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
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
March 31, 2017, the Company was the 97.7% limited partner of the Operating Partnership, with the remaining 2.3% owned by the holders
of the Company’s long term incentive plan (“LTIP”) units. Refer to Note 7 – “Stock-Based Compensation”
for additional information regarding the LTIP units. The Company has contributed all of its healthcare facilities to the Operating
Partnership in exchange for common units of limited partnership interest in the Operating Partnership. The Company intends to
conduct all future acquisition activity and operations through the Operating Partnership. The Operating Partnership has separate
wholly-owned Delaware limited liability company subsidiaries that were formed for each healthcare facility acquisition. On July
1, 2016, the Company closed its initial public offering and issued 15,000,000 shares of its common stock at a price of $10.00
per share resulting in net proceeds of $138,969,275.
Note 2 – Summary of Significant
Accounting Policies
Basis of presentation
The accompanying financial
statements are unaudited and include the accounts of the Company. The accompanying financial statements have been prepared in
accordance with GAAP and the rules and regulations of the United States Securities and Exchange Commission (“SEC”).
Certain information and footnote disclosures required for annual financial statements have been condensed or excluded pursuant
to SEC rules and regulations. Accordingly, the accompanying financial statements do not include all of the information and footnotes
required by GAAP for complete financial statements and should be read in conjunction with the audited financial statements and
notes thereto for the fiscal year ended December 31, 2016. 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 March 31,
2017 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.
Use of Estimates
The preparation of
the consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”)
requires the Company to make estimates and assumptions that affect the amounts reported in the consolidated financial statements
and footnotes. Actual results could differ from those estimates.
Restricted Cash
The restricted cash
balance as of March 31, 2017 and December 31, 2016 was $1,773,909 and $941,344, respectively, an increase of $832,565. The restricted
cash balance as of March 31, 2017, consisted of $85,686 of cash required by a third party lender to be held by the Company as
a reserve for debt service, $1,391,375 in security deposits received from facility tenants at the inception of their leases, and
$296,848 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 December
31, 2016 consisted of $383,265 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 $238,579 in funds held
by the Company from certain of its tenants that the Company collected to pay specific tenant expenses. The $832,565 increase during
the three months ended March 31, 2017 resulted from an aggregate increase of $1,130,144 in tenant security deposits derived from
acquisitions during the current quarter and funds held by the Company to pay specific tenant expenses, partially offset by a decrease
of $297,579 in funds required to be held by the Company by a third party lender.
Tenant Receivables
The tenant receivable
balance as of March 31, 2017 and December 31, 2016 was $347,110 and $212,435, respectively, an increase of $134,675. The balance
as of March 31, 2017 consisted of $133,959 in funds owed from the Company’s tenants for rent that the Company has earned
but not received, $29,834 in other tenant related receivables, and $183,317 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 balance as of December 31, 2016 consisted of $28,599 in funds owed from the Company’s tenants
for rent that the Company has earned but not received, $22,323 in other tenant related receivables, and $161,513 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.
Escrow Deposits
Escrow deposits include
funds held in escrow to be used for the acquisition of properties in the future and for the payment of taxes, insurance, and other
amounts as stipulated by the Company’s Cantor Loan, as hereinafter defined. The escrow balance as of March 31, 2017 and
December 31, 2016 was $2,528,996 and $1,212,177, respectively, an increase of $1,316,819. This increase resulted from $1,308,324
of funds added to the escrow account to be used to acquire facilities in the future and from an increase of $8,495 in deposits
that were required to be held in escrow related to the Cantor Loan.
Deferred Assets
The deferred assets
balance as of March 31, 2017 and December 31, 2016 was $1,087,148 and $704,537, respectively, an increase of $382,611. These amounts
represent the Company’s deferred rent receivable balance resulting from the straight lining of revenue recognized for applicable
tenant leases. The increase results from the facilities that were acquired during the three months ended March 31, 2017 that had
leases that required the straight lining of revenue.
Other Assets
Costs that are incurred
prior to the completion of an acquisition are capitalized if all of the following conditions are met: (a) the costs are directly
identifiable with the specific property, (b) the costs would be capitalized if the property were already acquired, and (c) acquisition
of the property is probable. These costs are included with the value of the acquired property upon completion of the acquisition.
The costs will be charged to expense when it is probable that the acquisition will not be completed. The balance in this account
was $11,484 and $140,374 as of March 31, 2017 and December 31, 2016, respectively, a decrease of $128,890. This decrease during
the three months ended March 31, 2017 resulted from $254,249 of costs that were reclassified to the asset value of facilities
when the respective acquisitions were completed and $3,150 of costs charged to expense when it was probable that an acquisition
would not be completed, partially offset by an increase resulting from additional capitalized costs incurred of $128,509.
Security Deposits Liability
The security deposits
liability balance as of March 31, 2017 and December 31, 2016 was $2,099,844 and $719,592, respectively, an increase of $1,380,252.
This increase resulted primarily from an increase in security deposits of $1,300,179 that were required at the inception of the
lease from several of the facilities that were acquired during the three months ended March 31, 2017 (Great Bend represented approximately
$1,100,000 of the increase) as well as from an increase of $80,073 in tenant funds that 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.
Note 3 – Property Portfolio
Summary of Properties Acquired During
the Three Months Ended March 31, 2017
During the three months
ended March 31, 2017, the Company completed eight acquisitions. A summary description of the acquisitions is as follows:
Oklahoma City Facilities
On March 31, 2017,
the Company closed on an purchase contract (the “Purchase Agreement”) 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 consists
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”), respectively.
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 in the percentages set forth above,
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 the 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 OCOM facilities
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 will be 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 aggregate annual rent under the GB Lease will be $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, in the amount 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 (the “Purchase Agreement”) with HVI, LLC (the “HVI Seller”),
acquired HVI Seller’s interest, as ground lessee, in the ground lease (the “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 $5.225 million. The Ground Lease commenced in 2012 and has an initial term of seventy-five 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”) with South Lake Hospital, Inc. (which is the subtenant under two separate
Subleases), 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 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 Clermont Facility 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 (the “Purchase 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 Lewisburg Facility 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.
Summary of Properties in the Company’s
Existing Portfolio as of December 31, 2016
HealthSouth Facilities
HealthSouth East Valley Rehabilitation
Hospital – Mesa, AZ
On December 20, 2016,
the Company, through a wholly owned subsidiary of the Operating Partnership, acquired, pursuant to a purchase contract (the “Mesa
PSA”) with HR ACQUISITION I CORPORATION (the “Mesa Seller”) the land and buildings known as the HealthSouth
East Valley Rehabilitation Hospital (the “Mesa Property”) located in Mesa, AZ from the Mesa Seller for a purchase
price of $22,350,000.
Upon the closing of
the acquisition of the Mesa Property, the Company assumed from the Mesa Seller the existing triple-net lease agreement (the “Mesa
Lease”) pursuant to which the Mesa Property is leased to HealthSouth Mesa Rehabilitation Hospital, LLC with a remaining
initial lease term of approximately eight years, subject to four consecutive five-year renewal options by the tenant, which lease
is guaranteed by HealthSouth Corporation (“HealthSouth”). The aggregate annual rent for the Mesa Property is currently
$1,710,617, subject to 3% annual rent escalations. HealthSouth Mesa Rehabilitation Hospital, LLC has the option under the Mesa
Lease to purchase the Mesa Property at the end of the initial lease term and at the end of each renewal term thereof, if any,
upon the terms and conditions set forth in the Mesa Lease.
HealthSouth
Rehabilitation Hospital of Altoona – Altoona, PA
On
December 20, 2016, the Company, through a wholly owned subsidiary of the Operating Partnership, acquired, pursuant to a purchase
contract (the “Altoona PSA”) with HR ACQUISITION OF PENNSYLVANIA, INC. (the “Altoona Seller”) the land
and building comprising the HealthSouth Rehabilitation Hospital of Altoona (the “Altoona Property”) located in Altoona,
PA from the Altoona Seller for a purchase price of $21,545,000.
Upon the closing of
the acquisition of the Altoona Property, the Company assumed from the Altoona Seller the existing triple-net lease agreement (the
“Altoona Lease”) pursuant to which the Altoona Property is leased to HealthSouth with a remaining initial lease term
of approximately 4.5 years, subject to two consecutive five-year renewal options by the tenant. The annual rent for the Altoona
Property is currently $1,635,773, subject to annual rent escalations based on increases in the consumer price index, or CPI, but
not greater than 4% nor less than 2%.
HealthSouth Rehabilitation Hospital
of Mechanicsburg – Mechanicsburg, PA
On December 20, 2016,
the Company, through a wholly owned subsidiary of the Operating Partnership, pursuant to a purchase contract (the “Mechanicsburg
PSA” and together with the Mesa PSA and the Altoona PSA, and the transactions contemplated thereby, the “Transactions”)
with HR ACQUISITION OF PENNSYLVANIA, INC. (the “Lease Assignor” and PENNSYLVANIA HRT, INC. (“HRT”), Lease
Assignor and HRT collectively referred to as “Mechanicsburg Seller”) (i) acquired the land and building comprising
the HealthSouth Rehabilitation Hospital of Mechanicsburg (the “Mechanicsburg Property”) located in Mechanicsburg,
PA from the Mechanicsburg Seller for a purchase price of $24,198,000; and (ii) accepted an assignment of the ground lessee’s
interest (the “Assignment”) in the Ground Lease dated May 1, 1996 from the Lease Assignor, whereby HRT ground leased
the Mechanicsburg Property to the Lease Assignor.
Upon the closing of
the acquisition of the Mechanicsburg Property and acceptance of the Assignment, the Company assumed from the Lease Assignor the
existing triple-net lease agreement (the “Mechanicsburg Lease”) pursuant to which the Mechanicsburg Property is leased
to HealthSouth with a remaining initial lease term of approximately 4.5 years, subject to two consecutive five-year renewal options
by the tenant. The annual rent for the Mechanicsburg Property is currently $1,836,886, subject to annual rent escalations based
on increases in the CPI, but not greater than 4% nor less than 2%. HealthSouth has the option under the Mechanicsburg Lease to
purchase the Mechanicsburg Property at the end of the initial lease term and at the end of each renewal term thereof, if any,
upon the terms and conditions set forth in the Mechanicsburg Lease.
The obligations under
the Mesa Lease are guaranteed by HealthSouth (NYSE: HLS). Additionally, HealthSouth is the tenant of the leases for both the Altoona
Property and the Mechanicsburg Property. Information about HealthSouth, 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.healthsouth.com/
or on the SEC website at
www.sec.gov
. The HealthSouth acquisitions were funded using the Company’s revolving credit
facility and available cash.
Accounting Treatment
The Company accounted
for the acquisitions of the three HealthSouth facilities as business combinations 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 HealthSouth
facilities acquisitions:
Land and site improvements
|
|
$
|
5,614,486
|
|
Building and tenant improvements
|
|
|
56,220,509
|
|
In place leases
|
|
|
5,154,249
|
|
Above market lease intangibles
|
|
|
74,096
|
|
Leasing costs
|
|
|
1,088,813
|
|
Below market lease intangibles
|
|
|
(59,153
|
)
|
Total purchase price
|
|
$
|
68,093,000
|
|
The above allocation is preliminary and
subject to revision within the measurement period, not to exceed one year from the date of the acquisition.
Ellijay Facilities
On December 16, 2016,
pursuant to the terms of an asset purchase agreement between the Company, as Purchaser, and SunLink Healthcare Professional Property,
LLC, a Georgia limited liability company, as seller (“SunLink”), the Company acquired three buildings, consisting
of one medical office building and two ancillary healthcare related buildings (the “Ellijay Facilities”), located
in Ellijay, Georgia, for a purchase price of $4.9 million. The acquisitions included the Ellijay Facilities, together with the
real property, the improvements, and all appurtenances thereto owned by SunLink. The Ellijay Facilities are operated by Piedmont
Mountainside Hospital, Inc., (“Piedmont”) the existing tenant of the Ellijay Facilities.
Upon the closing of
the transaction, the Company assumed the previous landlord’s interest in the existing 10-year triple-net lease with Piedmont,
effective as of July 1, 2016 and expiring in 2026. The acquisition was funded using a portion of the proceeds from the Company’s
initial public offering.
Accounting Treatment
The Company accounted
for the acquisition of the Ellijay Facilities 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 Ellijay Facilities acquisition:
Land and site improvements
|
|
$
|
913,509
|
|
Building and tenant improvements
|
|
|
3,336,809
|
|
In place leases
|
|
|
672,307
|
|
Leasing commissions and legal fees
|
|
|
197,576
|
|
Below market lease intangibles
|
|
|
(220,201
|
)
|
Total purchase price
|
|
$
|
4,900,000
|
|
The above allocation
is preliminary and subject to revision within the measurement period, not to exceed one year from the date of the acquisition.
Carson City Facilities
On September 27, 2016,
the Company assumed the original buyer’s interest in an asset purchase agreement between the original buyer and Carson Medical
Complex, a Nevada general partnership, as seller (“Carson”). On October 31, 2016, the Company, pursuant to the asset
purchase agreement, acquired two medical office buildings (the “Carson Facilities”), located in Carson City, Nevada
for a purchase price of $3.8 million. The acquisitions included the Carson Facilities, together with the real property, the improvements,
and all appurtenances thereto owned by Carson. The Carson Facilities are operated by Carson Medical Group, a Nevada professional
corporation, the existing tenant of the Carson Facilities (the “Carson Tenant”).
Upon the closing of
the transaction, the Company assumed the previous landlord’s interest in the existing 7-year triple-net lease with Carson
Tenant, effective as of October 31, 2016 and expiring in 2023. The lease provides for one five-year extension at the option of
the Carson Tenant. The acquisition was funded using a portion of the proceeds from the Company’s initial public offering.
Sandusky Facilities (five properties)
On September 29, 2016,
the Company assumed the original buyer’s interest in an asset purchase agreement between the original buyer and NOMS Property,
LLC and Northern Ohio Medical Specialists, LLC, both Ohio limited liability companies, as sellers (“NOMS,” and together
with NOMS Property, LLC, the “NOMS Sellers”), to acquire a portfolio of seven medical properties (the “NOMS
Facilities”) known as the NOMS portfolio located in Sandusky, Ohio, for a total purchase price of $10.0 million. The acquisition
included the NOMS Facilities, together with the real property, the improvements, and all appurtenances thereto. The NOMS Facilities
are operated by NOMS, the existing tenant of the NOMS Facilities (the “NOMS Tenant”).
On October 7, 2016,
pursuant to the terms of the above-referenced asset purchase agreement, the Company acquired five of the seven properties comprising
the NOMS Facilities (the “Five Properties”). The Company purchased the Five Properties for an allocated purchase price
of $4.6 million of the total $10 million purchase price. Upon its acquisition of the Five Properties, the Company entered into
a new 11-year triple-net lease with NOMS Tenant, effective as of October 7, 2016, and expiring in 2027. The lease provides for
four additional five-year renewal options. The acquisition of the Five Properties was funded using a portion of the proceeds from
the Company’s initial public offering.
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, a 3,136 square foot administration building and a 13,686 square foot facility, both located
in Watertown South Dakota (collectively, the “Watertown Facilities”), for a purchase price of $9.0 million. The acquisitions
included the Watertown Facilities, together with the real property, the improvements, and all appurtenances thereto. The Watertown
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 $11.86 million. 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 $9.20 million.
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 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 and Revolving Credit Facility.”
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 from Cherry Hill Real Estate, LLC (“Cherry Hill”).
The property 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, 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 and accordingly the purchase price of $4.75 million was
allocated approximately $4.52 million to building and approximately $0.23 million to land.
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 and Revolving Credit Facility.”
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 a hospital facility located in Plano, Texas, along with all real property and improvements thereto for $17.5 million
(the “Plano Facility”). 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%. As discussed in Note 4 – “Notes Payable Related
to Acquisitions and Revolving Credit Facility,” 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 December 31, 2016.
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. Five of
the facilities are located in Tennessee and one facility is located in Mississippi. The portfolio will be leased back through
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 its majority stockholder in the total amount of $20,900,000.
West Mifflin Facility
On September 25, 2015,
the Company acquired a surgery center and medical office building located in West Mifflin, Pennsylvania and the adjacent parking
lot for $11.35 million. 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, National Association (“Capital One”) and funded the remainder of the purchase price with the proceeds
from a Convertible Debenture it issued to its majority stockholder in the total amount of $4,545,838.
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 $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 its majority stockholder and with the Company’s existing cash.
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 $21.7 million. 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 are 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 December 31, 2015,
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 its majority stockholder.
A rollforward of the
gross investment in land, building and improvements as of March 31, 2017, resulting from the eight acquisitions completed during
the three months ended March 31, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
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:
|
|
|
5,345,336
|
|
|
|
91,148,425
|
|
|
|
2,587,378
|
|
|
|
99,081,139
|
|
|
|
8,985,679
|
|
|
|
108,066,818
|
|
Balances as of March 31, 2017
|
|
$
|
23,130,337
|
|
|
|
270,401,823
|
|
|
|
5,238,665
|
|
|
|
298,770,825
|
|
|
|
15,893,366
|
|
|
|
314,664,191
|
|
|
(1)
|
Represents intangible assets acquired
net of intangible liabilities acquired.
|
Depreciation expense
was $1,346,053 and $398,830 for the three months ended March 31, 2017 and March 31, 2016, respectively.
Unaudited Pro Forma Financial Information
for Business Combination Transactions During the Three Months Ended March 31, 2017
The following table
illustrates the unaudited pro forma consolidated revenue, net loss, and loss per share as if the entities that the Company acquired
during the three months ended March 31, 2017 that were accounted for as business combinations (the OCOM North, OCOM South, Clermont
and Lewisburg facilities) had occurred as of January 1, 2016:
|
|
Three Months Ended March
31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
5,875,993
|
|
|
$
|
2,692,735
|
|
Net loss
|
|
$
|
(2,784,362
|
)
|
|
$
|
(3,183,101
|
)
|
Loss per share
|
|
$
|
(0.16
|
)
|
|
$
|
(5.09
|
)
|
Weighted average shares outstanding
|
|
|
17,605,675
|
|
|
|
624,978
|
|
Intangible Assets and Liabilities
The following is a
summary of the carrying amount of intangible assets and liabilities as of March 31, 2017:
|
|
As of March 31, 2017
|
|
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
In-place leases
|
|
$
|
10,846,201
|
|
|
$
|
(315,311
|
)
|
|
$
|
10,530,890
|
|
Above market ground lease
|
|
|
487,978
|
|
|
|
(567
|
)
|
|
|
487,411
|
|
Above market leases
|
|
|
832,948
|
|
|
|
(3,878
|
)
|
|
|
829,070
|
|
Leasing costs
|
|
|
4,215,221
|
|
|
|
(70,611
|
)
|
|
|
4,144,610
|
|
|
|
$
|
16,382,348
|
|
|
$
|
(390,367
|
)
|
|
$
|
15,991,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Below market leases
|
|
$
|
488,982
|
|
|
$
|
(13,639
|
)
|
|
$
|
475,343
|
|
The following is a
summary of the carrying amount of intangible assets and liabilities as of December 31, 2016:
|
|
As of December 31, 2016
|
|
|
|
Cost
|
|
|
Accumulated
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 months ended March 31, 2017. The Company had no intangible
assets or liabilities as of March 31, 2016 and therefore no amortization was incurred during the three months ended March 31,
2016.
Amortization expense related to in-place leases
|
|
$
|
280,522
|
|
Amortization expense related to leasing costs
|
|
$
|
63,078
|
|
Decrease of rental revenue related to above market ground lease
|
|
$
|
567
|
|
Decrease of rental revenue related to above market leases
|
|
$
|
3,435
|
|
Increase of rental revenue related to below market leases
|
|
$
|
12,202
|
|
As of March 31, 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
|
|
$
|
11,496
|
|
|
$
|
1,442,015
|
|
2018
|
|
|
8,855
|
|
|
|
1,905,036
|
|
2019
|
|
|
8,855
|
|
|
|
1,905,036
|
|
2020
|
|
|
8,855
|
|
|
|
1,905,036
|
|
2021
|
|
|
6,010
|
|
|
|
1,290,423
|
|
Thereafter
|
|
|
(885,209
|
)
|
|
|
6,227,954
|
|
Total
|
|
$
|
(841,138
|
)
|
|
$
|
14,675,500
|
|
As of March 31, 2017, the weighted average
amortization period for asset lease intangibles and liability lease intangibles are 8.3 years and 6.7 years, respectively.
Note 4 – Notes Payable Related
to Acquisitions and Revolving Credit Facility
Summary of Notes Payable Related to
Acquisitions, Net of Debt Discount
Costs incurred related
to securing the Company’s fixed rate debt instruments have been capitalized as a debt discount, net of accumulated amortization,
and are netted against the Company’s Notes Payable balance in the accompanying Consolidated Balance Sheet.
A detail of the Company’s
note payable related to acquisitions, net of debt discount as if March 31, 2017 and December 31, 2016 is as follows:
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Notes payable related to acquisitions, gross
|
|
$
|
39,474,900
|
|
|
$
|
39,474,900
|
|
Less: Unamortized debt discount
|
|
|
(1,028,797
|
)
|
|
|
(1,061,602
|
)
|
Notes payable related to acquisitions, net
|
|
$
|
38,446,103
|
|
|
$
|
38,413,298
|
|
A rollforward of the
unamortized debt discount balance as of March 31, 2017, that was incurred on the Company’s fixed rate debt, is as follows:
Balance as of January 1, 2017, net
|
|
$
|
1,061,602
|
|
Debt discount amortization expense
|
|
|
(32,805
|
)
|
Balance as of March 31, 2017, net
|
|
$
|
1,028,797
|
|
Amortization expense
incurred related to the debt discount was $32,805 and $90,241 for the three months ended March 31, 2017 and March 31, 2016, respectively,
and is included in the “Interest Expense” line item in the accompanying Consolidated Statements of Operations.
Summary of Deferred Financing Costs,
Net
Costs incurred related
to securing the Company’s revolving credit facility have been capitalized as a deferred financing asset, net of accumulated
amortization in the accompanying Consolidated Balance Sheet.
A rollforward of the
deferred financing cost balance as of March 31, 2017, that was incurred on the Company’s revolving credit facility, is as
follows:
Balance as of January 1, 2017, net
|
|
$
|
927,085
|
|
Additions – revolving credit facility
|
|
|
769,163
|
|
Deferred financing cost amortization expense
|
|
|
(125,867
|
)
|
Balance as of March 31, 2017, net
|
|
$
|
1,570,381
|
|
Amortization expense
incurred related to the revolving credit facility was $125,867 and zero for the three months ended March 31, 2017 and March 31,
2016, respectively, and 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 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 three months ended March 31, 2017. The note balance as of March 31, 2017 and December 31, 2016 was $32,097,400.
Interest expense was $418,873 for the three months ended March 31, 2017. No interest expense was incurred on this note for the
three months ended March 31, 2016.
As of March 31, 2017,
scheduled principal payments due for each fiscal year ended December 31 are listed below as follows:
2017
|
|
$
|
-
|
|
2018
|
|
|
-
|
|
2019
|
|
|
-
|
|
2020
|
|
|
-
|
|
2021
|
|
|
-
|
|
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 (through its wholly owned subsidiary
GMR Pittsburgh LLC, as borrower) 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. The note requires a quarterly fixed charge coverage ratio of at least 1:1, a quarterly minimum debt yield of 0.09:1.00,
and annualized Operator EBITDAR measured on a quarterly basis of not less than $6,000,000. The Operator is Associates in Ophthalmology,
Ltd. and Associates Surgery Centers, LLC. No principal payments were made for the three months ended March 31, 2017. The note
balance as of March 31, 2017 and December 31, 2016 was $7,377,500. Interest expense incurred on this note was $68,610 and $69,373
for the three months ended March 31, 2017 and March 31, 2016, respectively.
As of March 31, 2017,
scheduled principal payments due for each fiscal year ended December 31 are listed below as follows:
2017
|
|
$
|
-
|
|
2018
|
|
|
22,044
|
|
2019
|
|
|
136,007
|
|
2020
|
|
|
7,219,449
|
|
Total
|
|
$
|
7,377,500
|
|
Amended Revolving Credit Facility
On December 2, 2016, the
Company, the Operating Partnership, as borrower, and certain subsidiaries (GMR Asheville LLC, GMR Watertown LLC, GMR Sandusky
LLC, GMR East Orange LLC, GMR Omaha LLC, and GMR Reading LLC) (such subsidiaries, the “Subsidiary Guarantors”) of
the Operating Partnership entered into a senior revolving credit facility (the “Credit Facility”) with BMO Harris
Bank N.A., as Administrative Agent, which initially provided up to $75 million in revolving credit commitments for the Operating
Partnership. The initial Credit Facility included an accordion feature that provided the Operating Partnership with additional
capacity, subject to the satisfaction of customary terms and conditions of up to $125 million, for a total initial facility size
of up to $200 million. On March 3, 2017, the Company, the Operating Partnership, as borrower, and the Subsidiary Guarantors of
the Operating Partnership entered into an amendment to the Credit Facility with BMO Harris Bank N.A., as Administrative Agent,
which increased the commitment amount to $200 million plus an accordion feature that allows for up to an additional $50 million
of principal amount subject to certain conditions, for a total facility size of $250 million. The Subsidiary Guarantors and the
Company are guarantors of the obligations under the amended Credit Facility. The amount available to borrow from time to time
under the amended Credit Facility is limited according to a quarterly borrowing base valuation of certain properties owned by
the Subsidiary Guarantors. The initial termination date of the Credit Facility is December 2, 2019 which could be extended for
one year in the case that no event of default occurs.
Amounts outstanding
under the Credit Facility bear annual interest at a floating rate that is based, at the Operating Partnership’s option,
on (i) adjusted LIBOR plus 2.00% to 3.00% or (ii) a base rate plus 1.00% to 2.00%, in each case, depending upon the Company’s
consolidated leverage ratio. In addition, the Operating Partnership is obligated to pay a quarterly fee equal to a rate per annum
equal to (x) 0.20% if the average daily unused commitments are less than 50% of the commitments then in effect and (y) 0.30% if
the average daily unused commitments are greater than or equal to 50% of the commitments then in effect and determined based on
the average daily unused commitments during such previous quarter.
The Operating Partnership
is subject to ongoing compliance with a number of customary affirmative and negative covenants, including limitations with respect
to liens, indebtedness, distributions, mergers, consolidations, investments, restricted payments and asset sales. The Operating
Partnership must also maintain (i) a maximum consolidated leverage ratio, commencing with the fiscal quarter ending December 31,
2016 and as of the end of each fiscal quarter thereafter, of less than (y) 0.65:1.00 for each fiscal quarter ending prior to October
1, 2019 and (z) thereafter, 0.60:1.00, (ii) a minimum fixed charge coverage ratio of 1.50:1.00, (iii) a minimum net worth of $119,781,219
plus 75% of all net proceeds raised through subsequent equity offerings and (iv) a ratio of total secured recourse debt to total
asset value of not greater than 0.10:1.00.
During the three months
ended March 31, 2017, the Company borrowed $101.2 million against the Credit Facility and made no repayments. As of March 31,
2017 and December 31, 2016, the outstanding the Credit Facility balance was $128.9 million and $27.7 million respectively. For
the three months ended March 31, 2017, interest incurred on the Credit Facility was $453,925. No interest expense was incurred
for the three months ended March 31, 2016.
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 March 31, 2017 and December 31, 2016,
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 March 31, 2017 and December 31, 2016, there were 17,605,675 outstanding
shares of common stock.
On January 10, 2017
the Company paid the fourth quarter 2016 dividend that was announced on December 14, 2016 in the amount of $3,604,437.
On March
20, 2017, the Company announced the declaration of a cash dividend of $0.20 per share of common stock to stockholders of
record as of March 27, 2017 and to the holders of the LTIP units that were granted on July 1, 2016 and December 21, 2016.
This dividend, in the amount of $3,603,485 is to be paid on or about April 10, 2017, and was accrued as of March 31,
2017. Pursuant to a previously declared dividend approved by the board of directors of the Company (“Board”) and
in compliance with applicable provisions of the Maryland General Corporation Law, the Company paid a monthly dividend of
$0.0852 per share during the three months ended March 31, 2016 for a total of $164,152.
Additionally, in accordance
with the terms of the Company’s 2017 Annual Equity Bonus and Long-Term Equity Award Plan as disclosed in Note 7 –
“Stock-Based Compensation,” as of March 31, 2017 the Company accrued a dividend of $0.20 per LTIP unit on the 241,662
aggregate annual and long-term LTIP targeted grants that are subject to retroactive receipt of dividends on the amount of LTIPs
ultimately earned. The amount of the accrual was $48,332.
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 unregistered
common stock. The shares of unregistered common stock issuable to ZH USA, LLC under the Convertible Debenture are subject to customary
anti-dilution rights in the event of stock splits, stock dividends and similar corporate events.
Note 6 – Related Party Transactions
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 quarter ended March 31, 2016, the Company expensed $754,000 in acquisition fees that were paid to the Advisor for acquisitions
that were completed during the quarter.
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. Certain material terms of the amended and restated management agreement are summarized below:
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 Board 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 pays 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 pays 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 is 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 (the “2016 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 months
ended March 31, 2017 and 2016, management fees of $627,147 and $90,000, respectively were incurred and expensed by the Company
and during the quarter ended March 31, 2017 the Company paid management fees to the Advisor in the amount of $620,709. No management
fees were paid during the quarter ended March 31, 2016. As of March 31, 2017 and March 31, 2016, accrued management fees of $627,147
and $720,000, respectively, were due to the Advisor.
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 March 31, 2017 or March 31, 2016.
Note Payable
to Majority Stockholder
The Company has received
funds from its majority stockholder ZH USA, LLC in the form of a non-interest bearing due on demand note payable, which is classified
as “Note payable to majority stockholder” on the accompanying Consolidated Balance Sheets. The Company did not receive
any additional funds or make any payments on this note during the three months ended March 31, 2017. The balance of this note
was $421,000 as of March 31, 2017 and December 31, 2016, respectively.
Note Payable
to Related Party
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 was due on demand. The note was paid in full as of December 31, 2016. Interest expense
incurred on this note for the three months ended March 31, 2017 and March 31, 2016 was zero and $1,634. Under the arrangement
with the related party the Company has the ability to receive additional loans in the future.
Due to Related
Parties, Net
A
rollforward of the due (to) from related parties balance, net as of March 31, 2017 is as follows:
|
|
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, 2017
|
|
$
|
(620,709
|
)
|
|
|
(586
|
)
|
|
|
40,384
|
|
|
|
(580,911
|
)
|
Management fee expense
incurred
(a)
|
|
|
(627,147
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(627,147
|
)
|
Management fees paid
to Advisor
(a)
|
|
|
620,709
|
|
|
|
-
|
|
|
|
-
|
|
|
|
620,709
|
|
Loan repaid to Advisor
(b)
|
|
|
-
|
|
|
|
586
|
|
|
|
-
|
|
|
|
586
|
|
Loan
received from other related party
(b)
|
|
|
-
|
|
|
|
-
|
|
|
|
(136
|
)
|
|
|
(136
|
)
|
Balance as of March 31, 2017
|
|
$
|
(627,147
|
)
|
|
|
-
|
|
|
|
40,248
|
|
|
|
(586,899
|
)
|
|
(a)
|
Net amount accrued of $6,438 consists of $627,147 in management
fee expense incurred, net of $620,709 of accrued management fees that were repaid to
the Advisor. This represents a cash flow operating activity.
|
|
(b)
|
Net amount repaid of $450 consists of a loan repaid to the
Advisor in the amount of $586, partially offset by a loan received from a related party
in the amount of $136. This represents a cash flow financing activity.
|
Note 7 – Stock-Based Compensation
On February 28,
2017, the Board approved the recommendations of the Compensation Committee of the Board with respect to the granting of 2017
annual performance-based equity incentive awards in the form of long-term incentive plan, or LTIP units (the
“Annual Awards”) and long-term performance-based LTIP awards (the “Long-Term Awards”) to the
executive officers of the Company and other employees of the Company’s external manager who perform services for the
Company (the “2017 Program”).
The 2017 Program is
a part of the Company’s 2016 Plan and therefore the Annual Awards and Long-Term Awards were granted pursuant to the 2016
Plan. The purpose of the 2016 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 Plan.
The Company granted
LTIP units under the 2017 Program and experienced forfeitures during the three months ended March 31, 2017 as follows:
Annual Awards
|
|
|
97,243
|
|
Long-Term Awards
|
|
|
147,081
|
|
Total LTIP units granted during the three months ended March 31, 2017
|
|
|
244,324
|
|
2017 Program LTIP units forfeited during the three months ended March 31, 2017
|
|
|
(2,662
|
)
|
Total LTIP units granted in the three months ended March 31, 2017
|
|
|
241,662
|
|
The Company granted
LTIP units under the 2016 Plan during the year ended December 31, 2016 and experienced forfeitures during the three months ended
March 31, 2017 as follows:
LTIP units granted on July 1, 2016
|
|
|
358,250
|
|
LTIP units granted on December 21, 2016
|
|
|
56,254
|
|
Total LTIP units granted for the year ended December 31, 2016
|
|
|
414,504
|
|
2016 Plan LTIP units forfeited during the three months ended March 31, 2017
|
|
|
(2,760
|
)
|
Total 2016 Plan LTIP units issued and outstanding as
of March 31, 2017
|
|
|
411,744
|
|
Under the
2016 Plan a total of 1,232,397 shares of common stock are available to be granted or issued in respect of other
equity-based awards such as LTIP units. Shares subject to awards under the 2017 Program and the 2016 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 grant. The 2017 Program is administered by the Company’s
compensation committee, which will interpret the 2017 Program and the Committee has broad discretion to select the eligible
individuals to whom awards will be granted, as well as the type, size and terms and conditions of each award, including the
fair market value of LTIP units, 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.
2017 Program
Of the 244,324
LTIP units that were granted under the 2017 Program (prior to forfeitures) during the three months ended March 31, 2017, an
aggregate of 97,243 target LTIP units were awarded under the Annual Awards and an aggregate of 147,081 target LTIP units were
awarded under the Long-Term Awards. All the 244,324 LTIP units were granted to non-employees. The number of target LTIP units
comprising each Annual Award was based on the closing price of the Company’s common stock reported on the New York
Stock Exchange (“NYSE”) on the date of grant (February 28, 2017) and the number of target LTIP Units comprising
each Long-Term Award was based on the fair value of the Long-Term Awards as determined by an independent valuation
consultant, in each case rounded to the next whole LTIP unit in order to eliminate fractional units. There was an aggregate
of 2,662 forfeited units that will not be eligible to vest.
Annual Awards
.
The Annual Awards are subject to the terms and conditions of LTIP Annual Award Agreements (“LTIP Annual Award Agreements”)
between the Company and each grantee.
The Compensation Committee
established various operating performance goals for calendar year 2017, as set forth in Exhibit A to the LTIP Annual Award Agreements
(the “Performance Goals”), that will be used to determine the actual number of LTIP Units earned by each grantee under
each LTIP Annual Award Agreement. As soon as reasonably practicable following the last day of the 2017 fiscal year, the Compensation
Committee will determine the extent to which the Company has achieved the Performance Goals and, based on such determination,
will calculate the number of LTIP Units that each grantee is entitled to receive under the grantee’s Annual Award based
on the performance percentages described in the grantee’s LTIP Annual Award Agreement. Each grantee may earn up to 150%
of the number of target LTIP units covered by the grantee’s Annual Award. Any target LTIP Units that are not earned will
be forfeited and cancelled.
The Company expenses
the fair value of all unit awards in accordance with the fair value recognition requirements of ASC Topic 718, Compensation-Stock
Compensation, for “employees,” and ASC Topic 505, Equity, for “non-employees.”
As the Annual Awards
were granted to non-employees, in accordance with the provisions of ASC Topic 505, the Annual Awards utilize the grant date fair
value for expense recognition; however, the accounting after the measurement date requires a fair value re-measurement each reporting
period until the awards vest. Since these are performance based awards with no market condition, the closing price on the valuation
date and revaluation date will be used for expense recognition purposes.
Long-Term Awards
.
The Long-Term Awards are subject to the terms and conditions of LTIP Long-Term Award Agreements (“LTIP Long-Term Award Agreements”)
between the Company and each grantee. The number of LTIP Units that each grantee is entitled to earn under the LTIP Long-Term
Award Agreements will be determined following the conclusion of a three-year performance period based on the Company’s total
shareholder return, which is determined based on a combination of appreciation in stock price and dividends paid during the performance
period (“TSR”). Each grantee may earn up to 200% of the number of target LTIP units covered by the grantee’s
Long-Term Award. Any target LTIP Units that are not earned will be forfeited and cancelled. The number of LTIP Units earned under
the Long-Term Awards will be determined as soon as reasonably practicable following the end of the three-year performance period
based on the Company’s TSR on an absolute basis (as to 75% of the Long-Term Award) and relative to the SNL Healthcare REIT
Index (as to 25% of the Long-Term Award).
As the Long-Term Awards
were granted to non-employees and involved market-based performance conditions, in accordance with the provisions of ASC Topic
505, the Long-Term Awards utilize a Monte Carlo simulation to provide a grant date fair value for expense recognition; however,
the accounting after the measurement date requires a fair value re-measurement each reporting period until the awards vest. The
fair value re-measurement will be performed by calculating a Monte Carlo produced fair value at the conclusion of each reporting
period until vesting.
The Monte Carlo
simulation is a generally accepted statistical technique used, in this instance, to simulate a range of possible future stock
prices for the Company and the members of the SNL Healthcare REIT Index (the “Index”) over the Performance Period
(February 28, 2017 to February 27, 2020). The purpose of this modeling is to use a probabilistic approach for estimating the
fair value of the performance share award for purposes of accounting under ASC Topic 718. ASC Topic 505 does not provide
guidance on how to derive a fair value, so the valuation defaults to that described in ASC Topic 718.
The assumptions used
in the Monte Carlo simulation include beginning average stock price, valuation date stock price, expected volatilities, correlation
coefficients, risk-free rate of interest, and expected dividend yield. The beginning average stock price is the beginning average
stock price for the Company and each member of the Index for the 5 trading days leading up to February 28, 2017. The valuation
date stock price is the closing stock price of the Company and each of the peer companies in the Index on February 28, 2017 for
the grant date fair value, and the closing stock price on March 31, 2017 for revaluation. The expected volatilities are modeled
using the historical volatilities for the Company and the members of the Index. The correlation coefficients are calculated using
the same data as the historical volatilities. The risk-free rate of interest is taken from the U.S. Treasury website, and relates
to the expected life of the remaining performance period on valuation or revaluation. Lastly, the dividend yield assumption is
0.0%, which is mathematically equivalent to reinvesting dividends in the issuing entity, which is part of the Company’s
award agreement assumptions.
Vesting.
LTIP
units that are earned as of the end of the applicable performance period will be subject to forfeiture restrictions that will
lapse (“vesting”), subject to continued employment through each vesting date, in two installments as follows: 50%
of the earned LTIP units will vest upon being earned as of the end of the applicable performance period and the remaining 50%
will vest on the first anniversary of the date on which such LTIP units are earned.
Distributions.
Pursuant to both the LTIP Annual Award Agreements and LTIP Long-Term Award Agreements, distributions equal to the dividends
declared and paid by the Company will accrue during the applicable performance period on the maximum number of LTIP Units that
the grantee could earn and will be paid with respect to all of the earned LTIP Units at the conclusion of the applicable performance
period, in cash or by the issuance of additional LTIP Units at the discretion of the Compensation Committee
2016 Plan
Of the
aggregate 414,504 LTIP units that were granted under the 2016 Plan prior to December 31, 2016 (prior to forfeitures), 60,400
units vested immediately on July 1, 2016 upon completion of the Company’s initial public offering (the “IPO
Units”), 68,900 LTIP units vested on December 1, 2016, and an additional 8,000 LTIP units vested immediately during
December 2016 (a total of 137,300 vested units as of March 31, 2017). Additionally, there was an aggregate of 2,760 forfeited
units that were not vested. The remaining unvested 274,444 LTIP units (the “Service LTIPs”), net of forfeitures,
consists of 260,694 units granted to employees of the Advisor and its affiliates deemed to be non-employees in accordance
with ASC Topic 505 and vest over periods of 36 months, 41 months, and 53 months, from the grant date, dependent on the
population granted to, as well as 13,750 units granted to the Company’s independent directors (that were treated as
employees in accordance with ASC Topic 718), and vest over a period of 12 months from the grant date.
Detail of Compensation Expense Recognized
For The Three Months Ended March 31, 2017
The Company incurred
compensation expense of $419,610 for the three months ended March 31, 2017 related to the grants awarded under the 2017 Program
and the 2016 Plan. Compensation expense is classified as “General and Administrative” expense in the Company’s
accompanying Consolidated Statements of Operations. A detail of compensation expense recognized during the three months ended
March 31, 2017, by plan, is as follows:
2016 Plan:
|
|
|
|
|
Service LTIPs – non-employee
|
|
$
|
286,664
|
|
Service LTIPs – employee
|
|
|
33,118
|
|
2017 Program:
|
|
|
|
|
Annual awards – non-employee
|
|
|
64,469
|
|
Long-term awards – non-employee
|
|
|
35,359
|
|
Total compensation expense
|
|
$
|
419,610
|
|
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 March 31, 2017, are as follows for the subsequent years ended December 31; as listed below.
2017
|
|
$
|
17,629,066
|
|
2018
|
|
|
23,842,680
|
|
2019
|
|
|
24,292,689
|
|
2020
|
|
|
24,732,689
|
|
2021
|
|
|
22,669,753
|
|
Thereafter
|
|
|
164,999,000
|
|
Total
|
|
$
|
278,165,877
|
|
For the three months
ended March 31, 2017, the HealthSouth facilities constituted approximately 30% of the Company’s rental revenue, the Omaha
and Plano facilities each constituted approximately 9% of the Company’s rental revenue, and the Tennessee facilities constituted
approximately 8% of rental revenue. All other facilities in the Company’s portfolio constituted the remaining 44% of the
total rental revenue with no individual facility representing greater than approximately 6% of total rental revenue.
For the three months
ended March 31, 2016, the Omaha facility constituted approximately 34% of the Company’s rental revenue, the Tennessee facilities
constituted approximately 27% of rental revenue, the Plano Facility constituted approximately 18% of rental revenue and the Pittsburgh
facility constituted approximately 17% of rental revenue. All other facilities individually contributed the remaining total of
approximately 4% of rental revenue.
Note 9 – Omaha and Clermont Land Leases
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 Omaha land lease, annual rents increase 12.5% every fifth anniversary of the lease. The initial Omaha land
lease increase will occur in April 2017. During both of the three months ended March 31, 2017 and March 31, 2016, the Company
expensed $18,154 related to the Omaha land lease.
On March 1, 2017,
the Company acquired an interest, as ground lessee, in the ground lease that covers and affects certain real property located
in Clermont, Florida, along with the seller’s right, title and interest arising under the ground lease in and to the medical
building located upon the land. The ground lease expense is a pass-through to the tenant so no expense related to this ground
lease is recorded on the Company’s Statements of Operations. The Clermont ground Lease commenced in 2012 and has an initial
term of seventy-five years.
The aggregate minimum
cash payments to be made by the Company on the Omaha land lease and the Clermont land lease in effect as of March 31, 2017, are
as follows for the subsequent years ended December 31; as listed below.
2017
|
|
$
|
55,877
|
|
2018
|
|
|
78,245
|
|
2019
|
|
|
81,987
|
|
2020
|
|
|
81,987
|
|
2021
|
|
|
81,987
|
|
Thereafter
|
|
|
1,883,702
|
|
Total
|
|
$
|
2,263,785
|
|
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
Summary of Property Acquired Subsequent
to the Three Months Ended March 31, 2017
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)
for which the Company assumed the original buyer’s interest in an asset purchase agreement effective September 29, 2016,
for an allocated purchase price of approximately $1.1 million. The Company funded this acquisition using borrowings from its revolving
credit facility. For details related to the completed acquisitions of the six of the seven medical properties on October 7, 2016
and March 10, 2017, respectively, for an aggregate purchase price of $8.9 million, refer to Note 3 – “Property Portfolio.”
Registration Statement
On April 18, 2017,
the Company filed a universal shelf registration statement on Form S-3 with the SEC allowing the Company to offer up $500 million
in securities, from time to time, including common stock, preferred shares, and debt securities.
Dividend Paid
On April 10, 2017,
the Company paid the first quarter 2017 dividend that was declared on March 20, 2017, in the amount of $0.20 per share of common
stock to stockholders of record as of March 27, 2017. 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
$3,603,485.
Appointment
of new General Counsel and Secretary; Grant of Equity Awards
Effective
May 8, 2017, pursuant to action by the Board, Jamie A. Barber was appointed to serve as the Secretary
and General Counsel of the Company, to hold such offices until the earlier election and qualification of his successor or until
his earlier resignation or removal. In connection with such appointment on May 8, 2017, the Company granted to Mr. Barber the following
incentive equity awards under the 2016 Plan:
|
i.
|
Signing Award
. A grant of 5,230 LTIP Units. These LTIP Units will be subject to forfeiture
restrictions that will lapse in substantially equal one-third increments on each of the first, second and third anniversaries of
the date of grant, subject to Mr. Barber’s continued service as the General Counsel and Secretary of the Company. The Company
and Mr. Barber entered into an LTIP Unit Vesting Agreement substantially in the form the Company filed with the SEC in a Current
Report on Form 8-K on December 22, 2016.
|
|
ii.
|
2017 Annual Performance-Based Award
. An annual performance-based equity award under the
2017 Program and the 2016 Plan pursuant to which Mr. Barber will be entitled to receive a number of LTIP Units at the end of the
2017 fiscal year based on a target amount of 5,230 LTIP Units. The actual number of LTIP Units that may be earned by, and issued
to, Mr. Barber under the award at the end of the 2017 fiscal year may be more or less than such target amount based on the extent
to which the performance goals relating to such award are achieved and subject to the other terms and conditions relating to such
award set forth in the Annual Performance-Based LTIP Award Agreement entered into by the Company and Mr. Barber effective May 8,
2017, substantially in the form the Company filed with the SEC in a Current Report on Form 8-K on March 6, 2017 in connection with
similar annual performance-based equity awards made on February 28, 2017.
|
|
iii.
|
Long-Term Performance-Based Award
. A long-term performance-based equity award under the
2017 Program and the 2016 Plan pursuant to which Mr. Barber will be entitled to receive a number of LTIP Units at the end of a
three-year performance period concluding on the third anniversary of the date of grant based on a target amount of $80,000. The
actual number of LTIP Units that may be earned by, and issued to, Mr. Barber under the award at the end of the three-year performance
period may be more or less than such target amount based on the extent to which the performance goals relating to such award are
achieved and subject to the other terms and conditions relating to such award. The performance goals and other terms and conditions
of the award are set forth in the Long-Term Performance-Based LTIP Award Agreement entered into by the Company and Mr. Barber effective
May 8, 2017, substantially in the form the Company filed with the SEC in a Current Report on Form 8-K on March 6, 2017 in connection
with similar long-term performance-based equity awards made on February 28, 2017.
|
Reimbursement
Agreement
Effective
May 8, 2017, the Company and the Company’s external advisor (the “Manager”) entered into an agreement pursuant
to which, for a period of one year commencing on May 8, 2017, the Company has agreed to reimburse the Manager for $125,000 of the
annual salary of Mr. Barber for his service as the General Counsel and Secretary of the Company, such reimbursement to be paid
in arrears in 12 equal monthly installments beginning after the end of the month of May 2017 so long as Mr. Barber continues to
be primarily dedicated to the Company in his capacity as its General Counsel and Secretary. A copy of this agreement is filed as
an exhibit to this Report, and the foregoing summary description is qualified in its entirety by the terms and conditions of such
agreement.
Removal
of Former General Counsel and Secretary; Vesting of Certain Equity Awards and Forfeiture of Certain Equity Awards
On May 5, 2017,
the Company’s former General Counsel and Secretary. Mr. Conn Flanigan, was removed from those positions and as a
result has no further affiliation with the Company. In connection with such removal, and contingent upon Mr. Flanigan signing
all applicable release forms and related documents, 15,258 LTIP Units that had previously been granted to Mr. Flanigan that
were unvested as of the date of his removal became vested and all forfeiture restrictions with respect such LTIP Units
lapsed. In addition, 2,038 of the target annual performance-based LTIP Units awarded to Mr. Flanigan on February 28, 2017,
representing a pro rata portion of the total number of target annual performance-based LTIP Units awarded to Mr. Flanigan on
February 28, 2017, based on the percentage of the one-year performance period that had elapsed as of the date of his removal,
became vested but have not yet been earned or issued since they remain subject to the performance goals set forth in the
Annual Performance-Based LTIP Award Agreement entered into by the Company and Mr. Flanigan effective February 28, 2017 as
part of the 2017 Program, the form of which was filed with the SEC in a Current Report on Form 8-K on March 6, 2017. The
remaining 3,914 of the target annual performance-based LTIP Units awarded to Mr. Flanigan on February 28, 2017 were
forfeited. In addition, 635 of the target long-term performance-based LTIP Units awarded to Mr. Flanigan on February 28,
2017, representing a pro rata portion of the total number of target long-term performance-based LTIP Units awarded to Mr.
Flanigan on February 28, 2017, based on the percentage of the three-year performance period that had elapsed as of the date
of his removal, became vested but have not yet been earned or issued since they remain subject to the performance goals set
forth in the Long-Term Performance-Based LTIP Award Agreement entered into by the Company and Mr. Flanigan effective February
28, 2017, the form of which was filed with the SEC in a Current Report on Form 8-K on March 6, 2017. The remaining 9,755 of
the target long-term performance-based LTIP Units awarded to Mr. Flanigan on February 28, 2017 were forfeited.