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Section 1: 10-Q (10-Q)

mrt-10q_20170930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from               to

 

Commission File Number: 001-37887

 

MEDEQUITIES REALTY TRUST, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Maryland

46-5477146

( State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

3100 West End Avenue, Suite 1000

Nashville, TN

37203

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (615) 627-4710

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

 (Do not check if a small reporting company)

  

Small reporting company

 

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of November 2, 2017, the registrant had 31,755,888 shares of common stock outstanding.

 

 


MEDEQUITIES REALTY TRUST, INC. AND SUBSIDIARIES

 

Table of Contents

 

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

Item 1.

Financial Statements (Unaudited)

3

 

Consolidated Balance Sheets

3

 

Consolidated Statements of Operations

4

 

Consolidated Statements of Comprehensive Income

5

 

Consolidated Statement of Equity

6

 

Consolidated Statements of Cash Flows

7

 

Notes to Interim Consolidated Financial Statements

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

18

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

33

Item 4.

Controls and Procedures

33

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

33

Item 1A.

Risk Factors

33

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

33

Item 3.

Defaults Upon Senior Securities

33

Item 4.

Mine Safety Disclosures

34

Item 5.

Other Information

34

Item 6.

Exhibits

34

Signatures

 

35

 

 

 

 

2


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

MEDEQUITIES REALTY TRUST, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands, except per share amounts)

 

 

 

September 30, 2017

 

 

December 31, 2016

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Real estate properties

 

 

 

 

 

 

 

 

Land

 

$

42,250

 

 

$

39,584

 

Building and improvements

 

 

489,334

 

 

 

440,927

 

Intangible lease assets

 

 

11,387

 

 

 

11,387

 

Furniture, fixtures, and equipment

 

 

2,981

 

 

 

2,976

 

Less accumulated depreciation and amortization

 

 

(37,547

)

 

 

(26,052

)

Total real estate properties, net

 

 

508,405

 

 

 

468,822

 

 

 

 

 

 

 

 

 

 

Mortgage notes receivable, net

 

 

29,120

 

 

 

9,915

 

Cash and cash equivalents

 

 

7,264

 

 

 

9,509

 

Other assets, net

 

 

26,044

 

 

 

31,507

 

Total Assets

 

$

570,833

 

 

$

519,753

 

 

 

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Debt, net

 

$

206,782

 

 

$

144,000

 

Accounts payable and accrued liabilities

 

 

6,376

 

 

 

15,244

 

Deferred revenue

 

 

2,040

 

 

 

2,251

 

Total liabilities

 

 

215,198

 

 

 

161,495

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

Common stock, $0.01 par value. Authorized 400,000 shares; 31,756 and 31,757

   issued and outstanding at September 30, 2017 and December 31, 2016,

   respectively

 

 

314

 

 

 

314

 

Additional paid in capital

 

 

374,994

 

 

 

372,615

 

Dividends declared

 

 

(60,935

)

 

 

(40,951

)

Retained earnings

 

 

38,426

 

 

 

23,774

 

Accumulated other comprehensive loss

 

 

(8

)

 

 

-

 

Total MedEquities Realty Trust, Inc. stockholders' equity

 

 

352,791

 

 

 

355,752

 

Noncontrolling interest

 

 

2,844

 

 

 

2,506

 

Total equity

 

 

355,635

 

 

 

358,258

 

Total Liabilities and Equity

 

$

570,833

 

 

$

519,753

 

 

See accompanying notes to interim consolidated financial statements.

 

 

3


MEDEQUITIES REALTY TRUST, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(in thousands, except per share amounts)

(Unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

15,114

 

 

$

13,603

 

 

$

43,240

 

 

$

34,561

 

Interest on mortgage notes receivable

 

 

644

 

 

 

231

 

 

 

1,606

 

 

 

689

 

Interest on notes receivable

 

 

8

 

 

 

11

 

 

 

27

 

 

 

36

 

Total revenues

 

 

15,766

 

 

 

13,845

 

 

 

44,873

 

 

 

35,286

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

3,931

 

 

 

3,617

 

 

 

11,176

 

 

 

10,705

 

Property related

 

 

326

 

 

 

341

 

 

 

1,155

 

 

 

1,006

 

Acquisition related

 

 

33

 

 

 

29

 

 

 

362

 

 

 

488

 

Franchise, excise and other taxes

 

 

50

 

 

 

87

 

 

 

76

 

 

 

222

 

Bad debt expense

 

 

-

 

 

 

-

 

 

 

-

 

 

 

216

 

General and administrative

 

 

3,046

 

 

 

2,436

 

 

 

9,196

 

 

 

7,760

 

Total operating expenses

 

 

7,386

 

 

 

6,510

 

 

 

21,965

 

 

 

20,397

 

Operating income

 

 

8,380

 

 

 

7,335

 

 

 

22,908

 

 

 

14,889

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

 

3

 

 

 

191

 

 

 

5

 

 

 

194

 

Interest expense

 

 

(2,117

)

 

 

(2,792

)

 

 

(5,440

)

 

 

(9,143

)

 

 

 

(2,114

)

 

 

(2,601

)

 

 

(5,435

)

 

 

(8,949

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

6,266

 

 

$

4,734

 

 

$

17,473

 

 

$

5,940

 

Less: Preferred stock dividends

 

 

-

 

 

 

(2,464

)

 

 

-

 

 

 

(7,394

)

Less: Net (income) loss attributable to noncontrolling interest

 

 

(941

)

 

 

(821

)

 

 

(2,821

)

 

 

665

 

Net income (loss) attributable to common stockholders

 

$

5,325

 

 

$

1,449

 

 

$

14,652

 

 

$

(789

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to common stockholders per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

0.17

 

 

$

0.12

 

 

$

0.46

 

 

$

(0.09

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

31,467

 

 

 

10,964

 

 

 

31,429

 

 

 

10,961

 

Diluted

 

 

31,506

 

 

 

10,964

 

 

 

31,460

 

 

 

10,961

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.21

 

 

$

0.42

 

 

$

0.63

 

 

$

0.63

 

 

See accompanying notes to interim consolidated financial statements.

 


4


MEDEQUITIES REALTY TRUST, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(in thousands)

(Unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

6,266

 

 

$

4,734

 

 

$

17,473

 

 

$

5,940

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase (decrease) in fair value of cash flow hedge

 

 

115

 

 

 

-

 

 

 

(8

)

 

 

-

 

Total other comprehensive income (loss)

 

 

115

 

 

 

-

 

 

 

(8

)

 

 

-

 

Comprehensive income

 

 

6,381

 

 

 

4,734

 

 

 

17,465

 

 

 

5,940

 

Less: comprehensive (income) loss attributable to noncontrolling interest

 

 

(941

)

 

 

(821

)

 

 

(2,821

)

 

 

665

 

Comprehensive income attributable to common stockholders

 

$

5,440

 

 

$

3,913

 

 

$

14,644

 

 

$

6,605

 

 

See accompanying notes to interim consolidated financial statements.

 

 

5


MEDEQUITIES REALTY TRUST, INC. AND SUBSIDIARIES

Consolidated Statement of Equity

(in thousands)

(Unaudited)

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Retained

 

 

Dividends

 

 

Accumulated other comprehensive

 

 

Non-

controlling

 

 

 

 

 

 

 

Shares

 

 

Par Value

 

 

Capital

 

 

Earnings

 

 

Declared

 

 

loss

 

 

Interest

 

 

Total Equity

 

Balance at December 31, 2016

 

 

31,757

 

 

$

314

 

 

$

372,615

 

 

$

23,774

 

 

$

(40,951

)

 

$

-

 

 

$

2,506

 

 

$

358,258

 

Grants of restricted stock

 

 

34

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Issuance of common stock, net of costs

 

 

-

 

 

 

-

 

 

 

(20

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(20

)

Repurchase and cancellation of restricted stock

 

 

(5

)

 

 

-

 

 

 

(50

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(50

)

Retirement of common stock

 

 

(11

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Shares surrendered for taxes upon vesting

 

 

(19

)

 

 

-

 

 

 

(224

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(224

)

Other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(8

)

 

 

-

 

 

 

(8

)

Distributions to noncontrolling interest

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,483

)

 

 

(2,483

)

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

2,673

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,673

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

14,652

 

 

 

-

 

 

 

-

 

 

 

2,821

 

 

 

17,473

 

Dividends to common stockholders

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(19,984

)

 

 

-

 

 

 

-

 

 

 

(19,984

)

Balance at September 30, 2017

 

 

31,756

 

 

$

314

 

 

$

374,994

 

 

$

38,426

 

 

$

(60,935

)

 

$

(8

)

 

$

2,844

 

 

$

355,635

 

 

See accompanying notes to interim consolidated financial statements.

 

 

6


MEDEQUITIES REALTY TRUST, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

Operating activities

 

 

 

 

 

 

 

 

Net income

 

$

17,473

 

 

$

5,940

 

Adjustments to reconcile net income to net cash provided by operating activities

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

12,776

 

 

 

13,598

 

Stock-based compensation

 

 

2,673

 

 

 

1,927

 

Straight-line rent receivable

 

 

(4,319

)

 

 

4,703

 

Straight-line rent liability

 

 

118

 

 

 

124

 

Provision for bad debt

 

 

-

 

 

 

216

 

Write-off of pre-acquisition costs

 

 

137

 

 

 

252

 

Write-off of pre-offering costs

 

 

-

 

 

 

89

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Other assets

 

 

10,948

 

 

 

(11,400

)

Accounts payable and accrued liabilities

 

 

(9,429

)

 

 

9,721

 

Deferred revenues

 

 

(187

)

 

 

(2,326

)

Net cash provided by operating activities

 

 

30,190

 

 

 

22,844

 

Investing activities

 

 

 

 

 

 

 

 

Acquisitions of real estate

 

 

(50,138

)

 

 

(72

)

Capital expenditures for real estate

 

 

(774

)

 

 

-

 

Funding of mortgage notes and note receivable

 

 

(19,200

)

 

 

(1,662

)

Repayments of notes receivable

 

 

125

 

 

 

1,712

 

Capitalized pre-acquisition costs, net

 

 

(274

)

 

 

(268

)

Capital expenditures for corporate property

 

 

(13

)

 

 

(2

)

Net cash used in investing activities

 

 

(70,274

)

 

 

(292

)

Financing activities

 

 

 

 

 

 

 

 

Proceeds from borrowings on term loan

 

 

125,000

 

 

 

-

 

Net repayments on secured revolving credit facility

 

 

(61,500

)

 

 

(3,400

)

Dividends paid to common stockholders

 

 

(19,988

)

 

 

(8,096

)

Deferred loan costs

 

 

(2,771

)

 

 

(1,400

)

Distributions to noncontrolling interest

 

 

(2,483

)

 

 

(1,573

)

Taxes remitted upon vesting of restricted stock

 

 

(224

)

 

 

-

 

Capitalized pre-offering costs

 

 

(102

)

 

 

(948

)

Cancellation of restricted stock

 

 

(50

)

 

 

-

 

Offering costs

 

 

(43

)

 

 

-

 

Dividends paid to preferred stockholders

 

 

-

 

 

 

(7,398

)

Net cash provided by (used in) financing activities

 

 

37,839

 

 

 

(22,815

)

Decrease in cash and cash equivalents

 

 

(2,245

)

 

 

(263

)

Cash and cash equivalents, beginning of period

 

 

9,509

 

 

 

12,474

 

Cash and cash equivalents, end of period

 

$

7,264

 

 

$

12,211

 

 

 

 

 

 

 

 

 

 

Supplemental Cash Flow Information

 

 

 

 

 

 

 

 

Interest paid

 

$

4,348

 

 

$

7,105

 

Accrued pre-offering costs

 

 

122

 

 

 

2,296

 

Texas gross margins taxes paid, net of reimbursement

 

 

55

 

 

 

69

 

Accrued deferred loan costs

 

 

52

 

 

 

2

 

Accrued pre-acquisition costs

 

 

15

 

 

 

3

 

Accrued capitalized acquisition costs

 

 

6

 

 

 

-

 

 

See accompanying notes to interim consolidated financial statements.

 

 

7


MEDEQUITIES REALTY TRUST, INC. AND SUBSIDIARIES

Notes to Interim Consolidated Financial Statements

Unaudited

September 30, 2017

 

Note 1 - Organization and Nature of Business

MedEquities Realty Trust, Inc. (the “Company”), which was incorporated in the state of Maryland on April 23, 2014, is a self-managed and self-administered company that invests in a diversified mix of healthcare properties and healthcare-related real estate debt investments. As of September 30, 2017, the Company had investments of $537.5 million, net in 31 real estate properties and three mortgage notes receivable. The Company owns 100% of all of its properties and investments, other than Baylor Scott & White Medical Center - Lakeway (“Lakeway Hospital”), in which the Company owns a 51% interest through a consolidated partnership (the “Lakeway Partnership”). All of the Company’s assets are held by, and its operations conducted through, its operating partnership, MedEquities Realty Operating Partnership, LP, which is a 100% owned subsidiary of the Company. The Company has elected to be taxed as a real estate investment trust (“REIT”) for U.S. federal income tax purposes.

Note 2 - Accounting Policies and Related Matters

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial statements. In the opinion of management, the accompanying unaudited consolidated financial statements reflect all adjustments consisting of normal recurring adjustments necessary for a fair presentation of its financial position and results of operations. Interim results of operations are not necessarily indicative of the results that may be achieved for a full year. The financial statements and related notes do not include all information and footnotes required by GAAP for annual reports. These interim consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2016, included in the Company’s 2016 Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 27, 2017.

The interim consolidated financial statements include the accounts of the Company’s wholly owned subsidiaries and subsidiaries in which the Company has a controlling interest. All material intercompany transactions and balances have been eliminated in consolidation.

For information about significant accounting policies, refer to the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2016 included in the Company’s 2016 Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 27, 2017. During the three and nine months ended September 30, 2017, there were no material changes to these policies except as noted below.

Derivatives: In the normal course of business, the Company is subject to risk from adverse fluctuations in interest rates. The Company has chosen to manage this risk through the use of derivative financial instruments, primarily interest rate swaps. Counterparties to these contracts are major financial institutions. The Company is exposed to credit loss in the event of nonperformance by these counterparties. The Company does not use derivative instruments for trading or speculative purposes. The Company’s objective in managing exposure to interest risk is to limit the impact on cash flows.

To qualify for hedge accounting, the Company’s interest rate swaps must effectively reduce the risk exposure that they are designed to hedge. In addition, at inception of a qualifying cash flow hedging relationship, the underlying transactions must be, and be expected to remain, probable of occurring in accordance with the Company’s related assertions. All of the Company’s hedges are cash flow hedges.

The Company recognizes all derivative instruments as assets or liabilities at their fair value in the Consolidated Balance Sheets. Changes in the fair value of derivative instruments that are not designated as hedges or that do not meet the criteria of hedge accounting are recognized in earnings. For derivatives designed in qualified cash flow hedging relationships, the change in fair value of the effective portion of the derivatives is recognized in accumulated other comprehensive income (loss), whereas the change in fair value of the ineffective portion is recognized in earnings. Gains and losses are reclassified from accumulated other comprehensive income (loss) into earnings once the underlying hedged transaction is recognized in earnings.

Recent Accounting Developments: On January 1, 2017, the Company adopted the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update (“ASU”) No. 2016-09, “Improvements to Employee Share-Based Payment Accounting,” which amends the accounting for share-based payment transactions, including income tax effects, equity versus liability classification and classification on the statement of cash flows. The adoption of this guidance had no impact on the Company’s consolidated results of operations, financial condition, statement of cash flows or liquidity.

 

In January 2017, the FASB issued ASU No. 2017-01, “Clarifying the Definition of a Business,” that clarifies the framework for determining whether an integrated set of assets and activities meets the definition of a business. The revised framework establishes a screen for determining whether an integrated set of assets and activities is a business and narrows the definition of a business, which is

8


expected to result in fewer transactions being accounted for as business combinations. Acquisitions of integrated sets of assets and activities that do not meet the definition of a business are accounted for as asset acquisitions. ASU 2017-01 will be effective for fiscal years, and for interim periods within those fiscal years, beginning January 1, 2018. Early application of this standard is generally allowed for acquisitions after the standard was issued but before the acquisition has been reflected in a company’s financial statements. The Company has applied the provisions of ASU 2017-01 beginning with its real estate acquisitions in 2017. The adoption of ASU 2017-01 did not have a material effect on the Company’s consolidated financial statements.

 

In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities.” The purpose of this updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. The transition guidance provides companies with the option of early adopting the new standard using a modified retrospective transition method in any interim period after issuance of the update, or alternatively requires adoption for fiscal years beginning January 1, 2019. This adoption method will require recognition of the cumulative effect of initially applying the standard as an adjustment to accumulated other comprehensive income (loss) with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year of adoption. The Company continues to assess all potential impacts of the standard but does not currently expect adoption to have a material impact on the Company’s consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers,” a comprehensive new revenue recognition standard that supersedes most of the existing revenue recognition guidance. This standard’s core principle is that a company will recognize revenue when it transfers goods or services to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods and services. In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers: Deferral of the Effective Date,” which deferred the effective date of this standard by one year. This standard becomes effective for the Company on January 1, 2018 and for interim periods therein. The guidance permits two implementation approaches, one requiring retrospective application of the new standard with restatement of prior years and one requiring prospective application of the new standard with disclosure of results under old standards. The Company continues to evaluate this standard and preliminary analyses indicate that the standard is not expected to have a significant impact on the Company’s consolidated financial position, results of operations and cash flows since the Company’s revenues consist primarily of rental income from leasing arrangements, which are specifically excluded from the guidance in ASU 2014-09.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” which amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheet and making targeted improvements to lessor accounting. The guidance requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The guidance will be effective beginning January 1, 2019. Early adoption is permitted. The Company is currently evaluating the impact of adopting this new accounting standard on the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326),” which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The standard also requires additional disclosures related to significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio.  The amended guidance is effective for fiscal years, and interim periods within those years, beginning January 1, 2020 with early adoption permitted for the fiscal years, and interim periods within those fiscal years, beginning January 1, 2019. The Company is evaluating the impact of adopting this new accounting standard on the Company’s consolidated financial statements and currently expects that it will not have a material impact.

In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows - Restricted Cash,” which required that a statement of cash flows explains the change during the period in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The new guidance is effective for fiscal years, and interim periods within those years, beginning January 1, 2018. The adoption of this guidance will change the presentation of restricted cash on the Company’s consolidated statement of cash flows. However, it will have no impact on the Company’s consolidated results of operations, financial condition, or liquidity.

 


9


Note 3 – Investment Activity

During the nine months ended September 30, 2017, the Company made the following real estate investments, which are described in more detail below (dollars in thousands):

Investment

 

Date

 

Number of Properties/Loans

 

Investment Type (1)

 

Gross Investment

 

Advanced Diagnostics Hospital East Mortgage Loan

 

January 2017

 

1

 

MTG

 

$

12,500

 

Woodlake at Tolland Nursing and Rehabilitation Center

 

June 2017

 

1

 

SNF

 

 

10,120

 

Magnolia Portfolio

 

July 2017

 

2

 

SNF

 

 

15,003

 

Medistar Gemini Mortgage Loan

 

August 2017

 

1

 

MTG

 

 

6,700

 

AAC Portfolio

 

August 2017

 

4

 

BH

 

 

25,020

 

Total

 

 

 

9

 

 

 

$

69,343

 

 

(1)

MTG- Mortgage Note Receivable; SNF- Skilled Nursing Facility; BH- Behavioral Health Facility

2017 Real Estate Acquisitions

On June 30, 2017, the Company acquired Woodlake at Tolland Nursing & Rehabilitation Center, a 130-bed skilled nursing facility located in Woodlake, Connecticut, from a wholly owned subsidiary of Prospect Medical Holdings, Inc. for an aggregate purchase price of $10.0 million in cash. The property is 100% leased pursuant to a 12-year initial term triple-net lease with two ten-year renewal options at an initial lease rate of 9.0% with annual escalators. This transaction was accounted for as an asset acquisition and approximately $0.1 million of transaction costs were capitalized.

On July 31, 2017, the Company acquired two skilled nursing facilities, totaling 160 licensed beds, located in Indiana from Magnolia Health Systems, Inc. (the “Magnolia Portfolio”) for an aggregate purchase price of $15.0 million in cash. The facilities are 100% leased to Magnolia Health Systems, Inc. pursuant to a 15-year initial term triple-net master lease with two ten-year renewal options at an initial lease rate of 9.0% with annual escalators. This transaction was accounted for as an asset acquisition and less than $0.1 million of transaction costs were capitalized.

On August 9, 2017, the Company acquired four behavioral health and substance abuse treatment facilities from subsidiaries of AAC Holdings, Inc. (the “AAC Portfolio”) for an aggregate purchase price of $25.0 million in cash. The facilities are comprised of two standalone intensive outpatient treatment facilities in Las Vegas, Nevada and Arlington, Texas, a 110-bed sober living facility in Las Vegas and a 56-bed sober living facility in Arlington that is expected to expand to 131 beds by the end of 2018. The properties are 100% leased to AAC Holdings, Inc. pursuant to a 15-year initial term triple-net master lease with two five-year renewal options at an initial lease rate of 8.75% with annual escalators. This transaction was accounted for as an asset acquisition and less than $0.1 million of transaction costs were capitalized.

 

2017 Mortgage Notes Receivable Funding

On January 30, 2017, the Company invested $12.5 million through a newly originated interest-only loan at an interest rate of 9.6% and secured by a first mortgage on a licensed general acute care surgical hospital that consists of 23,300 square feet with four operating rooms, two special procedure rooms, four inpatient rooms and four full-size extended recovery rooms. Beginning on October 1, 2017, the Company had the exclusive option to purchase the hospital. In November 2017, the Company exercised its option and has agreed to acquire the property for a purchase price of approximately $17.5 million, which will be satisfied by applying the $12.5 million aggregate principal amount outstanding on the mortgage note to the purchase price and $5.0 million in cash consideration. This transaction is expected to close in the fourth quarter of 2017, subject to customary closing conditions. Upon closing, the Company will lease the property to AD Hospital East, LLC pursuant to a 15-year triple net lease with two ten-year renewal options at an initial yield of 9.6%, with annual rent escalators. The lease will contain certain operator and personal guarantees, which are subject to future reduction based on maintaining certain minimum financial covenants, and will be secured by certain additional assets related to the hospital owned by the guarantor.

On August 1, 2017, the Company funded a $6.7 million mortgage note receivable to a subsidiary of Medistar Corporation, which is secured by land and an existing building in Webster, Texas.  Interest accrues at a rate of 10% per annum and is payable upon the maturity date of the loan on December 31, 2017.  The borrower intends to redevelop the existing property into an integrated medical facility with approximately 48,000 rentable square feet, with construction expected to commence in the fourth quarter of 2017.  The Company is considering funding the redevelopment of the facility through a construction mortgage note receivable totaling approximately $15.5 million, which would replace the existing mortgage note receivable and may include an option to purchase the property in a sale-leaseback transaction upon satisfactory completion of the redevelopment.

10


Concentrations of Credit Risks

The following table contains information regarding tenant concentration in the Company’s portfolio, based on the percentage of revenue for the nine months ended September 30, 2017 and 2016, related to tenants, or affiliated tenants, that exceed 10% of revenues.

 

 

 

% of Total Revenue for the

nine months ended September 30,

 

 

 

2017

 

 

2016

 

BSW Health (1)

 

 

24.6%

 

 

 

3.5%

 

GruenePointe Holdings

 

 

24.1%

 

 

 

30.2%

 

Fundamental Healthcare

 

 

15.2%

 

 

 

17.5%

 

Life Generations Healthcare

 

 

14.4%

 

 

 

18.3%

 

Vibra Healthcare

 

 

13.2%

 

 

 

16.1%

 

 

 

(1)

The Lakeway Hospital lease with Baylor Scott & White Health (“BSW Health”) commenced on September 1, 2016.

The following table contains information regarding the geographic concentration of the properties in the Company’s portfolio as of September 30, 2017, which includes percentage of rental income for the nine months ended September 30, 2017 and 2016 (dollars in thousands).

 

 

 

 

 

 

 

 

 

% of Total

 

 

% of Rental Income

 

State

 

Number of

Properties

 

Gross Investment

 

 

Real Estate                              Property Investments

 

 

Nine months ended

September 30, 2017

 

 

Nine months ended

September 30, 2016

 

Texas

 

16

 

$

283,705

 

 

 

52.0%

 

 

 

61.0%

 

 

 

55.6%

 

California

 

7

 

 

154,727

 

 

 

28.3%

 

 

 

24.3%

 

 

 

30.0%

 

Nevada

 

4

 

 

62,397

 

 

 

11.4%

 

 

 

10.1%

 

 

 

10.2%

 

South Carolina

 

1

 

 

20,000

 

 

 

3.7%

 

 

 

3.4%

 

 

 

4.2%

 

Indiana

 

2

 

 

15,003

 

 

 

2.7%

 

 

 

0.6%

 

 

 

-

 

Connecticut

 

1

 

 

10,120

 

 

 

1.9%

 

 

 

0.6%

 

 

 

-

 

 

 

31

 

$

545,952

 

 

 

100.0%

 

 

 

100.0%

 

 

 

100.0%

 

 

 

 

Note 4 – Debt

The table below details the Company’s debt balance at September 30, 2017 and December 31, 2016 (in thousands):

 

 

 

September 30, 2017

 

 

December 31, 2016

 

Term loan- secured

 

$

125,000

 

 

$

-

 

Revolving credit facility- secured

 

 

82,500

 

 

 

144,000

 

Unamortized deferred financing costs

 

 

(718

)

 

 

-

 

 

 

$

206,782

 

 

$

144,000

 

On February 10, 2017, the Company entered into a second amended and restated credit agreement, which provides for a $300 million revolving credit facility that matures in February 2021 and a $125 million term loan that matures in February 2022. The revolving credit facility has one 12-month extension option, subject to certain conditions, including the payment of a 0.15% extension fee. The new facility replaced the Company’s prior $300 million secured revolving credit facility, which was scheduled to mature in November 2017. The Company incurred fees associated with the amended credit facility of approximately $2.7 million, of which $1.9 million is associated with the revolving credit facility and $0.8 million is associated with the term loan.

Amounts outstanding under the amended credit facility bear interest at LIBOR plus a margin between 1.75% and 3.00% or a base rate plus a margin between 0.75% and 2.00%, in each case depending on the Company’s leverage. The revolving credit facility includes an unused facility fee of 0.25% of the amount of the unused portion of the revolving credit facility if amounts borrowed are equal to or greater than 50.0% of the total commitments or 0.35% if amounts borrowed are less than 50.0% of such commitments. Prior to the February 10, 2017 amendment, amounts outstanding under the facility bore interest at LIBOR plus a margin between 2.75% and 3.75% or a base rate plus a margin between 2.00% and 2.50%, in each case depending on the Company’s leverage.

The amended credit agreement also includes an accordion feature that allows the total borrowing capacity, including the term loan component, to be increased to up to $700 million, subject to certain conditions, including obtaining additional commitments from

11


lenders. The amount available to borrow under the amended credit facility is limited according to a borrowing base valuation of assets owned by subsidiaries of the Company’s operating partnership. The amended credit facility is secured by a pledge of the Company’s operating partnership’s equity interests in its subsidiaries that own borrowing base assets, which is substantially all of the Company’s assets. The amended credit agreement includes the ability to convert to an unsecured credit facility when certain conditions are met, including the Company having a minimum gross asset value of $1.0 billion, a minimum borrowing base of $500 million, less than 50% leverage and continued compliance with the covenants under the amended credit agreement.

At September 30, 2017 and 2016, the weighted average interest rate under the amended credit facility was 3.4% and 3.8%, respectively.

Total costs related to the revolving credit facility at September 30, 2017 were $3.3 million, gross ($2.8 million, net). These costs are included in other assets on the consolidated balance sheet at September 30, 2017 and will be amortized to interest expense through February 2021, the maturity date of the revolving credit facility. The total amount of deferred financing costs associated with the term loan at September 30, 2017 was $0.8 million, gross ($0.7 million, net). These costs are netted against the balance outstanding under the term loan on the Company’s consolidated balance sheet and will be amortized to interest expense through February 2022, the maturity date of the term loan.

The Company recognized amortization expense of deferred financing costs, included in interest expense on the consolidated statements of income, of $0.2 million and $0.8 million for the three and nine months ended September 30, 2017, respectively. Amortization expense of deferred financing costs was $0.4 million and $2.0 million for the three and nine months ended September 30, 2016, respectively. The amortization expense for the nine months ended September 30, 2016 includes approximately $0.3 million of unamortized deferred financing costs associated with a credit facility amendment that was expensed in May 2016.

The maximum available capacity under the amended credit facility was $260.8 million at September 30, 2017. At November 7, 2017, the Company had $207.5 million in borrowings outstanding, of which $82.5 million was outstanding under the revolving credit facility with a weighted average interest rate of 2.99% and $125.0 million was outstanding on the term loan. As of November 7, 2017, the Company had $53.3 million in additional borrowing capacity under the revolving credit facility, based on its current borrowing base assets.

Interest Rate Swap Agreements

To mitigate exposure to interest rate risk, on February 10, 2017, the Company entered into four interest rate swap agreements, effective April 10, 2017, on the full $125 million term loan to fix the variable LIBOR interest rate at 1.84%, plus the LIBOR spread under the amended credit agreement, which was 1.75% at November 7, 2017.  

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

Amounts reported in accumulated other comprehensive income (loss) related to these interest rate swaps will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt.  During the next 12 months, the Company estimates that an additional $0.5 million will be reclassified from other comprehensive income (loss) as an increase to interest expense.

The fair value of the Company’s derivative financial instruments at September 30, 2017 was a liability of less than $0.1 million and was included in accounts payable and accrued liabilities on the consolidated balance sheet. The Company did not have any derivative financial instruments at December 31, 2016.

The table below details the location in the consolidated financial statements of the loss recognized on interest rate derivatives designated as cash flow hedges for the three and nine months ended September 30, 2017 (dollars in thousands). The Company did not have any interest rate derivatives for the three and nine months ended September 30, 2016.

 

 

 

Three months ended September 30, 2017

 

 

Nine months ended September 30, 2017

 

Amount of loss recognized in other comprehensive income (loss)

 

$

(85

)

 

$

(441

)

Amount of loss reclassified from accumulated other comprehensive loss into interest expense

 

 

(200

)

 

 

(433

)

Total other comprehensive income (loss)

 

$

115

 

 

$

(8

)

 


12


As of September 30, 2017, the fair value of the interest rate swaps in a net liability position, including accrued interest but excluding any adjustment for nonperformance risk related to these agreements, was approximately $0.1 million. As of September 30, 2017, the Company has not posted any collateral related to these agreements and was not in breach of any provisions of the agreements. If the Company had breached any of these provisions, it could have been required to settle any obligations under the agreements at their aggregate termination value of $0.1 million at September 30, 2017.

Covenants

The amended credit agreement contains customary financial and operating covenants, including covenants relating to the Company’s total leverage ratio, fixed charge coverage ratio, tangible net worth, maximum distribution/payout ratio and restrictions on recourse debt, secured debt and certain investments. The credit agreement also contains customary events of default, in certain cases subject to customary cure periods, including among others, nonpayment of principal or interest, material breach of representations and warranties, and failure to comply with covenants. Any event of default, if not cured or waived, could result in the acceleration of any outstanding indebtedness under the credit agreement. The Company was in compliance with all financial covenants as of September 30, 2017.

Note 5 – Other Assets

Items included in Other Assets on the Company’s consolidated balance sheets as of September 30, 2017 and December 31, 2016 are detailed in the table below (dollars in thousands):

 

 

September 30, 2017

 

 

December 31, 2016

 

Straight-line rent receivable

 

$

10,789

 

 

$

6,470

 

Tenant allowances and lease incentives, net

 

 

8,314

 

 

 

8,624

 

Deferred financing costs, net

 

 

2,759

 

 

 

1,465

 

Prepaid assets and deposits

 

 

2,135

 

 

 

3,174

 

Pre-acquisition costs

 

 

1,014

 

 

 

883

 

Interest and accounts receivable

 

 

328

 

 

 

561