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Section 1: 10-Q (10-Q)

mrt-10q_20180930.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, 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 every Interactive Data File required to be submitted 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 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

 

 

  

Smaller 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 5, 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 Operations

4

 

Consolidated Statements of Comprehensive Income (Loss)

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

34

Item 3.

Defaults Upon Senior Securities

35

Item 4.

Mine Safety Disclosures

35

Item 5.

Other Information

35

Item 6.

Exhibits

36

Signatures

 

37

 

 

 

 

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, 2018

 

 

December 31, 2017

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Real estate properties

 

 

 

 

 

 

 

 

Land

 

$

45,594

 

 

$

43,180

 

Building and improvements

 

 

535,366

 

 

 

505,623

 

Intangible lease assets

 

 

11,387

 

 

 

11,387

 

Furniture, fixtures and equipment

 

 

3,634

 

 

 

3,538

 

Less accumulated depreciation and amortization

 

 

(55,064

)

 

 

(41,984

)

Total real estate properties, net

 

 

540,917

 

 

 

521,744

 

 

 

 

 

 

 

 

 

 

Mortgage notes receivable, net

 

 

39,973

 

 

 

18,557

 

Note receivable

 

 

7,000

 

 

 

-

 

Cash and cash equivalents

 

 

5,810

 

 

 

12,640

 

Other assets, net

 

 

34,509

 

 

 

28,662

 

Total Assets

 

$

628,209

 

 

$

581,603

 

 

 

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Debt, net

 

$

270,447

 

 

$

215,523

 

Accounts payable and accrued liabilities

 

 

7,005

 

 

 

6,605

 

Deferred revenue

 

 

1,635

 

 

 

2,722

 

Total liabilities

 

 

279,087

 

 

 

224,850

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

Common stock, $0.01 par value. Authorized 400,000 shares; 31,863 and 31,836

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

 

 

314

 

 

 

314

 

Additional paid in capital

 

 

378,211

 

 

 

375,690

 

Dividends declared

 

 

(87,646

)

 

 

(67,691

)

Retained earnings

 

 

50,450

 

 

 

44,196

 

Accumulated other comprehensive income

 

 

4,200

 

 

 

1,247

 

Total MedEquities Realty Trust, Inc. stockholders' equity

 

 

345,529

 

 

 

353,756

 

Noncontrolling interest

 

 

3,593

 

 

 

2,997

 

Total equity

 

 

349,122

 

 

 

356,753

 

Total Liabilities and Equity

 

$

628,209

 

 

$

581,603

 

 

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,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

8,399

 

 

$

15,114

 

 

$

40,649

 

 

$

43,240

 

Interest on mortgage notes receivable

 

 

1,103

 

 

 

644

 

 

 

2,964

 

 

 

1,606

 

Interest on notes receivable

 

 

176

 

 

 

8

 

 

 

341

 

 

 

27

 

Total revenues

 

 

9,678

 

 

 

15,766

 

 

 

43,954

 

 

 

44,873

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

4,388

 

 

 

3,931

 

 

 

12,765

 

 

 

11,176

 

Property related

 

 

307

 

 

 

326

 

 

 

1,726

 

 

 

1,155

 

Real estate acquisition related

 

 

610

 

 

 

33

 

 

 

902

 

 

 

362

 

Franchise, excise and other taxes

 

 

96

 

 

 

50

 

 

 

238

 

 

 

76

 

General and administrative

 

 

2,284

 

 

 

3,046

 

 

 

10,656

 

 

 

9,196

 

Total operating expenses

 

 

7,685

 

 

 

7,386

 

 

 

26,287

 

 

 

21,965

 

Operating income

 

 

1,993

 

 

 

8,380

 

 

 

17,667

 

 

 

22,908

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

 

1

 

 

 

3

 

 

 

11

 

 

 

5

 

Interest expense

 

 

(3,190

)

 

 

(2,117

)

 

 

(8,534

)

 

 

(5,440

)

 

 

 

(3,189

)

 

 

(2,114

)

 

 

(8,523

)

 

 

(5,435

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(1,196

)

 

$

6,266

 

 

$

9,144

 

 

$

17,473

 

Less: Net income attributable to noncontrolling interest

 

 

(951

)

 

 

(941

)

 

 

(2,890

)

 

 

(2,821

)

Net income (loss) attributable to common stockholders

 

$

(2,147

)

 

$

5,325

 

 

$

6,254

 

 

$

14,652

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to common stockholders per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.07

)

 

$

0.17

 

 

$

0.19

 

 

$

0.46

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

31,624

 

 

 

31,467

 

 

 

31,576

 

 

 

31,429

 

Diluted

 

 

31,624

 

 

 

31,506

 

 

 

31,618

 

 

 

31,460

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.21

 

 

$

0.21

 

 

$

0.63

 

 

$

0.63

 

 

See accompanying notes to interim consolidated financial statements.

 


4


MEDEQUITIES REALTY TRUST, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

(Unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(1,196

)

 

$

6,266

 

 

$

9,144

 

 

$

17,473

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase (decrease) in fair value of cash flow hedge

 

 

431

 

 

 

115

 

 

 

2,953

 

 

 

(8

)

Total other comprehensive income (loss)

 

 

431

 

 

 

115

 

 

 

2,953

 

 

 

(8

)

Comprehensive income (loss)

 

 

(765

)

 

 

6,381

 

 

 

12,097

 

 

 

17,465

 

Less: comprehensive income attributable to noncontrolling interest

 

 

(951

)

 

 

(941

)

 

 

(2,890

)

 

 

(2,821

)

Comprehensive income (loss) attributable to MedEquities Realty Trust, Inc.

 

$

(1,716

)

 

$

5,440

 

 

$

9,207

 

 

$

14,644

 

 

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

 

 

(28

)

 

 

-

 

 

 

(312

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(312

)

Other comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,953

 

 

 

-

 

 

 

2,953

 

Distributions to noncontrolling interest

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,294

)

 

 

(2,294

)

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

2,833

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,833

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

6,254

 

 

 

-

 

 

 

-

 

 

 

2,890

 

 

 

9,144

 

Dividends to common stockholders

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(19,955

)

 

 

-

 

 

 

-

 

 

 

(19,955

)

Balance at September 30, 2018

 

 

31,863

 

 

$

314

 

 

$

378,211

 

 

$

50,450

 

 

$

(87,646

)

 

$

4,200

 

 

$

3,593

 

 

$

349,122

 

 

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,

 

 

 

2018

 

 

2017

 

Operating activities

 

 

 

 

 

 

 

 

Net income

 

$

9,144

 

 

$

17,473

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

14,319

 

 

 

12,776

 

Stock-based compensation

 

 

2,833

 

 

 

2,673

 

Straight-line rent receivable

 

 

280

 

 

 

(4,319

)

Straight-line rent liability

 

 

112

 

 

 

118

 

Construction mortgage interest income

 

 

(870

)

 

 

-

 

Write-off of pre-acquisition costs

 

 

459

 

 

 

137

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Other assets

 

 

(6,302

)

 

 

10,686

 

Accounts payable and accrued liabilities

 

 

214

 

 

 

(9,429

)

Deferred revenues

 

 

(1,062

)

 

 

(187

)

Net cash provided by operating activities

 

 

19,127

 

 

 

29,928

 

Investing activities

 

 

 

 

 

 

 

 

Acquisitions of real estate

 

 

(23,458

)

 

 

(50,138

)

Capital expenditures for real estate

 

 

(1,370

)

 

 

(774

)

Funding of mortgage notes and note receivable

 

 

(34,028

)

 

 

(19,200

)

Repayments of mortgage note and note receivable

 

 

1,207

 

 

 

125

 

Capitalized pre-acquisition costs, net

 

 

(224

)

 

 

(274

)

Capital expenditures for corporate property

 

 

(21

)

 

 

(13

)

Net cash used in investing activities

 

 

(57,894

)

 

 

(70,274

)

Financing activities

 

 

 

 

 

 

 

 

Net borrowings (repayments) on secured revolving credit facility

 

 

54,800

 

 

 

(61,500

)

Dividends paid to common stockholders

 

 

(20,097

)

 

 

(19,988

)

Distributions to noncontrolling interest

 

 

(2,294

)

 

 

(2,483

)

Taxes remitted upon vesting of restricted stock

 

 

(330

)

 

 

(224

)

Deferred loan costs

 

 

(124

)

 

 

(2,771

)

Capitalized pre-offering costs

 

 

(18

)

 

 

(102

)

Proceeds from borrowings on term loan

 

 

-

 

 

 

125,000

 

Cancellation of restricted stock

 

 

-

 

 

 

(50

)

Offering costs

 

 

-

 

 

 

(43

)

Net cash provided by financing activities

 

 

31,937

 

 

 

37,839

 

Decrease in cash, cash equivalents, and restricted cash

 

 

(6,830

)

 

 

(2,507

)

Cash, cash equivalents and restricted cash at beginning of period

 

 

12,640

 

 

 

9,771

 

Cash, cash equivalents and restricted cash at end of period

 

$

5,810

 

 

$

7,264

 

 

 

 

 

 

 

 

 

 

Supplemental Cash Flow Information

 

 

 

 

 

 

 

 

Interest paid

 

$

7,093

 

 

$

4,348

 

Norris Academy acquisition of real estate

 

 

6,383

 

 

 

-

 

Norris Academy mortgage note conversion

 

 

(6,383

)

 

 

-

 

Accrued capital expenditures for real estate

 

 

1,103

 

 

 

-

 

Accrued funding on construction mortgage loan

 

 

1,071

 

 

 

-

 

Accrued deferred loan costs

 

 

201

 

 

 

52

 

Texas gross margins taxes paid, net of reimbursement

 

 

96

 

 

 

55

 

Accrued pre-acquisition costs

 

 

49

 

 

 

15

 

Accrued pre-offering costs

 

 

-

 

 

 

122

 

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, 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 September 30, 2018, the Company had investments of $587.9 million, net in 34 real estate properties and six 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 nine months ended September 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 nine months ended September 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. In July 2018, the FASB issued ASU No. 2018-11, “Leases- Targeted Improvements,” which provides an alternative adoption method at the transition date, allowing entities to recognize a cumulative effect adjustment to the opening balance of retained earnings upon adoption. These standards become effective for the Company 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 September 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 – Portfolio Activity

Investment Activity

During the nine months ended September 30, 2018, the Company originated four healthcare-related real estate debt investments, funded additional principal under an existing mortgage note receivable and completed two real estate acquisitions for a total additional investment of $59.5 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 $11.3 million as of September 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

9


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 and less than $0.1 million of transaction costs were capitalized.

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%. The balance outstanding under this loan was approximately $8.8 million as of September 30, 2018.

On September 21, 2018, the Company acquired the newly constructed Norris Academy, a psychiatric residential treatment facility for children and youth with neurodevelopmental disorders located in northeast Tennessee, which previously served as collateral for a construction mortgage loan. The purchase price of approximately $6.4 million was satisfied by applying the aggregate principal amount outstanding on the mortgage loan provided by the Company. The property is 100% leased to a wholly owned subsidiary of Sequel Youth and Family Services, LLC pursuant to a 15-year triple-net lease with two 10-year renewal options at an initial yield of 9.0% with annual rent escalators. This transaction was accounted for as an asset acquisition.

Texas Ten Portfolio Master Lease Update

In 2015, the Company acquired a portfolio of ten skilled nursing facilities located throughout Texas (the “Texas Ten Portfolio”) for an aggregate purchase price of $145.0 million that contains an aggregate of approximately 339,733 square feet and 1,138 licensed beds. The Texas Ten Portfolio is leased pursuant to a triple-net master lease that expires in July 2030 with the tenant (the “Texas Ten Tenant”) responsible for all costs of the facilities, including taxes, utilities, insurance, maintenance and capital improvements. Monthly base rent due under the master lease was approximately $1.1 million during 2017 and 2018. Beginning in May 2018, the Texas Ten Tenant stopped paying the monthly contractual rent due under the master lease because of ongoing operational difficulties that began in the second half of 2017 that have adversely impacted its liquidity position; however, the Texas Ten Tenant applied its full two-month base rent security deposit to satisfy the month rents due from May and June 2018.

As a result of the operational issues and related non-payment of full contractual rent due for the third quarter, the Company began recognizing revenue under the master lease as cash is received from the tenant effective July 1, 2018. The Company received approximately $0.5 million in cash during the third quarter that has been recognized as rental income. During the quarter ended September 30, 2018, the Company reserved approximately $4.8 million for the balance of straight-line rent outstanding as of June 30, 2018 that has been previously recorded in rental income. For the nine months ended September 30, 2018, the Company has recognized approximately $6.9 million in rental income, excluding straight-line rent, associated with this master lease, which represents base rent that has been collected and two months of rent for which the tenant’s security deposit has been applied.  For the three and nine months ended September 30, 2017 the Company recognized base rent of $3.2 million and $9.5 million, respectively.

Fundamental Healthcare Master Lease Update

The Company leases a portfolio of four properties to subsidiaries of Fundamental Healthcare (“Fundamental”) pursuant to a triple-net master lease with expected base rent of approximately $8.8 million for 2018. Effective October 6, 2018, the Company amended the master lease to defer approximately $2.4 million in base rent for May 2018 through March 2019 associated with Mountain’s Edge Hospital, which is currently undergoing an expansion that is expected to be completed by the end of the first quarter of 2019. Beginning in April 2019, the deferred rent amount will be due in equal monthly installments over the remainder of 2019.  Interest on the outstanding deferred rent accrues interest at 9.0% during the deferral and repayment periods. As of September 30, 2018, the deferred rent balance was $1.2 million, which is recorded in other assets on the Company’s consolidated balance sheet.

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, 2018 and 2017, related to tenants, or affiliated tenants, that exceed 10% of revenues:

 

 

 

% of Total Revenue for the

nine months ended September 30,

 

 

 

2018

 

 

2017

 

Baylor Scott & White Health

 

25.0%

 

 

24.6%

 

Fundamental Healthcare

 

16.8%

 

 

15.2%

 

Life Generations Healthcare

 

14.7%

 

 

14.4%

 

Vibra Healthcare

 

14.7%

 

 

13.2%

 

Texas Ten Tenant

 

(1)

 

 

24.1%

 

10


 

(1)

The Company began recognizing revenue under the master lease as cash is received from the Texas Ten Tenant effective July 1, 2018. As a result, total revenue for the nine months ended September 30, 2018 is less than 10% for the Texas Ten Tenant. See “Texas Ten Portfolio Master Lease Update” above.

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

 

 

 

 

 

 

 

 

 

% of Total

 

 

% of Rental Income

 

State

 

Number of

Properties

 

Gross Investment

 

 

Real Estate

Property Investments

 

 

Nine months ended

September 30, 2018

 

 

Nine months ended

September 30, 2017

 

Texas

 

17

 

$

300,259

 

 

50.4%

 

 

50.5%

 

 

61.0%

 

California

 

7

 

 

154,726

 

 

26.0%

 

 

25.7%

 

 

24.3%

 

Nevada

 

4

 

 

66,063

 

 

11.1%

 

 

13.9%

 

 

10.1%

 

South Carolina

 

1

 

 

20,000

 

 

3.3%

 

 

3.7%

 

 

3.4%

 

Indiana

 

3

 

 

38,416

 

 

6.4%

 

 

4.4%

 

 

0.6%

 

Connecticut

 

1

 

 

10,133

 

 

1.7%

 

 

1.8%

 

 

0.6%

 

Tennessee

 

1

 

 

6,384

 

 

1.1%

 

 

0.0%

 

 

-

 

 

 

34

 

$

595,981

 

 

100.0%

 

 

100.0%

 

 

100.0%

 

 

Note 4 – Debt

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

 

 

 

September 30, 2018

 

 

December 31, 2017

 

Term loan- secured

 

$

125,000

 

 

$

125,000

 

Revolving credit facility- secured

 

 

146,000

 

 

 

91,200

 

Unamortized deferred financing costs

 

 

(553

)

 

 

(677

)

 

 

$

270,447

 

 

$

215,523

 

The Company’s Second Amended and Restated Credit Agreement (as amended, 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 September 30, 2018 and 2017, the weighted-average interest rate under the Credit Agreement was 4.0% and 3.4%, respectively.

Total costs related to the revolving credit facility at September 30, 2018 were $3.7 million, gross ($2.3 million, net). These costs are included in Other assets, net on the consolidated balance sheet at September 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 September 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 operations, of $0.3 million and $0.8 million for the three and nine months ended September 30, 2018, respectively. Amortization expense of deferred financing costs was $0.2 million and $0.8 million for the three and nine months ended September 30, 2017, respectively.

Second Amendment to Credit Agreement

On October 9, 2018, the Company entered into the Second Amendment (the “Credit Amendment”) to the Credit Agreement. The Credit Amendment amends certain terms, covenants and conditions of the Credit Agreement, including, but not limited to the following:

 

increases the applicable margin from pre-amendment of 1.75% to 3.00% for LIBOR-rate loans and 0.75% to 2.00% for base-rate loans to post-amendment of 2.00% and 3.50% for LIBOR-rate loans and 1.00% and 2.50% for base-rate loans, in each case depending on the Company’s leverage ratio, until the Performance Hurdle has occurred, at which time, subject to certain conditions, the applicable margins will revert to those in effect prior to the Credit Amendment;    

 

temporarily increases the borrowing base availability attributable to the Company’s borrowing base assets, other than the Texas Ten Portfolio, until December 31, 2018;

11


 

reduces the borrowing base availability attributable to the Texas Ten Portfolio until the earlier to occur of the Texas Ten Revaluation Date and December 31, 2018; provided, that the borrowing base availability attributable to the Texas Ten Portfolio will be reduced to zero and the Texas Ten Portfolio will be excluded as a borrowing base asset if the Texas Ten Revaluation Date does not occur on or prior to December 31, 2018;

 

until the Performance Hurdle has occurred, restricts the Company’s use of proceeds from borrowings under the Credit Agreement unless approved by lenders representing two-thirds of the outstanding commitments under the Credit Agreement. Proceeds totaling approximately $20.4 million have been pre-approved for specific uses, comprised primarily of the remaining funding obligations for the expansion at Mountain’s Edge Hospital and under the Company’s construction mortgage loan to Haven Healthcare;

 

provides that the covenants relating to (i) the minimum aggregate occupancy rate for borrowing base properties and (ii) the maximum adjusted net operating income attributable to a tenant or group of affiliated tenants, shall not apply on or before March 31, 2019; and

 

does not place additional limitations regarding dividends and distributions prior to December 31, 2018; however, if a default or event of default has occurred as a result, in whole or in part, of the failure of the Texas Ten Revaluation Date to occur on or before December 31, 2018, prohibits the Company from making any dividends or distributions unless approved by lenders representing two-thirds of the outstanding commitments under the Credit Agreement.    

Under the Credit Amendment, the “Texas Ten Revaluation Date” is defined as the occurrence of all of the following: (i) the written approval by the administrative agent and lenders representing 60.0% of the outstanding commitments under the Credit Agreement of a tenant for the Texas Ten Portfolio pursuant to a lease approved in writing by the administrative agent (the “Replacement Texas Ten Lease”) and a termination of the existing lease for the Texas Ten Portfolio, all pursuant to agreements approved in writing by the administrative agent; (ii) delivery to the administrative agent of a new appraisal of, and the determination of a new appraised value for, the Texas Ten Portfolio based upon the Replacement Texas Ten Lease; and (iii) compliance with each other provision of the Credit Agreement relating to the inclusion of borrowing base assets in the determination of borrowing base availability under the Credit Agreement.

Under the Credit Amendment, the “Performance Hurdle” is defined as the occurrence of all of the following: (i) the Texas Ten Revaluation Date shall have occurred on or before December 31, 2018; (ii) the completion of the expansion at Mountain’s Edge Hospital in accordance with the terms of the Fundamental Master Lease, subject to certain other conditions; (iii) the obligations of the tenant under the Fundamental Master Lease to pay full rent and of the tenant under the Replacement Texas Ten Lease to pay rent shall have commenced; (iv) no default or event of default under the Fundamental Master Lease or the Replacement Texas Ten Lease shall have occurred; (v) the tenants under the Fundamental Master Lease and the Replacement Texas Ten Lease shall have not less than one full quarter history of paying rent and reserves with no payment defaults, late payments or delinquencies; (vi) the Company’s operating partnership shall have delivered to the administrative agent a written request to return to the original pricing spreads in effect prior to the Credit Amendment (which request may not be delivered prior to July 1, 2019), together with a written certification that the foregoing conditions have been satisfied; and (vii) lenders representing two-thirds of the outstanding commitments under the Credit Agreement shall have approved the return to the original pricing spreads in effect prior to the Credit Amendment.

The Company incurred fees associated with the Credit Amendment of approximately $0.7 million. These costs will be amortized to interest expense through July 1, 2019.

The maximum available capacity under the Credit Agreement, after giving effect to the Credit Amendment, was $287.9 million at November 9, 2018. At November 9, 2018, the Company had $276.5 million in borrowings outstanding, of which $151.5 million was outstanding under the revolving credit facility with a weighted-average interest rate of 5.04%, reflecting a 2.75% spread over LIBOR and $125.0 million was outstanding on the term loan. As of November 9, 2018, the Company had approximately $11.4 million in additional available borrowing capacity under the Credit Agreement, which may be used only for the purposes described above unless and until the Performance Hurdle has occurred.  

Management’s Assessment of Future Borrowing Base Availability and Future Plans

Management currently estimates borrowings outstanding under the Credit Agreement would exceed the borrowing base availability as of January 1, 2019 by approximately $60 million if the Texas Ten Portfolio is not re-leased on or prior to December 31, 2018, in accordance with the terms of the Credit Amendment. Management expects to obtain the necessary bank group approvals for a new lease for the entire Texas Ten Portfolio prior to the expiration of the borrowing base terms in the Credit Amendment. Discussions are in advanced stages with multiple parties that have expressed interest in the portfolio. At this time, management expects any new lease would be a triple-net lease providing for annual base rents to the Company of approximately $7.7 million with tenant responsible for property taxes, utilities, maintenance, and other operating expenses. The terms of the new lease are expected to allow the Texas Ten Portfolio to satisfy the borrowing base eligibility requirements included in the Credit Agreement and reset the borrowing base availability to a minimum of approximately $264.5 million.

Management also believes that borrowings outstanding on the Credit Agreement will be reduced by December 31, 2018. The Company has one mortgage note receivable and one note receivable that mature on December 31, 2018 with aggregate outstanding

12


principal and interest of approximately $18.6 million. Proceeds from the repayment of these loans will be applied to amounts outstanding on the credit facility, which would reduce borrowings below the revised borrowing base availability noted above.

The two events described above along with the Company’s current cash on hand and expected monthly net cash flows are expected to provide sufficient liquidity for the Company to satisfy the remaining funding obligations under the Haven construction mortgage loan and Mountain’s Edge expansion project as well as ongoing operating expenses, including interest payments under the Credit Agreement throughout the remainder of 2018 and all of 2019.  

If the Company does not satisfy the Texas Ten Revaluation Date criteria by December 31, 2018 or collect the principal and interest on the one mortgage note receivable and one note receivable that mature on December 31, 2018, management expects the Company’s borrowings under the Credit Agreement will exceed borrowing base availability. The Company would seek an additional modification of its Credit Agreement to remedy any over-advanced position, which may include, but is not limited to, granting the lenders a first mortgage interest in its real estate portfolio in order to secure all amounts outstanding under the Credit Agreement. Based upon preliminary discussions with the lead agent under the Credit Agreement, management believes that a conversion to a mortgaged-back facility is executable and the value of the Company’s real estate investments is sufficient to cover amounts outstanding on the facility.

The Company has been in compliance with all financial covenants included in the Credit Agreement and management expects to remain in compliance with the financial covenants over the next twelve months.  

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 September 30, 2018 and 2.75% at November 9, 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 $1.0 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 September 30, 2018 and December 31, 2017 was an asset of $4.2 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 nine months ended September 30, 2018 and 2017 (dollars in thousands):

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

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

 

$

509

 

 

$

(85

)

 

$

2,979

 

 

$

(441

)

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

 

 

78

 

 

 

(200

)

 

 

26

 

 

 

(433

)

Total change in accumulated other comprehensive income (loss)

 

$

431

 

 

$

115

 

 

$

2,953

 

 

$

(8

)

As of September 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

13


outstanding indebtedness under the Credit Agreement. The Company was in compliance with all financial covenants as of September 30, 2018.

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 September 30, 2018, the Plan had 3,356,723 shares authorized for issuance with 2,121,792 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.

14


The following tables summarize the stock-based award activity for the nine months ended September 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

 

 

(156,740

)

 

 

15.54

 

 

 

(8,312

)

 

 

9.35

 

Forfeited

 

 

-

 

 

 

-

 

 

 

(194,598

)

 

 

9.00

 

Outstanding as of September 30, 2018

 

 

203,867

 

 

$

11.26

 

 

 

458,625

 

 

$

9.75