments described below,
the Bylaws include certain changes to clarify language and consistency with Maryland law and the listing requirements of the New
York Stock Exchange and to make various technical revisions and non-substantive changes.
The Bylaws were amended
to provide for the following matters, among others:
|
(a)
|
Procedures
for calling and holding special stockholders’ meetings;
|
|
(b)
|
Procedures for notice,
organization and conduct of stockholders’ meetings;
|
|
(c)
|
Advance notice provisions
for stockholder nominations for director and stockholder business proposals;
|
|
(d)
|
Clarification that
the Company’s election to become subject to Section 3-804(c) of the Maryland General Corporation Law has already become
effective;
|
|
(e)
|
Procedures for calling
a meeting of the Board in the event of an emergency;
|
|
(f)
|
Procedures for Board
committees to fill vacancies, appoint committee chairs and delegate powers;
|
|
(g)
|
The adjournment
or postponement of a shareholder meeting to a date not more than 120 days after the original record date, without the need
to set a new record date; and
|
|
(h)
|
Litigation regarding
internal actions be brought in the Circuit Court for Baltimore City, Maryland (or, if that court does not have jurisdiction,
the United States District Court for the District of Maryland, Baltimore Division).
|
On June 28, 2016,
the Company, the Advisor, and the Operating Partnership entered into an Underwriting Agreement with Wunderlich Securities, Inc.,
as representative of the several underwriters named therein, relating to the offer and sale of the Company’s common stock
in its initial public offering. On July 1, 2016, the Company closed its initial public offering and issued 13,043,479 shares of
its common stock at a price of $10.00 per share resulting in gross proceeds of $130,434,790. After deducting amounts that the
Company paid in costs that were directly attributable to the offering, underwriting discounts, advisory fees, and commissions,
for a total of $11,272,068, the Company received net proceeds from the offering of $119,162,722. Additionally, on July 11, 2016
the underwriters exercised their over-allotment option in full, resulting in the issuance by the Company of an additional 1,956,521
shares of the Company’s common stock at a price of $10.00 per share for gross proceeds of $19,565,210. After deducting underwriting
discounts, advisory fees, and commissions of $1,369,565, the Company received net proceeds from the over-allotment option shares
of $18,195,645. Transaction costs incurred in connection with the offering were approximately $1,681,259. As disclosed in Note
2 – “Summary of Significant Accounting Policies,” these transaction costs were recorded as a deferred asset.
On July 1, 2016, upon completion of the initial public offering, this deferred asset balance was netted against additional paid-in
capital on the accompanying Consolidated Balance Sheet as of September 30, 2016. Total shares issued by the Company in the initial
public offering, including over-allotment option shares, were 15,000,000 shares and the total net proceeds received were $137,358,367.
Use of Proceeds:
The Company designated
the following uses for the net proceeds of the initial public offering:
|
·
|
approximately
$14.9 million ($14.6 million in principal outstanding as of July 1, 2016 and an early
termination fee of $0.3 million) to repay the outstanding loan from Capital One encumbering
the Company’s Omaha Facility on July 11, 2016 (see Note 4 – “Notes
Payable Related to Acquisitions”);
|
|
·
|
$10.0
million to repay a portion of the Company’s outstanding 8.0% convertible debentures
held by ZH USA, LLC on July 8, 2016 (see Note 6 – “Related Party Transactions”);
|
|
·
|
$9.38
million in aggregate to acquire the Reading Facilities on July 20, 2016 (see Note 3 –
“Property Portfolio”);
|
|
·
|
$1.5
million to repay the outstanding interest free loan from ZH USA, LLC on July 8, 2016
(see Note 6 – “Related Party Transactions”); and
|
|
·
|
the
remaining approximately $101.6 million for the acquisition of properties in the Company’s
investment pipeline, properties under letter of intent and other potential acquisitions,
capital improvements to the Company’s properties and general corporate and working
capital purposes. See Note 3 – “Property Portfolio” for proceeds used
to acquire properties during the quarter.
|
The Company invested
the unexpended net proceeds of the offering in interest-bearing accounts, money market accounts, and interest-bearing securities
in a manner that is consistent with its intention to qualify for taxation as a real estate investment trust (“REIT”).
In connection with
the Company’s initial public offering, the Company’s common stock was listed on the New York Stock Exchange under
the ticker symbol “GMRE.”
Note 2 – Summary of Significant
Accounting Policies
Basis of presentation
The accompanying financial
statements are unaudited and include the accounts of the Company and its subsidiaries. The accompanying financial statements have
been prepared in accordance with GAAP and the rules and regulations of the SEC. Certain information and footnote disclosures required
for annual financial statements have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, the accompanying
financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and
should be read in conjunction with the audited financial statements and notes thereto for the fiscal year ended December 31, 2015.
In the opinion of management, all adjustments of a normal and recurring nature necessary for a fair presentation of the financial
statements for the interim periods have been made.
Consolidation
Policy
The accompanying consolidated financial statements include the accounts of the Company, including the Operating Partnership and its wholly-owned subsidiaries, and the interests in the Operating Partnership held by the LTIP unit holders, which the Operating Partnership has control over and therefore consolidates. These LTIP units represent “noncontrolling interests” and have no value as of September 30, 2016 as they have not been converted into OP Units and therefore did not participate in the Company’s consolidated net loss. At the time when there is value associated with the noncontrolling interests, the Company will classify such interests as a component of consolidated equity, separate from the Company’s total stockholder’s equity on its Consolidated Balance Sheets. Additionally, net income or loss will be allocated to noncontrolling interests based on their respective ownership percentage of the Operating Partnership. All material intercompany balances and transactions between the Company and its subsidiaries have been eliminated.
Restricted Cash
The restricted cash
balance of $805,776 as of September 30, 2016, consisted of $367,587 of cash required by a third party lender to be held by the
Company as a reserve for debt service, $319,500 in a security deposit received from the Plano facility tenant at the inception
of its lease, and $118,689 in funds held by the Company from certain of its tenants that the Company collected to pay specific
tenant expenses, such as real estate taxes and in some cases insurance, on the tenant’s behalf. The restricted cash balance
as of September 30, 2016 increased $358,149 from the balance as of December 31, 2015 of $447,627. The December 31, 2015 balance
consisted solely of funds required to be held by the Company as a reserve for debt service.
Tenant Receivables
The tenant receivables
balance of $177,369 as of September 30, 2016, consisted of $17,965 in funds owned from the Company’s tenants for rent that
the Company has earned but not received as well $159,404 in funds owed by certain of the Company’s tenants for amounts the
Company collects to pay specific tenant expenses, such as real estate taxes and in some cases insurance, on the tenants’
behalf. The tenant receivables balance was zero as of December 31, 2015.
Escrow Deposits
Escrow deposits include
funds held in escrow to be used for the acquisition of future properties and for the payment of taxes, insurance, and other amounts
as stipulated by the Company’s third party loan agreements. The escrow balance as of September 30, 2016 and December 31,
2015 was $903,636 and $454,310, respectively, an increase of $449,326. This increase resulted from deposits that were required
to be held in escrow in the amount of $843,636 related to the Cantor Loan, as hereinafter defined, partially offset by $394,310
in escrow funds that were expended to acquire facilities during the nine months ended September 30, 2016. Refer to Note 3 –
“Property Portfolio” and Note 4 – “Notes Payable Related to Acquisitions,” respectively, for information
regarding the facilities acquired and details regarding the Cantor Loan.
Deferred Assets
The deferred assets
balance of $245,619 as of September 30, 2016, represented the Company’s deferred rent receivable balance resulting from
the straight lining of revenue recognized for applicable tenant leases. During the nine months ended September 30, 2016, the Company
deferred and paid $1,610,908 in specific incremental costs directly attributable to the offering of its equity securities bringing
the total deferred incremental costs incurred balance to $1,681,259. Deferral of these incremental costs is in accordance with
the provisions of Accounting Standards Codification (“ASC”) Topic 340, “Other Assets and Deferred Costs.”
Also in accordance with the provisions of ASC Topic 340, upon the completion of the Company’s initial public offering on
July 1, 2016, the $1,681,259 total deferred incremental cost balance was reclassified as a reduction of the Company’s additional
paid-in capital balance in the Company’s accompanying Consolidated Balance Sheets. The deferred asset balance as of December
31, 2015 was $93,646, consisting of a deferred rent receivable balance of $23,295 and $70,351 in deferred costs incurred directly
attributable to the Company’s offering of its equity securities.
Security Deposits Liability
The security deposits
liability balance of $597,593 as of September 30, 2016 represented $319,500 in funds deposited by the Plano facility tenant at
the inception of its lease and $278,093 in tenant funds the Company will use to pay for certain of its tenants’ expenses,
such as real estate taxes and in some cases insurance, on the tenants’ behalf. See Note 3 – “Property Portfolio”
for additional information regarding the Plano facility acquisition. The security liability balance was zero as of December 31,
2015.
Stock-Based Compensation
As disclosed in Note
7 – “2016 Equity Incentive Plan,” the Company grants LTIP unit awards to employees of its advisor and its affiliates,
and to the Company’s independent directors. The Company expenses the fair value of unit awards in accordance with the fair
value recognition requirements of ASC Topic 718, “Compensation-Stock Compensation” and ASC Topic 505, “Equity.”
These ASC topics require companies to measure the cost of the recipient services received in exchange for an award of an equity
instrument based on the grant-date fair value of the award. Under ASC Topic 718, the Company’s independent directors are
deemed to be employees and therefore compensation expense for these units is recognized based on the price of $10.00 per unit,
the closing share price for the Company’s common stock at the closing date of the initial public offering on July 1, 2016,
ratably over the 12-month service period, using the straight line method. Under ASC Topic 505, the employees of the Advisor and
its affiliates are deemed to be non-employees of the Company and therefore compensation expense for these units is recognized
using the share price of the Company’s common stock at the end of the reporting period, ratably over the 42-month or 54-month
service period, respectively, depending on the grant terms, using the straight line method. Total compensation expense of $830,827
related to all of the Company’s LTIP units was recorded for the three and nine months ended September 30, 2016 and was classified
as “General and Administrative” expense in the Company’s accompanying Consolidated Statements of Operations.
Net Loss Per Common Share
Basic net loss per
common share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted net loss per common share is computed by dividing net loss attributable to common stockholders
by the sum of the weighted average number of common shares outstanding plus any potential dilutive shares for the period.
The effect of the conversion of vested LTIP units into OP Units and the conversion of OP Units into common stock is not reflected
in the computation of basic and diluted earnings per share, as all units are exchangeable for common stock on a one-for-one basis
and are anti-dilutive to the Company’s net loss for the three and nine months ended September 30, 2016. The Company considered
the requirements of the two-class method when computing earnings per share. Earnings per share would not be affected by using
the two-class method because the Company incurred a net loss for the three and nine months ended September 30, 2016.
Segment Reporting
In accordance with
the provisions of ASC Topic 280, “Segment Reporting,” the Company has determined that it has one reportable segment
consisting of its activities related to the acquisition of healthcare facilities and the leasing of these facilities to leading
clinical operators.
Note 3 – Property Portfolio
Summary of Properties under Executed
Asset Purchase Agreements as of September 30, 2016
Sandusky Facilities
On September 13, 2016,
the Company entered into an assignment and assumption agreement to assume from a third party a purchase contract to acquire a
portfolio of seven properties known as the NOMS portfolio located in Northern Ohio, for a total purchase price of $10.0 million.
As disclosed in Note 11 – “Subsequent Events,” on October 7, 2016, the Company closed on the sale of five of
the seven facilities representing approximately $4.6 million of the total $10 million purchase price. The acquisition of the remaining
two buildings for approximately $5.4 million is expected to close in December 2016. The total NOMS portfolio covers an aggregate
of 50,931 square feet. The NOMS portfolio was owned by a multi-specialty physician group which has been in operation since 2000.
The group includes over 120 physicians of which approximately half are primary care providers. The Company is leasing the five
acquired properties to NOMS and will lease the remaining two properties to NOMS using a triple-net lease structure with initial
terms of 11 years with four additional five-year renewal options. NOMS was the tenant in the five buildings prior to the Company’s
acquisition and is also currently the tenant in the remaining two buildings. The acquisition of the five buildings was funded
using a portion of the proceeds from the Company’s initial public offering. The acquisition of the remaining two buildings
will also be funded using proceeds from the initial public offering.
Summary of Properties Acquired During
the Nine Months Ended September 30, 2016
During the three months
ended September 30, 2016, the Company completed three acquisitions. Including these three acquisitions the Company completed a
total of six acquisitions during the nine months ended September 30, 2016. A description of each facility acquired during that
period is as follows.
Watertown Facilities
On September 30, 2016,
the Company closed on an asset purchase agreement with Brown Investment Group, LLC, a South Dakota limited liability company,
to acquire a 30,062 square foot clinic and a 3,136 square foot administration building located at 506 1
st
Avenue SE,
Watertown, South Dakota and a 13,686 square foot facility located at 511 14
th
Avenue NE, Watertown South Dakota (collectively,
the “Facilities”), for a purchase price of approximately $9.0 million (approximately $9.1 million including legal
and related fees). The acquisitions included the Facilities, together with the real property, the improvements, and all appurtenances
thereto. The Facilities are operated by the Brown Clinic, P.L.L.P. (“Brown Clinic”), a South Dakota professional limited
liability partnership.
Upon the closing of
the transaction, the Company leased the portfolio properties to Brown Clinic via a 15-year triple-net lease that expires in 2031.
The lease provides for two additional five-year extensions at the option of the tenant. The acquisition was funded using a portion
of the proceeds from the Company’s initial public offering.
East Orange Facility
On September 29, 2016,
the Company closed on an asset purchase agreement with Prospect EOGH, Inc. (“Prospect”), a New Jersey corporation,
and wholly-owned subsidiary of Prospect Medical Holdings, Inc. (“PMH”), a Delaware corporation, to acquire a 60,442
square foot medical office building (“MOB”) located at 310 Central Avenue, East Orange, New Jersey on the campus of
the East Orange General Hospital, for a purchase price of approximately $11.86 million (approximately $12.3 million including
legal and related fees). The building currently houses physician offices, a 29-bed dialysis center, a wound center, a diagnostic
lab, a hyperbaric chamber and a pharmacy. The acquisitions included the MOB, together with the real property, the improvements,
and all appurtenances thereto.
Upon the closing of
the transaction, the Company leased the MOB to PMH via a 10-year triple-net lease that expires in 2026. The lease provides for
four additional five-year extensions at the option of the tenant. The acquisition was funded using a portion of the proceeds from
the Company’s initial public offering.
Reading Facilities
On July 20, 2016,
the Company closed on an asset purchase agreement to acquire a 17,000 square foot eye center located at 1802 Papermill Road, Wyomissing,
PA 19610 (the “Eye Center”) owned and operated by Paper Mill Partners, L.P., a Pennsylvania limited partnership, and
a 6,500 square foot eye surgery center located at 2220 Ridgewood Road, Wyomissing, PA 19610 (the “Surgery Center”)
owned and operated by Ridgewood Surgery Center, L.P., a Pennsylvania limited partnership, for a purchase price of approximately
$9.20 million (approximately $9.38 million including legal and related fees). The acquisition included both facilities, together
with the real property, the improvements, and all appurtenances thereto.
Upon the closing of
the transaction, the Eye Center was leased back to Berks Eye Physicians & Surgeons, Ltd., a Pennsylvania professional corporation
(the “Eye Center Tenant”) and the Surgery Center was leased back to Ridgewood Surgery Associates, LLC, a Pennsylvania
limited liability company (the “Surgery Center Tenant”). Both leases are 10-year absolute triple-net lease agreements
that expire in 2026 and are cross defaulted. Both leases also provide for two consecutive five-year extensions at the option of
the tenants. The Eye Center lease is guaranteed by the Surgery Center Tenant and the Surgery Center lease is guaranteed by the
Eye Center Tenant, each pursuant to a written guaranty. The acquisition was funded using a portion of the proceeds from the Company’s
initial public offering.
Melbourne Facility
On March 31, 2016,
the Company closed on a purchase agreement to acquire a 78,000 square-foot medical office building located on the Melbourne Bayfront
for a purchase price of $15.45 million (approximately $15.5 million including legal and related fees) from Marina Towers, LLC,
a Florida limited liability company. The facility is located at 709 S. Harbor City Blvd., Melbourne, FL on 1.9 acres of land.
The acquisition included the site and building, an easement on the adjacent property to the north for surface parking, all tenant
leases, and above and below ground parking garages. The entire facility has been leased back to Marina Towers, LLC via a 10-year
absolute triple-net master lease agreement that expires in 2026. The tenant has two successive options to renew the lease for
five-year periods on the same terms and conditions as the primary non-revocable lease term with the exception of rent, which will
be adjusted to the prevailing fair market rent at renewal and will escalate in successive years during the extended lease period
at two percent annually.
The Melbourne facility
acquisition was financed in full using proceeds from the third party Cantor Loan, which is disclosed in Note 4 – “Notes
Payable Related to Acquisitions.”
The Melbourne facility’s
obligations under the lease with Marina Towers, LLC are fully guaranteed by its parent company, First Choice Healthcare Solutions,
Inc. (OTCMKTS: FCHS). Information about First Choice Healthcare Solutions, Inc., including its audited historical financial statements,
can be obtained from its Annual Report on Form 10-K and other reports and filings available on its website at http://www.myfchs.com/
or on the SEC website at www.sec.gov.
Westland Facility
On March 31, 2016,
the Company closed on a purchase agreement to acquire a two-story medical office building and ambulatory surgery center located
in Westland, Michigan for an aggregate purchase price of $4.75 million (approximately $4.8 million including legal and related
fees) from Cherry Hill Real Estate, LLC (“Cherry Hill”). The property contains 15,018 leasable square feet and is
located on a 1.3-acre site. Under the purchase agreement, the Company acquired the site and building, including parking. Also
on March 31, 2016, the Company executed a lease agreement for the entire facility with The Surgical Institute of Michigan, LLC
under a triple-net master lease agreement that expires in 2026, subject to two successive ten-year renewal options for the tenant
on the same terms as the initial lease, except that the rental rate will be subject to adjustment upon each renewal based on then-prevailing
market rental rates. The purchase agreement contains customary covenants, representations and warranties. Commensurate with the
execution of its lease with the Company, The Surgical Institute of Michigan, LLC terminated its lease agreement with Cherry Hill
that was in place at the time of the sale of the facility to the Company. The Company has accounted for this acquisition as a
business combination in accordance with the provisions of ASC Topic 805, “Business Combinations,” and accordingly
the transaction has been recorded at fair value with all values allocated to land and building based upon their fair values at
the date of acquisition. No intangible assets were identified in connection with this acquisition.
The Westland facility
acquisition was financed in full using proceeds from the third party Cantor Loan, which is disclosed in Note 4 – “Notes
Payable Related to Acquisitions.”
Plano Facility
On January 28, 2016,
the Company closed on an asset purchase agreement with an unrelated party Star Medreal, LLC, a Texas limited liability company,
to acquire an approximately 24,000 square foot, eight bed acute hospital facility located in Plano, Texas, along with all real
property and improvements thereto for approximately $17.5 million (approximately $17.7 million including legal and related fees).
Under the terms of the agreement, the Company was obligated to pay a development fee of $500,000 to Lumin, LLC at closing. The
property has been leased back via an absolute triple-net lease agreement that expires in 2036. The tenant will be Star Medical
Center, LLC and Lumin Health, LLC will serve as guarantor. Lumin Health, LLC is an affiliate and management company for Star Medical
Center, LLC. The tenant has two successive options to renew the lease for ten-year periods on the same terms and conditions as
the primary non-revocable lease term with the exception of rent, which will be computed at then prevailing fair market value as
determined by an appraisal process defined in the lease. The terms of the lease also provide for a tenant allowance up to $2.75
million for a 6,400 square foot expansion to be paid by the Company.
Also on January 28,
2016, the Company entered into a Promissory Note and Deed of Trust with East West Bank to borrow a total of $9,223,500. Deferred
financing costs of $53,280 were incurred and capitalized by the Company in securing this loan. The loan was scheduled to mature
on January 28, 2021, five years from the closing date. At closing the Company paid the lender a non-refundable deposit of $50,000
and a non-refundable commitment fee of $46,118. The loan bears interest at a rate per annum equal to the Wall Street Journal Prime
Rate (as quoted in the "Money Rates" column of The Wall Street Journal (Western Edition), rounded to two decimal places,
as it may change from time to time, plus 0.50%, but not less than 4.0%. Interest expense of $64,551 was incurred on this note
for the nine months ended September 30, 2016, prior to its repayment. As discussed in Note 4 – “Notes Payable Related
to Acquisitions,” the Company used a portion of the proceeds from another third party loan to repay the $9,223,500 principal
balance of the note with East West Bank in full as of September 30, 2016. The Company also wrote off the deferred financing costs
of $53,280 as of September 30, 2016 related to this note.
Additional funding
for this transaction was received from ZH USA, LLC during the year ended December 31, 2015 in the amount of $9,369,310 (consisting
of $9,025,000 funded directly for this transaction and $344,310 that was held in escrow from previous funding from ZH USA, LLC).
The $9,369,310 was recorded by the Company as unsecured Convertible Debentures due to related party on demand, bearing interest
at eight percent per annum. ZH USA, LLC may elect to convert all or a portion of the outstanding principal amount of the Convertible
Debenture into shares of the Company’s common stock in an amount equal to the principal amount of the Convertible Debenture,
together with accrued but unpaid interest, divided by $12.748. See Note 6 – “Related Party Transactions” for
details regarding the conversion to common stock or pay-off of the Convertible Debenture balance as of September 30, 2016.
A rollforward of the
gross investment in land, building and improvements as of September 30, 2016, resulting from the six acquisitions completed during
the nine-month period, is as follows:
|
|
Land
|
|
|
Building & Improvements
|
|
|
Gross Investment
|
|
Balances as of January 1, 2016
|
|
$
|
4,563,852
|
|
|
$
|
51,574,271
|
|
|
$
|
56,138,123
|
|
Acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Watertown Facilities
|
|
|
1,100,000
|
|
|
|
8,002,171
|
|
|
|
9,102,171
|
|
East Orange Facility
|
|
|
2,150,000
|
|
|
|
10,112,200
|
|
|
|
12,262,200
|
|
Reading Facilities
|
|
|
1,440,000
|
|
|
|
7,939,985
|
|
|
|
9,379,985
|
|
Melbourne Facility
|
|
|
1,200,000
|
|
|
|
14,250,000
|
|
|
|
15,450,000
|
|
Westland Facility
|
|
|
230,000
|
|
|
|
4,520,000
|
|
|
|
4,750,000
|
|
Plano Facility
|
|
|
1,050,000
|
|
|
|
16,696,139
|
|
|
|
17,746,139
|
|
Total Additions:
|
|
|
7,170,000
|
|
|
|
61,520,495
|
|
|
|
68,690,495
|
|
Balances as of September 30, 2016
|
|
$
|
11,733,852
|
|
|
$
|
113,094,766
|
|
|
$
|
124,828,618
|
|
Depreciation expense
was $585,449 and $1,528,281 for the three and nine months ended September 30, 2016, respectively. Depreciation expense was $153,148
and $446,491 for the three and nine months ended September 30, 2015, respectively.
As of December 31, 2015, the Company
had acquired the following facilities:
Tennessee Facilities
On December 31, 2015,
the Company acquired a six building, 52,266 square foot medical clinic portfolio for a purchase price of $20.0 million (approximately
$20.2 million including legal and related fees). Five of the facilities are located in Tennessee and one facility is located in
Mississippi. The portfolio will be leased back through the Gastroenterology Center of the Midsouth, P.C. via an absolute triple-net
lease agreement that expires in 2027. The tenant has two successive options to renew the lease for five-year periods on the same
terms and conditions as the primary non-revocable lease term with the exception of rent, which will be computed at the same rate
of escalation used during the fixed lease term. Base rent increases by 1.75% each lease year commencing on January 1, 2018. The
property is owned in fee simple. Funding for the transaction and all related costs was received in the form of a convertible debenture
(“Convertible Debenture”) the Company issued to ZH USA, LLC in the total amount of $20,900,000. Refer to Note 6 –
“Related Party Transactions” for additional details regarding the funding of this transaction.
West Mifflin Facility
On September 25, 2015,
the Company acquired a combined approximately 27,193 square foot surgery center and medical office building located in West Mifflin,
Pennsylvania and the adjacent parking lot for approximately $11.35 million (approximately $11.6 million including legal and related
fees). The facilities are operated by Associates in Ophthalmology, LTD and Associates Surgery Centers, LLC, respectively, and
leased back to those entities by the Company via two separate lease agreements that expire in 2030. Each lease has two successive
options by the tenants to renew for five-year periods. Base rent increases by 2% each lease year commencing on October 1, 2018.
The property is owned in fee simple. In connection with the acquisition of the facilities, the Company borrowed $7,377,500 from
Capital One and funded the remainder of the purchase price with the proceeds from a Convertible Debenture it issued to ZH USA,
LLC in the total amount of $4,545,838. Refer to Note 4 – “Notes Payable Related to Acquisitions” and Note 6
– “Related Party Transactions” for additional details regarding the funding of this transaction.
Asheville Facility
On September 19, 2014,
the Company acquired an approximately 8,840 square foot medical office building known as the Orthopedic Surgery Center, located
in Asheville, North Carolina for approximately $2.5 million. The Asheville facility is subject to an operating lease which expires
in 2017, with lease options to renew up to five years. The property is owned in fee simple. In connection with the acquisition
of the Asheville facility, the Company borrowed $1.7 million from the Bank of North Carolina and funded the remainder of the purchase
price with the proceeds from a Convertible Debenture it issued to ZH USA, LLC and with the Company’s existing cash. Refer
to Note 4 – “Notes Payable Related to Acquisitions” for additional details regarding the funding of this transaction.
Omaha Facility
On June 5, 2014, the
Company completed the acquisition of a 56-bed long term acute care hospital located at 1870 S. 75
th
Street, Omaha,
Nebraska for approximately $21.7 million (approximately $21.9 million including legal and related fees). The Omaha facility is
operated by Select Specialty Hospital – Omaha, Inc. pursuant to a sublease which expires in 2023, with sub lessee options
to renew up to 60 years. The real property where the Omaha facility and other improvements are located is subject to a land lease
with Catholic Health Initiatives, a Colorado nonprofit corporation (the “land lease”). The land lease initially was
to expire in 2023 with sub lessee options to renew up to 60 years. However, as of September 30, 2016, the Company exercised two
five-year lease renewal options and therefore the land lease currently expires in 2033, subject to future renewal options by the
Company. In connection with the acquisition of the Omaha facility in June 2014, the Company borrowed $15.06 million from Capital
One and funded the remainder of the purchase price with funds from ZH USA, LLC. Refer to Note 4 – “Notes Payable Related
to Acquisitions” for details regarding the payment in full of the outstanding borrowings from Capital One using the proceeds
received from the initial public offering.
The Omaha facility’s
obligations under the sublease with Select Specialty Hospital – Omaha, Inc. are fully guaranteed by its parent company,
Select Medical Corporation (NYSE: SEM). Information about Select Medical Corporation, including its audited historical financial
statements, can be obtained from its Annual Report on Form 10-K and other reports and filings available on its website at http://www.selectmedical.com/
or on the SEC website at www.sec.gov.
Note 4 – Notes Payable Related
to Acquisitions
Summary of Notes Payable Related to
Acquisitions, Net of Debt Discount
Effective for the
fiscal year ended December 31, 2015, the Company early adopted the provisions of Accounting Standards Update 2015-03 entitled
“Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”), which requires retrospective application.
The adoption of ASU 2015-03 represents a change in accounting principle. A detail of the impact of adopting ASU 2015-03 on the
Company’s Notes Payable Related to Acquisitions, net of unamortized discount balances, as of September 30, 2016 and December
31, 2015, is as follows:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
Notes payable related to acquisitions, gross
|
|
$
|
41,097,797
|
|
|
$
|
23,788,065
|
|
Less: Unamortized debt discount
|
|
|
(1,177,522
|
)
|
|
|
(302,892
|
)
|
Notes payable related to acquisitions, net
|
|
$
|
39,920,275
|
|
|
$
|
23,485,173
|
|
The Company incurred
financing costs related to the procurement of the Cantor, Plano, West Mifflin, Asheville, and Omaha loans that are treated as
debt discounts.
A rollforward of the
unamortized debt discount balance as of September 30, 2016 is as follows:
Balance as of January 1, 2016, net
|
|
$
|
302,892
|
|
Additions – Plano and Cantor financings
|
|
|
1,090,079
|
|
Write-off of Plano financing costs
(a)(b)
|
|
|
(53,280
|
)
|
Debt discount amortization expense
(b)
|
|
|
(162,169
|
)
|
Balance as of September 30, 2016, net
|
|
$
|
1,177,522
|
|
|
(a)
|
As disclosed in Note 3 –
“Property Portfolio,” the Plano loan was refinanced with proceeds from the
Cantor Loan and accordingly the Plano related deferred financing costs were written off
during the nine months ended September 30, 2016 into the “Interest Expense”
line item in the accompanying Consolidated Statements of Operations.
|
|
(b)
|
Sum equals amortization expense
incurred on the debt discount for the nine months ended September 30, 2016 of $215,449.
|
Amortization expense
of $62,604 and $215,449 for the three and nine months ended September 30, 2016, respectively, and $30,257 and $89,850 for the
three and nine months ended September 30, 2015, respectively, is included in the “Interest Expense” line item in the
accompanying Consolidated Statements of Operations.
Cantor Loan
On March 31, 2016,
through certain of the Company’s subsidiaries, the Company entered into a $32,097,400 portfolio commercial mortgage-backed
securities loan (the “Cantor Loan”) with Cantor Commercial Real Estate Lending, LP (“CCRE”). The subsidiaries
are GMR Melbourne, LLC, GMR Westland, LLC, GMR Memphis, LLC, and GMR Plano, LLC (“GMR Loan Subsidiaries”). The Cantor
Loan has cross-default and cross-collateral terms. The Company used the proceeds of the Cantor Loan to acquire the Marina Towers
(Melbourne, FL) and the Surgical Institute of Michigan (Westland, MI) properties and to refinance the Star Medical (Plano, TX)
assets by paying off the existing principal amount of the loan with East West bank in the amount of $9,223,500, and the Company
granted a security interest in the Gastro One (Memphis, TN) assets.
The Cantor Loan has
a maturity date of April 6, 2026 and accrues annual interest at 5.22%. The first five years of the term require interest only
payments and after that payments will include interest and principal, amortized over a 30-year schedule. Prepayment can only occur
within four months prior to the maturity date, except that after the earlier of (a) 2 years after the loan is placed in a securitized
mortgage pool, or (ii) May 6, 2020, the Cantor Loan can be fully and partially defeased upon payment of amounts due under the
Cantor Loan and payment of a defeasance amount that is sufficient to purchase U.S. government securities equal to the scheduled
payments of principal, interest, fees, and any other amounts due related to a full or partial defeasance under the Cantor Loan.
The Company is securing
the payment of the Cantor Loan with the assets, including property, facilities, and rents, held by the GMR Loan Subsidiaries and
has agreed to guarantee certain customary recourse obligations, including findings of fraud, gross negligence, or breach of environmental
covenants by the GMR Loan Subsidiaries. The GMR Loan Subsidiaries will be required to maintain a monthly debt service coverage
ratio of 1.35:1.00 for all of the collateral properties in the aggregate.
No principal payments
were made for the nine months ended September 30, 2016. The note balance as of September 30, 2016 was $32,097,400. Interest expense
incurred on this note was $428,179 and $851,704 for the three and nine months ended September 30, 2016. No interest expense was
incurred on this note for the three and nine months ended September 30, 2015.
As of September 30,
2016, scheduled principal payments due for each fiscal year ended December 31 are listed below as follows:
2016
|
|
$
|
-
|
|
2017
|
|
|
-
|
|
2018
|
|
|
-
|
|
2019
|
|
|
-
|
|
2020
|
|
|
-
|
|
Thereafter
|
|
|
32,097,400
|
|
Total
|
|
$
|
32,097,400
|
|
West Mifflin Note Payable
In order to finance
a portion of the purchase price for the West Mifflin facility, on September 25, 2015 the Company entered into a Term Loan and
Security Agreement with Capital One to borrow $7,377,500. The note bears interest at 3.72% per annum and all unpaid interest and
principal is due on September 25, 2020. Interest is paid in arrears and interest payments begin on November 1, 2015, and on the
first day of each calendar month thereafter. Principal payments begin on November 1, 2018 and on the first day of each calendar
month thereafter based on an amortization schedule with the principal balance due on the maturity date. The note may not be prepaid
in whole or in part prior to September 25, 2017. Thereafter, the Company, at its option, may prepay the note at any time, in whole
(but not in part) on at least thirty calendar days but not more than sixty calendar days advance written notice. The note has
an early termination fee of two percent if prepaid prior to September 25, 2018. No principal payments were made for the nine months
ended September 30, 2016 and the twelve months ended December 31, 2015. The note balance as of September 30, 2016 and December
31, 2015 was $7,377,500. Interest expense incurred on this note was $70,136 and $209,645 for the three and nine months ended September
30, 2016, respectively. No interest expense was incurred on this note for the three and nine months ended September 30, 2015.
As of September 30,
2016, scheduled principal payments due for each fiscal year ended December 31 are listed below as follows:
2016
|
|
$
|
-
|
|
2017
|
|
|
-
|
|
2018
|
|
|
22,044
|
|
2019
|
|
|
136,007
|
|
2020
|
|
|
7,219,449
|
|
Total
|
|
$
|
7,377,500
|
|
Asheville Note Payable
In order to finance
a portion of the purchase price of the Asheville facility, on September 15, 2014 the Company entered into a Promissory Note with
the Bank of North Carolina to borrow $1,700,000. The note bears interest on the outstanding principal balance at the simple, fixed
interest rate of 4.75% per annum and all unpaid principal and interest is due on February 15, 2017. Commencing on October 15,
2014, the Company made on the 15
th
of each calendar month until and including March 15, 2015, monthly payments consisting
of interest only. Thereafter, commencing on April 15, 2015, the outstanding principal and accrued interest is payable in monthly
amortizing payments on the 15
th
day of each calendar month, until and including January 15, 2017. This note may be
prepaid in part or in full at any time and no prepayment penalty will be assessed with respect to any amounts prepaid. The Company
made principal payments in the amount of $39,204 and $37,899 for the nine months ended September 30, 2016 and the twelve months
ended December 31, 2015, respectively. The note balance as of September 30, 2016 and December 31, 2015 was $1,622,897 and $1,662,101,
respectively. Interest expense on this note was $19,799 and $59,667 for the three and nine months ended September 30, 2016, respectively,
and $20,433 and $61,101 for the three and nine months ended September 30, 2015, respectively.
As of September 30,
2016, scheduled principal payments due for each fiscal year ended December 31 are listed below as follows:
2016
|
|
$
|
13,515
|
|
2017
|
|
|
1,609,382
|
|
Total
|
|
$
|
1,622,897
|
|
Omaha Note Payable
In order to finance
a portion of the purchase price for the Omaha facility, on June 5, 2014 the Company entered into a Term Loan and Security Agreement
with Capital One, National Association to borrow $15,060,000. The loan bears interest at 4.91% per annum and all unpaid interest
and principal was due on June 5, 2017 (the “Maturity Date”). Interest was paid in arrears and payments began on August
1, 2014, and were due on the first day of each calendar month thereafter. Principal payments began on January 1, 2015 and were
due on the first day of each calendar month thereafter based on an amortization schedule with the principal balance due on the
Maturity Date. This note was paid in full on July 11, 2016 using the proceeds from the initial public offering. In accordance
with the terms of the note the prepayment resulted in the Company being required to pay an early termination fee in the amount
of $301,200 because the note was paid in full prior to its Maturity Date. This fee was also paid on July 11, 2016 and is recorded
as “Interest Expense” in the accompanying Consolidated Statements of Operations for the three and nine months ended
September 30, 2016. The Company made principal payments in the amount of $14,748,464 and $311,536 for the nine months ended September
30, 2016 and the twelve months ended December 31, 2015, respectively. The note balance as of September 30, 2016 and December 31,
2015 was zero and $14,748,464, respectively. Interest expense on this note was $121,247 and $487,714 for the three and nine months
ended September 30, 2016, respectively, (excluding the $301,200 early termination fee disclosed above), and $186,702 and $495,275
for the three and nine months ended September 30, 2015, respectively.
Note 5 – Stockholders’
Equity
Preferred Stock
The Company’s charter authorizes
the issuance of 10,000,000 shares of preferred stock, par value $0.001 per share. As of September 30, 2016 and December 31, 2015,
no shares of preferred stock were issued and outstanding.
Common Stock
The Company has 500,000,000
of authorized shares of common stock, $0.001 par value. As of September 30, 2016 and December 31, 2015, there were 17,605,675
and 250,000 outstanding shares of common stock, respectively.
On March 2, 2016,
ZH USA, LLC converted $15,000,000 of principal under the Convertible Debenture into 1,176,656 shares of the Company’s then
unregistered common stock based on a conversion rate of $12.748 per share.
On July 1, 2016, the
Company closed its initial public offering and issued 13,043,479 shares of its common stock at a price of $10.00 per share resulting
in gross proceeds of $130,434,790. After deducting amounts that the Company paid in costs that were directly attributable to the
offering, underwriting discounts, advisory fees, and commissions, for a total of $11,272,068, the Company received net proceeds
from the offering of $119,162,722. Additionally, on July 11, 2016 the underwriters exercised their over-allotment option in full,
resulting in the issuance by the Company of an additional 1,956,521 shares of the Company’s common stock at a price of $10.00
per share for gross proceeds of $19,565,210. After deducting underwriting discounts, advisory fees, and commissions of $1,369,565,
the Company received net proceeds from the over-allotment option shares of $18,195,645. Transaction costs incurred in connection
with the offering were approximately $1,681,259. Total shares issued by the Company in the initial public offering, including
over-allotment option shares, were 15,000,000 and the total net proceeds received were $137,358,367.
On July 1, 2016, ZH
USA, LLC converted $15,030,134 of the principal under the Convertible Debenture into 1,179,019 shares of the Company’s registered
common stock based on a conversion rate of $12.748 per share.
In order to help the
Company qualify as a REIT, among other purposes, the Company’s charter, subject to certain exceptions, restricts the number
of shares of the Company’s common stock that a person may beneficially or constructively own. The Company’s charter
provides that, subject to certain exceptions, no person may beneficially or constructively own more than 9.8%, in value or in
number of shares, whichever is more restrictive, of the outstanding shares of any class or series of the Company’s capital
stock. On June 27, 2016, the Company’s board of directors approved a waiver of the 9.8% ownership limit in our charter allowing
ZH USA, LLC to own up to 16.9% of the Company’s outstanding shares of common stock.
Pursuant to a previously
declared dividend approved by the Board of Directors of the Company and in compliance with applicable provisions of the Maryland
General Corporation Law, the Company has paid a monthly dividend of $0.0852 per share each month during the four-month period
from January 2016 through April 2016. During the nine months ended September 30, 2016 the Company paid total dividends to holders
of its common stock in the amount of $285,703. On September 14, 2016, the Company announced the declaration of a cash dividend
of $0.20 per share of common stock to stockholders of record as of September 27, 2016 and to the holders of the LTIP units that
were granted on July 1, 2016. This dividend, in the amount of $3,592,786, was accrued as of September 30, 2016 and paid on October
11, 2016. During the nine months ended September 30, 2015, the Company paid total dividends to holders of its common stock in
the amount of $170,400. Additionally, a dividend was declared on September 17, 2015 and paid in October 2015. The amount of that
dividend was $21,300.
Note 6 – Related Party Transactions
Management
Agreement
Initial
Management Agreement
On November 10, 2014,
the Company entered into a management agreement, with an effective date of April 1, 2014, with Inter-American Management LLC (the
“Advisor”), a Delaware limited liability company and an affiliate of the Company. ZH International Holdings Limited
(formerly known as Heng Fai Enterprises, Ltd.), a Hong Kong limited company that is engaged in real estate development, investments,
management and sales, hospitality management and investments and REIT management, is the 85% owner of the Advisor. ZH International
Holdings Limited owns ZH USA, LLC, a related party and the Company’s former (pre initial public offering) majority stockholder.
Under the terms of this initial management agreement, the Advisor is responsible for designing and implementing the Company’s
business strategy and administering its business activities and day-to-day operations. For performing these services, the Company
was obligated under the initial management agreement to pay the Advisor a base management fee equal to the greater of (a) 2.0%
per annum of the Company’s net asset value (the value of the Company’s assets less the value of the Company’s
liabilities), or (b) $30,000 per calendar month. Additionally, in accordance with the terms of the initial management agreement,
during the nine months ended September 30, 2016, the Company expensed $754,000 that was paid to the Advisor for the acquisitions
of the Plano, Melbourne and Westland Facilities, respectively. For the three and nine months ended September 30, 2015, the Company
incurred $227,000 of acquisition expenses related to the West Mifflin facility it acquired during the three months ended September
30, 2015.
Amended Management Agreement
Upon completion of
the Company’s initial public offering on July 1, 2016, the Company and the Advisor entered into an amended and restated
management agreement. Terms of the amended and restated management agreement are as follows:
Term and Termination
The initial term of
the amended and restated management agreement will expire on the third anniversary of the closing date of the initial public offering
and will automatically renew for an unlimited number of successive one-year periods thereafter, unless the agreement is not renewed
or is terminated in accordance with its terms. If the Company’s board of directors decides to terminate or not renew the
amended and restated management agreement, the Company will generally be required to pay the Advisor a termination fee equal to
three times the sum of the average annual base management fee and the average annual incentive compensation with respect to the
previous eight fiscal quarters ending on the last day of the fiscal quarter prior to termination. Subsequent to the initial term,
the Company may terminate the management agreement only under certain circumstances.
Base Management Fee
The Company will pay
its advisor a base management fee in an amount equal to: 1.5% of its stockholders’ equity per annum, calculated quarterly
for the most recently completed fiscal quarter and payable in quarterly installments in arrears.
For purposes of calculating
the base management fee, the Company’s stockholders’ equity means: (a) the sum of (1) the Company stockholders’
equity as of March 31, 2016, (2) the aggregate amount of the conversion price (including interest) for the conversion of the Company’s
outstanding convertible debentures into common stock and OP units upon completion of the initial public offering, and (3) the
net proceeds from (or equity value assigned to) all issuances of equity and equity equivalent securities (including common stock,
common stock equivalents, preferred stock, long-term incentive plan (“LTIP”) units and OP units issued by the Company
or the Operating Partnership) in the initial public offering, or in any subsequent offering (allocated on a pro rata daily basis
for such issuances during the fiscal quarter of any such issuance), less (b) any amount that the Company pays to repurchase shares
of its common stock or equity securities of the OP. Stockholders’ equity also excludes (1) any unrealized gains and losses
and other non-cash items (including depreciation and amortization) that have impacted stockholders’ equity as reported in
the Company’s financial statements prepared in accordance with GAAP, and (2) one-time events pursuant to changes in GAAP,
and certain non-cash items not otherwise described above, in each case after discussions between the Advisor and its independent
directors and approval by a majority of the Company’s independent directors. As a result, the Company’s stockholders’
equity, for purposes of calculating the base management fee, could be greater or less than the amount of stockholders’ equity
shown on its financial statements.
The base management
fee of the Advisor shall be calculated within 30 days after the end of each quarter and such calculation shall be promptly delivered
to the Company. The Company is obligated to pay the quarterly installment of the base management fee calculated for that quarter
in cash within five business days after delivery to the Company of the written statement of the Advisor setting forth the computation
of the base management fee for such quarter.
Incentive Compensation Fee
The Company will pay
its advisor an incentive fee with respect to each calendar quarter (or part thereof that the management agreement is in effect)
in arrears. The incentive fee will be an amount, not less than zero, equal to the difference between (1) the product of (x) 20%
and (y) the difference between (i) the Company’s AFFO (as defined below) for the previous 12-month period, and (ii) the
product of (A) the weighted average of the issue price of equity securities issued in the initial public offering and in future
offerings and transactions, multiplied by the weighted average number of all shares of common stock outstanding on a fully-diluted
basis (including any restricted stock units, any restricted shares of common stock, OP units, LTIP units, and shares of common
stock underlying awards granted under the 2016 Equity Incentive Plan or any future plan in the previous 12-month period, and (B)
8%, and (2) the sum of any incentive fee paid to the Advisor with respect to the first three calendar quarters of such previous
12-month period; provided, however, that no incentive fee is payable with respect to any calendar quarter unless AFFO is greater
than zero for the four most recently completed calendar quarters, or the number of completed calendar quarters since the closing
date of the offering, whichever is less. For purposes of calculating the incentive fee during the first 12 months after completion
of the offering, AFFO will be determined by annualizing the applicable period following completion of the offering.
AFFO is calculated
by adjusting the Company’s funds from operations, or FFO, by adding back acquisition and disposition costs, stock based
compensation expenses, amortization of deferred financing costs and any other non-recurring or non-cash expenses, which are costs
that do not relate to the operating performance of the Company’s properties, and subtracting loss on extinguishment of debt,
straight line rent adjustment, recurring tenant improvements, recurring leasing commissions and recurring capital expenditures.
Management Fee Expense Incurred
and Accrued Management Fees
For the three and
nine months ended September 30, 2016, management fees of $627,147 and $807,147, respectively were incurred and expensed by the
Company. For the three and nine months ended September 30, 2015, management fees of $90,000 and $270,000, respectively were incurred
and expensed by the Company. During the nine months ended September 30, 2016 the Company repaid $510,000 of the cumulative outstanding
accrued management fee balance. As of September 30, 2016 and December 31, 2015, accrued management fees of $927,147 and $630,000,
respectively, were due to the Advisor, and remain unpaid.
Allocated General and Administrative
Expenses
In the future, the
Company may receive an allocation of general and administrative expenses from the Advisor that are either clearly applicable to
or were reasonably allocated to the operations of the properties. There were no allocated general and administrative expenses
from the Advisor for the three months ended September 30, 2016 or the twelve months ended December 31, 2015.
Convertible Debenture, due to Related
Party
The Company has received
funds from its related party ZH USA, LLC in the form of convertible interest bearing notes (8% per annum, payable in arrears)
due on demand unsecured debt, which are classified as “Convertible debenture, due to related party” on the accompanying
Consolidated Balance Sheets. The Company may prepay the note at any time, in whole or in part. Additionally, ZH USA, LLC may elect
to convert all or a portion of the outstanding principal amount of the note into shares of common stock in an amount equal to
the principal amount of the note, together with accrued but unpaid interest, divided by $12.748.
On March 2, 2016,
ZH USA, LLC converted $15,000,000 of principal under the Convertible Debenture into 1,176,656 shares of the Company’s then
unregistered common stock based on a conversion rate of $12.748 per share.
On June 15, 2016,
in anticipation of its initial public offering, the Company entered into a Pay-Off Letter and Conversion Agreement (the “Pay-Off
Letter and Conversion Agreement”) with ZH USA, LLC with regards to the Convertible Debentures loaned to the Company. Under
the terms of the Pay-Off Letter and Conversion Agreement, upon the closing date of the initial public offering on July 1, 2016,
ZH USA, LLC converted $15,030,134 of the principal under the Convertible Debenture into 1,179,019 shares of the Company’s
registered common stock based on a conversion rate of $12.748 per share. Additionally, in accordance with the Pay-Off Letter and
Conversion Agreement, on July 8, 2016 the Company paid off the remaining principal amount of $10,000,000 outstanding under the
Convertible Debentures.
A rollforward of the
funding from ZH USA, LLC classified as convertible debenture, due to related party as of September 30, 2016 is as follows:
Balance as of January 1, 2016
|
|
$
|
40,030,134
|
|
Conversion of convertible debenture to common shares (March 2, 2016)
(a)
|
|
|
(15,000,000
|
)
|
Conversion of convertible debenture to common shares (July 1, 2016)
(a)
|
|
|
(15,030,134
|
)
|
Pay-off of remaining principal balance
|
|
|
(10,000,000
|
)
|
Balance as of September 30, 2016
|
|
$
|
-
|
|
|
|
|
|
|
(a) Total amount converted to common shares equals $30,030,134
|
|
|
|
|
On July 8, 2016, also
in accordance with the Pay-Off Letter and Conversion Agreement, the Company paid all accrued interest owed and outstanding on
the Convertible Debentures in the amount of $1,716,811. Accrued interest was included in the line item “Accrued Expenses”
in the accompanying Consolidated Balance Sheets.
Interest expense on
the Convertible Debentures was $43,889 and $1,242,899 for the three and nine months ended September 30, 2016, respectively, and
$126,545 and $342,599 for the three and nine months ended September 30, 2015, respectively.
Prior to the conversions
and the pay-off of the remaining outstanding principal balance of the Convertible Debentures discussed above, the Company analyzed
the conversion option in the convertible debenture for derivative accounting treatment under ASC Topic 815, “Derivatives
and Hedging,” and determined that the instrument does not qualify for derivative accounting. The Company performed an analysis
in accordance with ASC Topic 470-20, “Debt with Conversion and Other Options,” to determine if the conversion option
was subject to a beneficial conversion feature and determined that the instrument does not have a beneficial conversion feature.
Notes Payable
to Related Parties
During the nine months
ended September 30, 2016, the Company received total funds in the amount of $450,000 in the form of an interest bearing note payable
from a related party. The note bears interest at 4% per annum and is due on demand. Interest expense incurred on this note was
$4,150 and $10,284, for the three and nine months ended September 30, 2016, respectively. This note was paid in full with a payment
of $450,000 during the nine months ended September 30, 2016.
During the year ended
December 31, 2015, the Company received funds in the amount of $421,000 from ZH USA, LLC in the form of a non-interest bearing
due on demand note payable. No funds were received from ZH USA, LLC during the nine months ended September 30, 2016.
The total note payable
balance from these related party loans was $421,000 as of September 30, 2016 and December 31, 2015, respectively, and are classified
as “Notes payable to related parties” on the accompanying Consolidated Balance Sheets.
ZH USA, LLC Loan
On June 7, 2016, the Company received an
interest free loan from ZH USA, LLC in the principal amount of $1.5 million, which was repaid in full on July 8, 2016, using a
portion of the proceeds from the initial public offering.
Due to Related
Parties, Net
A
rollforward of the due (to) from related parties balance, net as of September 30, 2016 is as follows:
|
|
Due from
Advisor
|
|
|
Due to
Advisor –
Mgmt. Fees
|
|
|
Due to Advisor –
Other Funds
|
|
|
Due (to) from
Other Related
Party
|
|
|
Total Due (To)
From Related
Parties, Net
|
|
Balance as of January 1, 2016
|
|
$
|
178,111
|
|
|
|
(630,000
|
)
|
|
|
(240,280
|
)
|
|
|
(155,000
|
)
|
|
|
(847,169
|
)
|
Management fees repaid to Advisor
(a)
|
|
|
-
|
|
|
|
(297,147
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(297,147
|
)
|
Funds loaned by Advisor
(b)
|
|
|
-
|
|
|
|
-
|
|
|
|
(184,986
|
)
|
|
|
-
|
|
|
|
(184,986
|
)
|
Funds loaned to ZH USA, LLC
(c)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
39,000
|
|
|
|
39,000
|
|
Funds repaid to Other Related Party
(b)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
155,000
|
|
|
|
155,000
|
|
Balance as of September 30, 2016
|
|
$
|
178,111
|
|
|
|
(927,147
|
)
|
|
|
(425,266
|
)
|
|
|
39,000
|
|
|
|
(1,135,302
|
)
|
|
(a)
|
Net amount accrued of $297,147 consists of $807,147 of management
fee expenses incurred during the nine-month period net of $510,000 of accrued management
fees that were repaid to the Advisor. This is a cash flow operating activity.
|
|
(b)
|
Net amount received of $29,986
consists of $184,986 loaned to the Company net of $155,000 in funds repaid by the Company.
This is a cash flow financing activity.
|
|
(c)
|
Represent funds of $39,000
the Company loaned to a related party for its general use. This is a cash flow
investing activity.
|
Note 7 - 2016 Equity Incentive Plan
LTIP Units and Related Accounting Impact
Prior to the completion
of the initial public offering on July 1, 2016, the Company’s board of directors approved and adopted the 2016 Equity Incentive
Plan. The purpose of the 2016 Equity Incentive Plan is to attract and retain qualified persons upon whom, in large measure, our
sustained progress, growth and profitability depend, to motivate the participants to achieve long-term company goals and to more
closely align the participants’ interests with those of the Company’s other stockholders by providing them with a
proprietary interest in the Company’s growth and performance. The Company’s executive officers, employees, employees
of our advisor and its affiliates, consultants and non-employee directors are eligible to participate in the 2016 Equity Incentive
Plan. Under the 2016 Equity Incentive Plan, a number of shares of the Company’s common stock equal to 7 percent of the outstanding
shares of our common stock on a fully diluted basis upon the completion of the initial public offering (including 7 percent of
the shares sold pursuant to the underwriters’ option), are available for issuance pursuant to awards under the 2016 Equity
Incentive Plan, less the shares underlying the LTIP grants awarded upon completion of the initial public offering.
Specifically, an aggregate
of 358,250 LTIP units were granted upon completion of the offering on July 1, 2016 pursuant to the 2016 Equity Incentive Plan.
In addition, an aggregate of 874,147 additional shares are available for future issuance under the Company’s 2016 Equity
Incentive Plan, or 7 percent of the fully diluted outstanding shares of the Company’s common stock upon completion of the
initial public offering, including the underwriters’ over-allotment option, which was exercised in full on July 11, 2016.
Of the 358,250 LTIP
units that were granted, 60,400 of the units vested immediately upon completion of the Company’s initial public offering
on July 1, 2016 (the “IPO Units”). The remaining 297,850 LTIP units (the “Service LTIPs”) consist of 284,100
units granted to employees of the Advisor and its affiliates deemed to be non-employees in accordance with ASC Topic 505 and vest
over a period of 42 to 54 months as well as 13,750 units granted to the Company’s independent directors that were deemed
to be employees in accordance with ASC Topic 718 and vest over a period of 12 months. The Service LTIPs vest and are expensed
ratably as service is performed over the periods described above using the straight-line method, subject to certain terms and
conditions.
Total compensation
expense of $830,827 related to all of the Company’s LTIP units was recorded for the three and nine months ended September
30, 2016 and was classified as “General and Administrative” expense in the Company’s accompanying Consolidated
Statements of Operations. Total compensation expense recognized is comprised of a charge of $604,000 on the IPO Units, calculated
based on a share price of $10.00 per unit, the closing share price for the Company’s common stock at the closing date of
the initial public offering on July 1, 2016 and compensation expense of $226,827 incurred on of 23,056 Service LTIP using the
straight-line method. The compensation expense incurred related to the Service LTIPs granted to independent directors that were
deemed to be employees was based on a price of $10.00 per unit, the closing share price for the Company’s common stock on
the closing date of the initial public offering on July 1, 2016. The compensation expense incurred related to the Service LTIPs
granted to employees of the Advisor and its affiliates deemed to be non-employees was based on a share price of $9.76 per unit,
the closing share price for the Company’s common stock on September 30, 2016. The Service LTIPs granted to non-employees
are revalued each period at their then-current fair value at the end of that period, with a final measurement at the date of vesting.
There was a total
of 274,794 LTIP units that no compensation expense has been incurred on as of September 30, 2016. Total unamortized compensation
expense related to these units of approximately $2.7 million is expected to be recognized subsequent to September 30, 2016 over
a weighted average remaining period of 3.30 years. All LTIP units provide for the payment of dividends at the same time dividends
are paid to holders of the Company’s common stock.
Shares subject to
awards under the 2016 Equity Incentive Plan that are forfeited, cancelled, lapsed, settled in cash or otherwise expired (excluding
shares withheld to satisfy exercise prices or tax withholding obligations) will again be available for awards under the 2016 Equity
Incentive Plan. The 2016 Equity Incentive Plan is administered by the Company’s compensation committee, which will interpret
the 2016 Equity Incentive Plan and have broad discretion to select the eligible persons to whom awards will be granted, as well
as the type, size and terms and conditions of each award, including the exercise price of options, the number of shares subject
to awards and the expiration date of, and the vesting schedule or other restrictions (including, without limitation, restrictive
covenants) applicable to, awards.
The 2016
Equity Incentive Plan allows the Company to grant the following types of awards:
|
·
|
options,
including non-qualified options and incentive stock options;
|
|
·
|
stock
appreciation rights, or SARs;
|
|
·
|
stock
awards, including restricted stock and unrestricted stock;
|
|
·
|
restricted
stock units;
|
|
·
|
other
equity-based awards, including LTIP units;
|
|
·
|
substitute
awards; and performance awards.
|
Operating Partnership and LTIP Units
As disclosed on March
14, 2016, the Company entered into the Agreement of Limited Partnership of Global Medical REIT, L.P. (“Partnership Agreement”),
pursuant to which the Company, through a wholly-owned subsidiary, serves as the sole general partner of the Operating Partnership
and may not be removed as general partner by the limited partners with or without cause.
The Partnership Agreement,
as amended, provides, among other things, that the Operating Partnership initially has two classes of limited partnership interests,
which are Units of limited partnership interest (“OP Units”), and the Operating Partnership’s LTIP units. In
calculating the percentage interests of the partners in the Operating Partnership, LTIP units are treated as OP Units. In general,
LTIP units will receive the same per-unit distributions as the OP Units. Initially, each LTIP unit will have a capital account
balance of zero and, therefore, will not have full parity with OP Units with respect to any liquidating distributions. However,
the Partnership Agreement, as amended provides that “book gain,” or economic appreciation, in the Company’s
assets realized by the Operating Partnership as a result of the actual sale of all or substantially all of the Operating Partnership’s
assets, or the revaluation of the Operating Partnership’s assets as provided by applicable U.S. Department of Treasury regulations,
will be allocated first to the holders of LTIP units until their capital account per unit is equal to the average capital account
per-unit of the Company’s OP Unit holders in the Operating Partnership. We expect that the Operating Partnership will issue
OP Units to limited partners, and the Company, in exchange for capital contributions of cash or property, and will issue LTIP
units pursuant to the Company’s 2016 Equity Incentive Plan to persons who provide services to the Company, including the
Company’s officers, directors and employees.
Pursuant to the Partnership
Agreement, as amended, any holders of OP Units, other than the Company or its subsidiaries, will receive redemption rights which,
subject to certain restrictions and limitations, will enable them to cause the Operating Partnership to redeem their OP Units
in exchange for cash or, at the Company’s option, shares of the Company’s common stock, on a one-for-one basis. The
Company has agreed to file, not earlier than one year after the closing of the IPO, one or more registration statements registering
the issuance or resale of shares of its common stock issuable upon redemption of the OP Units, including those issued upon conversion
of LTIP units to the Manager and the Former Advisor.
LTIP units
are convertible into OP Units on a one for one basis, subject to certain conditions as set forth in the LTIP Unit Vesting Agreement
entered into by each LTIP unit holder. First, the LTIP units must have vested. The existing LTIP Unit Vesting Agreements generally
provide for a five-year vesting period. Second, the number of vested LTIP units that may be converted into OP Units is limited
to the proportion of the "capital account equivalency" that the LTIP units have achieved with the OP Units. The number
of vested LTIP units that may be converted generally is equal to the capital account balance of such LTIP units divided by the
capital account balance per unit of the OP units held by the General Partner. LTIP unit holders initially receive a capital account
with a zero balance and receive priority allocations of certain gains to increase their capital account balances until they equal
the capital account balances of OP Unit holders. Upon capital account equalization and vesting, LTIP units are convertible into
an equal number of OP Units at the holder’s election with notice to the Operating Partnership. The Operating Partnership,
at any time at the election of the General Partner, may also force a conversion of vested LTIP units into OP Units, subject to
the capital account equivalency requirement described in this paragraph.
LTIP unit
holders have the same voting rights as holders of OP Units, with the LTIP units voting as a single class with the OP Units and
having one vote per LTIP unit. With certain exceptions, a majority vote of the LTIP unit holders is required to amend the provisions
of the Partnership Agreement related to LTIP units.
Note 8 – Rental Revenue
The aggregate annual
minimum cash to be received by the Company on the noncancelable operating leases related to its portfolio of facilities in effect
as of September 30, 2016, are as follows for the subsequent years ended December 31; as listed below:
2016
|
|
$
|
2,265,155
|
|
2017
|
|
|
9,060,123
|
|
2018
|
|
|
9,204,836
|
|
2019
|
|
|
9,403,255
|
|
2020
|
|
|
9,583,394
|
|
Thereafter
|
|
|
82,475,421
|
|
Total
|
|
$
|
121,992,184
|
|
For the three months
ended September 30, 2016, the Omaha facility constituted approximately 22% of the Company’s rental revenue, the Tennessee
facilities constituted approximately 18% of rental revenue, the Plano facility constituted approximately 17% of rental revenue,
the West Mifflin facility constituted approximately 11% of rental revenue, the Melbourne facility constituted approximately 15%
of rental revenue, and the Reading facility constituted approximately 8% of rental revenue. The Asheville and Westland facilities
constituted approximately 3% and 6% of rental revenue, respectively. Based on their dates of acquisition the East Orange and Watertown
facilities constituted less than one percent of rental revenue.
For the nine months
ended September 30, 2016, the Omaha facility constituted approximately 26% of the Company’s rental revenue, the Tennessee
facilities constituted approximately 21% of rental revenue, the Plano facility constituted approximately 17% of rental revenue,
the West Mifflin facility constituted approximately 13% of rental revenue, the Melbourne facility constituted approximately 12%
of rental revenue, and the Reading facility constituted approximately 3% of rental revenue. The Asheville and Westland facilities
each constituted approximately 4% of rental revenue. Based on their dates of acquisition the East Orange and Watertown facilities
constituted approximately zero percent of rental revenue.
For the three months
ended September 30, 2015, the Omaha facility constituted approximately 85% of the Company’s rental revenue, the Asheville
facility constituted approximately 12% of rental revenue, and the West Mifflin facility constituted approximately 3% of rental
revenue.
For the nine months
ended September 30, 2015, the Omaha facility constituted approximately 87% of the Company’s rental revenue, the Asheville
facility constituted approximately 12% of rental revenue, and the West Mifflin facility constituted approximately 1% of rental
revenue.
Note 9 – Omaha Land Lease Rent Expense
The Omaha facility
land lease initially was to expire in 2023 with options to renew up to 60 years. However, the Company exercised two five-year
lease renewal options and therefore the land lease currently expires in 2033, subject to future renewal options by the Company.
Under the terms of the land lease, annual rents increase 12.5% every fifth anniversary of the lease. The initial land lease increase
will occur in April 2017. During the three and nine months ended September 30, 2016, the Company expensed $18,153 and $54,461,
respectively related to this lease. During the three and nine months ended September 30, 2015, the Company expensed $46,768 and
$61,738, respectively related to this lease.
The aggregate minimum
cash payments to be made by the Company on the non-cancelable Omaha facility related land lease in effect as of September 30,
2016, are as follows for the subsequent years ended December 31; as listed below.
2016
|
|
$
|
14,969
|
|
2017
|
|
|
59,877
|
|
2018
|
|
|
63,619
|
|
2019
|
|
|
67,362
|
|
2020
|
|
|
67,362
|
|
Thereafter
|
|
|
973,586
|
|
Total
|
|
$
|
1,246,775
|
|
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
Dividend Paid
On October 11, 2016,
the Company paid the dividend that was declared on September 14, 2016, in the amount of $0.20 per share of common stock to stockholders
of record as of September 27, 2016. At the same time, the Operating Partnership paid a cash distribution to holders of LTIP units
in the amount of $0.20 per unit. The aggregate amount of the dividend and LTIP unit distribution paid was $3,592,786.
Property Acquisitions Completed Subsequent to September
30, 2016
Carson City Facilities
On October 31, 2016,
the Company acquired land and two medical office buildings located in Carson City, Nevada for a total purchase price of $3.975
million and as part of the transaction assumed a seven-year triple net lease agreement with the existing tenant. The acquisition
was funded using a portion of the proceeds from the Company’s initial public offering.
Sandusky Facilities
As disclosed in Note
3 – “Property Portfolio,” on September 13, 2016, the Company entered into an assignment and assumption agreement
to assume from a third party a purchase contract to acquire a portfolio of seven properties known as the NOMS portfolio located
in Northern Ohio, for a total purchase price of $10.0 million. On October 7, 2016, the Company closed on the sale of five of the
seven facilities representing approximately $4.6 million of the total $10 million purchase price. The acquisition of the remaining
two buildings for approximately $5.4 million is expected to close in December 2016. The total NOMS portfolio covers an aggregate
of 50,931 square feet. The NOMS portfolio was owned by a multi-specialty physician group which has been in operation since 2000.
The group includes over 120 physicians of which approximately half are primary care providers. The Company is leasing the five
acquired properties to NOMS and will lease the remaining two properties to NOMS using a triple-net lease structure with initial
terms of 11 years with four additional five-year renewal options. NOMS was the tenant in the five buildings prior to the Company’s
acquisition and is also currently the tenant in the remaining two buildings. The acquisition of the five buildings was funded
using a portion of the proceeds from the Company’s initial public offering. The acquisition of the remaining two buildings
will also be funded using proceeds from the initial public offering.
Asset Purchase Agreements Executed Subsequent to September
30, 2016
Las Cruces Facility
On November 4, 2016,
the Company entered into a purchase agreement to acquire a surgical and imaging center in Las Cruces, New Mexico for a total purchase
price of $4.88 million. The Company will execute a 12-year triple net lease agreement with Las Cruces Orthopedic Associates upon
completion of the transaction. The Company expects to complete this transaction during the fourth quarter of 2016.
Ellijay Facilities
On November 1, 2016,
the Company entered into a purchase agreement to acquire land and three office buildings located in Ellijay, Georgia for a total
purchase price of $4.9 million. The Company will assume a 10-year triple net lease agreement with the existing tenant upon the
closing of the transaction. The Company expects to complete this transaction during the fourth quarter of 2016.
Credit Facility Commitment Letter
Subsequent
to quarter-end, the Company received a commitment for a $75 million secured credit facility that the Company will be able to
use to finance acquisitions.