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Section 1: 10-Q (10-Q)

mrt-10q_20180630.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 June 30, 2018

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 August 1, 2018, the registrant had 31,862,628 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 Income

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

15

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

28

Item 4.

Controls and Procedures

28

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

28

Item 1A.

Risk Factors

28

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

30

Item 3.

Defaults Upon Senior Securities

30

Item 4.

Mine Safety Disclosures

30

Item 5.

Other Information

30

Item 6.

Exhibits

31

Signatures

 

32

 

 

 

 

2


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

MEDEQUITIES REALTY TRUST, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands, except per share amounts)

 

 

 

June 30, 2018

 

 

December 31, 2017

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Real estate properties

 

 

 

 

 

 

 

 

Land

 

$

45,281

 

 

$

43,180

 

Building and improvements

 

 

527,651

 

 

 

505,623

 

Intangible lease assets

 

 

11,387

 

 

 

11,387

 

Furniture, fixtures and equipment

 

 

3,538

 

 

 

3,538

 

Less accumulated depreciation and amortization

 

 

(50,567

)

 

 

(41,984

)

Total real estate properties, net

 

 

537,290

 

 

 

521,744

 

 

 

 

 

 

 

 

 

 

Mortgage notes receivable, net

 

 

42,773

 

 

 

18,557

 

Note receivable

 

 

7,000

 

 

 

-

 

Cash and cash equivalents

 

 

4,172

 

 

 

12,640

 

Other assets, net

 

 

37,107

 

 

 

28,662

 

Total Assets

 

$

628,342

 

 

$

581,603

 

 

 

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Debt, net

 

$

264,406

 

 

$

215,523

 

Accounts payable and accrued liabilities

 

 

5,825

 

 

 

6,605

 

Deferred revenue

 

 

1,751

 

 

 

2,722

 

Total liabilities

 

 

271,982

 

 

 

224,850

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

Common stock, $0.01 par value. Authorized 400,000 shares; 31,885 and 31,836

   issued and outstanding at June 30, 2018 and December 31, 2017, respectively

 

 

314

 

 

 

314

 

Additional paid in capital

 

 

377,685

 

 

 

375,690

 

Dividends declared

 

 

(81,340

)

 

 

(67,691

)

Retained earnings

 

 

52,597

 

 

 

44,196

 

Accumulated other comprehensive income

 

 

3,769

 

 

 

1,247

 

Total MedEquities Realty Trust, Inc. stockholders' equity

 

 

353,025

 

 

 

353,756

 

Noncontrolling interest

 

 

3,335

 

 

 

2,997

 

Total equity

 

 

356,360

 

 

 

356,753

 

Total Liabilities and Equity

 

$

628,342

 

 

$

581,603

 

 

See accompanying notes to interim consolidated financial statements.

 

 

3


MEDEQUITIES REALTY TRUST, INC. AND SUBSIDIARIES

Consolidated Statements of Income

(in thousands, except per share amounts)

(Unaudited)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

16,321

 

 

$

14,287

 

 

$

32,250

 

 

$

28,126

 

Interest on mortgage notes receivable

 

 

1,074

 

 

 

529

 

 

 

1,861

 

 

 

962

 

Interest on notes receivable

 

 

165

 

 

 

9

 

 

 

165

 

 

 

19

 

Total revenues

 

 

17,560

 

 

 

14,825

 

 

 

34,276

 

 

 

29,107

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

4,183

 

 

 

3,627

 

 

 

8,377

 

 

 

7,245

 

Property related

 

 

1,097

 

 

 

477

 

 

 

1,419

 

 

 

829

 

Real estate acquisition related

 

 

184

 

 

 

263

 

 

 

292

 

 

 

329

 

Franchise, excise and other taxes

 

 

71

 

 

 

(60

)

 

 

142

 

 

 

26

 

General and administrative

 

 

5,056

 

 

 

2,979

 

 

 

8,372

 

 

 

6,150

 

Total operating expenses

 

 

10,591

 

 

 

7,286

 

 

 

18,602

 

 

 

14,579

 

Operating income

 

 

6,969

 

 

 

7,539

 

 

 

15,674

 

 

 

14,528

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

 

3

 

 

 

1

 

 

 

10

 

 

 

2

 

Interest expense

 

 

(2,786

)

 

 

(1,808

)

 

 

(5,344

)

 

 

(3,323

)

 

 

 

(2,783

)

 

 

(1,807

)

 

 

(5,334

)

 

 

(3,321

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

4,186

 

 

$

5,732

 

 

$

10,340

 

 

$

11,207

 

Less: Net income attributable to noncontrolling interest

 

 

(954

)

 

 

(936

)

 

 

(1,939

)

 

 

(1,880

)

Net income attributable to common stockholders

 

$

3,232

 

 

$

4,796

 

 

$

8,401

 

 

$

9,327

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to common stockholders per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

0.10

 

 

$

0.15

 

 

$

0.26

 

 

$

0.29

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

31,552

 

 

 

31,404

 

 

 

31,551

 

 

 

31,410

 

Diluted

 

 

31,626

 

 

 

31,487

 

 

 

31,617

 

 

 

31,451

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.21

 

 

$

0.21

 

 

$

0.42

 

 

$

0.42

 

 

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 June 30,

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

4,186

 

 

$

5,732

 

 

$

10,340

 

 

$

11,207

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase (decrease) in fair value of cash flow hedge

 

 

735

 

 

 

(493

)

 

 

2,522

 

 

 

(123

)

Total other comprehensive income (loss)

 

 

735

 

 

 

(493

)

 

 

2,522

 

 

 

(123

)

Comprehensive income

 

 

4,921

 

 

 

5,239

 

 

 

12,862

 

 

 

11,084

 

Less: comprehensive income attributable to noncontrolling interest

 

 

(954

)

 

 

(936

)

 

 

(1,939

)

 

 

(1,880

)

Comprehensive income attributable to MedEquities Realty Trust, Inc.

 

$

3,967

 

 

$

4,303

 

 

$

10,923

 

 

$

9,204

 

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

 

 

Income

 

 

Interest

 

 

Total Equity

 

Balance at December 31, 2017

 

 

31,836

 

 

$

314

 

 

$

375,690

 

 

$

44,196

 

 

$

(67,691

)

 

$

1,247

 

 

$

2,997

 

 

$

356,753

 

Grants of restricted stock

 

 

47

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Vesting of restricted stock units

 

 

8

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Shares surrendered for taxes upon vesting

 

 

(6

)

 

 

-

 

 

 

(57

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(57

)

Other comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,522

 

 

 

-

 

 

 

2,522

 

Distributions to noncontrolling interest

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,601

)

 

 

(1,601

)

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

2,052

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,052

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

8,401

 

 

 

-

 

 

 

-

 

 

 

1,939

 

 

 

10,340

 

Dividends to common stockholders

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(13,649

)

 

 

-

 

 

 

-

 

 

 

(13,649

)

Balance at June 30, 2018

 

 

31,885

 

 

$

314

 

 

$

377,685

 

 

$

52,597

 

 

$

(81,340

)

 

$

3,769

 

 

$

3,335

 

 

$

356,360

 

 

See accompanying notes to interim consolidated financial statements.

 

 

6


MEDEQUITIES REALTY TRUST, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

Operating activities

 

 

 

 

 

 

 

 

Net income

 

$

10,340

 

 

$

11,207

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

9,411

 

 

 

8,343

 

Stock-based compensation

 

 

2,052

 

 

 

1,890

 

Straight-line rent receivable

 

 

(3,192

)

 

 

(2,697

)

Straight-line rent liability

 

 

75

 

 

 

79

 

Construction mortgage interest income

 

 

(527

)

 

 

-

 

Write-off of pre-acquisition costs

 

 

190

 

 

 

137

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Other assets

 

 

(5,493

)

 

 

1,446

 

Accounts payable and accrued liabilities

 

 

1,166

 

 

 

(913

)

Deferred revenues

 

 

(954

)

 

 

(169

)

Net cash provided by operating activities

 

 

13,068

 

 

 

19,323

 

Investing activities

 

 

 

 

 

 

 

 

Acquisitions of real estate

 

 

(23,432

)

 

 

(10,092

)

Capital expenditures for real estate

 

 

(761

)

 

 

(769

)

Funding of mortgage notes and note receivable

 

 

(31,667

)

 

 

(12,500

)

Repayments of mortgage note and note receivable

 

 

1,000

 

 

 

125

 

Capitalized pre-acquisition costs, net

 

 

(311

)

 

 

(263

)

Capital expenditures for corporate property

 

 

-

 

 

 

(5

)

Net cash used in investing activities

 

 

(55,171

)

 

 

(23,504

)

Financing activities

 

 

 

 

 

 

 

 

Net borrowings (repayments) on secured revolving credit facility

 

 

48,800

 

 

 

(104,500

)

Dividends paid to common stockholders

 

 

(13,406

)

 

 

(13,320

)

Distributions to noncontrolling interest

 

 

(1,601

)

 

 

(1,700

)

Taxes remitted upon vesting of restricted stock

 

 

(75

)

 

 

-

 

Deferred loan costs

 

 

(65

)

 

 

(2,738

)

Capitalized pre-offering costs

 

 

(18

)

 

 

-

 

Proceeds from borrowings on term loan

 

 

-

 

 

 

125,000

 

Cancellation of restricted stock

 

 

-

 

 

 

(50

)

Offering costs

 

 

-

 

 

 

(42

)

Net cash provided by financing activities

 

 

33,635

 

 

 

2,650

 

Decrease in cash, cash equivalents, and restricted cash

 

 

(8,468

)

 

 

(1,531

)

Cash, cash equivalents and restricted cash at beginning of period

 

 

12,640

 

 

 

9,771

 

Cash, cash equivalents and restricted cash at end of period

 

$

4,172

 

 

$

8,240

 

 

 

 

 

 

 

 

 

 

Supplemental Cash Flow Information

 

 

 

 

 

 

 

 

Interest paid

 

$

4,858

 

 

$

2,465

 

Texas gross margins taxes paid, net of reimbursement

 

 

180

 

 

 

71

 

Accrued pre-acquisition costs

 

 

116

 

 

 

100

 

Accrued deferred loan costs

 

 

9

 

 

 

27

 

 

See accompanying notes to interim consolidated financial statements.

 

 

7


MEDEQUITIES REALTY TRUST, INC. AND SUBSIDIARIES

Notes to Interim Consolidated Financial Statements

Unaudited

June 30, 2018

 

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 June 30, 2018, the Company had investments of $587.1 million, net in 33 real estate properties and seven healthcare-related real estate debt investments. 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, 2017, included in the Company’s 2017 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on February 21, 2018.

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, 2017 included in the Company’s 2017 Annual Report on Form 10-K filed with the SEC on February 21, 2018. During the six months ended June 30, 2018, there were no material changes to these policies except as noted below.

Recent Accounting Developments: On January 1, 2018, the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update (“ASU”) No. 2016-18, “Statement of Cash Flows - Restricted Cash,” became effective for the Company. This guidance requires that a statement of cash flows explain 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 consolidated statement of cash flows for the six months ended June 30, 2017 reflects an increase in the beginning of period cash, cash equivalents and restricted cash line item and a decrease in the change in other assets line item, each of approximately $0.3 million, as a result of the adoption of this new guidance.

On January 1, 2018, the FASB’s new revenue recognition standard included in Accounting Standards Codification (“ASC”) 606, Revenue from Contacts with Customers, became effective for the Company. This new revenue recognition standard superseded 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. The Company’s revenues are comprised of rental income from leasing arrangements and interest from mortgage and other notes receivable, which are specifically excluded from the new revenue recognition guidance. Therefore, implementation of this new standard did not have a significant impact on the Company’s consolidated financial position, results of operations and cash flows.

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 align better 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. The Company adopted the new standard on January 1, 2018, which had no impact on the Company’s consolidated financial statements.

8


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 expects to adopt this standard on January 1, 2019. The Company does not anticipate significant changes in the timing of income from its leases with tenants. However, the Company will be required to recognize right of use assets and related lease liabilities on its consolidated balances sheets in circumstances where the Company is the lessee. As of June 30, 2018, the Company was the lessee under two operating leases, one ground lease and a lease for its corporate office space, which are expected to result in approximately $0.5 million in rent expense for the year ended December 31, 2018. The Company does not anticipate that the adoption of this standard will have a material effect on its financial condition or results of operations. The Company is in the process of determining the amount of the right of use assets and related lease liabilities that will be recognized upon adoption.

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.

Note 3 – Investment Activity

During the six months ended June 30, 2018, the Company originated four healthcare-related real estate debt investments, funded additional principal under an existing mortgage note receivable and made one real estate acquisition for a total additional investment of $52.4 million. Additional details regarding these investments are described in more detail below.

On January 5, 2018, the Company closed on a construction mortgage note receivable with a maximum principal amount of up to $19.0 million to Haven Behavioral Healthcare, Inc. to fund the purchase and conversion of an existing long-term acute care hospital to a 72-bed inpatient psychiatric hospital in Meridian, Idaho. The loan has a three-year term and an annual interest rate of 10.0%. Interest accrues monthly and is added to the outstanding balance of the mortgage note receivable. Upon completion of the planned renovation, the Company has the exclusive right to purchase the property, for a purchase price equal to the outstanding loan balance, in a sale-leaseback transaction with a 15-year triple-net master lease with an initial yield of 9.3%. The balance outstanding under this loan was approximately $8.6 million as of June 30, 2018.

On January 31, 2018, the Company originated a $5.4 million mortgage note receivable to Louisville Rehab LP to partially fund the construction of a 42-bed inpatient rehabilitation facility in Clarksville, Indiana. The note is secured by a second lien on the facility. The three-year loan has an annual interest rate of 9.5%, which has a claw-back feature that would equate to a 15.0% rate from inception of the loan should the Company elect not to exercise its purchase option. The Company has the exclusive option to purchase the new facility upon completion for approximately $26.0 million that would be leased pursuant to a 20-year triple-net master lease guaranteed by Cobalt Medical Partners and Cobalt Rehabilitation Hospitals at an initial lease rate of 9.0%.

On February 16, 2018, the Company funded an additional $3.0 million under an existing mortgage note receivable with Medistar Corporation, which is secured by land and an existing building in Webster, Texas that increased the total balance of the loan to $9.7 million.  Effective with this additional funding, the interest rate under the loan increased from an annual interest rate of 10.0% to an annual interest rate of 12.0% and is payable upon maturity of the loan on December 31, 2018.

On March 29, 2018, the Company originated a $5.0 million mortgage note receivable with a subsidiary real estate entity of GruenePointe Holdings, LLC, which is secured by a second lien on a skilled nursing and assisted living facility (“Adora Midtown”) and a first lien on an additional parcel of land in Dallas, Texas.  The loan has a two-year term and accrues interest at an annual rate of 10.0% that is payable on the maturity date of March 29, 2020. The Company has an existing purchase option on Adora Midtown for a gross purchase price not to exceed approximately $28.0 million, plus an earnout based on the facility’s earnings before interest, taxes, depreciation, amortization and rent expense during the three years following the closing date of the acquisition.

On April 6, 2018, the Company originated a $7.0 million pre-development note receivable with Medistar Stockton Rehab, LLC. The note accrues interest at an annual rate of 10.0% that is payable on the maturity date of December 31, 2018. The note is secured by a leasehold mortgage on the development of a future healthcare facility in Stockton, California.   

On June 27, 2018, the Company acquired Southern Indiana Rehabilitation Hospital, a 60-bed inpatient rehabilitation facility located in New Albany, Indiana, a suburb of Louisville, Kentucky, for an aggregate purchase price of $23.4 million in cash. The property is 100% leased to an affiliate of Vibra Healthcare, LLC pursuant to a 15-year initial term triple-net lease with two five-year renewal options at an initial lease rate of 9.0% with annual escalators. This transaction was accounted for as an asset acquisition. The purchase price allocation for this acquisition is preliminary as the valuation is still in progress.

9


On June 27, 2018, the Company entered into a loan modification agreement for the $10.0 million mortgage note with Vibra Healthcare, LLC and Vibra Healthcare II, LLC (the “Vibra Mortgage Loan”) that converted the loan to a 10-year amortizing loan requiring monthly principal and interest payments with a balloon payment on the maturity date of June 30, 2023. As part of the modification, the borrowers repaid $1.0 million of principal. The interest rate on the loan remains unchanged at 9.0%.

Construction Mortgage Notes Activity

  As of June 30, 2018, the Company had two construction mortgage loans with funding commitments of up to $25.0 million, which are detailed in the table below (dollars in thousands):  

Investment

 

Origination Date

 

Total Commitment

 

 

Outstanding Balance at June 30, 2018

 

Sequel Construction Mortgage Loan

 

October 2017

 

$

6,000

 

 

$

5,280

 

Haven Construction Mortgage Loan

 

January 2018

 

 

19,000

 

 

 

8,625

 

Total

 

 

 

$

25,000

 

 

$

13,905

 

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 six months ended June 30, 2018 and 2017, related to tenants, or affiliated tenants, that exceed 10% of revenues:

 

 

 

% of Total Revenue for the

six months ended June 30,

 

 

 

2018

 

 

2017

 

Texas Ten Tenant

 

23.2%

 

 

24.9%

 

Baylor Scott & White Health

 

21.4%

 

 

25.3%

 

Fundamental Healthcare

 

14.4%

 

 

15.2%

 

Life Generations Healthcare

 

12.6%

 

 

14.8%

 

Vibra Healthcare

 

11.4%

 

 

13.4%

 

 

The following table contains information regarding the geographic concentration of the properties in the Company’s portfolio as of June 30, 2018, which includes percentage of rental income for the six months ended June 30, 2018 and 2017 (dollars in thousands):

 

 

 

 

 

 

 

 

 

% of Total

 

 

% of Rental Income

 

State

 

Number of

Properties

 

Gross Investment

 

 

Real Estate                              Property Investments

 

 

Six months ended

June 30, 2018

 

 

Six months ended

June 30, 2017

 

Texas

 

17

 

$

300,259

 

 

51.2%

 

 

59.8%

 

 

62.4%

 

California

 

7

 

 

154,726

 

 

26.3%

 

 

21.5%

 

 

24.7%

 

Nevada

 

4

 

 

64,350

 

 

10.9%

 

 

11.6%

 

 

9.4%

 

South Carolina

 

1

 

 

20,000

 

 

3.4%

 

 

3.1%

 

 

3.5%

 

Indiana

 

3

 

 

38,389

 

 

6.5%

 

 

2.5%

 

 

-

 

Connecticut

 

1

 

 

10,133

 

 

1.7%

 

 

1.5%

 

 

0.0%

 

 

 

33

 

$

587,857

 

 

100.0%

 

 

100.0%

 

 

100.0%

 

 

Note 4 – Debt

The table below details the Company’s debt balance at June 30, 2018 and December 31, 2017 (in thousands):

 

 

 

June 30, 2018

 

 

December 31, 2017

 

Term loan- secured

 

$

125,000

 

 

$

125,000

 

Revolving credit facility- secured

 

 

140,000

 

 

 

91,200

 

Unamortized deferred financing costs

 

 

(594

)

 

 

(677

)

 

 

$

264,406

 

 

$

215,523

 

The Company’s second amended and restated credit agreement (the “credit agreement”) 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.

At June 30, 2018 and 2017, the weighted-average interest rate under the credit agreement was 4.0% and 3.4%, respectively.

10


Total costs related to the revolving credit facility at June 30, 2018 were $3.4 million, gross ($2.3 million, net). These costs are included in Other assets, net on the consolidated balance sheet at June 30, 2018 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 June 30, 2018 was $0.8 million, gross ($0.6 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 $0.3 million and $0.5 million for the three and six months ended June 30, 2018, respectively. Amortization expense of deferred financing costs was $0.2 million and $0.6 million for the three and six months ended June 30, 2017, respectively.

The maximum available capacity under the credit facility was $288.5 million at June 30, 2018. At August 8, 2018, the Company had $271.0 million in borrowings outstanding, of which $146.0 million was outstanding under the revolving credit facility with a weighted-average interest rate of 4.08% and $125.0 million was outstanding on the term loan. As of August 8, 2018, the Company had approximately $29.2 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 credit agreement, which was 2.00% at June 30, 2018 and August 8, 2018.  

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.

The changes in the fair value of derivatives designated and that qualify as cash flow hedges are recorded in accumulated other comprehensive income. Those amounts reported in accumulated other comprehensive income 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 $0.7 million will be reclassified from other comprehensive income as a decrease to interest expense.

The fair value of the Company’s derivative financial instruments at June 30, 2018 and December 31, 2017 was an asset of $3.8 million and $1.2 million, respectively, and was included in Other assets, net on the consolidated balance sheets.

The table below details the location in the consolidated financial statements of the gain (loss) recognized on interest rate derivatives designated as cash flow hedges for the three and six months ended June 30, 2018 and 2017 (dollars in thousands):

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Amount of gain (loss) recognized in other comprehensive income (loss)

 

$

761

 

 

$

(726

)

 

$

2,470

 

 

$

(356

)

Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into interest expense

 

 

26

 

 

 

(233

)

 

 

(52

)

 

 

(233

)

Total change in accumulated other comprehensive income (loss)

 

$

735

 

 

$

(493

)

 

$

2,522

 

 

$

(123

)

As of June 30, 2018, the Company did not have any derivatives in a net liability position including accrued interest but excluding any adjustments for nonperformance risk.

Covenants

The 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 June 30, 2018.

11


Note 5 - Incentive Plan

The Company’s Amended and Restated 2014 Equity Incentive Plan (the “Plan”) provides for the grant of stock options, share awards (including restricted common stock and restricted stock units), stock appreciation rights, dividend equivalent rights, performance awards, annual incentive cash awards and other equity-based awards, including Long Term Incentive Plan (“LTIP”) units, which are convertible on a one-for-one basis into units of limited partnership interest in the Company’s operating partnership. As of June 30, 2018, the Plan had 3,356,723 shares authorized for issuance with 1,934,394 shares available for future issuance, subject to certain adjustments set forth in the Plan.

Restricted Stock

Awards of restricted stock are awards of the Company’s common stock that are subject to restrictions on transferability and other restrictions as established by the Company’s compensation committee on the date of grant that are generally subject to forfeiture if employment terminates prior to vesting. Upon vesting, all restrictions would lapse. Except to the extent restricted under the award agreement, a participant awarded restricted stock will have all of the rights of a stockholder as to those shares, including, without limitation, the right to vote and the right to receive dividends on the shares.  The awards generally cliff vest over three years or vest ratably over three years from the date of grant.  The value of the awards is determined based on the market value of the Company’s common stock on the date of grant.  The Company expenses the cost of restricted stock ratably over the vesting period.  

Restricted Stock Units

The Company’s restricted stock unit (“RSU”) awards represent the right to receive unrestricted shares of common stock based on the achievement of Company performance objectives as determined by the Company’s compensation committee.  Grants of RSUs prior to 2016 generally entitle recipients to shares of common stock equal to 0% up to 100% of the number of RSUs granted at the vesting date, based on two independent criteria measured over a three-year period: (i) the Company’s absolute total stockholder return (“TSR”) and (ii) the Company’s TSR relative to the MSCI US REIT Index (symbol: RMS).  Grants of RSUs during and subsequent to 2016 generally entitle recipients to shares of common stock equal to 0% up to 150% of the number of RSUs granted at the vesting date, based on four independent criteria measured over a three-year period: (i) the Company’s growth in gross real estate investments, (ii) the Company’s growth in Adjusted Funds From Operations (“AFFO”) per share, (iii) the Company’s absolute TSR and (iv) the Company’s TSR relative to the FTSE NAREIT Equity Healthcare REIT Index.

RSUs are not eligible to vote or subject to receive dividend equivalents prior to vesting.  Dividend equivalents are credited to the recipient and are paid only to the extent the applicable criteria are met, the RSUs vest, and the related common stock is issued.

The grant date fair value of RSUs subject to vesting based on the Company’s absolute TSR and TSR relative to a REIT index is estimated using a Monte Carlo simulation that utilizes inputs such as expected future volatility of the Company’s common stock, volatilities of certain peer companies included in the applicable indexes upon which the relative TSR performance is measured, estimated risk-free interest rate and the expected service periods of three years.  The grant date fair value of RSUs subject to vesting based on the Company’s growth in gross real estate investments and the Company’s growth in AFFO per share is determined based on the market value of the Company’s common stock on the date of grant.  The Company assesses the probability of achievement of the growth in gross real estate investments and growth in AFFO per share and records expense for the awards based on the probable achievement of these metrics. The Company recognizes the cost of RSUs ratably over the vesting period.

The following tables summarize the stock-based award activity for the six months ended June 30, 2018 and 2017:

 

 

 

Restricted Stock Awards

 

 

Weighted-Average

Grant Date Fair Value Per Restricted Stock Award

 

 

RSU Awards

 

 

Weighted-Average Grant Date Fair Value Per RSU

 

Outstanding as of December 31, 2017

 

 

313,819

 

 

$

13.42

 

 

 

660,598

 

 

$

9.52

 

Granted

 

 

46,788

 

 

 

11.14

 

 

 

937

 

 

 

11.13

 

Vested

 

 

(29,032

)

 

 

13.71

 

 

 

(8,312

)

 

 

9.35

 

Forfeited

 

 

-

 

 

 

-

 

 

 

(7,200

)

 

 

9.00

 

Outstanding as of June 30, 2018

 

 

331,575

 

 

$

13.07

 

 

 

646,023

 

 

$

9.53

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted Stock Awards

 

 

Weighted-Average

Grant Date Fair Value Per Restricted Stock Award

 

 

RSU Awards

 

 

Weighted-Average Grant Date Fair Value Per RSU

 

Outstanding as of December 31, 2016

 

 

352,793

 

 

$

14.57

 

 

 

575,775

 

 

$

8.51

 

Granted

 

 

33,780

 

 

 

11.10

 

 

 

-

 

 

 

-

 

Vested

 

 

(11,110

)

 

 

15.00