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 strong clinical operators with leading market share.
The Company is externally managed and advised by Inter-American Management, LLC (the “Advisor”), a Delaware limited
liability company and affiliate of the Company. ZH International Holdings Limited (formerly known as Heng Fai Enterprises, Ltd.)
a Hong Kong limited liability company that is engaged in real estate development, investments, management and sales, hospitality
management and investments, and REIT management, is an 85% owner of the Advisor and the Company’s Chief Executive Office
is a 15% 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.
The Company holds its
facilities and conducts its operations through a Delaware limited partnership subsidiary named Global Medical REIT L.P. (the “Operating
Partnership”). The Company serves as the sole general partner of the Operating Partnership through a wholly-owned subsidiary
of the Company named Global Medical REIT GP LLC (the “GP”), a Delaware limited liability company, which owns an approximate
0.01% interest in the Operating Partnership. As of September 30, 2017, the Company was the 97.64% limited partner of the Operating
Partnership, with 1.82% owned by holders of long-term incentive plan (“LTIP”) units and 0.53% owned by third party
holders of Operating Partnership Units (“OP Units”). The Operating Partnership holds the Company’s healthcare
facilities through separate wholly-owned Delaware limited liability company subsidiaries that were formed for each healthcare facility
acquisition.
The Company elected
to be taxed as a REIT for U.S. federal income tax purposes commencing with its taxable year ended December 31, 2016.
Note 2 – Summary of Significant
Accounting Policies
Basis of presentation
The accompanying consolidated
financial statements are unaudited and are prepared in accordance with accounting principles generally accepted in the United States
of America (“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.
Principles of Consolidation
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 LTIP unit holders and OP Unit holders. The Company presents the portion of any equity
it does not own but controls (and thus consolidates) as noncontrolling interest. Noncontrolling interest in the Company includes
the LTIP units that have been granted to directors, employees and affiliates of the Company and the OP Units held by third parties.
Refer to Note 5 – “Stockholders’ Equity” and Note 7 – “Stock-Based Compensation” and
for additional information regarding the OP Units and LTIP units.
The Company classifies
noncontrolling interest as a component of consolidated equity on its Consolidated Balance Sheets, separate from the Company’s
total stockholders’ equity. The Company’s net income or loss is allocated to noncontrolling interests based on the
respective ownership or voting percentage in the Operating Partnership associated with such noncontrolling interests and is removed
from consolidated income or loss on the Consolidated Statements of Operations in order to derive net income or loss attributable
to common stockholders. The noncontrolling ownership percentage is calculated by dividing the aggregate number of LTIP units and
OP Units held by the total number of units outstanding. Any future issuances of additional LTIP units or OP Units would change
the noncontrolling ownership interest.
Use of Estimates
The preparation of
the consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect
the amounts reported in the consolidated financial statements and footnotes. Actual results could differ from those estimates.
Restricted Cash
The restricted cash
balance as of September 30, 2017 and December 31, 2016 was $2,040,026 and $941,344, respectively. The restricted cash balance as
of September 30, 2017 consisted of $337,242 of cash required by a third-party lender to be held by the Company as a reserve for
debt service, $1,619,659 in security deposits received from facility tenants at the inception of their leases, and $83,125 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 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, a security deposit of $319,500,
and $238,579 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 insurance.
Tenant Receivables
The tenant receivable
balance as of September 30, 2017 and December 31, 2016 was $616,741 and $212,435, respectively. The balance as of September 30,
2017 consisted of $113,400 in funds owed from the Company’s tenants for rent that the Company had earned but had not yet
received and $503,341 in funds owed by certain of the Company’s tenants for amounts the Company collects to pay specific
tenant expenses, such as real estate taxes and insurance, on the tenants’ behalf. The balance as of December 31, 2016 consisted
primarily of $50,922 in funds owed from the Company’s tenants for rent that the Company had earned but had not yet received
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 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 September 30, 2017 and
December 31, 2016 was $1,297,665 and $1,212,177, respectively
Deferred Assets
The deferred assets
balance as of September 30, 2017 and December 31, 2016 was $2,923,494 and $704,537, respectively. The balance as of September 30,
2017 consisted of $2,776,735 in deferred rent receivables resulting from the recognition of revenue from leases with fixed annual
rental escalations on a straight line basis and the balance of $146,759 represented other deferred costs. The December 31, 2016
balance of $704,537 consisted of deferred rent receivables.
Other Assets
Other assets primarily
consists of capitalized costs related to the Company’s property acquisitions. Costs that are incurred prior to the completion
of the acquisition of a property 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 are charged to expense when it is probable that the acquisition will not be completed. The other assets balance was $160,214
as of September 30, 2017, which consisted of $138,324 in capitalized costs related to property acquisitions and $21,890 in a prepaid
asset. The balance as of December 31, 2016 was $140,374, and consisted solely of capitalized costs related to property acquisitions.
Security Deposits and Other
The security deposits
and other liability balance as of September 30, 2017 and December 31, 2016 was $2,206,145 and $719,592, respectively. The balance
as of September 30, 2017 consisted of security deposits of $1,619,679 and a tenant impound liability of $586,466 related to amounts
owed for specific tenant expenses, such as real estate taxes and insurance. The balance as of December 31, 2016 consisted of security
deposits of $319,500 and a tenant impound liability of $400,092 related to amounts owed for specific tenant expenses, such as real
estate taxes and insurance.
Net Income (Loss) Attributable to Common
Stockholders Per Share
The Company uses the
treasury stock method to compute diluted net income or loss attributable to common stockholders per share. Basic net income or
loss per share of common stock is computed by dividing net income or loss attributable to common stockholders by the weighted average
number of shares of common stock outstanding for the period. Diluted net income or loss per share of common stock is computed by
dividing net income or loss attributable to common stockholders by the sum of the weighted average number of shares of common stock
outstanding plus any potential dilutive shares for the period. The Company considered the requirements of the two-class method
when computing earnings per share and determined that there would be no difference in its reported results if the two-class method
was utilized.
Reclassification
The Company reclassified
the line item “Acquired Lease Intangible Assets, Net” on its Consolidated Balance Sheets as of December 31, 2016, to
present the gross intangible assets acquired as part of its business combination transactions as a separate line item within the
category “Investment in Real Estate” and also reclassified the related accumulated amortization balance on the intangible
assets acquired to the line item “Accumulated Depreciation and Amortization.” This reclassification was made to conform
to the Company’s presentation of those balances as of September 30, 2017.
The Company’s
Consolidated Statements of Operations for the three and nine months ended September 30, 2017 and 2016 includes the expense line
item “Operating Expenses” which primarily includes both reimbursable property operating expenses that the Company pays
on behalf of certain of its tenants, including real estate taxes and insurance, non-reimbursable property operating expenses, and
other operating expenses. Reimbursements of tenant operating expenses are recorded on a gross basis (i.e., the Company recognizes
an equivalent increase in revenue (expense recoveries) and expense (operating expenses)). Prior to the third quarter of 2017, the
Company recorded property operating expenses in the “General and Administrative” expense line item. Accordingly for
prior periods these expenses have been reclassified from the “General and Administrative” expense line item into the
“Operating Expenses” line item within the Company’s Consolidated Statements of Operations.
Note 3 – Property Portfolio
Summary of Properties Acquired
During the nine months ended September
30, 2017, the Company completed 16 acquisitions. A rollforward of the gross investment in land, building and improvements as of
September 30, 2017, resulting from these acquisitions is as follows:
|
|
Land
|
|
|
Building
|
|
|
Site & Tenant Improvements
|
|
|
Acquired Lease Intangibles
|
|
|
Gross Investment in Real Estate
|
|
Balances as of January 1, 2017
|
|
$
|
17,785,001
|
|
|
$
|
179,253,398
|
|
|
$
|
2,651,287
|
|
|
$
|
7,187,041
|
|
|
$
|
206,876,727
|
|
Facility Acquired – Date Acquired:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cape Coral – 1/10/17
|
|
|
353,349
|
|
|
|
7,016,511
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,369,860
|
|
Lewisburg – 1/12/17
|
|
|
471,184
|
|
|
|
5,819,137
|
|
|
|
504,726
|
|
|
|
504,953
|
|
|
|
7,300,000
|
|
Las Cruces – 2/1/17
|
|
|
397,148
|
|
|
|
4,618,258
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,015,406
|
|
Prescott – 2/9/17
|
|
|
790,637
|
|
|
|
3,821,417
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,612,054
|
|
Clermont – 3/1/17
|
|
|
-
|
|
|
|
4,361,028
|
|
|
|
205,922
|
|
|
|
867,678
|
|
|
|
5,434,628
|
|
Sandusky – 3/10/17
|
|
|
409,204
|
|
|
|
3,997,607
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,406,811
|
|
Great Bend – 3/31/17
|
|
|
836,929
|
|
|
|
23,800,758
|
|
|
|
-
|
|
|
|
-
|
|
|
|
24,637,687
|
|
Oklahoma City – 3/31/17
|
|
|
2,086,885
|
|
|
|
37,713,709
|
|
|
|
1,876,730
|
|
|
|
7,822,676
|
|
|
|
49,500,000
|
|
Sandusky – 4/21/17
|
|
|
97,804
|
|
|
|
978,035
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,075,839
|
|
Brockport – 6/27/17
|
|
|
412,838
|
|
|
|
6,885,477
|
|
|
|
491,427
|
|
|
|
1,294,763
|
|
|
|
9,084,505
|
|
Flower Mound – 6/27/17
|
|
|
580,763
|
|
|
|
2,922,164
|
|
|
|
381,859
|
|
|
|
406,757
|
|
|
|
4,291,543
|
|
Sherman facility – 6/30/17
|
|
|
1,600,711
|
|
|
|
25,011,110
|
|
|
|
-
|
|
|
|
-
|
|
|
|
26,611,821
|
|
Sandusky facility – 8/15/17
|
|
|
55,734
|
|
|
|
1,214,999
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,270,733
|
|
Lubbock facility – 8/18/17
|
|
|
1,302,651
|
|
|
|
5,041,964
|
|
|
|
947,227
|
|
|
|
908,158
|
|
|
|
8,200,000
|
|
Germantown – 8/30/17
|
|
|
2,700,468
|
|
|
|
8,078,246
|
|
|
|
656,111
|
|
|
|
4,505,425
|
|
|
|
15,940,250
|
|
Austin – 9/25/17
|
|
|
6,957,821
|
|
|
|
28,507,662
|
|
|
|
1,373,336
|
|
|
|
3,811,181
|
|
|
|
40,650,000
|
|
Total Additions
1
:
|
|
|
19,054,126
|
|
|
|
169,788,082
|
|
|
|
6,437,338
|
|
|
|
20,121,591
|
|
|
|
215,401,137
|
|
Balances as of September 30, 2017
|
|
$
|
36,839,127
|
|
|
$
|
349,041,480
|
|
|
$
|
9,088,625
|
|
|
$
|
27,308,632
|
|
|
$
|
422,277,864
|
|
1
The Lubbock facility
acquisition included approximately $1,000,000 of OP Units issued as part of the total consideration. Additionally, an aggregate
of $865,676 of intangible liabilities were acquired from the acquisitions that occurred during the nine months ended September
30, 2017, resulting in total gross investments funded using cash of $213,535,461.
Depreciation expense
was $2,175,668 and $5,372,308 for the three and nine months ended September 30, 2017, respectively, and $585,449 and $1,528,281
for the three and nine months ended September 30, 2016, respectively.
A summary description
of the four acquisitions that were completed during the three months ended September 30, 2017 is as follows:
Austin Facility
On September 25, 2017,
the Company closed on the acquisition of the Central Texas Rehabilitation Hospital (the “Rehab Hospital”) and approximately
1.27 acres of land adjacent to the Rehab Hospital that has been planned to accommodate the development of a long-term, acute care
hospital (the “Developable Land,” and together with the Rehab Hospital, the “Austin Facility”), for an
aggregate purchase price of $40.65 million. Norvin Austin Rehab LLC (the “Austin Seller”), was the seller of the Austin
Facility.
Upon the closing of
the acquisition of the Austin Facility, the Company assumed the Austin Seller’s interest, as lessor, in the absolute triple-net
lease (the “Austin Facility Lease”) with CTRH, LLC.
Accounting Treatment
The Company accounted
for the acquisition of the Austin Facility as a business combination in accordance with the provisions of Accounting Standards
Codification (“ASC”) Topic 805 - Business Combinations. The following table presents the preliminary purchase price
allocation for the assets acquired as part of the acquisition:
Land and site improvements
|
|
$
|
7,222,455
|
|
Building and tenant improvements
|
|
|
29,616,364
|
|
Above market lease intangible
|
|
|
245,686
|
|
In-place leases
|
|
|
1,680,282
|
|
Leasing costs
|
|
|
1,885,213
|
|
Total purchase price
|
|
$
|
40,650,000
|
|
The above allocation
is preliminary and subject to revision within the measurement period, not to exceed one year from the date of the acquisition.
Germantown Facility
On August 30, 2017,
the Company purchased a medical office building located in Germantown, Tennessee (the “Germantown Facility”) from Brierbrook
Partners, LLC (“Brierbrook”) for a purchase price of $15.94 million and assumed Brierbrook’s interest, as lessor,
in three existing absolute triple-net leases of the Germantown Facility.
Accounting Treatment
The Company accounted
for the acquisition of the Germantown Facility as a business combination in accordance with the provisions of ASC Topic 805 - Business
Combinations. The following table presents the preliminary purchase price allocation for the assets acquired as part of the acquisition:
Land and site improvements
|
|
$
|
3,049,683
|
|
Building and tenant improvements
|
|
|
8,385,142
|
|
Above market lease intangible
|
|
|
3,284,388
|
|
In-place leases
|
|
|
586,812
|
|
Leasing costs
|
|
|
634,225
|
|
Total purchase price
|
|
$
|
15,940,250
|
|
The above allocation
is preliminary and subject to revision within the measurement period, not to exceed one year from the date of the acquisition.
Lubbock Facility
On August 18, 2017,
the Company purchased a medical office building located in Lubbock, Texas (the “Lubbock Facility”) from Cardiac Partners
Development, LP, for a purchase price of $8.2 million and entered into a new triple-net lease of the Lubbock Facility with Lubbock
Heart Hospital, LLC, as tenant.
Accounting Treatment
The Company accounted
for the acquisition of the Lubbock Facility as a business combination in accordance with the provisions of ASC Topic 805 - Business
Combinations. The following table presents the preliminary purchase price allocation for the assets acquired as part of the acquisition:
Land and site improvements
|
|
$
|
1,566,487
|
|
Building and tenant improvements
|
|
|
5,725,355
|
|
In-place leases
|
|
|
414,189
|
|
Leasing costs
|
|
|
493,969
|
|
Total purchase price
|
|
$
|
8,200,000
|
|
The above allocation
is preliminary and subject to revision within the measurement period, not to exceed one year from the date of the acquisition.
Sandusky Facility (Ballville Property)
On August 15, 2017,
the Company purchased a medical office building located in Ballville, Ohio (the “Ballville Property”) from NOMS Property,
LLC, for a purchase price of $1.3 million and entered into an amendment of the existing triple-net master lease dated October 7,
2016 (the “NOMS Lease”), between the Company, as lessor, and Northern Ohio Medical Specialists, LLC (“NOMS”),
as tenant, whereby the Ballville Property was added to the NOMS Lease and leased to NOMS.
Unaudited Pro Forma Financial Information
for the Three and Nine Months Ended September 30, 2017 and September 30, 2016
The following table
illustrates the unaudited pro forma consolidated revenue, net income (loss), and income (loss) per share as if the facilities that
the Company acquired during the nine months ended September 30, 2017 that were accounted for as business combinations (the Austin,
Germantown, Lubbock, Flower Mound, Brockport, OCOM, Clermont and Lewisburg facilities) had occurred on January 1, 2016. The following
summary of pro forma financial information is for the three and nine months ended September 30, 2017 and 2016:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
9,425,057
|
|
|
$
|
4,909,852
|
|
|
$
|
25,736,802
|
|
|
$
|
13,808,974
|
|
Net income (loss)
|
|
$
|
653,952
|
|
|
$
|
(2,047,241
|
)
|
|
$
|
(1,053,239
|
)
|
|
$
|
(4,616,832
|
)
|
Net income (loss) attributable to common stockholders
|
|
$
|
428,546
|
|
|
$
|
(2,047,241
|
)
|
|
$
|
(1,284,133
|
)
|
|
$
|
(4,616,832
|
)
|
Income (loss) attributable to common stockholders per share – basic and diluted
|
|
$
|
0.02
|
|
|
$
|
(0.12
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.71
|
)
|
Weighted average shares outstanding – basic and diluted
|
|
|
21,522,251
|
|
|
|
17,371,743
|
|
|
|
18,938,367
|
|
|
|
6,514,230
|
|
Intangible Assets and Liabilities
The following is a
summary of the carrying amount of intangible assets and liabilities as of September 30, 2017:
|
|
As of September 30, 2017
|
|
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Assets
|
|
|
|
|
|
|
|
|
|
In-place leases
|
|
$
|
14,590,650
|
|
|
$
|
(1,056,983
|
)
|
|
$
|
13,533,667
|
|
Above market ground lease
|
|
|
487,978
|
|
|
|
(3,972
|
)
|
|
|
484,006
|
|
Above market leases
|
|
|
4,363,022
|
|
|
|
(73,911
|
)
|
|
|
4,289,111
|
|
Leasing costs
|
|
|
7,866,982
|
|
|
|
(311,734
|
)
|
|
|
7,555,248
|
|
|
|
$
|
27,308,632
|
|
|
$
|
(1,446,600
|
)
|
|
$
|
25,862,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Below market leases
|
|
$
|
1,145,030
|
|
|
$
|
(64,907
|
)
|
|
$
|
1,080,123
|
|
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 and nine months ended September 30, 2017. The Company had no
intangible assets or liabilities as of September 30, 2016 and therefore no amortization was incurred during the three and nine
months ended September 30, 2016.
|
|
Three Months Ended
September 30, 2017
|
|
|
Nine Months Ended
September 30, 2017
|
|
Amortization expense related to in-place leases
|
|
$
|
388,409
|
|
|
$
|
1,022,194
|
|
Amortization expense related to leasing costs
|
|
$
|
135,078
|
|
|
$
|
304,201
|
|
Decrease of rental revenue related to above market ground lease
|
|
$
|
1,702
|
|
|
$
|
3,972
|
|
Decrease of rental revenue related to above market leases
|
|
$
|
55,757
|
|
|
$
|
73,468
|
|
Increase of rental revenue related to below market leases
|
|
$
|
32,443
|
|
|
$
|
63,470
|
|
As of September 30,
2017, scheduled future aggregate net amortization of acquired lease intangible assets and liabilities for each fiscal year ended
December 31 are listed below:
|
|
Net Decrease in Revenue
|
|
|
Net Increase in Expenses
|
|
2017
|
|
$
|
(113,108
|
)
|
|
$
|
650,590
|
|
2018
|
|
|
(452,433
|
)
|
|
|
2,602,359
|
|
2019
|
|
|
(452,433
|
)
|
|
|
2,602,359
|
|
2020
|
|
|
(452,433
|
)
|
|
|
2,602,359
|
|
2021
|
|
|
(455,278
|
)
|
|
|
1,987,746
|
|
Thereafter
|
|
|
(1,767,309
|
)
|
|
|
10,643,502
|
|
Total
|
|
$
|
(3,692,994
|
)
|
|
$
|
21,088,915
|
|
As of September 30, 2017, the weighted average
amortization period for asset lease intangibles and liability lease intangibles were 8.12 years and 8.32 years, respectively.
Note 4 – Notes Payable Related
to Acquisitions and Revolving Credit Facility
Summary of Notes Payable Related to
Acquisitions, Net of Debt Discount
The Company’s
notes payable related to acquisitions, net, includes two loans: (1) the Cantor Loan and (2) the West Mifflin Note, described in
detail below. The following table sets forth the aggregate balances of these loans as of September 30, 2017 and December 31, 2016.
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Notes payable related to acquisitions, gross
|
|
$
|
39,474,900
|
|
|
$
|
39,474,900
|
|
Less: Unamortized debt discount
|
|
|
(963,184
|
)
|
|
|
(1,061,602
|
)
|
Notes payable related to acquisitions, net
|
|
$
|
38,511,716
|
|
|
$
|
38,413,298
|
|
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 Sheets. Amortization
expense incurred related to the debt discount was $32,806 and $98,418 for the three and nine months ended September 30, 2017, respectively,
and $62,604 and $215,449 for the three and nine months ended September 30, 2016, respectively, and is included in the “Interest
Expense” line item in the accompanying Consolidated Statements of Operations.
Cantor Loan
On March 31, 2016,
the Company, through certain of its subsidiaries, 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.
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) two 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 on the Cantor Loan during the three and nine months ended September 30, 2017. The note balance as of September 30, 2017
and December 31, 2016 was $32,097,400. Interest expense was $428,180 and $1,270,578 for the three and nine months ended September
30, 2017, respectively.
Interest expense incurred on this note was $428,179 and $851,704
for the three and nine months ended September 30, 2016, respectively.
As of September 30,
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
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 (the “West Mifflin Note”)
to borrow $7,377,500. The West Mifflin Note bears interest at 3.72% per annum and all unpaid interest and principal is due on September
25, 2020. Interest is paid in arrears and interest payments began on November 1, 2015, and on the first day of each calendar month
thereafter. Principal payments begin on November 1, 2018 and on the first day of each calendar month thereafter based on an amortization
schedule with the principal balance due on the maturity date. The Company, at its option, may prepay the West Mifflin 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 West Mifflin Note has an early termination fee of two percent if prepaid prior to September 25, 2018. The West Mifflin Note
requires a quarterly fixed charge coverage ratio of at least 1:1, a quarterly minimum debt yield of 0.09:1.00, and annualized Operator
EBITDAR (as defined in the note) measured on a quarterly basis of not less than $6,000,000. The Operator is Associates in Ophthalmology,
Ltd. and Associates Surgery Centers, LLC. No principal payments were made during the three and nine months ended September 30,
2017. The West Mifflin Note balance as of September 30, 2017 and December 31, 2016 was $7,377,500.
Interest
expense incurred on the West Mifflin Note was $70,136 and $208,882 for the three and nine months ended September 30, 2017, respectively,
and $70,136 and $209,645 for the three and nine months ended September 30, 2016, respectively.
As of September 30,
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
|
|
Revolving Credit Facility
As of September 30,
2017 and December 31, 2016, the Company had $126,100,000 and $27,700,000 of outstanding borrowings under its revolving credit facility,
respectively. As described below, the maximum amount that the Company can borrow under the facility is $250,000,000.
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 (“BMO”), which initially provided up to $75,000,000 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 $125,000,000, for a total initial facility size
of up to $200,000,000. 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, which increased the commitment amount to $200,000,000
plus an accordion feature that allows for up to an additional $50,000,000 of principal amount subject to certain conditions, for
a total facility size of $250,000,000 (the “Revolving Credit Facility”). On September 28, 2017, the Company obtained
commitments from certain of its lenders on the Revolving Credit Facility for the entire $50,000,000 accordion. The Subsidiary Guarantors
and the Company are guarantors of the obligations under the Revolving Credit Facility. The amount available to borrow from time
to time under the Revolving Credit Facility is limited according to a quarterly borrowing base valuation of certain properties
owned by the Subsidiary Guarantors. The initial termination date of the Revolving Credit Facility is December 2, 2019, which could
be extended for one year in the case that no event of default occurs.
Amounts outstanding
under the Revolving Credit Facility bear annual interest at a floating rate that is based, at the Operating Partnership’s
option, on (i) adjusted LIBOR plus 2.00% to 3.00% or (ii) a base rate plus 1.00% to 2.00%, in each case, depending upon the Company’s
consolidated leverage ratio. In addition, the Operating Partnership is obligated to pay a quarterly fee equal to a rate per annum
equal to (x) 0.20% if the average daily unused commitments are less than 50% of the commitments then in effect and (y) 0.30% if
the average daily unused commitments are greater than or equal to 50% of the commitments then in effect and determined based on
the average daily unused commitments during such previous quarter.
The Operating Partnership
is subject to ongoing compliance with a number of customary affirmative and negative covenants, including limitations with respect
to liens, indebtedness, distributions, mergers, consolidations, investments, restricted payments and asset sales. The Operating
Partnership must also maintain (i) a maximum consolidated leverage ratio, 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 nine months
ended September 30, 2017, the Company borrowed $205,400,000 under the Revolving Credit Facility and repaid $107,000,000 using funds
primarily from the follow-on common stock offering and the preferred offering for a net amount borrowed of $98,400,000. For the
three and nine months ended September 30, 2017, interest incurred on the Revolving Credit Facility was $1,335,730 and $2,945,588,
respectively. No interest expense was incurred for the three and nine months ended September 30, 2016 as the Revolving Credit Facility
was not in place.
Deferred Financing Costs, Net
Costs incurred related
to securing the Company’s Revolving Credit Facility have been capitalized as a deferred financing asset, net of accumulated
amortization, in the accompanying Consolidated Balance Sheets. A rollforward of the deferred financing cost balance as of September
30, 2017, is as follows:
Balance as of January 1, 2017, net
|
|
$
|
927,085
|
|
Additions – Revolving Credit Facility
1
|
|
|
2,792,692
|
|
Deferred financing cost amortization expense
|
|
|
(741,796
|
)
|
Balance as of September 30, 2017, net
|
|
$
|
2,977,981
|
|
1
This amount includes $1,223,359 of costs incurred in connection with the Company’s Revolving Credit Facility that were
erroneously expensed and included in the “General and Administrative Expense” line item within the Company’s
Consolidated Statement of Operations for the three months ended March 31, 2017. During the six-month period ended June 30,
2017, the Company corrected this error by removing the $1,223,359 from expense and capitalizing it as “Deferred Financing
Costs, Net” on the Company’s Consolidated Balance Sheet as of June 30, 2017. See Note 2 – “Summary of Significant
Accounting Policies.”
Amortization expense
incurred related to the Revolving Credit Facility deferred financing costs were $307,831 and $741,796 for the three and nine months
ended September 30, 2017, respectively, and is included in the “Interest Expense” line item in the accompanying Consolidated
Statements of Operations. There was no amortization expense incurred on the Revolving Credit Facility during the three and nine
months ended September 30, 2016, as the Revolving Credit Facility was not in place.
Weighted-Average Interest Rate and Term
The Company’s
weighted average interest rate and term of its debt was 3.84% and 3.43 years, respectively, at September 30, 2017, compared to
4.29% and 6.04 years, respectively, at December 31, 2016.
Note 5 – Stockholders’ Equity
Preferred Stock
General
On September 15, 2017,
the Company closed on the issuance of 3,105,000 shares of its Series A Cumulative Redeemable Preferred Stock, $0.001 par value
per share, with an initial liquidation preference of $25 per share (“Series A Preferred Stock”), inclusive of 405,000
shares issued in connection with the underwriters’ exercise of their over-allotment option. The Company may, at its option,
redeem the Series A Preferred Stock for cash in whole or in part, from time to time, at any time on or after September 15, 2022,
at a cash redemption price of $25 per share. The Series A Preferred Stock will have no voting rights, except for limited voting
rights if the Company fails to pay dividends for six quarterly periods. The issuance resulted in aggregate gross proceeds of $77,625,000.
After deducting underwriting discounts and advisory fees of $2,445,188, and expenses paid or to be paid by the Company that were
directly attributable to the offering of $220,809 (which are both treated as a reduction of the “Preferred Stock” balance
on the accompanying Consolidated Balance Sheets), the Company’s preferred stock balance as of September 30, 2017 was $74,959,003.
Net proceeds received from the transaction were $75,146,720, which the Company used primarily to repay borrowings on its Revolving
Credit Facility. The Company assessed the characteristics of the Series A Preferred Stock in accordance with the provisions of
ASC Topic 480 – “Distinguishing Liabilities from Equity,” and concluded that the Series A Preferred Stock is
classified as permanent equity.
Preferred Stock Dividends
Holders of the Company’s
Series A Preferred Stock will be entitled to receive dividend payments only when, as and if declared by the Board of Directors
of the Company (the “Board”)(or a duly authorized committee of the Board). Any such dividends will accrue or be payable
in cash from the original issue date, on a cumulative basis, quarterly in arrears on each dividend payment date. Additionally,
dividends will be payable at a fixed rate per annum equal to 7.50% of the liquidation preference of $25 per share (equivalent to
$1.875 per share on an annual basis). Dividends on the Series A Preferred Stock will be cumulative and will accrue whether or not:
funds are legally available for the payment of those dividends, the Company has earnings or those dividends are authorized.
The quarterly dividend
payment dates are January 31, April 30, July 31 and October 31 of each year, commencing on October 31, 2017. The initial dividend
is scheduled to be paid on October 31, 2017 to holders of record as of October 15, 2017, and will be a pro rata dividend from,
and including, the original issue date to, and including, October 30, 2017, in the pro rata amount of $0.2396 per share for a total
dividend amount of $743,598. Refer to Note 11 – “Subsequent Events” for additional information regarding this
dividend payment.
Common Stock
General
On June 30, 2017, the
Company closed a public underwritten offering of its common shares and on July 20, 2017 the Company closed on the over-allotment
option granted to the underwriters. These transactions resulted in an aggregate of 4,025,000 shares of its common stock being issued
at a public offering price of $9 per share, resulting in aggregate gross proceeds of $36,225,000. After deducting underwriting
discounts and advisory fees of $1,986,876, and expenses paid by the Company that were directly attributable to the offering of
$443,499 (both of which are treated as a reduction of the Company’s additional paid-in capital balance), the Company received
net proceeds from the transactions of $33,794,625.
Dividends
Since July 2016, the
Company’s Board had declared cash dividends on its common stock as summarized in the following table.
Date Announced
|
|
Record Date
|
|
Applicable
Quarter
|
|
Payment Date
|
|
Dividend Amount
1
|
|
|
Dividends per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 14, 2016
|
|
September 27, 2016
|
|
Q3 2016
|
|
October 11, 2016
|
|
$
|
3,592,786
|
|
|
$
|
0.20
|
|
December 14, 2016
|
|
December 27, 2016
|
|
Q4 2016
|
|
January 10, 2017
|
|
$
|
3,604,037
|
|
|
$
|
0.20
|
|
March 20, 2017
|
|
March 27, 2017
|
|
Q1 2017
|
|
April 10, 2017
|
|
$
|
3,603,485
|
|
|
$
|
0.20
|
|
June 16, 2017
|
|
June 27, 2017
|
|
Q2 2017
|
|
July 10, 2017
|
|
$
|
3,607,726
|
|
|
$
|
0.20
|
|
September 8, 2017
|
|
September 26, 2017
|
|
Q3 2017
|
|
October 9, 2017
|
|
$
|
4,416,164
|
2
|
|
$
|
0.20
|
|
|
1
|
Includes dividends on granted LTIP units and OP Units
issued to third parties.
|
|
2
|
This amount was accrued as of September 30, 2017 and
paid on October 9, 2017. For additional details refer to Note 11 – “Subsequent Events.”
|
During the nine months
ended September 30, 2017, the Company paid total dividends in the amount of $10,815,248, consisting of the dividends declared for
the fourth quarter of 2016 through the second quarter of 2017. Additionally, during the nine months ended September 30, 2016, the
Company paid total dividends in the amount of $285,703.
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 September 30, 2017 the Company accrued a dividend of $0.20 per LTIP unit for each of the three quarters
of 2017 on the aggregate annual and long-term LTIP units that are subject to retroactive receipt of dividends on the amount of
LTIPs ultimately earned. The aggregate amount of the accrual as of September 30, 2017 was $92,123.
OP Units
As of September 30,
2017, there were 117,941 OP Units issued and held by third parties with an aggregate value of approximately $1,077,497. 109,608
of the OP Units were issued in connection with the acquisition of a facility and were valued at the measurement date of August
18, 2017 using the Company’s closing stock price on that date of $9.14 per share, resulting in a value of $1,000,000. Additionally,
8,333 OP Units were issued pursuant to a third party advisory agreement. These OP Units were valued at the measurement date of
August 1, 2017 using the Company’s closing stock price on that date of $9.30 per share resulting in a value of $77,497. The
advisory agreement is for the period from June 27, 2017 through December 31, 2017 for a total fee of $250,000 payable in shares
of Company common stock, LTIP Units, or OP Units, in three equal installments on August 1, 2017, October 1, 2017, and December
1, 2017. The number of units issued pursuant to the advisory agreement is determined based on the higher of $10 per share
or the average closing price per share of the Company’s common stock as reported on the NYSE on the last 10 trading days
of the calendar month preceding each payment date.
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 t
he Advisor. Under the terms of this initial management agreement, the Advisor was 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 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. In accordance with the terms of the initial management agreement, during the nine-month period
ended September 30, 2016, the Company incurred $807,147 of base management fees and repaid $510,000 of cumulative management fees
accrued and outstanding. Additionally, during the nine-month period ended September 30, 2016, the Company incurred $754,000 in
acquisition fees that were paid to the Advisor for acquisitions that were completed during that period.
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 (the “Amended Management Agreement”). Certain material terms of the Amended Management Agreement are summarized
below:
Term and Termination
The Amended Management
Agreement has an initial term of three years expiring on the third anniversary of the closing date of the initial public offering
but 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 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 Amended
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, 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 Operating Partnership. 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.
Per the terms of the
Amended Management Agreement, 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. To date the Company has not incurred or paid an incentive fee.
Management Fee Expense Incurred and
Accrued Management Fees
For the three and nine
months ended September 30, 2017, management fees of $803,804 and $2,059,325, respectively, were incurred and expensed by the Company
and during the nine months ended September 30, 2017, the Company paid management fees to the Advisor in the amount of $1,876,229.
For the three and nine months ended September 30, 2016, management fees of $627,147 and $807,147, respectively, were incurred and
expensed by the Company and during the nine months ended September 30, 2016 the Company paid management fees to the Advisor in
the amount of $510,000. As of September 30, 2017 and December 31, 2016, accrued management fees of $803,805 and $620,709, respectively,
were due to the Advisor.
Allocated General and Administrative
Expenses
Effective May 8, 2017,
the Company and the Advisor entered into an agreement pursuant to which, for a period of one year commencing on May 8, 2017, the
Company has agreed to reimburse the Advisor for $125,000 of the annual salary of 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 the General Counsel and Secretary continues to be primarily dedicated to the Company in his capacity as its General Counsel
and Secretary. In the future, the Company may receive additional allocations of general and administrative expenses from the Advisor
that are either clearly applicable to or were reasonably allocated to the operations of the Company. Other than via the terms of
the reimbursement agreement, there were no allocated general and administrative expenses from the Advisor for the three and nine
months ended September 30, 2017 or September 30, 2016.
Note Payable
to Majority Stockholder
In prior years the
Company received funds from its former 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 related parties” on the accompanying
Consolidated Balance Sheets. The Company repaid this loan in full during the nine months ended September 30, 2017 and accordingly
the balance of this note was zero and $421,000 as of September 30, 2017 and December 31, 2016, respectively.
Due to Related
Parties, Net
A
rollforward of the due (to) from related parties balance, net, as of September 30, 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
1
|
|
|
(2,059,325
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,059,325
|
)
|
Management fees paid to Advisor
1
|
|
|
1,876,229
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,876,229
|
|
Loan repaid to Advisor
2
|
|
|
-
|
|
|
|
149
|
|
|
|
-
|
|
|
|
149
|
|
Loan repaid to other related party
3
|
|
|
-
|
|
|
|
-
|
|
|
|
(38,428
|
)
|
|
|
(38,428
|
)
|
Balance as of September 30, 2017
|
|
$
|
(803,805
|
)
|
|
|
(437
|
)
|
|
|
1,956
|
|
|
|
(802,286
|
)
|
|
1
|
Net
amount accrued of $183,096 consists of $2,059,325 in management fee expense incurred, net of $1,876,229 of accrued management
fees that were paid to the Advisor. This represents a cash flow operating activity.
|
|
2
|
Amount
represents the partial repayment of expenses that were previously paid by the Advisor on the Company’s behalf. This
represents a cash flow financing activity.
|
|
3
|
Amount
represents the net repayment of previous loans made by the Company to related parties. This represents a cash flow
investing activity.
|
Note 7 – Stock-Based Compensation
2017 Program – Performance Based
Awards
On February 28, 2017,
the Board approved the recommendations of the Compensation Committee of the Board (the “Compensation Committee”) with
respect to the awarding of 2017 annual performance-based equity incentive award targets in the form of 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”).
Additionally, the Board approved the recommendations of the Compensation Committee with respect to awarding Annual Awards and Long-Term
Awards to two executive officers of the Company whose employment commenced on August 23, 2017 and May 8, 2017, respectively. None
of the LTIP units awarded under the 2017 Program have been earned by the participants as of September 30, 2017.
The 2017 Program is
a part of the Company’s 2016 Plan and therefore the Annual Awards and Long-Term Awards were awarded pursuant to the 2016
Plan. The purpose of the 2016 Plan is to attract and retain qualified persons upon whom, in large measure, the Company’s
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 its advisor
and its affiliates, consultants and non-employee directors are eligible to participate in the 2016 Plan.
The LTIP unit award
targets under the 2017 Program and subsequent activity during the nine months ended September 30, 2017, is as follows:
|
|
Annual
|
|
|
Long-Term
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Awards on February 28, 2017
|
|
|
97,243
|
|
|
|
147,081
|
|
|
|
244,324
|
|
Awards on August 23, 2017 and May 8, 2017
|
|
|
8,224
|
|
|
|
17,754
|
|
|
|
25,978
|
|
Total 2017 Program LTIP units awarded as of September 30, 2017
|
|
|
105,467
|
|
|
|
164,835
|
|
|
|
270,302
|
|
2017 Program LTIP units forfeited
|
|
|
(19,338
|
)
|
|
|
(58,668
|
)
|
|
|
(78,006
|
)
|
Net 2017 Program LTIP awards as of September 30, 2017
|
|
|
86,129
|
|
|
|
106,167
|
|
|
|
192,296
|
|
As of September 30,
2017, all 192,296 LTIP unit target awards as of September 30, 2017 were 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 dates of grant (August 23, 2017, May 8, 2017, and 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.
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. During the three months ended September 30, 2017, management made a determination that the Annual
Award payout trend as of September 30, 2017 was 55%, and accordingly, applied 55% to the net target Annual Awards as of September
30, 2017 (86,129 units) to estimate the Annual Awards expected to be earned at the end of the performance period (47,371 units).
Cumulative stock based compensation expense during the three and nine months ended September 30, 2017 was adjusted to reflect the
reduction in the Annual Award target to 55%. 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; May 8, 2017 to May 7, 2020; and August 23, 2017 to August 22, 2020, respectively). 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 five trading days leading up to the grant date. The valuation
date stock price is the closing stock price of the Company and each of the peer companies in the Index on the grant date for the
grant date fair value, and the closing stock price on September 30, 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 – Time Based Grants
(excludes 2017 Program - Performance Based Awards)
The LTIP units granted
under the 2016 Plan (excluding 2017 Program awards) during the nine months ended September 30, 2017, are as follows:
Total 2016 Plan LTIP units granted as of January 1, 2017
|
|
|
414,504
|
|
Additional LTIP units granted
|
|
|
27,179
|
|
Total 2016 Plan LTIP units granted as of September 30, 2017
|
|
|
441,683
|
|
2016 Plan LTIP units forfeited
|
|
|
(38,733
|
)
|
Net 2016 Plan LTIP units granted and outstanding as of September 30, 2017
|
|
|
402,950
|
|
Of the 27,179 LTIP
units that were granted during the nine months ended September 30, 2017, there was a total of 11,204 LTIP units granted to two
executives of the Company (employees of the Advisor) on August 23, 2017 and May 8, 2017 and the remaining 15,975 LTIP units were
granted to the Company’s independent directors on May 18, 2017.
Of the 402,950 LTIP
units that were granted under the 2016 Plan (net of forfeitures), 60,400 units vested immediately on July 1, 2016 upon completion
of the Company’s initial public offering, 68,900 LTIP units vested on December 1, 2016, 13,750 units that were granted to
the independent directors vested on July 1, 2017, and an additional 72,488 LTIP units vested immediately as a result of individuals
(primarily executives) leaving the Company, resulting in a total of 215,538 vested LTIP units as of September 30, 2017.
The remaining unvested
187,412 LTIP units, net of forfeitures, (the “Service LTIPs”) consists of 171,437 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 to 53
months, from the grant date, dependent on the population granted to, as well as 15,975 units granted to the Company’s independent
directors on May 18, 2017 (who were treated as employees in accordance with ASC Topic 718), and vest over a period of 12 months
from the grant date.
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. Based on the grants and target awards outstanding as of September 30, 2017, there are 637,151 shares that remain
available to be granted or issued under the 2016 Plan as of September 30, 2017. 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) are available for grant.
Detail of Compensation Expense Recognized
For The Three and Nine Months Ended September 30, 2017
The Company incurred
compensation expense of $340,287 and $1,480,724 for the three and nine months ended September 30, 2017, respectively, 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 and nine months ended September 30, 2017, is as follows:
|
|
Three Months Ended September 30, 2017
|
|
|
Nine Months Ended September 30, 2017
|
|
2016 Plan – Time Based Grants:
|
|
|
|
|
|
|
|
|
Service LTIPs – non-employee
|
|
$
|
258,033
|
|
|
$
|
933,143
|
|
Service LTIPs – employee
|
|
|
56,567
|
|
|
|
123,967
|
|
2017 Program – Performance Based Award Targets:
|
|
|
|
|
|
|
|
|
Annual Awards – non-employee
|
|
|
(22,107
|
)
|
|
|
238,835
|
|
Long-Term Awards – non-employee
|
|
|
47,794
|
|
|
|
184,779
|
|
Total compensation expense
|
|
$
|
340,287
|
|
|
$
|
1,480,724
|
|
Total unamortized compensation expense related
to these units of approximately $1.9 million is expected to be recognized subsequent to September 30, 2017 over a weighted average
remaining period of 1.23 years.
Note 8 – Rental Revenue
The aggregate annual
minimum cash to be received by the Company on the noncancelable operating leases related to its portfolio of medical facilities
in effect as of September 30, 2017, are as follows for the subsequent years ended December 31 as listed below.
2017
|
|
$
|
8,035,103
|
|
2018
|
|
|
32,516,357
|
|
2019
|
|
|
33,166,395
|
|
2020
|
|
|
33,811,627
|
|
2021
|
|
|
32,003,983
|
|
Thereafter
|
|
|
251,225,055
|
|
Total
|
|
$
|
390,758,520
|
|
For the three months
ended September 30, 2017, the HealthSouth facilities constituted approximately 18% of the Company’s rental revenue, the OCOM
facilities constituted approximately 15% of the Company’ rental revenue, the Sherman facility constituted approximately 10%
of the Company’s rental revenue, the Great Bend facility constituted approximately 8% of the Company’s rental revenue,
the Omaha facility constituted approximately 6% of the Company’s rental revenue, and the Plano facility constituted approximately
5% of the Company’s rental revenue. All other facilities in the Company’s portfolio constituted the remaining 38% of
the total rental revenue with no individual facility constituting greater than approximately 4% of total rental revenue.
For the nine months
ended September 30, 2017, the HealthSouth facilities constituted approximately 22% of the Company’s rental revenue, the OCOM
facilities constituted approximately 12% of the Company’ rental revenue, the Omaha and Great Bend facilities each constituted
approximately 7% of the Company’s rental revenue, the Plano and Tennessee facilities each constituted approximately 6% of
the Company’s rental revenue, and the Marina Towers facility constituted approximately 5% of the Company’s rental revenue.
All other facilities in the Company’s portfolio constituted the remaining 35% of the total rental revenue with no individual
facility constituting greater than approximately 4% of total rental revenue.
For the three months
ended September 30, 2016, the Omaha facility constituted approximately 22% of the Company’s rental revenue, the Tennessee
facilities constituted approximately 18% of rental revenue, the Plano facility constituted approximately 17% of rental revenue,
the West Mifflin facility constituted approximately 11% of rental revenue, the Melbourne facility constituted approximately 15%
of rental revenue, and the Reading facility constituted approximately 8% of rental revenue. The Westland and Asheville facilities
constituted approximately 6% and 3% of rental revenue, respectively.
For the nine months
ended September 30, 2016, the Omaha facility constituted approximately 26% of the Company’s rental revenue, the Tennessee
facilities constituted approximately 21% of rental revenue, the Plano facility constituted approximately 17% of rental revenue,
the West Mifflin facility constituted approximately 13% of rental revenue, the Melbourne facility constituted approximately 12%
of rental revenue, and the Reading facility constituted approximately 3% of rental revenue. The Asheville and Westland facilities
each constituted approximately 4% of rental revenue.
Note 9 – Omaha and Clermont Land Leases
The Omaha facility
land lease 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 occurred in April 2017. During the three
and nine months ended September 30, 2017, the Company expensed $18,153 and $54,461, respectively, related to the Omaha land lease.
During the three and nine months ended September 30, 2016, the Company expensed $18,153 and $54,461, respectively, related to this
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 Consolidated 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 September 30, 2017,
are as follows for the subsequent years ended December 31; as listed below.
2017
|
|
$
|
18,626
|
|
2018
|
|
|
78,245
|
|
2019
|
|
|
81,987
|
|
2020
|
|
|
81,987
|
|
2021
|
|
|
81,987
|
|
Thereafter
|
|
|
1,883,702
|
|
Total
|
|
$
|
2,226,534
|
|
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
Common Stock Dividend Paid
On October 9, 2017
the Company paid the third quarter 2017 dividend that was announced on September 18, 2017 in the amount of $4,416,164.
Preferred Stock Dividend Paid
The initial preferred
stock dividend was paid on October 31, 2017 to holders of record as of October 15, 2017, for the pro rata dividend from, and including,
the original issue date to, and including, October 30, 2017, in the pro rata amount of $0.2396 per share for a total dividend amount
of $743,598.
LTIP Award
On October 11, 2017 the Board approved the
grant of 32,787 LTIP units to the Company’s Chief Executive Officer. The LTIP units were granted under the 2016 Plan and
vest over a period of two years, on October 11, 2018 and October 11, 2019.