Healthcare Trust, Inc. - Quarter Report: 2016 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2016
OR | |
o | 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: 000-55201
Healthcare Trust, Inc.
(Exact name of registrant as specified in its charter)
Maryland | 38-3888962 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
405 Park Ave., 14th Floor, New York, NY | 10022 | |
(Address of principal executive offices) | (Zip Code) | |
(212) 415-6500 | ||
(Registrant's telephone number, including area code) | ||
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 x No o
Indicate by check mark whether the registrant 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | |
Non-accelerated filer o | (Do not check if a smaller reporting company) | Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
As of October 31, 2016, the registrant had 88,837,166 shares of common stock outstanding.
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page | |
2
Part I — FINANCIAL INFORMATION
Item 1. Financial Statements.
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share and per share data)
September 30, | December 31, | |||||||
2016 | 2015 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Real estate investments, at cost: | ||||||||
Land | $ | 187,868 | $ | 192,790 | ||||
Buildings, fixtures and improvements | 1,871,126 | 1,885,713 | ||||||
Construction in progress | 43,070 | 21,309 | ||||||
Acquired intangible assets | 234,749 | 241,459 | ||||||
Total real estate investments, at cost | 2,336,813 | 2,341,271 | ||||||
Less: accumulated depreciation and amortization | (218,077 | ) | (146,669 | ) | ||||
Total real estate investments, net | 2,118,736 | 2,194,602 | ||||||
Cash and cash equivalents | 50,434 | 24,474 | ||||||
Restricted cash | 4,571 | 4,647 | ||||||
Investment securities, at fair value | — | 1,078 | ||||||
Straight-line rent receivable, net | 13,875 | 11,470 | ||||||
Prepaid expenses and other assets | 22,202 | 21,707 | ||||||
Deferred costs, net | 10,307 | 11,864 | ||||||
Total assets | $ | 2,220,125 | $ | 2,269,842 | ||||
LIABILITIES AND EQUITY | ||||||||
Mortgage notes payable, net of deferred financing costs | $ | 142,627 | $ | 157,305 | ||||
Mortgage premiums and discounts, net | 918 | 2,403 | ||||||
Credit facility | 476,500 | 430,000 | ||||||
Market lease intangible liabilities, net | 20,775 | 22,994 | ||||||
Accounts payable and accrued expenses (including $674 and $536 due to related parties as of September 30, 2016 and December 31, 2015, respectively) | 28,607 | 38,449 | ||||||
Deferred rent | 5,790 | 4,356 | ||||||
Distributions payable | 12,346 | 12,518 | ||||||
Total liabilities | 687,563 | 668,025 | ||||||
Preferred stock, $0.01 par value, 50,000,000 authorized, none issued and outstanding as of September 30, 2016 and December 31, 2015 | — | — | ||||||
Common stock, $0.01 par value, 300,000,000 shares authorized, 88,574,565 and 86,135,411 shares of common stock issued and outstanding as of September 30, 2016 and December 31, 2015, respectively | 886 | 861 | ||||||
Additional paid-in capital | 1,963,398 | 1,907,549 | ||||||
Accumulated other comprehensive income (loss) | — | (6 | ) | |||||
Accumulated deficit | (440,846 | ) | (316,284 | ) | ||||
Total stockholders' equity | 1,523,438 | 1,592,120 | ||||||
Non-controlling interests | 9,124 | 9,697 | ||||||
Total equity | 1,532,562 | 1,601,817 | ||||||
Total liabilities and equity | $ | 2,220,125 | $ | 2,269,842 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
3
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except for share and per share data)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Revenues: | ||||||||||||||||
Rental income | $ | 24,980 | $ | 24,495 | $ | 77,984 | $ | 68,282 | ||||||||
Operating expense reimbursements | 4,196 | 3,487 | 11,677 | 9,344 | ||||||||||||
Resident services and fee income | 46,428 | 36,011 | 137,084 | 103,004 | ||||||||||||
Contingent purchase price consideration | (83 | ) | 37 | 142 | 487 | |||||||||||
Total revenues | 75,521 | 64,030 | 226,887 | 181,117 | ||||||||||||
Expenses: | ||||||||||||||||
Property operating and maintenance | 44,041 | 33,506 | 123,527 | 89,612 | ||||||||||||
Impairment on sale of real estate investments | — | — | 389 | — | ||||||||||||
Operating fees to related parties | 5,199 | 4,312 | 15,526 | 7,722 | ||||||||||||
Acquisition and transaction related | 958 | 3,315 | 3,059 | 8,502 | ||||||||||||
General and administrative | 2,874 | 2,442 | 9,277 | 7,574 | ||||||||||||
Depreciation and amortization | 27,347 | 34,162 | 76,245 | 97,193 | ||||||||||||
Total expenses | 80,419 | 77,737 | 228,023 | 210,603 | ||||||||||||
Operating loss | (4,898 | ) | (13,707 | ) | (1,136 | ) | (29,486 | ) | ||||||||
Other income (expense): | ||||||||||||||||
Interest expense | (4,923 | ) | (3,081 | ) | (14,783 | ) | (6,838 | ) | ||||||||
Interest and other income | 2 | 66 | 45 | 555 | ||||||||||||
Gain on sale of real estate investment | 1,330 | — | 1,330 | — | ||||||||||||
Gain on sale of investment securities | 56 | 160 | 56 | 446 | ||||||||||||
Total other expenses | (3,535 | ) | (2,855 | ) | (13,352 | ) | (5,837 | ) | ||||||||
Loss before income tax | (8,433 | ) | (16,562 | ) | (14,488 | ) | (35,323 | ) | ||||||||
Income tax benefit (expense) | (260 | ) | 369 | 1,215 | 387 | |||||||||||
Net loss | (8,693 | ) | (16,193 | ) | (13,273 | ) | (34,936 | ) | ||||||||
Net loss attributable to non-controlling interests | 29 | 85 | 54 | 187 | ||||||||||||
Net loss attributable to stockholders | (8,664 | ) | (16,108 | ) | (13,219 | ) | (34,749 | ) | ||||||||
Other comprehensive loss: | ||||||||||||||||
Unrealized gain (loss) on investment securities, net | (43 | ) | (177 | ) | 6 | (507 | ) | |||||||||
Comprehensive loss attributable to stockholders | $ | (8,707 | ) | $ | (16,285 | ) | $ | (13,213 | ) | $ | (35,256 | ) | ||||
Basic and diluted weighted-average shares outstanding | 88,285,390 | 85,705,595 | 87,472,855 | 84,988,240 | ||||||||||||
Basic and diluted net loss per share | $ | (0.10 | ) | $ | (0.19 | ) | $ | (0.15 | ) | $ | (0.41 | ) | ||||
Distributions declared per share | $ | 0.43 | $ | 0.43 | $ | 1.27 | $ | 1.27 | ||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
4
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 2016
(In thousands, except for share data)
(Unaudited)
Common Stock | Accumulated Other Comprehensive Income | |||||||||||||||||||||||||||||
Number of Shares | Par Value | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders' Equity | Non-controlling Interests | Total Equity | ||||||||||||||||||||||||
Balance, December 31, 2015 | 86,135,411 | $ | 861 | $ | 1,907,549 | $ | (6 | ) | $ | (316,284 | ) | $ | 1,592,120 | $ | 9,697 | $ | 1,601,817 | |||||||||||||
Common stock issued through distribution reinvestment plan | 2,441,759 | 25 | 55,946 | — | — | 55,971 | — | 55,971 | ||||||||||||||||||||||
Common stock repurchases | (6,660 | ) | — | (170 | ) | — | — | (170 | ) | — | (170 | ) | ||||||||||||||||||
Equity-based compensation, net | 4,055 | — | 73 | — | — | 73 | — | 73 | ||||||||||||||||||||||
Distributions declared | — | — | — | — | (111,343 | ) | (111,343 | ) | — | (111,343 | ) | |||||||||||||||||||
Distributions to non-controlling interest holders | — | — | — | — | — | — | (519 | ) | (519 | ) | ||||||||||||||||||||
Unrealized gain on investments | — | — | — | 6 | — | 6 | — | 6 | ||||||||||||||||||||||
Net loss | — | — | — | — | (13,219 | ) | (13,219 | ) | (54 | ) | (13,273 | ) | ||||||||||||||||||
Balance, September 30, 2016 | 88,574,565 | $ | 886 | $ | 1,963,398 | $ | — | $ | (440,846 | ) | $ | 1,523,438 | $ | 9,124 | $ | 1,532,562 | ||||||||||||||
The accompanying notes are an integral part of this unaudited consolidated financial statement.
5
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended September 30, | ||||||||
2016 | 2015 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (13,273 | ) | $ | (34,936 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 76,245 | 97,193 | ||||||
Amortization of deferred financing costs | 3,373 | 2,676 | ||||||
Amortization of mortgage premiums and discounts, net | (1,485 | ) | (1,402 | ) | ||||
Amortization of market lease and other intangibles, net | 113 | (119 | ) | |||||
Bad debt expense | 8,157 | 3,766 | ||||||
Equity-based compensation | 73 | 36 | ||||||
Gain on sale of investment securities | (56 | ) | (446 | ) | ||||
Gain on sale of real estate investments, net | (941 | ) | — | |||||
Changes in assets and liabilities: | ||||||||
Straight-line rent receivable | (6,534 | ) | (7,296 | ) | ||||
Prepaid expenses and other assets | (5,146 | ) | (8,141 | ) | ||||
Accounts payable, accrued expenses and other liabilities | 1,897 | 7,007 | ||||||
Deferred rent | 1,434 | (736 | ) | |||||
Restricted cash | 76 | (1,169 | ) | |||||
Net cash provided by operating activities | 63,933 | 56,433 | ||||||
Cash flows from investing activities: | ||||||||
Investments in real estate | (21,761 | ) | (312,992 | ) | ||||
Deposits paid for real estate acquisitions | — | (3,150 | ) | |||||
Deposit received for unconsummated disposition | 100 | — | ||||||
Capital expenditures | (5,727 | ) | (4,984 | ) | ||||
Purchases of investment securities | — | (93 | ) | |||||
Proceeds from sales of investment securities | 1,140 | 19,278 | ||||||
Proceeds from sale of real estate investments | 26,065 | — | ||||||
Net cash used in investing activities | (183 | ) | (301,941 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from credit facility | 46,500 | 185,000 | ||||||
Payments on mortgage notes payable | (15,085 | ) | (6,023 | ) | ||||
Payments of deferred financing costs | (958 | ) | (12,407 | ) | ||||
Proceeds from issuance of common stock | — | 6 | ||||||
Common stock repurchases | (12,184 | ) | (5,921 | ) | ||||
Payments of offering costs and fees related to common stock issuances | — | (629 | ) | |||||
Distributions paid | (55,544 | ) | (49,358 | ) | ||||
Contributions from non-controlling interest holders | — | 500 | ||||||
Distributions to non-controlling interest holders | (519 | ) | (526 | ) | ||||
Net cash used in financing activities | (37,790 | ) | 110,642 | |||||
Net change in cash and cash equivalents | 25,960 | (134,866 | ) | |||||
Cash and cash equivalents, beginning of period | 24,474 | 182,617 | ||||||
Cash and cash equivalents, end of period | $ | 50,434 | $ | 47,751 | ||||
6
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended September 30, | ||||||||
2016 | 2015 | |||||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid for interest | $ | 13,883 | $ | 5,170 | ||||
Cash paid for taxes | 339 | 312 | ||||||
Non-cash investing and financing activities: | ||||||||
Accrued repurchases included in accounts payable and accrued expenses | $ | — | $ | 4,472 | ||||
Assumption of mortgage notes payable used to acquire investments in real estate | — | 38,387 | ||||||
Premiums on assumed mortgage notes payable | — | 2,834 | ||||||
Liabilities assumed in real estate acquisitions | — | 604 | ||||||
Common stock issued through distribution reinvestment plan | 55,971 | 58,848 | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
7
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
Note 1 — Organization
Healthcare Trust, Inc. (including, as required by context, Healthcare Trust Operating Partnership, LP (the "OP") and its subsidiaries, the "Company") invests in healthcare real estate, such as seniors housing and medical office buildings ("MOB"), located in the United States for investment purposes. As of September 30, 2016, the Company owned 163 properties located in 29 states and comprised of 8.4 million rentable square feet.
The Company, which was incorporated on October 15, 2012, is a Maryland corporation that elected and qualified to be taxed as a real estate investment trust for U.S. federal income tax purposes ("REIT") beginning with its taxable year ended December 31, 2013. Substantially all of the Company's business is conducted through the OP.
In February 2013, the Company commenced its initial public offering (the "IPO") on a "reasonable best efforts" basis of up to $1.7 billion of common stock, $0.01 par value per share, at a price of $25.00 per share, subject to certain volume and other discounts. The Company closed its IPO in November 2014. As of September 30, 2016, the Company had received $2.2 billion from its IPO and from proceeds received under the distribution reinvestment plan ("DRIP").
In 2015, the Company’s board of directors (the "Board") determined that it was in the Company’s best interest to evaluate strategic alternatives, including a listing on a national securities exchange. In April 2016, the Board, led by its independent directors, announced that it had initiated a strategic review process (the "Strategic Review") to identify, examine, and consider a range of strategic alternatives available to the Company with the objective of maximizing shareholder value. The Board formed a special committee (the "Special Committee") to evaluate various options in connection with the Strategic Review. The Special Committee engaged Morgan Stanley & Co. LLC ("Morgan Stanley") and KeyBanc Capital Markets ("KeyBanc") as financial advisors, with Morgan Stanley as lead advisor. The Board also formed a separate special committee to address conflicts of interest. The Board retained Gibson, Dunn & Crutcher LLP ("Gibson") as special legal counsel in connection with the Strategic Review.
On October 6, 2016, the Company announced that the Special Committee had concluded the Strategic Review and recommended that the Company continue to execute its business plan and focus on managing and strengthening its assets. The Special Committee and the committee to address conflicts of interest were terminated by the Board.
On April 7, 2016 (the "NAV Pricing Date"), the Board approved an estimate of per share net asset value ("NAV"). Subsequent valuations will occur periodically, at the discretion of the Board, provided that such estimates will be made at least annually. Pursuant to the DRIP, the Company's stockholders can elect to reinvest distributions by purchasing shares of the Company's common stock. Prior to the NAV Pricing Date, the Company offered shares pursuant to the DRIP at $23.75 per share, which was 95% of the initial offering price of shares of common stock in the IPO. Effective April 7, 2016, the Company began offering shares pursuant to the DRIP at the then-current NAV approved by the Board (see Note 8 — Common Stock).
The Company has no employees. Healthcare Trust Advisors, LLC (the "Advisor") has been retained by the Company to manage the Company's affairs on a day-to-day basis. The Company has retained Healthcare Trust Properties, LLC (the "Property Manager") to serve as the Company's property manager. The Advisor and Property Manager are under common control with AR Global Investments, LLC (the successor business to AR Capital, LLC, "AR Global"), the parent of the Company's sponsor, American Realty Capital VII, LLC (the "Sponsor"), as a result of which they are related parties, and each have received or will receive compensation, fees and expense reimbursements from the Company for services related to managing its business. The Advisor, Healthcare Trust Special Limited Partnership, LLC (the "Special Limited Partner") and Property Manager also have received or will receive compensation, fees and expense reimbursements related to the investment and management of the Company's assets.
Note 2 — Summary of Significant Accounting Policies
The accompanying unaudited consolidated financial statements of the Company included herein were prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The information furnished includes all adjustments and accruals of a normal recurring nature, which, in the opinion of management, are necessary for a fair presentation of results for the interim periods. All intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the three and nine months ended September 30, 2016 are not necessarily indicative of the results for the entire year or any subsequent interim period.
8
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2015, which are included in the Company's Annual Report on Form 10-K filed with the SEC on March 11, 2016. There have been no significant changes to the Company's significant accounting policies during the nine months ended September 30, 2016 other than the updates described below.
Reclassifications
Certain prior year amounts within rental income, resident services and fee income, contingent purchase price consideration, interest and other income, cash flows from operating activities and cash flows from financing activities have been reclassified to conform with the current year presentation.
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and consolidated joint venture arrangements in which the Company has controlling financial interests. The portions of the consolidated joint venture arrangements not owned by the Company are presented as non-controlling interests as of and during the period consolidated. All inter-company accounts and transactions have been eliminated in consolidation.
The Company evaluates its relationships and investments to determine if it has variable interests. A variable interest is an investment or other interest that will absorb portions of an entity's expected losses or receive portions of the entity's expected residual returns. If the Company determines that it has a variable interest in an entity, it evaluates whether such interest is in a variable interest entity ("VIE"). A VIE is broadly defined as an entity where either (1) the equity investors as a group, if any, lack the power through voting or similar rights to direct the activities of an entity that most significantly impact the entity's economic performance or (2) the equity investment at risk is insufficient to finance that entity's activities without additional subordinated financial support. The Company consolidates any VIEs when it is determined to be the primary beneficiary of the VIE's operations.
A variable interest holder is considered to be the primary beneficiary of a VIE if it has the power to direct the activities of a VIE that most significantly impact the entity's economic performance and has the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to the VIE. The Company qualitatively assesses whether it is (or is not) the primary beneficiary of a VIE. Consideration of various factors include, but are not limited to, the Company's ability to direct the activities that most significantly impact the entity's economic performance, its form of ownership interest, its representation on the entity's governing body, the size and seniority of its investment, its ability and the rights of other investors to participate in policy making decisions and to replace the manager of and/or liquidate the entity.
The Company continually evaluates the need to consolidate joint ventures based on standards set forth in GAAP. In determining whether the Company has a controlling interest in a joint venture and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, power to make decisions and contractual and substantive participating rights of the partners/members as well as whether the entity is a VIE for which the Company is the primary beneficiary.
The Company has determined the OP is a VIE of which the Company is the primary beneficiary. Substantially all of the Company's assets and liabilities are held by the OP.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued revised guidance relating to revenue recognition. Under the revised guidance, an entity is required to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The revised guidance was to become effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption was not permitted under GAAP. The revised guidance allows entities to apply the full retrospective or modified retrospective transition method upon adoption. In July 2015, the FASB deferred the effective date of the revised guidance by one year to annual reporting periods beginning after December 15, 2017, although entities will be allowed to early adopt the guidance as of the original effective date. The Company has not yet selected a transition method and is currently evaluating the impact of this new guidance.
9
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
In January 2015, the FASB issued updated guidance that eliminates from GAAP the concept of an event or transaction that is unusual in nature and occurs infrequently being treated as an extraordinary item. The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Any amendments may be applied either prospectively or retrospectively to all prior periods presented in the financial statements. Early adoption was permitted provided that the guidance was applied from the beginning of the fiscal year of adoption. The Company elected to adopt this new guidance as of September 30, 2015. The adoption of this guidance did not have a material impact on the Company's financial position, results of operations and cash flows.
In February 2015, the FASB amended the accounting for consolidation of certain legal entities. The amendments modify the evaluation of whether certain legal entities are VIEs or voting interest entities, eliminates the presumption that a general partner should consolidate a limited partnership and affect the consolidation analysis of reporting entities that are involved with VIEs (particularly those that have fee arrangements and related party relationships). The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption was permitted, including adoption in an interim period. The Company has elected to adopt this guidance effective January 1, 2016. The Company has evaluated the impact of the adoption of this new guidance on its consolidated financial statements and has determined that the OP is considered a VIE. However, the Company meets the disclosure exemption criteria as the Company is the primary beneficiary of the VIE and the Company’s partnership interest in a business and the assets of the OP can be used for purposes other than settling its obligations, such as paying distributions. As such, this standard did not have a material impact on the Company's consolidated financial statements.
In April 2015, the FASB amended the presentation of debt issuance costs on the balance sheet. The amendment requires that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the carrying amount of that debt liability. In August 2015, the FASB added that, for line of credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line, regardless of whether or not there are any outstanding borrowings. The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption was permitted for financial statements that have not previously been issued. The Company has elected to adopt this guidance effective January 1, 2016. The adoption of this revised guidance resulted in the reclassification of $2.0 million and $2.2 million of deferred financing costs related to the Company's mortgage notes payable from deferred costs, net to mortgage notes payable, net of deferred financing costs in the Company's consolidated balance sheets as of December 31, 2015.
In September 2015, the FASB issued an update that eliminates the requirement to adjust provisional amounts from a business combination and the related impact on earnings by restating prior period financial statements for measurement period adjustments. The new guidance requires that the cumulative impact of measurement period adjustments on current and prior periods, including the prior period impact on depreciation, amortization and other income statement items and their related tax effects, shall be recognized in the period the adjustment amount is determined. The cumulative adjustment would be reflected within the respective financial statement line items affected. The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption was permitted. The Company elected to adopt this guidance as of September 30, 2015. The adoption of this guidance did not have a material impact to the Company's financial position, results of operations and cash flows.
In January 2016, the FASB issued an update that amends the recognition and measurement of financial instruments. The new guidance revises an entity’s accounting related to equity investments and the presentation of certain fair value changes for financial liabilities measured at fair value. Among other things, it also amends the presentation and disclosure requirements associated with the fair value of financial instruments. The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is not permitted for most of the amendments in the update. The Company is currently evaluating the impact of this new guidance.
10
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
In February 2016, the FASB issued an update that sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The revised guidance is effective on January 1, 2019. Early adoption is permitted. The Company is currently evaluating the impact of this new guidance.
In March 2016, the FASB issued guidance which requires an entity to determine whether the nature of its promise to provide goods or services to a customer is performed in a principal or agent capacity and to recognize revenue in a gross or net manner based on its principal/agent designation. This guidance is effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the impact of this new guidance.
In March 2016, the FASB issued an update that changes the accounting for certain aspects of share-based compensation. Among other things, the revised guidance allows companies to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. The revised guidance is effective for reporting periods beginning after December 15, 2016. Early adoption is permitted. The Company has adopted the provisions of this guidance beginning January 1, 2016 and determined that there is no impact to the Company’s consolidated financial position, results of operations and cash flows. The Company's policy is to account for forfeitures as they occur.
In August 2016, the FASB issued guidance on how certain transactions should be classified and presented in the statement of cash flows as either operating, investing or financing activities. Among other things, the update provides specific guidance on where to classify debt prepayment and extinguishment costs, payments for contingent consideration made after a business combination and distributions received from equity method investments. The revised guidance is effective for reporting periods beginning after December 15, 2017. Early adoption is permitted. We are currently evaluating the impact of this new guidance.
In October 2016, the FASB issued guidance where a reporting entity will need to evaluate if it should consolidate a VIE. The amendments change the evaluation of whether a reporting entity is the primary beneficiary of a VIE by changing how a single decision maker of a VIE treats indirect interests in the entity held through related parties that are under common control with the reporting entity. The revised guidance is effective for reporting periods beginning after December 15, 2016. Early adoption is permitted. The Company is currently evaluating the impact of this new guidance.
11
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
Note 3 — Real Estate Investments
The Company owned 163 properties as of September 30, 2016. The Company invests in medical office buildings ("MOB"), seniors housing communities and other healthcare-related facilities primarily to expand and diversify its portfolio and revenue base. The following table presents the allocation of the assets acquired and capitalized construction in progress during the nine months ended September 30, 2016 and 2015.
Nine Months Ended September 30, | ||||||||
(Dollar amounts in thousands) | 2016 | 2015 | ||||||
Real estate investments, at cost: | ||||||||
Land | $ | — | $ | 49,921 | ||||
Buildings, fixtures and improvements | — | 257,516 | ||||||
Construction in progress | 21,761 | 17,977 | ||||||
Total tangible assets | 21,761 | 325,414 | ||||||
Acquired intangibles: | ||||||||
In-place leases | — | 38,885 | ||||||
Market lease and other intangible assets | — | 1,653 | ||||||
Market lease liabilities | — | (8,135 | ) | |||||
Total assets and liabilities acquired, net | 21,761 | 357,817 | ||||||
Mortgage notes payable assumed to acquire real estate investments | — | (38,387 | ) | |||||
Premiums on mortgages assumed | — | (2,834 | ) | |||||
Other assets and liabilities, net | — | (604 | ) | |||||
Deposits for real estate acquisitions | — | (3,000 | ) | |||||
Cash paid for acquired real estate investments | $ | 21,761 | $ | 312,992 | ||||
Number of properties purchased | — | 31 | ||||||
The following table presents future minimum base rental cash payments due to the Company over the next five years and thereafter as of September 30, 2016. These amounts exclude contingent rent payments, as applicable, that may be collected from certain tenants based on provisions related to sales thresholds and increases in annual rent based on exceeding certain economic indexes, among other items.
(In thousands) | Future Minimum Base Rent Payments | |||
October 1, 2016 — December 31, 2016 | $ | 23,503 | ||
2017 | 88,552 | |||
2018 | 83,867 | |||
2019 | 77,503 | |||
2020 | 72,181 | |||
Thereafter | 447,168 | |||
Total | $ | 792,774 | ||
As of September 30, 2016 and 2015, the Company did not have any tenants (including for this purpose, all affiliates of such tenants) whose annualized rental income on a straight-line basis represented 10% or greater of total annualized rental income for the portfolio on a straight-line basis.
12
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
The following table lists the states where the Company had concentrations of properties where annualized rental income on a straight-line basis represented 10% or more of consolidated annualized rental income on a straight-line basis for all properties as of September 30, 2016 and 2015:
September 30, | ||||
State | 2016 | 2015 | ||
Florida | 17.6% | 22.0% | ||
Georgia | 10.9% | * | ||
Iowa | * | 11.9% | ||
Pennsylvania | 11.0% | 13.3% | ||
_______________
* | State's annualized rental income on a straight-line basis was not greater than 10% of total annualized rental income for all portfolio properties as of the period specified. |
Intangible Assets and Liabilities
Acquired intangible assets and liabilities consisted of the following as of the periods presented:
September 30, 2016 | December 31, 2015 | |||||||||||||||||||||||
(In thousands) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||
Intangible assets: | ||||||||||||||||||||||||
In-place leases | $ | 195,940 | $ | 108,294 | $ | 87,646 | $ | 202,608 | $ | 82,390 | $ | 120,218 | ||||||||||||
Intangible market lease assets | 28,221 | 5,205 | 23,016 | 28,262 | 3,393 | 24,869 | ||||||||||||||||||
Other intangible assets | 10,588 | 506 | 10,082 | 10,589 | 309 | 10,280 | ||||||||||||||||||
Total acquired intangible assets | $ | 234,749 | $ | 114,005 | $ | 120,744 | $ | 241,459 | $ | 86,092 | $ | 155,367 | ||||||||||||
Intangible market lease liabilities | $ | 25,213 | $ | 4,438 | $ | 20,775 | $ | 25,613 | $ | 2,619 | $ | 22,994 | ||||||||||||
The following table discloses amounts recognized within the consolidated statements of operations and comprehensive loss related to amortization of in-place leases and other intangible assets, amortization and accretion of above- and below-market lease assets and liabilities, net and the accretion of above-market ground leases, for the periods presented:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(In thousands) | 2016 | 2015 | 2016 | 2015 | ||||||||||||
Amortization of in-place leases and other intangible assets(1) | $ | 12,595 | $ | 24,833 | $ | 31,343 | $ | 65,189 | ||||||||
Amortization and (accretion) of above- and below-market leases, net(2) | (44 | ) | (110 | ) | (171 | ) | (282 | ) | ||||||||
Accretion of above-market ground leases(3) | 43 | 50 | 129 | 150 | ||||||||||||
_______________
(1) | Reflected within depreciation and amortization expense |
(2) | Reflected within rental income |
(3) | Reflected within property operating and maintenance expense |
13
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
The following table provides the projected amortization expense and adjustments to revenues for the next five years:
(In thousands) | October 1, 2016 — December 31, 2016 | 2017 | 2018 | 2019 | 2020 | |||||||||||||||
In-place lease assets | $ | 7,204 | $ | 15,573 | $ | 13,302 | $ | 10,732 | $ | 8,795 | ||||||||||
Other intangible assets | 66 | 265 | 265 | 265 | 265 | |||||||||||||||
Total to be added to amortization expense | $ | 7,270 | $ | 15,838 | $ | 13,567 | $ | 10,997 | $ | 9,060 | ||||||||||
Above-market lease assets | $ | (541 | ) | $ | (1,877 | ) | $ | (1,357 | ) | $ | (1,068 | ) | $ | (741 | ) | |||||
Below-market lease liabilities | 582 | 2,089 | 1,860 | 1,580 | 1,423 | |||||||||||||||
Total to be added to rental income | $ | 41 | $ | 212 | $ | 503 | $ | 512 | $ | 682 | ||||||||||
Below-market ground lease assets | $ | 53 | $ | 212 | $ | 212 | $ | 212 | $ | 212 | ||||||||||
Above-market ground lease liabilities | (10 | ) | (40 | ) | (40 | ) | (40 | ) | (40 | ) | ||||||||||
Total to be added to property operating and maintenance expense | $ | 43 | $ | 172 | $ | 172 | $ | 172 | $ | 172 | ||||||||||
Real Estate Sales
During the nine months ended September 30, 2016, the Company sold Gregory Ridge Living Center ("Gregory Ridge") and Parkway Health Care Center ("Parkway"), both located in Kansas City, Missouri. During the three and nine months ended September 30, 2016, the Company sold Redwood Radiology and Outpatient Center ("Redwood Radiology") located in Santa Rosa, California. The following table summarizes the three properties sold during the nine months ended September 30, 2016. The Company did not sell any properties during the three and nine months ended September 30, 2015.
Property (In thousands) | Disposition Date | Contract Sale Price | Gain (Impairment) on Sale, Net | |||||||
Gregory Ridge Living Center - Kansas City, MO | June 1, 2016 | $ | 4,300 | $ | (126 | ) | ||||
Parkway Health Care Center - Kansas City, MO | June 1, 2016 | 4,450 | (263 | ) | ||||||
Redwood Radiology and Outpatient Center - Santa Rosa, CA | September 30, 2016 | 17,500 | 1,330 | |||||||
Total | 26,250 | $ | 941 | |||||||
Less: disposal costs (1) | (185 | ) | ||||||||
Proceeds from sale of real estate investments | $ | 26,065 | ||||||||
_______________
(1) As of September 30, 2016, the Company had $0.2 million of unpaid brokerage commissions.
The disposals of Gregory Ridge, Parkway and Redwood Radiology did not represent a strategic shift that has a major effect on the Company’s operations and financial results. Accordingly, the results of operations of Gregory Ridge, Parkway and Redwood Radiology remain classified within continuing operations for all periods presented until the respective dates of disposal of Gregory Ridge, Parkway and Redwood Radiology.
Note 4 — Investment Securities
As of September 30, 2016, the company had no investment securities.
As of December 31, 2015, the Company had investment securities with an aggregate fair value of $1.1 million. These investments were considered available-for-sale securities and, therefore, increases or decreases in the fair value of these investments are recorded in accumulated other comprehensive income as a component of equity on the consolidated balance sheets unless the securities are considered to be other than temporarily impaired, at which time the losses would be reclassified to expense.
14
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
The following table details the unrealized gains and losses on investment securities as of December 31, 2015:
(In thousands) | Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
December 31, 2015 | ||||||||||||||||
Equity securities | $ | 1,084 | $ | 19 | $ | (25 | ) | $ | 1,078 | |||||||
During the three and nine months ended September 30, 2016, the Company sold its investments in preferred stock with a cost basis and sale price of $1.1 million, which resulted in a realized gain on sale of investment of $0.1 million.
During the three months ended September 30, 2015, the Company sold certain of its investments in preferred stock, common stock and real estate income funds with a cost basis of $14.9 million for $15.1 million, which resulted in a realized gain on sale of investment of $0.2 million. During the nine months ended September 30, 2015, the Company sold certain of its investments in preferred stock, common stock and real estate income funds and its investment in a senior note with a cost basis of $18.8 million for $19.3 million, which resulted in a realized gain on sale of investment of $0.4 million.
Note 5 — Revolving Credit Facility
On March 21, 2014, the Company entered into a senior secured credit facility in the amount of $50.0 million (the "Credit Facility"). On April 15, 2014 the amount available under the Credit Facility was increased to $200.0 million.
On June 26, 2015, the Company entered into an amendment to the Credit Facility which, among other things, allowed for borrowings of up to $500.0 million. On July 31, 2015, the available borrowings were increased to $565.0 million. The Credit Facility also contains a subfacility for letters of credit of up to $25.0 million. The Credit Facility contains an "accordion" feature to allow the Company, under certain circumstances, to increase the aggregate borrowings under the Credit Facility to a maximum of $750.0 million.
The Company has the option, based upon its leverage, to have the Credit Facility priced at either: (a) LIBOR, plus an applicable margin that ranges from 1.60% to 2.20%; or (b) the Base Rate, plus an applicable margin that ranges from 0.35% to 0.95%. Base Rate is defined in the Credit Facility as the greater of (i) the fluctuating annual rate of interest announced from time to time by the lender as its “prime rate,” (ii) 0.5% above the federal funds effective rate or (iii) the applicable one-month LIBOR plus 1.0%.
The Credit Facility provides for monthly interest payments for each Base Rate loan and periodic payments for each LIBOR loan, based upon the applicable LIBOR loan period, with all principal outstanding being due on the maturity date of March 21, 2019. The Credit Facility may be prepaid at any time, in whole or in part, without premium or penalty (subject to standard breakage costs). In the event of a default, the lender has the right to terminate its obligations under the Credit Facility and to accelerate the payment on any unpaid principal amount of all outstanding loans.
As of September 30, 2016, the balance outstanding under the Credit Facility was $476.5 million, with an effective interest rate of 2.0%. The Company's unused borrowing capacity was $41.5 million, based on assets assigned to the Credit Facility as of September 30, 2016. Availability of borrowings is based on a pool of eligible unencumbered real estate assets. There was $430.0 million in advances outstanding as of December 31, 2015.
The Credit Facility requires the Company to meet certain financial covenants, including the maintenance of certain financial ratios (such as specified debt to equity and debt service coverage ratios) as well as the maintenance of a minimum net worth. As of September 30, 2016, the Company was in compliance with the financial covenants under the Credit Facility.
15
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
Note 6 — Mortgage Notes Payable
The following table reflects the Company's mortgage notes payable as of September 30, 2016 and December 31, 2015:
Outstanding Loan Amount as of | Effective Interest Rate | ||||||||||||||||
Portfolio | Encumbered Properties | September 30, 2016 | December 31, 2015 | Interest Rate | Maturity | ||||||||||||
(In thousands) | (In thousands) | ||||||||||||||||
Bowie Gateway Medical Center - Bowie, MD | — | $ | — | $ | 5,969 | 6.18 | % | Fixed | Sep. 2016 | ||||||||
Medical Center of New Windsor - New Windsor, NY | 1 | 8,633 | 8,720 | 6.39 | % | Fixed | Sep. 2017 | ||||||||||
Plank Medical Center - Clifton Park, NY | 1 | 3,427 | 3,461 | 6.39 | % | Fixed | Sep. 2017 | ||||||||||
Cushing Center - Schenectady, NY | — | — | 4,184 | 5.71 | % | Fixed | Feb. 2016 | ||||||||||
Countryside Medical Arts - Safety Harbor, FL | 1 | 5,927 | 5,992 | 6.07 | % | Fixed | (1) | Apr. 2019 | |||||||||
St. Andrews Medical Park - Venice, FL | 3 | 6,551 | 6,623 | 6.07 | % | Fixed | (1) | Apr. 2019 | |||||||||
Campus at Crooks & Auburn Building C - Rochester Hills, MI | — | — | 3,555 | 5.91 | % | Fixed | Apr. 2016 | ||||||||||
Slingerlands Crossing Phase I - Bethlehem, NY | 1 | 6,613 | 6,680 | 6.39 | % | Fixed | Sep. 2017 | ||||||||||
Slingerlands Crossing Phase II - Bethlehem, NY | 1 | 7,699 | 7,777 | 6.39 | % | Fixed | Sep. 2017 | ||||||||||
Benedictine Cancer Center - Kingston, NY | 1 | 6,743 | 6,811 | 6.39 | % | Fixed | Sep. 2017 | ||||||||||
Aurora Healthcare Center Portfolio - WI | 6 | 30,963 | 31,257 | 6.55 | % | Fixed | Jan. 2018 | ||||||||||
Palm Valley Medical Plaza - Goodyear, AZ | 1 | 3,453 | 3,525 | 4.21 | % | Fixed | Jun. 2023 | ||||||||||
Medical Center V - Peoria, AZ | 1 | 3,171 | 3,232 | 4.75 | % | Fixed | Sep. 2023 | ||||||||||
Courtyard Fountains - Gresham, OR | 1 | 24,930 | 24,999 | 3.82 | % | Fixed | (2) | Jan. 2020 | |||||||||
Fox Ridge Bryant - Bryant, AR | 1 | 7,730 | 7,825 | 3.98 | % | Fixed | May 2047 | ||||||||||
Fox Ridge Chenal - Little Rock, AR | 1 | 17,606 | 17,800 | 3.98 | % | Fixed | May 2049 | ||||||||||
Fox Ridge North Little Rock - North Little Rock, AR | 1 | 10,925 | 11,045 | 3.98 | % | Fixed | May 2047 | ||||||||||
Gross mortgage notes payable | 21 | 144,371 | 159,455 | 5.26 | % | (3) | |||||||||||
Deferred financing costs, net of accumulated amortization | (1,744 | ) | (2,150 | ) | |||||||||||||
Mortgage notes payable, net of deferred financing costs | $ | 142,627 | $ | 157,305 | |||||||||||||
_______________
(1) Fixed interest rate through May 10, 2017. Interest rate changes to variable rate starting in June 2017.
(2) Interest only payments through July 1, 2016. Principal and interest payments starting in August 2016.
(3) Calculated on a weighted average basis for all mortgages outstanding as of September 30, 2016.
As of September 30, 2016, the Company had pledged $261.7 million in real estate as collateral for these mortgage notes payable. This real estate is not available to satisfy other debts and obligations unless first satisfying the mortgage notes payable on the properties. Except as noted above, the Company makes payments of principal and interest on all of its mortgage notes payable on a monthly basis.
The following table summarizes the scheduled aggregate principal payments on mortgage notes payable for the five years subsequent to September 30, 2016:
(In thousands) | Future Principal Payments | |||
October 1, 2016 — December 31, 2016 | $ | 567 | ||
2017 | 34,832 | |||
2018 | 31,893 | |||
2019 | 13,324 | |||
2020 | 24,279 | |||
Thereafter | 39,476 | |||
Total | $ | 144,371 | ||
Some of the Company's mortgage note agreements require the compliance with certain property-level financial covenants including debt service coverage ratios. As of September 30, 2016, the Company was in compliance with the financial covenants under its mortgage note agreements.
16
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
Note 7 — Fair Value of Financial Instruments
GAAP establishes a hierarchy of valuation techniques based on the observability of inputs used in measuring financial instruments at fair value. GAAP establishes market-based or observable inputs as the preferred source of values, followed by valuation models using management assumptions in the absence of market inputs. The three levels of the hierarchy are described below:
Level 1 — Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability.
Level 3 — Unobservable inputs that reflect the entity's own assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques.
The determination of where an asset or liability falls in the hierarchy requires significant judgment and considers factors specific to the asset or liability. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company evaluates its hierarchy disclosures each quarter and depending on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter. However, the Company expects that changes in classifications between levels will be rare.
The Company has or had investments in common stock, redeemable preferred stock, real estate income funds and a senior note that are traded in active markets and therefore, due to the availability of quoted market prices in active markets, the Company has classified these investments as Level 1 in the fair value hierarchy.
The following table presents information about the Company's assets measured at fair value on a recurring basis as of December 31, 2015, aggregated by the level in the fair value hierarchy within which those instruments fall. The Company did not own any assets measured at fair value on a recurring basis as of September 30, 2016.
(In thousands) | Quoted Prices in Active Markets Level 1 | Significant Other Observable Inputs Level 2 | Significant Unobservable Inputs Level 3 | Total | ||||||||||||
December 31, 2015 | ||||||||||||||||
Investment securities | $ | 1,078 | $ | — | $ | — | $ | 1,078 | ||||||||
The Company is required to disclose the fair value of financial instruments for which it is practicable to estimate that value. The fair value of short-term financial instruments such as cash and cash equivalents, restricted cash, straight-line rent receivable, net, prepaid expenses and other assets, deferred costs, net, accounts payable and accrued expenses, deferred rent and distributions payable approximates their carrying value on the consolidated balance sheets due to their short-term nature. The fair values of the Company's remaining financial instruments that are not reported at fair value on the consolidated balance sheets are reported below:
Carrying Amount(1) at | Fair Value at | Carrying Amount(1) at | Fair Value at | |||||||||||||||
(In thousands) | Level | September 30, 2016 | September 30, 2016 | December 31, 2015 | December 31, 2015 | |||||||||||||
Mortgage notes payable | 3 | $ | 145,289 | $ | 149,198 | $ | 161,858 | $ | 162,654 | |||||||||
Credit Facility | 3 | $ | 476,500 | $ | 476,500 | $ | 430,000 | $ | 430,000 | |||||||||
_______________________________
(1) | Carrying value includes gross mortgage notes payable of $144.4 million and $159.5 million and mortgage premiums and discounts, net of $0.9 million and $2.4 million as of September 30, 2016 and December 31, 2015, respectively. |
The fair value of the mortgage notes payable is estimated using a discounted cash flow analysis, based on the Advisor's experience with similar types of borrowing arrangements. Advances under the Credit Facility are considered to be reported at fair value, because the Credit Facility's interest rate varies with changes in LIBOR.
17
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
Note 8 — Common Stock
As of September 30, 2016 and December 31, 2015, the Company had 88.6 million and 86.1 million shares of common stock outstanding, respectively, including unvested restricted shares and shares issued pursuant to the DRIP and had received total proceeds of $2.2 billion and $2.1 billion, respectively, including proceeds from shares issued pursuant to the DRIP.
In April 2013, the Board authorized, and the Company declared, a distribution payable on a monthly basis to stockholders of record on a daily basis at a rate equal to $0.0046575343 per day, which is equivalent to $1.70 per annum, per share of common stock, which began in May 2013. In March 2016, the Board ratified the existing distribution amount equivalent to $1.70 per annum, and, for calendar year 2016, affirmed a change to the daily distribution payable to stockholders of record each day during the applicable period to $0.0046448087 per day per share of common stock to accurately reflect that 2016 is a leap year. Distributions are payable by the 5th day following each month end to stockholders of record at the close of business each day during the prior month. Distribution payments are dependent on the availability of funds. The Board may reduce the amount of distributions paid or suspend distribution payments at any time and therefore distribution payments are not assured.
Share Repurchase Program
The Board has adopted a Share Repurchase Program (as amended, the "SRP") which enables stockholders to sell their shares to the Company in limited circumstances. The SRP permits investors to sell their shares back to the Company after they have held them for at least one year, subject to the significant conditions and limitations described below.
Prior to the time that the Company’s shares are listed on a national securities exchange and until the NAV Pricing Date (other than with respect to a repurchase request that was made in connection with a stockholder's death or disability), the repurchase price per share depended on the length of time investors held such shares, as follows: after one year from the purchase date — the lower of $23.13 or 92.5% of the amount they actually paid for each share; after two years from the purchase date — the lower of $23.75 or 95.0% of the amount they actually paid for each share; after three years from the purchase date — the lower of $24.38 or 97.5% of the amount they actually paid for each share; and after four years from the purchase date — the lower of $25.00 or 100.0% of the amount they actually paid for each share (in each case, as adjusted for any stock distributions, combinations, splits and recapitalizations). In cases of requests for death and disability, the repurchase price was be equal to the price actually paid for each share.
In accordance with the First SRP Amendment (described below) and beginning with the NAV Pricing Date, the price per share that the Company will pay to repurchase its shares will be equal to its NAV multiplied by a percentage equal to (i) 92.5%, if the person seeking repurchase has held his or her shares for a period greater than one year and less than two years; (ii) 95.0%, if the person seeking repurchase has held his or her shares for a period greater than two years and less than three years; (iii) 97.5%, if the person seeking repurchase has held his or her shares for a period greater than three years and less than four years; or (iv) 100.0%, if the person seeking repurchase has held his or her shares for a period greater than four years. In cases of requests for death and disability, the repurchase prices will be equal to NAV at the time of repurchase. Subject to limited exceptions, stockholders who redeem their shares of our common stock within the first four months from the date of purchase will be subject to a short-term trading fee of 2% of the aggregate NAV per share of the shares of common stock received.
Repurchases of shares of the Company's common stock, when requested, are at the sole discretion of the Board. Until the First SRP Amendment (described below), the Company limited the number of shares repurchased during any calendar year to 5% of the weighted average number of shares of common stock outstanding on December 31st of the previous calendar year. In addition, the Company was only authorized to repurchase shares in a given quarter up to the amount of proceeds received from its DRIP in that same quarter.
On January 26, 2016, the Board approved and amended the SRP (the "First SRP Amendment") to supersede and replace the existing SRP. Under the First SRP Amendment, repurchases of shares of the Company's common stock, when requested, are at the sole discretion of the Board and generally will be made semiannually (each six-month period ending June 30 or December 31, a “fiscal semester”). Repurchases for any fiscal semester will be limited to a maximum of 2.5% of the weighted average number of shares of common stock outstanding during the previous fiscal year (the "Prior Year Outstanding Shares"), with a maximum for any fiscal year of 5.0% of the Prior Year Outstanding Shares. In addition, the Company is only authorized to repurchase shares in a given fiscal semester up to the amount of proceeds received from its DRIP in that same fiscal semester. If the NAV Pricing Date occurs during any fiscal semester, any repurchase requests received during such fiscal semester will be paid at the applicable NAV then in effect.
18
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
On June 28, 2016, the Board further amended the Company’s SRP (the "Second SRP Amendment") to provide for one twelve-month repurchase period for calendar year 2016 (the “2016 Repurchase Period”) instead of two semi-annual periods ending June 30 and December 31. The annual limit on repurchases under the SRP remains unchanged and continues to be limited to a maximum of 5.0% of the Prior Year Outstanding Shares and is subject to the terms and limitations set forth in the SRP. Accordingly, the 2016 Repurchase Period will be limited to a maximum of 5.0% of the Prior Year Outstanding Shares and continue to be subject to the terms and conditions set forth in the SRP, as amended. Following calendar year 2016, the repurchase periods will return to two semi-annual periods and applicable limitations set forth in the SRP. The Second SRP Amendment also provides, for calendar year 2016 only, that any amendments, suspensions or terminations of the SRP will become effective on the day following the Company’s public announcement of such amendments, suspension or termination. The Second SRP Amendment became effective on July 30, 2016 and will only apply to repurchase periods in calendar year 2016.
When a stockholder requests redemption and the redemption is approved, the Company will reclassify such obligation from equity to a liability based on the settlement value of the obligation. Shares purchased under the SRP will have the status of authorized but unissued shares. The following table reflects the number of shares repurchased cumulatively through September 30, 2016:
Number of Shares Repurchased | Average Price per Share | ||||||
Cumulative repurchases as of December 31, 2015(1) | 968,370 | $ | 23.72 | ||||
Nine months ended September 30, 2016(2) | 6,660 | 24.36 | |||||
Cumulative repurchases as of September 30, 2016 (2) | 975,030 | $ | 23.73 | ||||
_____________________________
(1) | Excludes rejected repurchases of 201,367 shares for $4.6 million at an average price per share of $23.04, which were unfulfilled as of December 31, 2015 and remain rejected as of September 30, 2016. There were no other rejected share repurchase requests for the period from October 15, 2012 (date of inception) to September 30, 2016. |
(2) | Excludes 2.4 million shares that have been requested for repurchase and are not yet fulfilled as of September 30, 2016. These shares, and all additional shares requested prior to December 31, 2016, will be considered for repurchase, to the extent the requests are not withdrawn by December 31, 2016. All requested shares will be subject to the annual limitations set forth in the SRP. The 6,660 shares above represent unaccrued repurchases for the year ended December 31, 2015 that were finalized in January 2016. |
Distribution Reinvestment Plan
Pursuant to the DRIP, stockholders may elect to reinvest distributions by purchasing shares of common stock in lieu of receiving cash. No dealer manager fees or selling commissions are paid with respect to shares purchased under the DRIP. The shares purchased pursuant to the DRIP have the same rights and are treated in the same manner as the shares issued pursuant to the IPO. The Board may designate that certain cash or other distributions be excluded from reinvestment pursuant to the DRIP. The Company has the right to amend any aspect of the DRIP or terminate the DRIP with ten days' notice to participants. Shares issued under the DRIP are recorded as equity in the accompanying consolidated balance sheet in the period distributions are declared. During the nine months ended September 30, 2016 and 2015, the Company issued 2.4 million and 2.5 million shares of common stock pursuant to the DRIP, generating aggregate proceeds of $56.0 million and $58.8 million, respectively.
Note 9 — Related Party Transactions and Arrangements
As of September 30, 2016 and December 31, 2015, the Special Limited Partner owned 8,888 shares of the Company's outstanding common stock. The Advisor and its affiliates may incur and pay costs and fees on behalf of the Company.
Realty Capital Securities, LLC (the "Former Dealer Manager") served as the dealer manager of the IPO. American National Stock Transfer, LLC ("ANST"), a subsidiary of the parent company of the Former Dealer Manager, provided other general professional services through January 2016. RCS Capital Corporation ("RCAP"), the parent company of the Former Dealer Manager and certain of its affiliates that provided the Company with services, filed for Chapter 11 bankruptcy protection in January 2016, prior to which it was also under common control with AR Global, the parent of the Company's Sponsor. In May 2016, RCAP and its affiliated debtors emerged from bankruptcy under the new name Aretec Group, Inc.
19
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
On January 14, 2015, the Company purchased the Specialty Hospital portfolio from American Realty Capital Healthcare Trust, Inc. ("HCT") for a contract purchase price of $39.4 million. At the time of such purchase, the Sponsor and the Advisor and the sponsor and advisor of HCT were under common control.
The limited partnership agreement of the OP provides for a special allocation, solely for tax purposes, of excess depreciation deductions of up to $10.0 million to the Company's Advisor, a limited partner of the OP. In connection with this special allocation, the Company's Advisor has agreed to restore a deficit balance in its capital account in the event of a liquidation of the OP and has agreed to provide a guaranty or indemnity of indebtedness of the OP.
Fees Paid in Connection with the IPO
The Former Dealer Manager was paid fees in connection with the sale of the Company's common stock in the IPO. The Company paid the Former Dealer Manager a selling commission of up to 7.0% of the per share purchase price of offering proceeds before reallowance of commissions earned by participating broker-dealers. In addition, the Company paid the Former Dealer Manager up to 3.0% of the gross proceeds from the sale of shares, before reallowance to participating broker-dealers, as a dealer manager fee. The Former Dealer Manager was permitted to reallow its dealer manager fee to participating broker-dealers. A participating broker-dealer could elect to receive a fee equal to 7.5% of the gross proceeds from the sale of shares by such participating broker-dealer, with 2.5% thereof paid at the time of such sale and 1.0% thereof paid on each anniversary of the closing of such sale up to and including the fifth anniversary of the closing of such sale. If this option had been elected, the dealer manager fee would have been reduced to 2.5% of gross proceeds. During the nine months ended September 30, 2015, the Company received approximately $2,000 from the Former Dealer Manager for an unconsummated share transaction. The Company did not incur any commissions or fees in connection with the sale of the Company's common stock in the IPO from the Former Dealer Manager during the three and nine months ended September 30, 2016 and the three months ended September 30, 2015. The Company did not have any amounts outstanding to the Former Dealer Manager for fees in connection with the sale of the Company's common stock in the IPO as of September 30, 2016 or December 31, 2015.
The Advisor and its affiliates received compensation and reimbursement for services relating to the IPO, including transfer agent services provided by an affiliate of the Former Dealer Manager. All offering costs incurred by the Company or its affiliated entities on behalf of the Company were charged to additional paid-in capital on the accompanying balance sheet during the IPO. The Company did not incur any charges or reimbursements for services relating to the IPO from the Advisor or any of its affiliates during the three and nine months ended September 30, 2016 or 2015. The Company did not have any amounts outstanding to the Advisor or any of its affiliates for charges or reimbursements for services relating to the IPO as of September 30, 2016 or December 31, 2015.
The Company was responsible for paying offering and related costs from the IPO, excluding commissions and dealer manager fees, up to a maximum of 2.0% of gross proceeds received from the IPO, measured at the end of the IPO. Offering costs, excluding selling commissions and dealer manager fees, in excess of the 2.0% cap as of the end of the IPO were to be the Advisor's responsibility. As of the end of the IPO, offering and related costs, excluding selling commissions and dealer manager fees, did not exceed 2.0% of gross proceeds received from the IPO. In aggregate, offering costs including selling commissions and dealer manager fees were the Company's responsibility up to a maximum of 12.0% of the gross proceeds received from the IPO as determined at the end of the IPO. As of the end of the IPO in November 2014, offering costs were less than 12.0% of the gross proceeds received in the IPO.
Fees Paid in Connection With the Operations of the Company
The Advisor is paid an acquisition fee equal to 1.0% of the contract purchase price of each acquired property and 1.0% of the amount advanced for a loan or other investment. The Advisor is also reimbursed for services provided for which it incurs investment-related expenses, or insourced expenses. The amount reimbursed for insourced expenses may not exceed 0.5% of the contract purchase price of each acquired property and 0.5% of the amount advanced for a loan or other investment. Additionally, the Company reimburses the Advisor for third party acquisition expenses. The aggregate amount of acquisition fees and financing coordination fees (as described below) may not exceed 1.5% of the contract purchase price and the amount advanced for a loan or other investment for all the assets acquired. In no event will the total of all acquisition fees, acquisition expenses and any financing coordination fees payable with respect to the Company's portfolio of investments or reinvestments exceed 4.5% of the contract purchase price of the Company's portfolio to be measured at the close of the acquisition phase or 4.5% of the amount advanced for all loans or other investments.
20
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
If the Advisor provides services in connection with the origination or refinancing of any debt that the Company obtains and uses to acquire properties or to make other permitted investments, or that is assumed, directly or indirectly, in connection with the acquisition of properties, the Company will pay the Advisor a financing coordination fee equal to 0.75% of the amount available and/or outstanding under such financing, subject to certain limitations.
Until March 31, 2015, for its asset management services, the Company issued the Advisor an asset management subordinated participation by causing the OP to issue (subject to periodic approval by the Board) to the Advisor performance-based restricted, forfeitable partnership units of the OP designated as "Class B Units." The Class B Units were intended to be profit interests and vest, and are no longer subject to forfeiture, at such time as: (x) the value of the OP's assets plus all distributions made equals or exceeds the total amount of capital contributed by investors plus a 6.0% cumulative, pre-tax, non-compounded annual return thereon (the "economic hurdle"); (y) any one of the following occurs: (1) a listing; (2) an other liquidity event or (3) the termination of the advisory agreement by an affirmative vote of a majority of the Company's independent directors without cause; and (z) the Advisor is still providing advisory services to the Company (the "performance condition"). Unvested Class B Units will be forfeited immediately if: (a) the advisory agreement is terminated for any reason other than a termination without cause; or (b) the advisory agreement is terminated by an affirmative vote of a majority of the Company's independent directors without cause before the economic hurdle has been met.
When approved by the Board, the Class B Units were issued to the Advisor quarterly in arrears pursuant to the terms of the limited partnership agreement of the OP. The number of Class B Units issued in any quarter was equal to: (i) the excess of (A) the product of (y) the cost of assets multiplied by (z) 0.1875% over (B) any amounts payable as an oversight fee (as described below) for such calendar quarter; divided by (ii) the value of one share of common stock as of the last day of such calendar quarter, which is equal initially to $22.50 (the IPO price minus the selling commissions and dealer manager fees). The value of issued Class B Units will be determined and expensed when the Company deems the achievement of the performance condition to be probable. As of September 30, 2016, the Company cannot determine the probability of achieving the performance condition. The Advisor receives distributions on vested and unvested Class B Units equal to the distribution rate received on the Company's common stock. Such distributions on issued Class B Units are included in general and administrative expenses in the consolidated statement of operations and comprehensive loss until the performance condition is considered probable to occur. As of September 30, 2016, the Board had approved the issuance of 359,250 Class B Units to the Advisor in connection with this arrangement.
On May 12, 2015, the Company, the OP and the Advisor entered into an amendment (the “Amendment”) to the advisory agreement, which, among other things, provided that the Company would cease causing the OP to issue Class B Units in the OP to the Advisor or its assignees related to any period ending after March 31, 2015. Effective April 1, 2015, the Company began paying an asset management fee to the Advisor or its assignees as compensation for services rendered in connection with the management of the Company’s assets. The asset management fee is payable on the first business day of each month in the amount of 0.0625% multiplied by the lesser of (a) cost of assets or (b) fair value of assets for the preceding monthly period. The asset management fee is payable to the Advisor or its assignees in cash, in shares, or a combination of both, the form of payment to be determined in the sole discretion of the Advisor. For the purposes of the payment of any fees in shares (a) prior to the NAV Pricing Date, each share was valued at $22.50, (b) after the NAV Pricing Date and prior to any listing on a national securities exchange, if it occurs, each share will be valued at the then-current NAV per share and (c) at all other times, each share shall be valued by the Board in good faith at the fair market value.
Unless the Company contracts with a third party, the Company pays the Property Manager a property management fee of 1.5% of gross revenues from the Company's stand-alone single-tenant net leased properties and 2.5% of gross revenues from all other types of properties, respectively. The Company also reimburses the Property Manager for property level expenses. If the Company contracts directly with third parties for such services, the Company will pay them customary market fees and will pay the Property Manager an oversight fee of up to 1.0% of the gross revenues of the property managed. In no event will the Company pay the Property Manager or any affiliate of the Property Manager both a property management fee and an oversight fee with respect to any particular property.
21
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
Effective June 1, 2013, the Company entered into an agreement with the Former Dealer Manager to provide strategic advisory services and investment banking services required in the ordinary course of the Company's business, such as performing financial analysis, evaluating publicly traded comparable companies and assisting in developing a portfolio composition strategy, a capitalization structure to optimize future liquidity options and structuring operations. Strategic advisory fees were amortized over the estimated remaining term of the IPO and, as such, have been fully amortized as of December 31, 2014. The Former Dealer Manager and its affiliates also previously provided transfer agency services, as well as transaction management and other professional services. These fees were included in general and administrative expenses in the accompanying consolidated statement of operations and comprehensive loss.
The following table details amounts incurred, forgiven and payable in connection with the Company's operations-related services described above as of and for the periods presented:
Three Months Ended September 30, | Nine Months Ended September 30, | Payable (Receivable) as of | ||||||||||||||||||||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | September 30, | December 31, | |||||||||||||||||||||||||||||||||||
(In thousands) | Incurred | Forgiven | Incurred | Forgiven | Incurred | Forgiven | Incurred | Forgiven | 2016 | 2015 | ||||||||||||||||||||||||||||||
One-time fees and reimbursements: | ||||||||||||||||||||||||||||||||||||||||
Acquisition fees | $ | — | $ | — | $ | 1,719 | $ | — | $ | — | $ | — | $ | 3,707 | $ | — | $ | — | $ | — | ||||||||||||||||||||
Acquisition cost reimbursements | — | — | 859 | — | — | — | 1,853 | — | — | — | ||||||||||||||||||||||||||||||
Financing coordination fees | — | — | 512 | — | — | — | 3,400 | — | — | — | ||||||||||||||||||||||||||||||
Ongoing fees and reimbursements: | ||||||||||||||||||||||||||||||||||||||||
Asset management fees (1) | 4,396 | — | 3,656 | — | 13,177 | — | 7,066 | — | — | (5 | ) | |||||||||||||||||||||||||||||
Property management fees | 803 | — | 656 | — | 2,349 | — | 656 | 1,220 | — | (10 | ) | |||||||||||||||||||||||||||||
Professional fees and reimbursements | 1,090 | — | 1,085 | — | 2,999 | — | 3,156 | — | 499 | 499 | ||||||||||||||||||||||||||||||
Distributions on Class B Units | 153 | — | 154 | — | 457 | — | 336 | — | — | 52 | ||||||||||||||||||||||||||||||
Total related party operation fees and reimbursements | $ | 6,442 | $ | — | $ | 8,641 | $ | — | $ | 18,982 | $ | — | $ | 20,174 | $ | 1,220 | $ | 499 | $ | 536 | ||||||||||||||||||||
_______________
(1) | Prior to April 1, 2015, the Company caused the OP to issue (subject to periodic approval by the Board) to the Advisor restricted performance based Class B Units for asset management services. As of September 30, 2016, the Board had approved the issuance of 359,250 Class B Units to the Advisor in connection with this arrangement. Effective April 1, 2015, in connection with the Amendment, the Company began paying an asset management fee to the Advisor or its assignees in cash, in shares, or a combination of both and no longer issues any Class B Units. |
The Company reimburses the Advisor's costs of providing administrative services, subject to the limitation that the Company did not reimburse the Advisor for any amount by which the Company's operating expenses at the end of the four preceding fiscal quarters exceeded the greater of (a) 2.0% of average invested assets and (b) 25.0% of net income other than any additions to reserves for depreciation, bad debt or other similar non-cash expenses and excluding any gain from the sale of assets for that period (the "2%/25% Limitation"), unless the Company's independent directors determined that such excess was justified based on unusual and nonrecurring factors which they deemed sufficient, in which case the excess amount could be reimbursed to the Advisor in subsequent periods. Additionally, the Company reimburses the Advisor for personnel costs; however, the Company may not reimburse the Advisor for personnel costs in connection with services for which the Advisor receives acquisition fees, acquisition expenses or real estate commissions or for persons serving as executive officers of the Company. The 2%/25% Limitation was removed from the advisory agreement in connection with the amendment and restatement of to the advisory agreement in June 2015.
In order to improve operating cash flows and the ability to pay distributions from operating cash flows, the Advisor may elect to forgive and absorb certain fees. Because the Advisor may forgive or absorb certain fees, cash flow from operations that would have been paid to the Advisor may be available to pay distributions to stockholders. The fees that are forgiven are not deferrals and, accordingly, will not be paid to the Advisor in the future. During the nine months ended September 30, 2015, the Advisor elected to forgive $1.2 million in fees. There were no such fees forgiven during the three and nine months ended September 30, 2016 and the three months ended September 30, 2015. In certain instances, to improve the Company's working capital, the Advisor may elect to absorb a portion of the Company's property operating and general and administrative costs, which the Company will not repay. No such fees were absorbed during the three and nine months ended September 30, 2016 or 2015.
22
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
The predecessor to AR Global was a party to a services agreement with RCS Advisory Services, LLC, a subsidiary of the parent company of the Former Dealer Manager (“RCS Advisory”), pursuant to which RCS Advisory and its affiliates provided the Company and certain other companies sponsored by AR Global with services (including, without limitation, transaction management, compliance, due diligence, event coordination and marketing services, among others) on a time and expenses incurred basis or at a flat rate based on services performed. The predecessor to AR Global instructed RCS Advisory to stop providing such services in November 2015 and no services have since been provided by RCS Advisory.
The Company was also party to a transfer agency agreement with ANST, a subsidiary of the parent company of the Former Dealer Manager, pursuant to which ANST provided the Company with transfer agency services (including broker and stockholder servicing, transaction processing, year-end IRS reporting and other services), and supervisory services overseeing the transfer agency services performed by DST Systems, Inc., a third-party transfer agent ("DST"). AR Global received written notice from ANST on February 10, 2016 that it would wind down operations by the end of the month and would withdraw as the transfer agent effective February 29, 2016. On February 26, 2016, the Company entered into a definitive agreement with DST to provide the Company directly with transfer agency services (including broker and stockholder servicing, transaction processing, year-end IRS reporting and other services).
Fees and Participations Paid in Connection with a Listing or the Liquidation of the Company's Real Estate Assets
Fees Incurred in Connection with a Listing
In 2015, the Board determined that it was in the Company’s best interest to evaluate strategic alternatives, including a listing on a national securities exchange. Accordingly, in March 2015, the Company formally engaged KeyBanc and RCS Capital ("RCS Capital"), the investment banking and capital markets division of the Former Dealer Manager, and in May 2015, the Company formally engaged BMO Capital Markets Corp. ("BMO"), as financial advisors. Pursuant to the agreements with KeyBanc, BMO and RCS Capital, they each would have received a listing advisory fee equal to $1.5 million if the Company's shares were listed on a national securities exchange. In the event of a sale or acquisition transaction, KeyBanc, BMO and RCS Capital each would have received a proposed transaction fee equal to 0.25% of the value of the transaction. The agreements with KeyBanc, RCS Capital and BMO were terminated in January 2016. No fees were incurred in connection with these agreements during the three and nine months ended September 30, 2016 or 2015.
The Board, led by its independent directors, announced in April 2016 that it had initiated the Strategic Review. On October 6, 2016, the Company announced that the Special Committee concluded the Strategic Review and recommended that the Company continue to execute its business plan and focus on managing and strengthening its assets. See Note 1 — Organization.
Other Liquidation Related Fees and Participations
The Company will pay the Advisor an annual subordinated performance fee calculated on the basis of the Company's total return to stockholders, payable annually in arrears, such that for any year in which the Company's total return on stockholders' capital exceeds 6.0% per annum, the Advisor will be entitled to 15.0% of the excess total return but not to exceed 10.0% of the aggregate total return for such year. This fee will be paid only upon the sale of assets, distributions or other event which results in the return on stockholders' capital exceeding 6.0% per annum. No subordinated performance fees were incurred during the three and nine months ended September 30, 2016 or 2015.
The Company may pay the Advisor a brokerage commission on the sale of property, not to exceed the lesser of 2.0% of the contract sale price of the property and 50.0% of the total brokerage commission paid if a third party broker is also involved; provided, however, that in no event may the real estate commissions paid to the Advisor, its affiliates and unaffiliated third parties exceed the lesser of 6.0% of the contract sales price and a reasonable, customary and competitive real estate commission, in each case, payable to the Advisor if the Advisor or its affiliates, subject to approval by a majority of the independent directors upon a finding that the Advisor provided a substantial amount of services in connection with the sale. During the three months ended September 30, 2016, the Company incurred $0.1 million in brokerage commissions on the sale of one property and during the nine months ended September 30, 2016, the Company incurred $0.3 million in brokerage commissions on the sale of three properties. As of September 30, 2016, the Company had $0.2 million of brokerage commissions payable to the Advisor. No such fees were incurred during the three and nine months ended September 30, 2015.
23
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
The Special Limited Partner will be entitled to receive a subordinated participation in the net sales proceeds of the sale of real estate assets from the OP equal to 15.0% of remaining net sale proceeds after return of capital contributions to investors plus payment to investors of a 6.0% cumulative, pre-tax non-compounded annual return on the capital contributed by investors. The Special Limited Partner will not be entitled to the subordinated participation in net sale proceeds unless the Company's investors have received a 6.0% cumulative, pre-tax non-compounded annual return on their capital contributions. No such participation in net sales proceeds became due and payable during the three and nine months ended September 30, 2016 or 2015.
If the common stock of the Company is listed on a national exchange, the Special Limited Partner will be entitled to receive a subordinated incentive listing distribution from the OP equal to 15.0% of the amount by which the adjusted market value of real estate assets plus distributions exceeds the aggregate capital contributed by investors plus an amount equal to a 6.0% cumulative, pre-tax non-compounded annual return to investors. The Special Limited Partner will not be entitled to the subordinated incentive listing distribution unless investors have received a 6.0% cumulative, pre-tax non-compounded annual return on their capital contributions. No such distribution was incurred during the three and nine months ended September 30, 2016 or 2015. Neither the Special Limited Partner nor any of its affiliates can earn both the subordinated participation in the net sales proceeds and the subordinated incentive listing distribution.
Upon termination or non-renewal of the advisory agreement with the Advisor, with or without cause, the Special Limited Partner will be entitled to receive distributions from the OP equal to 15.0% of the amount by which the sum of the Company's market value plus distributions exceeds the sum of the aggregate capital contributed by investors plus an amount equal to an annual 6.0% cumulative, pre-tax, non-compounded annual return to investors. The Special Limited Partner may elect to defer its right to receive a subordinated distribution upon termination until either a listing on a national securities exchange or other liquidity event occurs.
Note 10 — Economic Dependency
Under various agreements, the Company has engaged or will engage the Advisor, its affiliates and entities under common control with the Advisor to provide certain services that are essential to the Company, including asset management services, supervision of the management and leasing of properties owned by the Company and asset acquisition and disposition decisions, as well as other administrative responsibilities for the Company including accounting services and investor relations.
As a result of these relationships, the Company is dependent upon the Advisor and its affiliates. In the event that the Advisor and its affiliates are unable to provide the Company with the respective services, the Company will be required to find alternative providers of these services.
Note 11 — Equity-Based Compensation
Restricted Share Plan
The Company has an employee and director incentive restricted share plan (the "RSP"), which provides for the automatic grant of 1,333 restricted shares of common stock to each of the independent directors, without any further approval by the Board or the stockholders, after initial election to the Board and after each annual stockholder meeting, with such shares vesting annually beginning with the one year anniversary of initial election to the Board and the date of the next annual meeting, respectively. Restricted stock issued to independent directors will vest over a five-year period in increments of 20.0% per annum. The RSP provides the Company with the ability to grant awards of restricted shares to the Company's directors, officers and employees (if the Company ever has employees), employees of the Advisor and its affiliates, employees of entities that provide services to the Company, directors of the Advisor or of entities that provide services to the Company, certain consultants to the Company and the Advisor and its affiliates or to entities that provide services to the Company. The total number of common shares granted under the RSP may not exceed 5.0% of the Company's outstanding shares of common stock on a fully diluted basis at any time and in any event will not exceed 3.4 million shares (as such number may be adjusted for stock splits, stock dividends, combinations and similar events).
24
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
Restricted share awards entitle the recipient to receive shares of common stock from the Company under terms that provide for vesting over a specified period of time. For restricted share awards granted prior to July 1, 2015, such awards would typically be forfeited with respect to the unvested shares upon the termination of the recipient's employment or other relationship with the Company. For restricted share awards granted on or after July 1, 2015, such awards provide for accelerated vesting of the portion of the unvested shares scheduled to vest in the year of the recipient's voluntary termination or the failure to be re-elected to the Board. Restricted shares may not, in general, be sold or otherwise transferred until restrictions are removed and the shares have vested. Holders of restricted shares may receive cash distributions prior to the time that the restrictions on the restricted shares have lapsed. Any distributions payable in shares of common stock shall be subject to the same restrictions as the underlying restricted shares. The following table reflects restricted share award activity for the period presented:
Number of Common Shares | Weighted-Average Issue Price | ||||||
Unvested, December 31, 2015 | 11,731 | $ | 22.50 | ||||
Granted | 5,388 | 22.27 | |||||
Vested | (3,199 | ) | 22.50 | ||||
Forfeitures | (1,333 | ) | 22.50 | ||||
Unvested, September 30, 2016 | 12,587 | $ | 22.50 | ||||
As of September 30, 2016, the Company had $0.2 million of unrecognized compensation cost related to unvested restricted share awards granted under the Company's RSP. That cost is expected to be recognized over a weighted-average period of 3.4 years.
Compensation expense related to restricted stock was approximately $43,000 and $30,000 during the three months ended September 30, 2016 and 2015, respectively. Compensation expense related to restricted stock was approximately $73,000 and $36,000 during the nine months ended September 30, 2016 and 2015, respectively. Compensation expense related to restricted stock is recorded as general and administrative expense in the accompanying consolidated statement of operations and comprehensive loss.
Other Share-Based Compensation
The Company may issue common stock in lieu of cash to pay fees earned by the Company's directors at the respective director's election. There are no restrictions on the shares issued since these payments in lieu of cash relate to fees earned for services performed. No such shares were issued during the three and nine months ended September 30, 2016 or 2015.
Note 12 — Accumulated Other Comprehensive Income
The following table illustrates the changes in accumulated other comprehensive income as of and for the period presented:
(In thousands) | Unrealized Gains (Losses) on Available-for-Sale Securities | |||
Balance, December 31, 2015 | $ | (6 | ) | |
Other comprehensive income, before reclassifications | 62 | |||
Amounts reclassified from accumulated other comprehensive income (1) | (56 | ) | ||
Balance, September 30, 2016 | $ | — | ||
__________________
(1) | During the nine months ended September 30, 2016, the Company sold its investments in preferred stock which resulted in a realized gain of $0.1 million, which is included in gain on sale of investment securities on the consolidated statement of operations and comprehensive loss. |
Note 13 — Non-controlling Interests
The Company is the sole general partner and holds substantially all of the units of limited partner interests in the OP ("OP Units"). As of September 30, 2016 and 2015, the Advisor held 90 OP Units, which represents a nominal percentage of the aggregate OP ownership.
25
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
In November 2014, the Company partially funded the purchase of an MOB from an unaffiliated third party by causing the OP to issue 405,908 OP Units, with a value of $10.1 million, or $25.00 per unit, to the unaffiliated third party.
A holder of OP Units has the right to distributions and has the right to convert OP Units for the cash value of a corresponding number of shares of the Company's common stock or, at the option of the OP, a corresponding number of shares of the Company's common stock, in accordance with the limited partnership agreement of the OP, provided, however, that such OP Units must have been outstanding for at least one year. The remaining rights of the limited partners in the OP are limited, however, and do not include the ability to replace the general partner or to approve the sale, purchase or refinancing of the OP's assets. During the three months ended September 30, 2016 and 2015, OP Unit non-controlling interest holders were paid distributions of $0.2 million. During the nine months ended September 30, 2016 and 2015, OP Unit non-controlling interest holders were paid distributions of $0.5 million.
The Company has an investment arrangement with an unaffiliated third party whereby such investor receives an ownership interest in certain of the Company's property-owning subsidiaries and is entitled to receive a proportionate share of the net operating cash flow derived from the subsidiaries' property. Upon disposition of a property subject to non-controlling interest, the investor will receive a proportionate share of the net proceeds from the sale of the property. The investor has no recourse to any other assets of the Company. Due to the nature of the Company's involvement with the arrangement and the significance of its investment in relation to the investment of the third party, the Company has determined that it controls each entity in this arrangement and therefore the entities related to this arrangement are consolidated within the Company's financial statements. A non-controlling interest is recorded for the investor's ownership interest in the properties.
The following table summarizes the activity related to investment arrangements with the unaffiliated third party. No distributions were made related to these investment arrangements during the three and nine months ended September 30, 2016 and 2015.
As of September 30, 2016 | As of December 31, 2015 | ||||||||||||||||||||||||
Property Name (Dollar amounts in thousands) | Investment Date | Third Party Net Investment Amount as of September 30, 2016 | Non-Controlling Ownership Percentage as of September 30, 2016 | Net Real Estate Assets Subject to Investment Arrangement | Mortgage Notes Payable Subject to Investment Arrangement | Net Real Estate Assets Subject to Investment Arrangement | Mortgage Notes Payable Subject to Investment Arrangement | ||||||||||||||||||
Plaza Del Rio Medical Office Campus Portfolio - Peoria, AZ | May 2015 | $ | 478 | 4.1 | % | $ | 10,537 | $ | — | $ | 10,561 | $ | — | ||||||||||||
Note 14 — Net Loss Per Share
The following is a summary of the basic and diluted net loss per share computation for the three and nine months ended September 30, 2016 and 2015:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Net loss attributable to stockholders (in thousands) | $ | (8,664 | ) | $ | (16,108 | ) | $ | (13,219 | ) | $ | (34,749 | ) | ||||
Basic and diluted weighted-average shares outstanding | 88,285,390 | 85,705,595 | 87,472,855 | 84,988,240 | ||||||||||||
Basic and diluted net loss per share | $ | (0.10 | ) | $ | (0.19 | ) | $ | (0.15 | ) | $ | (0.41 | ) | ||||
26
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
The Company had the following potentially dilutive securities as of September 30, 2016 and 2015, which were excluded from the calculation of diluted loss per share attributable to stockholders as the effect would have been antidilutive:
September 30, | ||||||
2016 | 2015 | |||||
Unvested restricted stock | 12,587 | 9,065 | ||||
OP Units | 405,998 | 405,998 | ||||
Class B units | 359,250 | 359,250 | ||||
Total common share equivalents | 777,835 | 774,313 | ||||
Note 15 — Segment Reporting
During the three and nine months ended September 30, 2016 and 2015, the Company operated in three reportable business segments for management and internal financial reporting purposes: medical office buildings, triple-net leased healthcare facilities, and seniors housing — operating properties ("SHOP").
The Company evaluates performance and makes resource allocations based on its three business segments. The medical office building segment primarily consists of MOBs leased to healthcare-related tenants under long-term leases, which may require such tenants to pay a pro rata share of property-related expenses. The triple-net leased healthcare facilities segment primarily consists of investments in seniors housing communities, hospitals, inpatient rehabilitation facilities and skilled nursing facilities under long-term leases, under which tenants are generally responsible to directly pay property-related expenses. The SHOP segment consists of direct investments in seniors housing communities, primarily providing assisted living, independent living and memory care services, which are operated through engaging independent third-party managers. There were no intersegment sales or transfers during the periods presented.
The Company evaluates the performance of the combined properties in each segment based on net operating income ("NOI"). NOI is defined as total revenues, excluding contingent purchase price consideration, less property operating and maintenance expense. NOI excludes all other items of expense and income included in the financial statements in calculating net income (loss). The Company uses NOI to assess and compare property level performance and to make decisions concerning the operation of the properties. The Company believes that NOI is useful as a performance measure because, when compared across periods, NOI reflects the impact on operations from trends in occupancy rates, rental rates, operating expenses and acquisition activity on an unleveraged basis, providing perspective not immediately apparent from net income (loss).
NOI excludes certain components from net income (loss) in order to provide results that are more closely related to a property's results of operations. For example, interest expense is not necessarily linked to the operating performance of a real estate asset and is often incurred at the corporate level. In addition, depreciation and amortization, because of historical cost accounting and useful life estimates, may distort operating performance at the property level. NOI presented by the Company may not be comparable to NOI reported by other REITs that define NOI differently. The Company believes that in order to facilitate a clear understanding of the Company's operating results, NOI should be examined in conjunction with net income (loss) as presented in the Company's consolidated financial statements. NOI should not be considered as an alternative to net income (loss) as an indication of the Company's performance or to cash flows as a measure of the Company's liquidity or ability to make distributions.
27
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
The following tables reconcile the segment activity to consolidated net loss for the three and nine months ended September 30, 2016 and 2015:
Three Months Ended September 30, 2016 | Nine Months Ended September 30, 2016 | |||||||||||||||||||||||||||||||
(In thousands) | Medical Office Buildings | Triple-Net Leased Healthcare Facilities | Seniors Housing — Operating Properties | Consolidated | Medical Office Buildings | Triple-Net Leased Healthcare Facilities | Seniors Housing — Operating Properties | Consolidated | ||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||
Rental income | $ | 16,590 | $ | 8,387 | $ | 3 | $ | 24,980 | $ | 49,709 | $ | 28,271 | $ | 4 | $ | 77,984 | ||||||||||||||||
Operating expense reimbursements | 3,825 | 371 | — | 4,196 | 11,253 | 424 | — | 11,677 | ||||||||||||||||||||||||
Resident services and fee income | — | — | 46,428 | 46,428 | — | — | 137,084 | 137,084 | ||||||||||||||||||||||||
Total revenues | 20,415 | 8,758 | 46,431 | 75,604 | 60,962 | 28,695 | 137,088 | 226,745 | ||||||||||||||||||||||||
Property operating and maintenance | 6,254 | 5,158 | 32,629 | 44,041 | 17,922 | 8,915 | 96,690 | 123,527 | ||||||||||||||||||||||||
NOI | $ | 14,161 | $ | 3,600 | $ | 13,802 | 31,563 | $ | 43,040 | $ | 19,780 | $ | 40,398 | 103,218 | ||||||||||||||||||
Contingent purchase price consideration | (83 | ) | 142 | |||||||||||||||||||||||||||||
Impairment on sale of real estate investments | — | (389 | ) | |||||||||||||||||||||||||||||
Operating fees to related parties | (5,199 | ) | (15,526 | ) | ||||||||||||||||||||||||||||
Acquisition and transaction related | (958 | ) | (3,059 | ) | ||||||||||||||||||||||||||||
General and administrative | (2,874 | ) | (9,277 | ) | ||||||||||||||||||||||||||||
Depreciation and amortization | (27,347 | ) | (76,245 | ) | ||||||||||||||||||||||||||||
Interest expense | (4,923 | ) | (14,783 | ) | ||||||||||||||||||||||||||||
Interest and other income | 2 | 45 | ||||||||||||||||||||||||||||||
Gain on sale of real estate investment | 1,330 | 1,330 | ||||||||||||||||||||||||||||||
Gain on sale of investment securities | 56 | 56 | ||||||||||||||||||||||||||||||
Income tax benefit (expense) | (260 | ) | 1,215 | |||||||||||||||||||||||||||||
Net loss attributable to non-controlling interests | 29 | 54 | ||||||||||||||||||||||||||||||
Net loss attributable to stockholders | $ | (8,664 | ) | $ | (13,219 | ) | ||||||||||||||||||||||||||
28
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
Three Months Ended September 30, 2015 | Nine Months Ended September 30, 2015 | |||||||||||||||||||||||||||||||
(In thousands) | Medical Office Buildings | Triple-Net Leased Healthcare Facilities | Seniors Housing — Operating Properties | Consolidated | Medical Office Buildings | Triple-Net Leased Healthcare Facilities | Seniors Housing — Operating Properties | Consolidated | ||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||
Rental income | $ | 15,258 | $ | 9,237 | $ | — | $ | 24,495 | $ | 39,976 | $ | 28,306 | $ | — | $ | 68,282 | ||||||||||||||||
Operating expense reimbursements | 3,452 | 35 | — | 3,487 | 9,221 | 123 | — | 9,344 | ||||||||||||||||||||||||
Resident services and fee income | — | — | 36,011 | 36,011 | — | — | 103,004 | 103,004 | ||||||||||||||||||||||||
Total revenues | 18,710 | 9,272 | 36,011 | 63,993 | 49,197 | 28,429 | 103,004 | 180,630 | ||||||||||||||||||||||||
Property operating and maintenance | 5,728 | 2,400 | 25,378 | 33,506 | 14,855 | 3,097 | 71,660 | 89,612 | ||||||||||||||||||||||||
NOI | $ | 12,982 | $ | 6,872 | $ | 10,633 | 30,487 | $ | 34,342 | $ | 25,332 | $ | 31,344 | 91,018 | ||||||||||||||||||
Contingent purchase price consideration | 37 | 487 | ||||||||||||||||||||||||||||||
Operating fees to related parties | (4,312 | ) | (7,722 | ) | ||||||||||||||||||||||||||||
Acquisition and transaction related | (3,315 | ) | (8,502 | ) | ||||||||||||||||||||||||||||
General and administrative | (2,442 | ) | (7,574 | ) | ||||||||||||||||||||||||||||
Depreciation and amortization | (34,162 | ) | (97,193 | ) | ||||||||||||||||||||||||||||
Interest expense | (3,081 | ) | (6,838 | ) | ||||||||||||||||||||||||||||
Interest and other income | 66 | 555 | ||||||||||||||||||||||||||||||
Gain on sale of investment securities | 160 | 446 | ||||||||||||||||||||||||||||||
Income tax benefit (expense) | 369 | 387 | ||||||||||||||||||||||||||||||
Net loss attributable to non-controlling interests | 85 | 187 | ||||||||||||||||||||||||||||||
Net loss attributable to stockholders | $ | (16,108 | ) | $ | (34,749 | ) | ||||||||||||||||||||||||||
29
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
The following table reconciles the segment activity to consolidated total assets as of the periods presented:
September 30, | December 31, | |||||||
(In thousands) | 2016 | 2015 | ||||||
ASSETS | ||||||||
Investments in real estate, net: | ||||||||
Medical office buildings | $ | 796,865 | $ | 839,041 | ||||
Triple-net leased healthcare facilities | 422,802 | 447,893 | ||||||
Construction in progress | 53,070 | 31,309 | ||||||
Seniors housing — operating properties | 845,999 | 876,359 | ||||||
Total investments in real estate, net | 2,118,736 | 2,194,602 | ||||||
Cash and cash equivalents | 50,434 | 24,474 | ||||||
Restricted cash | 4,571 | 4,647 | ||||||
Investment securities, at fair value | — | 1,078 | ||||||
Straight-line rent receivable, net | 13,875 | 11,470 | ||||||
Prepaid expenses and other assets | 22,202 | 21,707 | ||||||
Deferred costs, net | 10,307 | 11,864 | ||||||
Total assets | $ | 2,220,125 | $ | 2,269,842 | ||||
The following table reconciles capital expenditures by reportable business segment, excluding corporate non-real estate expenditures, for the periods presented:
Nine Months Ended September 30, | ||||||||
(In thousands) | 2016 | 2015 | ||||||
Medical office buildings | $ | 2,720 | $ | 1,343 | ||||
Triple-net leased healthcare facilities | 103 | 523 | ||||||
Seniors housing — operating properties | 2,904 | 1,670 | ||||||
Total capital expenditures | $ | 5,727 | $ | 3,536 | ||||
Note 16 — Commitments and Contingencies
The Company has entered into operating and capital lease agreements related to certain acquisitions under leasehold interests arrangements. The following table reflects the minimum base cash rental payments due from the Company over the next five years and thereafter under these arrangements, including the present value of the net minimum payment due under capital leases. These amounts exclude contingent rent payments, as applicable, that may be payable based on provisions related to increases in annual rent based on exceeding certain economic indexes among other items.
Future Minimum Base Rent Payments | ||||||||
(In thousands) | Operating Leases | Capital Leases | ||||||
October 1, 2016 — December 31, 2016 | $ | 168 | $ | 19 | ||||
2017 | 664 | 76 | ||||||
2018 | 668 | 78 | ||||||
2019 | 673 | 80 | ||||||
2020 | 671 | 82 | ||||||
Thereafter | 33,228 | 7,847 | ||||||
Total minimum lease payments | $ | 36,072 | 8,182 | |||||
Less: amounts representing interest | (3,372 | ) | ||||||
Total present value of minimum lease payments | $ | 4,810 | ||||||
30
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
Total rental expense from operating leases was $0.2 million and $0.6 million during the three and nine months ended September 30, 2016, respectively. Total rental expense from operating leases was $0.1 million and $0.3 million during the three and nine months ended September 30, 2015, respectively. During the three and nine months ended September 30, 2016 and 2015, interest expense related to capital leases was approximately $21,000 and $0.1 million, respectively.
Litigation and Regulatory Matters
In the ordinary course of business, the Company may become subject to litigation, claims and regulatory matters. There are no material legal or regulatory proceedings pending or known to be contemplated against the Company or its properties.
Environmental Matters
In connection with the ownership and operation of real estate, the Company may potentially be liable for costs and damages related to environmental matters. As of September 30, 2016, the Company had not been notified by any governmental authority of any non-compliance, liability or other claim, and is not aware of any other environmental condition that it believes will have a material adverse effect on the results of operations.
Development Project Funding
In August 2015, the Company entered into an asset purchase agreement and development agreement to acquire land and construction in progress, and subsequently fund the remaining construction, of a skilled nursing facility in Jupiter, Florida for $82.0 million. As of September 30, 2016, the Company had funded $10.0 million and $43.1 million for the land and construction in progress, respectively. Concurrent with the acquisition, the Company entered into a loan agreement and lease agreement with an affiliate of the project developer. The loan agreement is intended to provide working capital to the tenant during the initial operating period of the facility and allows for borrowings of up to $2.7 million from the Company on a non-revolving basis. Any outstanding principal balances under the loan will bear interest at 7.0% per year, payable on the first day of each fiscal quarter. As of September 30, 2016, there were no amounts outstanding due to the Company pursuant to the loan agreement.
Note 17 — Subsequent Events
The Company has evaluated subsequent events through the filing of this Quarterly Report on Form 10-Q and determined that there have not been any events that have occurred that would require adjustments to disclosures in the consolidated financial statements except for the following:
Conclusion of Strategic Review
In April 2016, the Board, led by its independent directors, announced that it had initiated the Strategic Review. On October 6, 2016, the Company announced that the Special Committee had concluded the Strategic Review. Refer to Note 1 — Organization for more information on the conclusion of the Strategic Review.
Changes in Board of Directors
On October 6, 2016, William M. Kahane resigned from the Board. Mr. Kahane did not resign pursuant to any disagreement with the Company. Following Mr. Kahane’s resignation, the Board appointed Edward M. Weil, Jr. to serve as a member of the Board, effective as of that same date.
On October 11, 2016, Randolph C. Read resigned from the Board, including his roles as non-executive chairman, audit committee member and nominating and corporate governance committee member. Mr. Read did not resign pursuant to any disagreement with the Company. Simultaneously with Mr. Read’s resignation, the Board appointed Leslie D. Michelson, then a member of the Board, to serve as non-executive chairman of the Board, effective as of that same date. Following approval by the Board, 3,480 unvested restricted shares of common stock owned by Mr. Read became vested simultaneously with his resignation as a member of the Board.
Following Mr. Read’s resignation on October 11, 2016, the Company entered into a consulting agreement (the “Consulting Agreement”) with International Capital Markets Group, Inc. (“ICMG”), a company controlled by Mr. Read. The Consulting Agreement provides for ICMG to provide strategic consulting services to the Company at the request of the new non-executive chairman of the Board, Leslie D. Michelson. For the performance of these services, the Company has agreed to pay ICMG approximately $38,000 on October 21, 2016, approximately $25,000 on November 21, 2016 and approximately $25,000 on December 31, 2016. The Company also has agreed to reimburse ICMG for expenses incurred.
31
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)
Master Credit Facility Financing
On October 31, 2016, the Company, through wholly-owned subsidiaries of the OP, entered into a master credit facility agreement (the “KeyBank Credit Agreement”) relating to a credit facility with KeyBank National Association (“KeyBank”) and a master credit facility agreement (the “Capital One Credit Agreement” and, together with the KeyBank Credit Agreement, the “Credit Agreements”) relating to a credit facility with Capital One Multifamily Finance, LLC (“Capital One”). The Credit Agreements and related loan documents were issued through Fannie Mae’s (“Lender”) Multifamily MBS program and assigned by Capital One and KeyBank to the Lender at closing. The Credit Agreements provide for initial aggregate borrowings of $60.0 million.
The credit facility with KeyBank (the “KeyBank Facility”) and the credit facility with Capital One (the “Capital One Facility”, and together with the KeyBank Facility, the “Fannie Credit Facilities”) each provide for an initial $30.0 million of advances. The Company may request future advances under the Fannie Credit Facilities by borrowing against the value of the initial mortgaged properties or adding eligible properties to the collateral pool, subject to customary conditions, including satisfaction of minimum debt service coverage and maximum loan-to-value tests. The initial advances under the Fannie Credit Facilities will mature on November 1, 2026. Until December 1, 2016, borrowings under the KeyBank Facility and the Capital One Facility will initially bear interest at 3.15% and 3.156%, respectively, per annum. Beginning December 1, 2016 the Fannie Credit Facilities will bear an annual interest rate that will vary on a monthly basis and will be equal to the sum of the current One Month LIBOR and 2.62%, with a floor of 2.62%. “One Month LIBOR” means the London Inter-Bank Offered Rate for one month U.S. dollar-denominated deposits. Effective October 31, 2016, in conjunction with the execution of the Fannie Credit Facilities, the OP entered into two interest rate cap agreements (the "IR Caps") with an unrelated third party, which cap interest paid on amounts outstanding under the Fannie Credit Facilities to a maximum of 3.5%. The IR Caps terminate on November 1, 2019. The Credit Agreements require borrowers to enter into replacement interest rate cap or swap agreements upon termination of the IR Caps to the extent any variable rate loans are outstanding on the date of termination.
The KeyBank Facility is initially secured by first-priority mortgages on four of the Company’s seniors housing properties located in Michigan, Missouri and Kansas. The Capital One Facility is initially secured by first-priority mortgages on two of the Company’s seniors housing properties located in Florida. Each of the security agreements securing the Fannie Credit Facilities are cross-defaulted and cross-collateralized with the other security agreements securing the Fannie Credit Facilities. The Fannie Credit Facilities are non-recourse, subject to standard “bad boy” carve-outs and environmental indemnities, which obligations are guaranteed by the OP on an unsecured basis.
The initial advances under the Fannie Credit Facilities may not be prepaid until November 1, 2017, after which they may be prepaid in full or in part through July 31, 2026 with payment of a 1% prepayment premium, and may be freely prepaid in full or in part thereafter. The Credit Agreements provide for optional acceleration by Lender upon an event of default. The Credit Agreements contain customary events of default, including the breach of transfer prohibitions, principal or interest payment defaults and bankruptcy-related defaults.
Upon an event of default under the Credit Agreements, payment of any unpaid amounts under the applicable Fannie Credit Facility may be accelerated by Lender and Lender may exercise its rights with respect to the applicable pool of seniors housing properties securing the Fannie Credit Facilities.
32
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements of Healthcare Trust, Inc. and the notes thereto. As used herein, the terms the "Company," "we," "our" and "us" refer to Healthcare Trust, Inc., a Maryland corporation, including, as required by context, Healthcare Trust Operating Partnership, LP (our "OP"), a Delaware limited partnership, and its subsidiaries. The Company is externally managed by Healthcare Trust Advisors, LLC (our "Advisor"), a Delaware limited liability company. Capitalized terms used herein, but not otherwise defined, have the meaning ascribed to those terms in "Part I — Financial Information" included in the notes to the consolidated financial statements and contained herein.
Forward-Looking Statements
Certain statements included in this Quarterly Report on Form 10-Q are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations of the Company and members of our management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as "may," "will," "seeks," "anticipates," "believes," "estimates," "expects," "plans," "intends," "should" or similar expressions. Actual results may differ materially from those contemplated by such forward-looking statements. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, unless required by law.
The following are some of the risks and uncertainties, although not all risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements:
• | Certain of our executive officers and directors are also officers, managers or holders of a direct or indirect controlling interest in our Advisor and other entities affiliated with AR Global Investments, LLC (the successor business to AR Capital, LLC, "AR Global"), the parent of our sponsor, American Realty Capital VII, LLC (the "Sponsor"). As a result, certain of our executive officers and directors, our Advisor and its affiliates face conflicts of interest, including significant conflicts created by our Advisor's compensation arrangements with us and other investment programs advised by affiliates of AR Global and conflicts in allocating time among these investment programs and us. These conflicts could result in unanticipated actions that adversely affect us. |
• | Because investment opportunities that are suitable for us may also be suitable for other investment programs advised by affiliates of AR Global, our Advisor and its affiliates face conflicts of interest relating to the purchase of properties and other investments and such conflicts may not be resolved in our favor, meaning that we could invest in less attractive assets, which could reduce the investment return to our stockholders. |
• | Although we intend to list our shares of common stock on a national stock exchange when we believe market conditions are favorable to do so, there is no assurance that our shares of common stock will be listed. No public market currently exists, or may ever exist, for shares of our common stock and our shares are, and may continue to be, illiquid. |
• | We focus on acquiring a diversified portfolio of healthcare-related assets located in the United States and are subject to risks inherent in concentrating investments in the healthcare industry. |
• | If our Advisor loses or is unable to obtain qualified personnel, our ability to implement our investment strategies could be delayed or hindered. |
• | The healthcare industry is heavily regulated, and new laws or regulations, changes to existing laws or regulations, loss of licensure or failure to obtain licensure could result in the inability of tenants to make lease payments to us. |
• | We are depending on our Advisor to select investments and conduct our operations. Adverse changes in the financial condition of our Advisor or our relationship with our Advisor could adversely affect us. |
• | We may be unable to pay distributions with cash flows from operations, or maintain cash distributions or increase distributions over time. |
• | We are obligated to pay fees, which may be substantial, to our Advisor and its affiliates. |
• | We depend on tenants for our revenue and, accordingly, our revenue is dependent upon the success and economic viability of our tenants. |
• | We may not be able to achieve our rental rate objectives on new and renewal leases and our expenses could be greater, which may impact our results of operations. |
• | Increases in interest rates could increase the amount of our debt payments and limit our ability to pay distributions. |
33
• | We are permitted to pay distributions of unlimited amounts from any source. There are no established limits on the amount of borrowings that we may use to fund distribution payments, except for those imposed by Maryland law. |
• | Any distributions, especially those not covered by our cash flows from operations, may reduce the amount of capital available for other purposes included investment in properties and other permitted investments and may negatively impact the value of our stockholders' investment. |
• | We have not and may not in the future generate cash flows sufficient to pay our distributions to stockholders and, as such, we may be required to fund distributions from borrowings, which may be at unfavorable rates and could restrict the amount we can borrow for investments and other purposes, or depend on our Advisor or our property manager, Healthcare Trust Properties, LLC (the "Property Manager") to waive fees or reimbursement of certain expenses and fees to fund our operations. There is no assurance these entities will waive such amounts or that we will be able to borrow funds at all. |
• | We are subject to risks associated with any dislocations or liquidity disruptions that may exist or occur in the credit markets of the United States from time to time. |
• | We are subject to risks associated with changes in general economic, business and political conditions including the possibility of intensified international hostilities, acts of terrorism, and changes in conditions of United States or international lending, capital and financing markets. |
• | We may fail to continue to qualify to be treated as a real estate investment trust for U.S. federal income tax purposes ("REIT"), which would result in higher taxes, may adversely affect our operations and would reduce the value of an investment in our common stock and the cash available for distributions. |
• | We may be deemed to be an investment company under the Investment Company Act of 1940, as amended (the "Investment Company Act"), and thus subject to regulation under the Investment Company Act. |
• | The offering price and repurchase price for our shares, including shares sold pursuant to our distribution reinvestment plan ("DRIP") may not, among other things, accurately reflect the value of our assets and may not represent what stockholders may receive upon a liquidation of our assets. |
Overview
We invest in healthcare real estate, such as seniors housing and medical office buildings ("MOB"), located in the United States for investment purposes. As of September 30, 2016, we owned 163 properties located in 29 states and comprised of 8.4 million rentable square feet.
We were incorporated on October 15, 2012 as a Maryland corporation that elected and qualified to be taxed as a REIT beginning with our taxable year ended December 31, 2013. Substantially all of our business is conducted through the OP.
In February 2013, we commenced our initial public offering ("IPO") on a "reasonable best efforts" basis of up to $1.7 billion of common stock, $0.01 par value per share, at a price of $25.00 per share, subject to certain volume and other discounts. We closed our IPO in November 2014. As of September 30, 2016, we have received $2.2 billion from our IPO and from proceeds received under the DRIP.
In 2015, our board of directors (the "Board") determined that it was in our best interest to evaluate strategic alternatives, including a listing on a national securities exchange. The Board, led by its independent directors, announced on April 22, 2016 that it had initiated a strategic review process (the "Strategic Review") to identify, examine, and consider a range of strategic alternatives available to us with the objective of maximizing shareholder value. The Board formed a special committee (the "Special Committee") to evaluate various options in connection with the Strategic Review. The Special Committee engaged Morgan Stanley & Co. LLC ("Morgan Stanley") and KeyBanc Capital Markets as financial advisors, with Morgan Stanley as lead advisor. The Board also formed a separate special committee to address conflicts of interest. The Board retained Gibson, Dunn & Crutcher LLP as special legal counsel in connection with the Strategic Review.
On October 6, 2016, we announced that the Special Committee had concluded the Strategic Review and recommended that we continue to execute our business plan and focus on managing and strengthening our assets. The Special Committee and the committee to address conflicts of interest were terminated by the Board.
On April 7, 2016 (the "NAV Pricing Date"), the Board approved a per share estimate of net asset value ("NAV") equal to $22.27, estimated as of December 31, 2015. Subsequent estimates of per share NAV will occur periodically, at the discretion of the Board, provided that such estimates will be made at least annually. Pursuant to the DRIP, our stockholders can elect to reinvest distributions by purchasing shares of our common stock. Prior to the NAV Pricing Date, we offered shares pursuant to the DRIP at $23.75 per share, which was 95% of the initial offering price of shares of common stock in the IPO. Effective April 7, 2016, we began offering shares pursuant to the DRIP at the then-current NAV approved by the Board.
34
We have no employees. The Advisor has been retained by us to manage our affairs on a day-to-day basis. We have retained the Property Manager to serve as our property manager. The Advisor and Property Manager are under common control with AR Global, the parent of our Sponsor, as a result of which they are related parties, and each have received or will receive compensation, fees and expense reimbursements for services related to managing of our business. The Advisor, Healthcare Trust Special Limited Partnership, LLC and Property Manager also have received or will receive compensation, fees and expense reimbursements from us related to the investment and management of our assets.
Significant Accounting Estimates and Critical Accounting Policies
Set forth below is a summary of the significant accounting estimates and critical accounting policies that management believes are important to the preparation of our financial statements. Certain of our accounting estimates are particularly important for an understanding of our financial position and results of operations and require the application of significant judgment by our management. As a result, these estimates are subject to a degree of uncertainty. These significant accounting estimates and critical accounting policies include:
Revenue Recognition
Our rental income is primarily related to rent received from tenants in our medical office buildings ("MOB") and triple-net leased healthcare facilities. Rent from tenants in our MOB and triple-net leased healthcare facilities operating segments is recorded in accordance with the terms of each lease on a straight-line basis over the initial term of the lease. Because many of the leases provide for rental increases at specified intervals, accounting principles generally accepted in the United States ("GAAP") require us to record a receivable, and include in revenues on a straight-line basis, unbilled rent receivables that we will only receive if the tenant makes all rent payments required through the expiration of the initial term of the lease. When we acquire a property, the acquisition date is considered to be the commencement date for purposes of this calculation. For new leases after acquisition, the commencement date is considered to be the date the tenant takes control of the space. For lease modifications, the commencement date is considered to be the date the lease is executed. We defer the revenue related to lease payments received from tenants in advance of their due dates.
Cost recoveries from tenants are included in operating expense reimbursement in the period the related costs are incurred, as applicable.
Resident services and fee income primarily relates to rent from residents in our seniors housing — operating properties ("SHOP") held using a structure permitted by the REIT Investment Diversification and Empowerment Act of 2007 and to fees for ancillary services performed for residents in our SHOPs. Rental income from residents of our SHOP operating segment is recognized as earned. Residents pay monthly rent that covers occupancy of their unit and basic services, including utilities, meals and some housekeeping services. The terms of the rent are short term in nature, primarily month-to-month. Fees for ancillary services are recorded in the period in which the services are performed.
We defer the revenue related to lease payments received from tenants and residents in advance of their due dates.
We continually review receivables related to rent and unbilled rent receivables and determine collectability by taking into consideration the tenant's payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collectability of a receivable is in doubt, we record an increase in the allowance for uncollectible accounts on the consolidated balance sheets or record a direct write-off of the receivable in the consolidated statements of operations and comprehensive loss.
Real Estate Investments
Investments in real estate are recorded at cost. Improvements and replacements are capitalized when they extend the useful life of the asset. Costs of repairs and maintenance are expensed as incurred.
We evaluate the inputs, processes and outputs of each asset acquired to determine if the transaction is a business combination or asset acquisition. If an acquisition qualifies as a business combination, the related transaction costs are recorded as an expense in the consolidated statements of operations and comprehensive loss. If an acquisition qualifies as an asset acquisition, the related transaction costs are generally capitalized and subsequently amortized over the useful life of the acquired assets.
In business combinations, we allocate the purchase price of acquired properties to tangible and identifiable intangible assets or liabilities based on their respective fair values. Tangible assets may include land, land improvements, buildings, fixtures and tenant improvements. Intangible assets may include the value of in-place leases and above- and below-market leases. In addition, any assumed mortgages receivable or payable and any assumed or issued non-controlling interests are recorded at their estimated fair values.
We generally determine the value of construction in progress based upon the replacement cost. During the construction period, we capitalize interest, insurance and real estate taxes until the development has reached substantial completion.
35
The fair value of the tangible assets of an acquired property with an in-place operating lease is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to the tangible assets based on the fair value of the tangible assets. The fair value of in-place leases is determined by considering estimates of carrying costs during the expected lease-up periods, current market conditions, as well as costs to execute similar leases. The fair value of above- or below-market leases is recorded based on the present value of the difference between the contractual amount to be paid pursuant to the in-place lease and our estimate of the fair market lease rate for the corresponding in-place lease, measured over the remaining term of the lease including any below-market fixed rate renewal options for below-market leases.
In making estimates of fair values for purposes of allocating purchase price, we utilize a number of sources, including real estate valuations prepared by independent valuation firms. We also consider information and other factors including market conditions, the industry that the tenant operates in, characteristics of the real estate, i.e. location, size, demographics, value and comparative rental rates, tenant credit profile and the importance of the location of the real estate to the operations of the tenant’s business.
In allocating the fair value to assumed mortgages, amounts are recorded to debt premiums or discounts based on the present value of the estimated cash flows, which is calculated to account for either above- or below-market interest rates.
In allocating the fair value to non-controlling interests, amounts are recorded based on the fair value of units issued at the date of acquisition, as determined by the terms of the applicable agreement.
Real estate investments that are intended to be sold are designated as "held for sale" on the consolidated balance sheets at the lesser of the carrying amount or fair value less estimated selling costs when they meet specific criteria to be presented as held for sale. Real estate investments are no longer depreciated when they are classified as held for sale. If the disposal, or intended disposal, of certain real estate investments represents a strategic shift that has had or will have a major effect on our operations and financial results, the operations of such real estate investments would be presented as discontinued operations in the consolidated statements of operations and comprehensive loss for all applicable periods.
Depreciation and Amortization
Depreciation is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings, 15 years for land improvements, five years for fixtures and improvements, and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests.
Construction in progress, including capitalized interest, insurance and real estate taxes, is not depreciated until the development has reached substantial completion.
Capitalized above-market lease values are amortized as a reduction of rental income over the remaining terms of the respective leases. Capitalized below-market lease values are accreted as an increase to rental income over the remaining terms of the respective leases and expected below-market renewal option periods.
Capitalized above-market ground lease values are accreted as a reduction of property operating expense over the remaining terms of the respective leases. Capitalized below-market ground lease values are amortized as an increase to property operating expense over the remaining terms of the respective leases and expected below-market renewal option periods.
The value of in-place leases, exclusive of the value of above-market and below-market in-place leases, is amortized to expense over the remaining periods of the respective leases.
The assumed mortgage premiums or discounts are amortized as an increase or reduction to interest expense over the remaining term of the respective mortgages.
Impairment of Long Lived Assets
If circumstances indicate that the carrying value of a property may not be recoverable, we review the asset for impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. These estimates consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used. For properties held for sale, the impairment loss is the adjustment to fair value less estimated cost to dispose of the asset. These assessments have a direct impact on net income because recording an impairment loss results in an immediate negative adjustment to net income.
36
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued revised guidance relating to revenue recognition. Under the revised guidance, an entity is required to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The revised guidance was to become effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption was not permitted under GAAP. The revised guidance allows entities to apply the full retrospective or modified retrospective transition method upon adoption. In July 2015, the FASB deferred the effective date of the revised guidance by one year to annual reporting periods beginning after December 15, 2017, although entities will be allowed to early adopt the guidance as of the original effective date. We have not yet selected a transition method and are currently evaluating the impact of this new guidance.
In January 2015, the FASB issued updated guidance that eliminates from GAAP the concept of an event or transaction that is unusual in nature and occurs infrequently being treated as an extraordinary item. The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Any amendments may be applied either prospectively or retrospectively to all prior periods presented in the financial statements. Early adoption was permitted provided that the guidance was applied from the beginning of the fiscal year of adoption. We elected to adopt this new guidance as of September 30, 2015. The adoption of this guidance did not have a material impact to our financial position, results of operations and cash flows.
In February 2015, the FASB amended the accounting for consolidation of certain legal entities. The amendments modify the evaluation of whether certain legal entities are variable interest entities ("VIEs") or voting interest entities, eliminates the presumption that a general partner should consolidate a limited partnership and affect the consolidation analysis of reporting entities that are involved with VIEs (particularly those that have fee arrangements and related party relationships). The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption was permitted, including adoption in an interim period. We have elected to adopt this guidance effective January 1, 2016. We have evaluated the impact of the adoption of this new guidance on our consolidated financial statements and have determined that the OP is considered a VIE. However, we meet the disclosure exemption criteria as we are the primary beneficiary of the VIE and our partnership interest in a business and the assets of the OP can be used for purposes other than settling its obligations, such as paying distributions. As such, this standard did not have a material impact to our consolidated financial statements.
In April 2015, the FASB amended the presentation of debt issuance costs on the balance sheet. The amendment requires that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the carrying amount of that debt liability. In August 2015, the FASB added that, for line of credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line, regardless of whether or not there are any outstanding borrowings. The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption was permitted for financial statements that have not previously been issued. We have elected to adopt this guidance effective January 1, 2016. The adoption of this revised guidance resulted in the reclassification of $2.0 million and $2.2 million of deferred financing costs related to our mortgage note payable from deferred costs, net to mortgage note payable, net of deferred financing costs in our consolidated balance sheets as of December 31, 2015.
In September 2015, the FASB issued an update that eliminates the requirement to adjust provisional amounts from a business combination and the related impact on earnings by restating prior period financial statements for measurement period adjustments. The new guidance requires that the cumulative impact of measurement period adjustments on current and prior periods, including the prior period impact on depreciation, amortization and other income statement items and their related tax effects, shall be recognized in the period the adjustment amount is determined. The cumulative adjustment would be reflected within the respective financial statement line items affected. The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption was permitted. We elected to adopt this guidance as of September 30, 2015. The adoption of this guidance did not have a material impact to our financial position, results of operations or cash flows.
In January 2016, the FASB issued an update that amends the recognition and measurement of financial instruments. The new guidance revises an entity’s accounting related to equity investments and the presentation of certain fair value changes for financial liabilities measured at fair value. Among other things, it also amends the presentation and disclosure requirements associated with the fair value of financial instruments. The revised guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is not permitted for most of the amendments in the update. We are currently evaluating the impact of this new guidance.
37
In February 2016, the FASB issued an update that sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The revised guidance is effective on January 1, 2019. Early adoption is permitted. We are currently evaluating the impact of this new guidance.
In March 2016, the FASB issued guidance which requires an entity to determine whether the nature of its promise to provide goods or services to a customer is performed in a principal or agent capacity and to recognize revenue in a gross or net manner based on its principal/agent designation. This guidance is effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. We are currently evaluating the impact of this new guidance.
In March 2016, the FASB issued an update that changes the accounting for certain aspects of share-based compensation. Among other things, the revised guidance allows companies to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. The revised guidance is effective for reporting periods beginning after December 15, 2016. Early adoption is permitted. We have adopted the provisions of this guidance beginning January 1, 2016 and determined that there is no impact to our consolidated financial position, results of operations and cash flows. Our policy is to account for forfeitures as they occur.
In August 2016, the FASB issued guidance on how certain transactions should be classified and presented in the statement of cash flows as either operating, investing or financing activities. Among other things, the update provides specific guidance on where to classify debt prepayment and extinguishment costs, payments for contingent consideration made after a business combination and distributions received from equity method investments. The revised guidance is effective for reporting periods beginning after December 15, 2017. Early adoption is permitted. We are currently evaluating the impact of this new guidance.
In October 2016, the FASB issued guidance where a reporting entity will need to evaluate if it should consolidate a VIE. The amendments change the evaluation of whether a reporting entity is the primary beneficiary of a VIE by changing how a single decision maker of a VIE treats indirect interests in the entity held through related parties that are under common control with the reporting entity. The revised guidance is effective for reporting periods beginning after December 15, 2016. Early adoption is permitted. We are currently evaluating the impact of this new guidance.
38
Properties
The following table presents certain additional information about the properties we owned as of September 30, 2016:
Portfolio | Number of Properties | Rentable Square Feet | Occupancy | Remaining Lease Term | Gross Asset Value | ||||||||
(In thousands) | |||||||||||||
Medical Office Buildings | 80 | 3,133,798 | 91.3% | 5.6 | $ | 870,892 | |||||||
Triple-Net Leased Healthcare Facilities (1): | |||||||||||||
Seniors Housing — Triple Net Leased | 20 | 646,532 | 100.0% | 13.4 | 159,686 | ||||||||
Hospitals | 4 | 428,620 | 77.6% | 9.6 | 87,621 | ||||||||
Post Acute / Skilled Nursing | 18 | 777,071 | 100.0% | 7.4 | 204,788 | ||||||||
Seniors Housing — Operating Properties | 38 | 3,397,658 | 90.1% | N/A | 957,156 | ||||||||
Land | 2 | N/A | N/A | N/A | 3,665 | ||||||||
Construction in Progress | 1 | N/A | N/A | N/A | 53,070 | ||||||||
Portfolio, September 30, 2016 | 163 | 8,383,679 | $ | 2,336,878 | |||||||||
_______________
(1) | Revenues for our triple-net leased healthcare facilities generally consist of fixed rental amounts (subject to annual contractual escalations) received from our tenants in accordance with the applicable lease terms and do not vary based on the underlying operating performance of the properties. As of September 30, 2016, properties leased to our seniors housing — triple net leased and post acute/skilled nursing tenants had operating occupancies of approximately 85.8% and 77.7%, respectively. While operating occupancy rates may affect the profitability of our tenants’ operations, they do not have a direct impact on our revenues or financial results. Operating occupancy statistics for our seniors housing — triple net leased and post acute/skilled nursing facilities are compiled through reports from tenants and have not been independently validated by us. The terms of leases with tenants in our hospital facilities do not require reporting of operating occupancy statistics to us and, as such, no operating occupancy information for our hospital facilities is included herein. |
N/A | Not applicable. |
39
Results of Operations
As of September 30, 2016, we operated in three reportable business segments for management and internal financial reporting purposes: medical office buildings, triple-net leased healthcare facilities, and seniors housing — operating properties. In our MOB operating segment, we own, manage and lease, ourselves or through third party property managers, single and multi-tenant MOBs where tenants are required to pay their pro rata share of property operating expenses, which may be subject to expense exclusions and floors, in addition to base rent. In our triple-net leased healthcare facilities operating segment, we own, manage and lease seniors housing communities, hospitals, post acute care and skilled nursing facilities throughout the United States under long-term triple-net leases, which tenants are generally directly responsible for all operating costs of the respective properties. In our SHOP operating segment, we invest in seniors housing communities under a structure permitted by the REIT Investment Diversification Empowerment Act of 2007 ("RIDEA"). Under RIDEA, a REIT may lease qualified healthcare properties on an arm's length basis to a taxable REIT subsidiary ("TRS") if the property is operated on behalf of such subsidiary by an entity who qualifies as an eligible independent contractor. As of September 30, 2016, we had 11 eligible independent contractors operating 38 SHOP properties. All of our properties across all three business segments are located throughout the United States.
Net operating income ("NOI") is a non-GAAP financial measure used by us to evaluate the operating performance of our real estate portfolio. NOI is equal to total revenues, excluding contingent purchase price consideration, less property operating and maintenance expense. NOI excludes all other financial statement amounts included in net income (loss). We believe NOI provides useful and relevant information because it reflects only those income and expense items that are incurred at the property level and presents such items on an unlevered basis. See “Non-GAAP Financial Measures” included elsewhere in this Quarterly Report on Form 10-Q for additional disclosures regarding NOI and a reconciliation to our net income (loss) attributable to common stockholders, as computed in accordance with GAAP.
40
Comparison of the Three Months Ended September 30, 2016 to the Three Months Ended September 30, 2015
On July 1, 2015, we owned 143 properties (our "Same Store" properties), including two vacant land parcels. We acquired 23 properties during the period from July 1, 2015 through September 30, 2016 (our "Acquisitions"), including one property under development. Information based on Same Store and Acquisitions allows us to evaluate the performance of our portfolio based on a consistent population of properties. Our results of operations for the three months ended September 30, 2016 as compared to the three months ended September 30, 2015 reflect significant increases in most categories primarily due to our Acquisitions. Net loss attributable to stockholders was $8.7 million and $16.1 million for the three months ended September 30, 2016 and 2015, respectively. The following table shows our results of operations for the three months ended September 30, 2016 and 2015 and the period to period change by line item of the consolidated statement of operations:
Three Months Ended September 30, | Increase (Decrease) | ||||||||||||||
2016 | 2015 | $ | % | ||||||||||||
Revenues: | |||||||||||||||
Rental income | $ | 24,980 | $ | 24,495 | $ | 485 | 2.0 | % | |||||||
Operating expense reimbursements | 4,196 | 3,487 | 709 | 20.3 | % | ||||||||||
Resident services and fee income | 46,428 | 36,011 | 10,417 | 28.9 | % | ||||||||||
Contingent purchase price consideration | (83 | ) | 37 | (120 | ) | NM | |||||||||
Total revenues | 75,521 | 64,030 | 11,491 | 17.9 | % | ||||||||||
Expenses: | |||||||||||||||
Property operating and maintenance | 44,041 | 33,506 | 10,535 | 31.4 | % | ||||||||||
Operating fees to related parties | 5,199 | 4,312 | 887 | 20.6 | % | ||||||||||
Acquisition and transaction related | 958 | 3,315 | (2,357 | ) | (71.1 | )% | |||||||||
General and administrative | 2,874 | 2,442 | 432 | 17.7 | % | ||||||||||
Depreciation and amortization | 27,347 | 34,162 | (6,815 | ) | (19.9 | )% | |||||||||
Total expenses | 80,419 | 77,737 | 2,682 | 3.5 | % | ||||||||||
Operating loss | (4,898 | ) | (13,707 | ) | 8,809 | 64.3 | % | ||||||||
Other income (expense): | |||||||||||||||
Interest expense | (4,923 | ) | (3,081 | ) | |||||||||||
Interest and other income | 2 | 66 | |||||||||||||
Gain on sale of real estate investment | 1,330 | — | |||||||||||||
Gain on sale of investment securities | 56 | 160 | |||||||||||||
Total other expenses | (3,535 | ) | (2,855 | ) | (680 | ) | (23.8 | )% | |||||||
Loss before income tax | (8,433 | ) | (16,562 | ) | 8,129 | 49.1 | % | ||||||||
Income tax benefit (expense) | (260 | ) | 369 | ||||||||||||
Net loss | (8,693 | ) | (16,193 | ) | 7,500 | 46.3 | % | ||||||||
Net loss attributable to non-controlling interests | 29 | 85 | |||||||||||||
Net loss attributable to stockholders | $ | (8,664 | ) | $ | (16,108 | ) | $ | 7,444 | 46.2 | % | |||||
_______________
NM — Not Meaningful
Segment Results — Medical Office Buildings
Rental income is primarily related to contractual rent received from tenants in our MOBs. Generally, operating expense reimbursements increase in proportion with the increase in property operating expenses in our MOB segment. Pursuant to many of our lease agreements in our MOBs, tenants are required to pay their pro rata share of property operating expenses, which may be subject to expense exclusions and floors, in addition to base rent. Property operating and maintenance relates to the costs associated with our properties, including real estate taxes, utilities, repairs, maintenance, bad debt expense and unaffiliated third party property management fees.
41
During the three months ended September 30, 2016, rental income increased at Same Store properties in our MOB segment as compared to the three months ended September 30, 2015, primarily due to the execution of new leases and net occupancy increases in several of our multi-tenant MOBs.
During the three months ended September 30, 2016, operating expense reimbursements and property operating and maintenance expense decreased at the Same Store properties in our MOB segment as compared to the three months ended September 30, 2015, primarily due to a tenant lease termination in May 2015 at The Hospital at Craig Ranch located in McKinney, Texas (the "Craig Ranch Termination").
During the three months ended September 30, 2016, rental income, operating expense reimbursements and property operating and maintenance expense at our MOB segment Acquisitions increased significantly as compared to the three months ended September 30, 2015 primarily due to our acquisition of 11 MOBs from July 1, 2015 through September 30, 2016.
The following table presents the revenue and property operating and maintenance expense and the period to period change within our MOB segment for the three months ended September 30, 2016 and 2015:
Same Store(1) | Acquisitions(2) | Segment Total(3) | ||||||||||||||||||||||||||||||||||||||||||
Three Months Ended September 30, | Increase (Decrease) | Three Months Ended September 30, | Increase (Decrease) | Three Months Ended September 30, | Increase (Decrease) | |||||||||||||||||||||||||||||||||||||||
2016 | 2015 | $ | % | 2016 | 2015 | $ | % | 2016 | 2015 | $ | % | |||||||||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||||||||||||||
Rental income | $ | 14,011 | $ | 13,939 | $ | 72 | 0.5 | % | $ | 2,579 | $ | 1,319 | $ | 1,260 | NM | $ | 16,590 | $ | 15,258 | $ | 1,332 | 8.7 | % | |||||||||||||||||||||
Operating expense reimbursements | 2,870 | 2,991 | (121 | ) | (4.0 | )% | 955 | 461 | 494 | NM | 3,825 | 3,452 | 373 | 10.8 | % | |||||||||||||||||||||||||||||
Total revenues | 16,881 | 16,930 | (49 | ) | (0.3 | )% | 3,534 | 1,780 | 1,754 | NM | 20,415 | 18,710 | 1,705 | 9.1 | % | |||||||||||||||||||||||||||||
Property operating and maintenance | 4,985 | 5,149 | (164 | ) | (3.2 | )% | 1,269 | 579 | 690 | NM | 6,254 | 5,728 | 526 | 9.2 | % | |||||||||||||||||||||||||||||
NOI | $ | 11,896 | $ | 11,781 | $ | 115 | 1.0 | % | $ | 2,265 | $ | 1,201 | $ | 1,064 | NM | $ | 14,161 | $ | 12,982 | $ | 1,179 | 9.1 | % | |||||||||||||||||||||
_______________
(1) | Our MOB segment included 70 Same Store properties, including one property sold during the three months ended September 30, 2016. |
(2) | Our MOB segment included 11 Acquisition properties. |
(3) | Our MOB segment included 81 properties as of September 30, 2016, including one property sold during the three months ended September 30, 2016. |
NM — Not Meaningful
The following table presents the number of Same Store MOBs, average occupancy and annualized straight line rental income per rented square foot for single- and multi-tenant MOBs in our MOB segment for the periods presented:
Number of Same Store Properties | Average Occupancy for the Three Months Ended September 30, | Annualized Straight-Line Rental Income Per Rented Square Foot as of September 30, | |||||||||||||||
Type of Same Store MOB | 2016 | 2015 | 2016 | 2015 | |||||||||||||
Single-tenant MOBs(1) | 25 | 100.0 | % | 100.0 | % | $ | 22.07 | $ | 22.52 | ||||||||
Multi-tenant MOBs | 45 | 83.8 | % | 87.0 | % | 22.44 | 22.59 | ||||||||||
Total | 70 | 89.3 | % | 91.5 | % | $ | 22.31 | $ | 22.56 | ||||||||
_______________
(1) | Includes one property sold during the three months ended September 30, 2016 |
Segment Results — Triple Net Leased Healthcare Facilities
Rental income is primarily related to contractual rent received from tenants in our triple-net leased healthcare facilities. Operating expense reimbursements in our triple net leased healthcare facilities segment generally includes reimbursement for property operating expenses that we pay on behalf of tenants in this segment. Pursuant to many of our lease agreements in our triple net leased healthcare facilities, tenants are generally directly responsible for all operating costs of the respective properties in addition to base rent. Property operating and maintenance relates to the costs associated with our properties, including real estate taxes, utilities, repairs, maintenance and bad debt expense. All of such expenses, except for bad debt expense, are generally reimbursed by the tenants in this segment.
42
During the three months ended September 30, 2016, rental income decreased and operating expense reimbursements and property operating and maintenance expense increased at the Same Store properties in our triple net leased healthcare segment as compared to the three months ended September 30, 2015. The decrease in rental income is primarily due to tenant lease terminations in August 2015 at the Specialty Hospital portfolio located in Mesa and Sun City, Arizona (the "Specialty Hospital Terminations"), as well as amendments to leases with two tenants that occupy 15 of our triple net leased healthcare facilities which provided reductions in monthly rental amounts due (the "Rent Reduction Amendments"). The increase in operating expense reimbursement is primarily due to real estate taxes paid by us that will be reimbursed by a tenant in this segment. The increase in property operating and maintenance expense is primarily related to the write-off of cash and straight-line rent receivables from a tenant at six of our skilled nursing facilities whose leases were terminated during the three months ended September 30, 2016 and an increase in bad debt reserve percentages to reflect our uncertainty of the collectability of rental payments from certain tenants within this segment.
During the three months ended September 30, 2016, rental income and property operating and maintenance expense at our triple net leased healthcare facilities segment Acquisitions increased as compared to the three months ended September 30, 2015 primarily due to our acquisition of 5 triple net leased healthcare facilities from July 1, 2015 through September 30, 2016.
The following table presents the revenue and property operating and maintenance expense and the period to period change within our triple net leased healthcare facilities segment for the three months ended September 30, 2016 and 2015:
Same Store(1) | Acquisitions(2) | Segment Total(3) | ||||||||||||||||||||||||||||||||||||||||||
Three Months Ended September 30, | Increase (Decrease) | Three Months Ended September 30, | Increase (Decrease) | Three Months Ended September 30, | Increase (Decrease) | |||||||||||||||||||||||||||||||||||||||
2016 | 2015 | $ | % | 2016 | 2015 | $ | % | 2016 | 2015 | $ | % | |||||||||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||||||||||||||
Rental income | $ | 7,081 | $ | 9,237 | $ | (2,156 | ) | (23.3 | )% | $ | 1,306 | $ | — | $ | 1,306 | NM | $ | 8,387 | $ | 9,237 | $ | (850 | ) | (9.2 | )% | |||||||||||||||||||
Operating expense reimbursements | 371 | 35 | 336 | NM | — | — | — | NM | 371 | 35 | 336 | NM | ||||||||||||||||||||||||||||||||
Total revenues | 7,452 | 9,272 | (1,820 | ) | (19.6 | )% | 1,306 | — | 1,306 | NM | 8,758 | 9,272 | (514 | ) | (5.5 | )% | ||||||||||||||||||||||||||||
Property operating and maintenance | 5,157 | 2,400 | 2,757 | 114.9 | % | 1 | — | 1 | NM | 5,158 | 2,400 | 2,758 | 114.9 | % | ||||||||||||||||||||||||||||||
NOI | $ | 2,295 | $ | 6,872 | $ | (4,577 | ) | (66.6 | )% | $ | 1,305 | $ | — | $ | 1,305 | NM | $ | 3,600 | $ | 6,872 | $ | (3,272 | ) | (47.6 | )% | |||||||||||||||||||
_______________
(1) | Our triple net leased healthcare facilities segment included 39 Same Store properties, including two properties sold in June 2016. |
(2) | Our triple net leased healthcare facilities segment included 5 Acquisition properties. |
(3) | Our triple net leased healthcare facilities segment included 44 properties as of September 30, 2016, including two properties sold in June 2016. |
NM — Not Meaningful
Revenues for our triple-net leased healthcare facilities generally consist of fixed rental amounts (subject to annual contractual escalations) received from our tenants in accordance with the applicable lease terms and do not vary based on the underlying operating performance of the properties.
Segment Results — Seniors Housing Operating Properties
Resident services and fee income is generated in connection with rent and services offered to residents in our SHOPs depending on the level of care required, as well as fees associated with other ancillary services. Property operating and maintenance relates to the costs associated with our properties, as described above, and professional fees, as well as costs relating to caring for the residents in our SHOPs, including food, labor and marketing expenses.
During the three months ended September 30, 2016, resident services and fee income and property operating and maintenance expense increased at the Same Store properties in our SHOP segment as compared to the three months ended September 30, 2015. These increases are primarily due to higher resident rental rates and increased costs to care for the residents of our SHOPs, partially offset by a decrease in average occupancy between periods.
During the three months ended September 30, 2016, rental income and property operating and maintenance expense increased at our SHOP segment Acquisitions as compared to the three months ended September 30, 2015 primarily due to our acquisition of 6 SHOPs from July 1, 2015 through September 30, 2016.
43
The following table presents the revenue and property operating and maintenance expense and the period to period change within our SHOP segment for the three months ended September 30, 2016 and 2015:
Same Store(1) | Acquisitions(2) | Segment Total(3) | ||||||||||||||||||||||||||||||||||||||||||
Three Months Ended September 30, | Increase (Decrease) | Three Months Ended September 30, | Increase (Decrease) | Three Months Ended September 30, | Increase (Decrease) | |||||||||||||||||||||||||||||||||||||||
2016 | 2015 | $ | % | 2016 | 2015 | $ | % | 2016 | 2015 | $ | % | |||||||||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||||||||||||||
Resident services and fee income | $ | 37,256 | $ | 35,786 | $ | 1,470 | 4.1 | % | $ | 9,172 | $ | 225 | $ | 8,947 | NM | $ | 46,428 | $ | 36,011 | $ | 10,417 | 28.9 | % | |||||||||||||||||||||
Rental income | 3 | — | 3 | NM | — | — | — | NM | 3 | — | 3 | NM | ||||||||||||||||||||||||||||||||
Total revenues | 37,259 | 35,786 | 1,473 | 4.1 | % | 9,172 | 225 | 8,947 | NM | 46,431 | 36,011 | 10,420 | 28.9 | % | ||||||||||||||||||||||||||||||
Property operating and maintenance | 26,591 | 25,214 | 1,377 | 5.5 | % | 6,038 | 164 | 5,874 | NM | 32,629 | 25,378 | 7,251 | 28.6 | % | ||||||||||||||||||||||||||||||
NOI | $ | 10,668 | $ | 10,572 | $ | 96 | 0.9 | % | $ | 3,134 | $ | 61 | $ | 3,073 | NM | $ | 13,802 | $ | 10,633 | $ | 3,169 | 29.8 | % | |||||||||||||||||||||
_______________
(1) | Our SHOP segment included 32 Same Store properties. |
(2) | Our SHOP segment included 6 Acquisition properties. |
(3) | Our SHOP segment included 38 properties as of September 30, 2016. |
NM — Not Meaningful
Contingent Purchase Price Consideration
During the three months ended September 30, 2016 and 2015, we recognized $(0.1) million and approximately $37,000, respectively, which primarily related to contingent purchase price consideration in connection with holdback and other vacancy escrow arrangements associated with two acquisitions. During the three months ended September 30, 2016, the settlement of certain property operating expenses related to vacancy escrow agreements at one acquisition resulted in us making payments to the seller. Contingent purchase price consideration during the three months ended September 30, 2015 related to releases from escrow under a vacancy escrow arrangement at one of our MOBs. Based on facts and circumstances that existed at the time of acquisition, we determined that it was not probable that we would recover certain amounts placed into escrow under vacancy escrow agreements. However, the vacant leasable space under the vacancy escrow agreements was still not occupied as of the agreed upon dates, which resulted in the return of escrowed funds to us and the recognition of contingent purchase price consideration.
Operating Fees to Related Parties
Operating fees to related parties increased $0.9 million to $5.2 million for the three months ended September 30, 2016 from $4.3 million for the three months ended September 30, 2015. Our Advisor and Property Manager are paid for asset management and property management services for managing our properties on a day-to-day basis. The asset management fee is based on a percentage of the lesser of (a) cost of assets and (b) fair value of assets. Asset management fees increased $0.7 million to $4.4 million for the three months ended September 30, 2016 from $3.7 million for the three months ended September 30, 2015. The increase in the asset management fee is due to an increase in the cost of assets for the three months ended September 30, 2016, which was primarily related to our Acquisitions and capital expenditures during the period from July 1, 2015 through September 30, 2016.
We incurred $0.8 million in property management fees during the three months ended September 30, 2016, a $0.1 million increase from the $0.7 million in property management fees incurred during the three months ended September 30, 2015. Property management fees increase in direct correlation with gross revenues.
Acquisition and Transaction Related Expenses
Acquisition and transaction related expenses of $1.0 million for the three months ended September 30, 2016 primarily related to costs associated with the Strategic Review. Acquisition and transaction related expenses of $3.3 million for the three months ended September 30, 2015 related to our acquisition of six properties, including one property under construction, during the period. Acquisition and transaction related expenses generally increase in direct correlation with the number and contract purchase price of properties acquired during the period and the level of activity surrounding any contemplated transaction.
44
General and Administrative Expenses
General and administrative expenses increased $0.5 million to $2.9 million for the three months ended September 30, 2016 from $2.4 million for the three months ended September 30, 2015, including $1.2 million incurred from related parties during each period. The increase in general and administrative expenses was primarily driven by the timing of our annual meeting of stockholders and related proxy solicitation services. In 2016, our annual meeting of stockholders was held during the three months ended September 30, 2016, while in 2015, our annual meeting of stockholders was held during the three months ended June 30, 2015, which caused related expenses to be recognized in different comparable periods. Costs related to these annual meetings of stockholders and proxy solicitation services have been expensed during the period in which the annual meetings occurred.
Depreciation and Amortization Expenses
Depreciation and amortization expense decreased $6.9 million to $27.3 million for the three months ended September 30, 2016 from $34.2 million for the three months ended September 30, 2015. Same Store depreciation and amortization decreased $13.0 million primarily due to the expiration of the estimated useful lives of in-place leases recorded at acquisition, partially offset by an increase of $6.2 million in depreciation and amortization related to our Acquisitions. The purchase price of acquired properties is allocated to tangible and identifiable intangible assets and depreciated or amortized over the estimated useful lives of the properties.
Interest Expense
Interest expense increased $1.8 million to $4.9 million for the three months ended September 30, 2016 from $3.1 million for the three months ended September 30, 2015. Interest expense related to our mortgage notes payable increased $0.3 million as a result of a higher average outstanding mortgage balance of $149.1 million during the three months ended September 30, 2016, compared to the $101.3 million average balance during the three months ended September 30, 2015, as well as the associated increases in amortization of deferred financing costs, partially offset by increased amortization of mortgage premiums.
We entered into a $50.0 million credit facility (the "Credit Facility") in March 2014. In April 2014, June 2015 and July 2015, we entered into amendments which increased available borrowings to $200.0 million, $500.0 million and $565.0 million, respectively. Interest expense related to the Credit Facility increased $1.5 million primarily as a result of higher amortization of deferred financing costs and non-usage fees as a result of the amendments and increases to the Credit Facility as well as a higher average outstanding balance on the Credit Facility of $469.0 million during the three months ended September 30, 2016 compared to the $160.0 million average balance during the three months ended September 30, 2015.
We view a mix of secured and unsecured financing sources as an efficient and accretive means to acquire properties and manage working capital. Our interest expense in future periods will vary based on our level of future borrowings, the cost of borrowings and the opportunity to acquire real estate assets which meet our investment objectives.
Interest and Other Income
Interest and other income decreased $0.1 million to approximately $2,000 for the three months ended September 30, 2016 from $0.1 million for the three months ended September 30, 2015. Interest and other income includes income from our investment securities and interest income earned on cash and cash equivalents held during the period. During the year ended December 31, 2015 and the three months ended September 31, 2016, we sold all of our positions in preferred stock, common stock and real estate income funds and an investment in a senior note, which resulted in a decrease in dividend and interest income from our investment portfolio during the three months ended September 30, 2016.
Gain on Sale of Investment Property
Gain on sale of investment property for the three months ended September 30, 2016 related to the sale of a real estate investment located in Santa Rosa, California for $17.5 million, which resulted in a gain of $1.3 million during the period. We did not sell any of our real estate investments during the three months ended September 30, 2015 and therefore had no gain on sale of investment property for such period.
Gain on Sale of Investment Securities
Gain on sale of investments for the three months ended September 30, 2016 of $0.1 million resulted from selling our investments in preferred stock with a cost basis of $1.1 million. Gain on sale of investments for the three months ended September 30, 2015 of $0.2 million resulted from our selling of certain of our investments in preferred stock, common stock and real estate income funds with a cost basis of $14.9 million.
45
Income Tax Benefit (Expense)
Income tax expense of $(0.3) million during the three months ended September 30, 2016, related to income from our taxable REIT subsidiary ("TRS"). Such income was derived from our 38 SHOPs, the net income or loss of which are owned by our TRS. Income tax benefit of $0.4 million for the three months ended September 30, 2015 primarily related to deferred tax assets generated by current period net operating losses associated with our TRS. These deferred tax assets are partially offset by other income tax expenses incurred during the same period. Income taxes generally relate to our SHOPs, which are leased by our TRS.
Net Loss Attributable to Non-Controlling Interests
Net loss attributable to non-controlling interests was approximately $29,000 and $0.1 million for the three months ended September 30, 2016 and 2015, respectively, which represents the portion or our net income or net loss that is related to OP Unit and non-controlling interest holders.
46
Comparison of the Nine Months Ended September 30, 2016 to the Nine Months Ended September 30, 2015
On January 1, 2015, we owned 118 properties (our "Same Store" properties), including two vacant land parcels. We acquired 48 properties during the period from January 1, 2015 through September 30, 2016 (our "Acquisitions"), including one property under development. Information based on Same Store and Acquisitions allows us to evaluate the performance of our portfolio based on a consistent population of properties. Our results of operations for the nine months ended September 30, 2016 as compared to the nine months ended September 30, 2015 reflect significant increases in most categories primarily due to our Acquisitions. Net loss attributable to stockholders was $13.2 million and $34.7 million for the nine months ended September 30, 2016 and 2015, respectively. The following table shows our results of operations for the nine months ended September 30, 2016 and 2015 and the period to period change by line item of the consolidated statement of operations:
Nine Months Ended September 30, | Increase (Decrease) | ||||||||||||||
2016 | 2015 | $ | % | ||||||||||||
Revenues: | |||||||||||||||
Rental income | $ | 77,984 | $ | 68,282 | $ | 9,702 | 14.2 | % | |||||||
Operating expense reimbursements | 11,677 | 9,344 | 2,333 | 25.0 | % | ||||||||||
Resident services and fee income | 137,084 | 103,004 | 34,080 | 33.1 | % | ||||||||||
Contingent purchase price consideration | 142 | 487 | (345 | ) | (70.8 | )% | |||||||||
Total revenues | 226,887 | 181,117 | 45,770 | 25.3 | % | ||||||||||
Expenses: | |||||||||||||||
Property operating and maintenance | 123,527 | 89,612 | 33,915 | 37.8 | % | ||||||||||
Impairment on sale of real estate investments | 389 | — | 389 | NM | |||||||||||
Operating fees to related parties | 15,526 | 7,722 | 7,804 | 101.1 | % | ||||||||||
Acquisition and transaction related | 3,059 | 8,502 | (5,443 | ) | (64.0 | )% | |||||||||
General and administrative | 9,277 | 7,574 | 1,703 | 22.5 | % | ||||||||||
Depreciation and amortization | 76,245 | 97,193 | (20,948 | ) | (21.6 | )% | |||||||||
Total expenses | 228,023 | 210,603 | 17,420 | 8.3 | % | ||||||||||
Operating loss | (1,136 | ) | (29,486 | ) | 28,350 | 96.1 | % | ||||||||
Other income (expense): | |||||||||||||||
Interest expense | (14,783 | ) | (6,838 | ) | |||||||||||
Interest and other income | 45 | 555 | |||||||||||||
Gain on sale of real estate investment | 1,330 | — | |||||||||||||
Gain on sale of investment securities | 56 | 446 | |||||||||||||
Total other expenses | (13,352 | ) | (5,837 | ) | (7,515 | ) | (128.7 | )% | |||||||
Loss before income tax | (14,488 | ) | (35,323 | ) | 20,835 | 59.0 | % | ||||||||
Income tax benefit (expense) | 1,215 | 387 | |||||||||||||
Net loss | (13,273 | ) | (34,936 | ) | 21,663 | 62.0 | % | ||||||||
Net loss attributable to non-controlling interests | 54 | 187 | |||||||||||||
Net loss attributable to stockholders | $ | (13,219 | ) | $ | (34,749 | ) | $ | 21,530 | 62.0 | % | |||||
_______________
NM — Not Meaningful
Segment Results — Medical Office Buildings
Rental income is primarily related to contractual rent received from tenants in our MOBs. Generally, operating expense reimbursements increase in proportion with the increase in property operating expenses in our MOB segment. Pursuant to many of our lease agreements in our MOBs, tenants are required to pay their pro rata share of property operating expenses, which may be subject to expense exclusions and floors, in addition to base rent. Property operating and maintenance relates to the costs associated with our properties, including real estate taxes, utilities, repairs, maintenance, bad debt expense and unaffiliated third party property management fees.
47
During the nine months ended September 30, 2016, rental income, operating expense reimbursements and property operating and maintenance expense decreased at the Same Store properties in our MOB segment as compared to the nine months ended September 30, 2015, primarily due to the Craig Ranch Termination.
During the nine months ended September 30, 2016, rental income, operating expense reimbursements and property operating and maintenance expense at our MOB segment Acquisitions increased significantly as compared to the nine months ended September 30, 2015 primarily due to our acquisition of 31 MOBs from January 1, 2015 through September 30, 2016.
The following table presents the revenue and property operating and maintenance expense and the period to period change within our MOB segment for the nine months ended September 30, 2016 and 2015:
Same Store(1) | Acquisitions(2) | Segment Total(3) | |||||||||||||||||||||||||||||||||||||||||||
Nine Months Ended September 30, | Increase (Decrease) | Nine Months Ended September 30, | Increase (Decrease) | Nine Months Ended September 30, | Increase (Decrease) | ||||||||||||||||||||||||||||||||||||||||
2016 | 2015 | $ | % | 2016 | 2015 | $ | % | 2016 | 2015 | $ | % | ||||||||||||||||||||||||||||||||||
Revenues: | |||||||||||||||||||||||||||||||||||||||||||||
Rental income | $ | 32,337 | $ | 33,131 | $ | (794 | ) | (2.4 | )% | $ | 17,372 | $ | 6,845 | $ | 10,527 | 153.8 | % | $ | 49,709 | $ | 39,976 | $ | 9,733 | 24.3 | % | ||||||||||||||||||||
Operating expense reimbursements | 7,409 | 8,213 | (804 | ) | (9.8 | )% | 3,844 | 1,008 | 2,836 | 281.3 | % | 11,253 | 9,221 | 2,032 | 22.0 | % | |||||||||||||||||||||||||||||
Total revenues | 39,746 | 41,344 | (1,598 | ) | (3.9 | )% | 21,216 | 7,853 | 13,363 | 170.2 | % | 60,962 | 49,197 | 11,765 | 23.9 | % | |||||||||||||||||||||||||||||
Property operating and maintenance | 11,646 | 13,049 | (1,403 | ) | (10.8 | )% | 6,276 | 1,806 | 4,470 | 247.5 | % | 17,922 | 14,855 | 3,067 | 20.6 | % | |||||||||||||||||||||||||||||
NOI | $ | 28,100 | $ | 28,295 | $ | (195 | ) | (0.7 | )% | $ | 14,940 | $ | 6,047 | $ | 8,893 | 147.1 | % | $ | 43,040 | $ | 34,342 | $ | 8,698 | 25.3 | % | ||||||||||||||||||||
_______________
(1) | Our MOB segment included 50 Same Store properties. |
(2) | Our MOB segment included 31 Acquisition properties, including one property sold during the nine months ended September 30, 2016. |
(3) | Our MOB segment included 81 properties as of September 30, 2016, including one property sold during the nine months ended September 30, 2016. |
NM — Not Meaningful
The following table presents the number of Same Store MOBs, average occupancy and annualized straight line rental income per rented square foot for single- and multi-tenant MOBs in our MOB segment for the periods presented:
Number of Same Store Properties | Average Occupancy for the Nine Months Ended September 30, | Annualized Straight Line Rental Income Per Rented Square Foot as of September 30, | |||||||||||||||
Type of Same Store MOB | 2016 | 2015 | 2016 | 2015 | |||||||||||||
Single-tenant MOBs | 16 | 100.0 | % | 100.0 | % | $ | 21.55 | $ | 21.53 | ||||||||
Multi-tenant MOBs | 34 | 84.2 | % | 88.1 | % | 22.65 | 22.85 | ||||||||||
Total | 50 | 88.9 | % | 91.6 | % | $ | 22.29 | $ | 22.42 | ||||||||
Segment Results — Triple Net Leased Healthcare Facilities
Rental income is primarily related to contractual rent received from tenants in our triple-net leased healthcare facilities. Operating expense reimbursements in our triple net leased healthcare facilities segment generally includes reimbursement for property operating expenses that we pay on behalf of tenants in this segment. Pursuant to many of our lease agreements in our triple net leased healthcare facilities, tenants are generally directly responsible for all operating costs of the respective properties in addition to base rent. Property operating and maintenance relates to the costs associated with our properties, including real estate taxes, utilities, repairs, maintenance and bad debt expense. All of such expenses, except for bad debt expense, are generally reimbursed by the tenants in this segment.
48
During the nine months ended September 30, 2016, rental income decreased and operating expense reimbursements and property operating and maintenance expense increased at the Same Store properties in our triple net leased healthcare segment as compared to the nine months ended September 30, 2015. The decrease in rental income was primarily due to the sale of two properties from this segment during the nine months ended September 30, 2016 and the Rent Reduction Amendments. The increase in operating expense reimbursements is primarily due to higher property operating expenses at one of our properties where we are reimbursed for property operating expenses that we pay on behalf of the tenant, as well as late fee revenue that was assessed to tenants with aged receivables. The increase in property operating and maintenance expense is primarily related to the write-off of cash and straight-line rent receivables from a tenant at six of our skilled nursing facilities whose leases were terminated during the nine months ended September 30, 2016 and to an increase in bad debt reserve percentages to reflect our uncertainty of the collectability of rental payments from certain tenants within this segment.
During the nine months ended September 30, 2016, rental income increased and property operating and maintenance expense and operating expense reimbursements decreased at our triple net leased healthcare facilities segment Acquisitions as compared to the nine months ended September 30, 2015. The increase in rental income was primarily due to our acquisition of eight triple net leased healthcare facilities from January 1, 2015 through September 30, 2016, with the increase being partially offset by decreases due to the Specialty Hospital Terminations. The decreases in property operating and maintenance expense and operating expense reimbursements was also due to the Specialty Hospital Terminations.
The following table presents the revenue and property operating and maintenance expense and the period to period change within our triple net leased healthcare facilities segment for the nine months ended September 30, 2016 and 2015:
Same Store (1) | Acquisitions (2) | Segment Total (3) | |||||||||||||||||||||||||||||||||||||||||||
Nine Months Ended September 30, | Increase (Decrease) | Nine Months Ended September 30, | Increase (Decrease) | Nine Months Ended September 30, | Increase (Decrease) | ||||||||||||||||||||||||||||||||||||||||
2016 | 2015 | $ | % | 2016 | 2015 | $ | % | 2016 | 2015 | $ | % | ||||||||||||||||||||||||||||||||||
Revenues: | |||||||||||||||||||||||||||||||||||||||||||||
Rental income | $ | 23,759 | $ | 25,620 | $ | (1,861 | ) | (7.3 | )% | $ | 4,512 | $ | 2,686 | $ | 1,826 | 68.0 | % | $ | 28,271 | $ | 28,306 | $ | (35 | ) | (0.1 | )% | |||||||||||||||||||
Operating expense reimbursements | 424 | 59 | 365 | NM | — | 64 | (64 | ) | NM | 424 | 123 | 301 | NM | ||||||||||||||||||||||||||||||||
Total revenues | 24,183 | 25,679 | (1,496 | ) | (5.8 | )% | 4,512 | 2,750 | 1,762 | 64.1 | % | 28,695 | 28,429 | 266 | 0.9 | % | |||||||||||||||||||||||||||||
Property operating and maintenance | 8,589 | 1,413 | 7,176 | 507.9 | % | 326 | 1,684 | (1,358 | ) | NM | 8,915 | 3,097 | 5,818 | 187.9 | % | ||||||||||||||||||||||||||||||
NOI | $ | 15,594 | $ | 24,266 | $ | (8,672 | ) | (35.7 | )% | $ | 4,186 | $ | 1,066 | $ | 3,120 | 292.7 | % | $ | 19,780 | $ | 25,332 | $ | (5,552 | ) | (21.9 | )% | |||||||||||||||||||
_______________
(1) | Our triple net leased healthcare facilities segment included 36 Same Store properties, including two properties sold during the nine months ended September 30, 2016. |
(2) | Our triple net leased healthcare facilities segment included 8 Acquisition properties. |
(3) | Our triple net leased healthcare facilities segment included 44 properties as of September 30, 2016, including two properties sold during the six months ended June 30, 2016. |
Revenues for our triple-net leased healthcare facilities generally consist of fixed rental amounts (subject to annual contractual escalations) received from our tenants in accordance with the applicable lease terms and do not vary based on the underlying operating performance of the properties.
Segment Results — Seniors Housing Operating Properties
Resident services and fee income is generated in connection with rent and services offered to residents in our SHOPs depending on the level of care required, as well as fees associated with other ancillary services. Property operating and maintenance relates to the costs associated with our properties, as described above, and professional fees, as well as costs relating to caring for the residents in our SHOPs, including food, labor, and marketing expenses.
During the nine months ended September 30, 2016, resident services and fee income and property operating and maintenance expense increased at the Same Store properties in our SHOP segment as compared to the nine months ended September 30, 2015. These increases are primarily due to higher resident rental rates, increased property taxes and higher costs to care for the residents of our SHOPs.
During the nine months ended September 30, 2016, rental income and property operating and maintenance expense increased at our SHOP segment Acquisitions as compared to the nine months ended September 30, 2015 primarily due to our acquisition of 8 SHOPs from January 1, 2015 through September 30, 2016.
49
The following table presents the revenue and property operating and maintenance expense and the period to period change within our SHOP segment for the nine months ended September 30, 2016 and 2015:
Same Store (1) | Acquisitions (2) | Segment Total (3) | ||||||||||||||||||||||||||||||||||||||||||
Nine Months Ended September 30, | Increase (Decrease) | Nine Months Ended September 30, | Increase (Decrease) | Nine Months Ended September 30, | Increase (Decrease) | |||||||||||||||||||||||||||||||||||||||
2016 | 2015 | $ | % | 2016 | 2015 | $ | % | 2016 | 2015 | $ | % | |||||||||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||||||||||||||
Resident services and fee income | $ | 103,112 | $ | 99,022 | $ | 4,090 | 4.1 | % | $ | 33,972 | $ | 3,982 | $ | 29,990 | NM | $ | 137,084 | $ | 103,004 | $ | 34,080 | 33.1 | % | |||||||||||||||||||||
Rental income | 4 | — | 4 | NM | — | — | — | NM | 4 | — | 4 | NM | ||||||||||||||||||||||||||||||||
Total revenues | 103,116 | 99,022 | 4,094 | 4.1 | % | 33,972 | 3,982 | 29,990 | NM | 137,088 | 103,004 | 34,084 | 33.1 | % | ||||||||||||||||||||||||||||||
Property operating and maintenance | 74,630 | 69,043 | 5,587 | 8.1 | % | 22,060 | 2,617 | 19,443 | NM | 96,690 | 71,660 | 25,030 | 34.9 | % | ||||||||||||||||||||||||||||||
NOI | $ | 28,486 | $ | 29,979 | $ | (1,493 | ) | (5.0 | )% | $ | 11,912 | $ | 1,365 | $ | 10,547 | NM | $ | 40,398 | $ | 31,344 | $ | 9,054 | 28.9 | % | ||||||||||||||||||||
_______________
(1) | Our SHOP segment included 30 Same Store properties. |
(2) | Our SHOP segment included 8 Acquisition properties. |
(3) | Our SHOP segment included 38 properties as of September 30, 2016. |
NM — Not Meaningful
Contingent Purchase Price Consideration
During the nine months ended September 30, 2016 and 2015, we recognized $0.1 million and $0.5 million, respectively, which primarily related to contingent purchase price consideration in connection with holdback and other vacancy escrow arrangements associated with two acquisitions. Contingent purchase price consideration during the nine months ended September 30, 2016 related to releases from a holdback escrow for unit renovations at one of our SHOPs, partially offset by the settlement of certain property operating expenses related to vacancy escrow agreements at one acquisition which resulted in us making payments to the seller. Contingent purchase price consideration during the nine months ended September 30, 2015 related to releases from escrow under a vacancy escrow arrangement at one of our MOBs. Based on facts and circumstances that existed at the time of acquisition, we determined that it was not probable that we would recover certain amounts placed into escrow under vacancy escrow agreements. However, the vacant leasable space under the vacancy escrow agreements was not occupied as of the agreed upon dates, which resulted in the return of escrowed funds to us and the recognition of contingent purchase price consideration.
Impairment on Sale of Real Estate Investments
Impairment on sale of real estate investments for the nine months ended September 30, 2016 related to the sale of two real estate investments located in Kansas City, Missouri for $8.8 million, which resulted in an impairment of $0.4 million during the period. We did not sell any real estate investments and therefore had no gains or impairments on sale of real estate investments during the nine months ended September 30, 2015.
Operating Fees to Related Parties
Operating fees to related parties increased $7.8 million to $15.5 million for the nine months ended September 30, 2016 from $7.7 million for the nine months ended September 30, 2015. We pay our Advisor and Property Manager for asset management and property management services, respectively.
Prior to April 1, 2015, asset management fees were paid by us causing the OP to issue restricted performance based Class B Units to the Advisor. On May 12, 2015, we entered into an amendment to our advisory agreement which, among other things, provided that, effective April 1, 2015, the asset management fee is payable to the Advisor or its assignees in cash, in shares, or a combination of both, the form of payment to be determined in the sole discretion of the Advisor, and is expensed as incurred. During the nine months ended September 30, 2015, we granted 128,781 Class B Units at an issue price of $22.50 per unit in lieu of paying for the asset management services in cash. The asset management fee is based a percentage of the lesser of (a) cost of assets and (b) fair value of assets. Asset management fees increased $6.1 million to $13.2 million for the nine months ended September 30, 2016 from $7.1 million for the nine months ended September 30, 2015. The increase in the asset management fee is due to the amendment to the advisory agreement as well as an increase in the cost of assets for the nine months ended September 30, 2016, which was primarily related to our Acquisitions and capital expenditures during the period from January 1, 2015 through September 30, 2016.
50
We incurred $2.3 million in property management fees during the nine months ended September 30, 2016, a $1.6 million increase from the $0.7 million in property management fees incurred during the nine months ended September 30, 2015. Property management fees increase in direct correlation with gross revenues. The Property Manager elected to waive a portion of property management fees for the nine months ended September 30, 2015. For the nine months ended September 30, 2015, we would have incurred additional property management fees of $1.2 million had these fees not been waived.
Acquisition and Transaction Related Expenses
Acquisition and transaction related expenses of $3.1 million for the nine months ended September 30, 2016 primarily related to costs associated with the Strategic Review, costs associated with property acquisitions that will not be completed and costs associated with acquisitions consummated during the year ended December 31, 2015. Acquisition and transaction related expenses of $8.5 million for the nine months ended September 30, 2015 primarily related to our acquisition of 31 properties during the period. Acquisition and transaction related expenses generally increase in direct correlation with the number and contract purchase price of properties acquired during the period and the level of activity surrounding any contemplated transaction.
General and Administrative Expenses
General and administrative expenses increased $1.7 million to $9.3 million for the nine months ended September 30, 2016 from $7.6 million for the nine months ended September 30, 2015, including $3.5 million incurred from related parties during each period. The increase was primarily driven by professional fees incurred to support our larger real estate portfolio.
Depreciation and Amortization Expenses
Depreciation and amortization expense decreased $21.0 million to $76.2 million for the nine months ended September 30, 2016 from $97.2 million for the nine months ended September 30, 2015. Same Store depreciation and amortization decreased $40.0 million primarily due to the expiration of the estimated useful lives of in-place leases recorded at acquisition, partially offset by increases of $18.8 million in depreciation and amortization related to our Acquisitions and $0.2 million related to internally developed corporate software that was capitalized and put into service in April 2015.
Interest Expense
Interest expense increased $8.0 million to $14.8 million for the nine months ended September 30, 2016 from $6.8 million for the nine months ended September 30, 2015. Interest expense related to our mortgage notes payable increased $1.4 million related to our higher average mortgage notes payable balance of $152.7 million during the nine months ended of September 30, 2016, compared to the $90.0 million average balance during the nine months ended September 30, 2015, as well as the associated increases in amortization of deferred financing costs and accretion of mortgage discounts, partially offset by increased amortization of mortgage premiums.
We entered into a $50.0 million Credit Facility in March 2014. In April 2014, June 2015 and July 2015 we entered into amendments which increased available borrowings to $200.0 million, $500.0 million and $565.0, million respectively. Interest expense related to the Credit Facility increased $6.5 million primarily as a result of higher amortization of deferred financing costs as a result of the amendments and increases to the Credit Facility, as well as higher interest payments due to an average outstanding balance on the Credit Facility of $457.8 million during the nine months ended September 30, 2016 compared to the $64.0 million average balance during the nine months ended September 30, 2015, partially offset by lower unused fees.
We view a mix of secured and unsecured financing sources as an efficient and accretive means to acquire properties and manage working capital. Our interest expense in future periods will vary based on our level of future borrowings, the cost of borrowings and the opportunity to acquire real estate assets which meet our investment objectives.
Interest and Other Income
Interest and other income decreased $0.6 million to approximately $45,000 for the nine months ended September 30, 2016 from $0.6 million for the nine months ended September 30, 2015. Interest and other income includes income from our investment securities and interest income earned on cash and cash equivalents held during the period. During the nine months ended September 30, 2015 and the three months ended September 30, 2016, we sold all of our positions in preferred stock, common stock, real estate income funds and our investment in a senior note, which resulted in a decrease in dividend and interest income from our investment portfolio during the nine months ended September 30, 2016.
Gain on Sale of Investment Property
Gain on sale of investment property for the nine months ended September 30, 2016 related to the sale of a real estate investment located in Santa Rosa, California for $17.5 million, which resulted in a gain of $1.3 million during the period. We did not sell any of our real estate investments during the nine months ended September 30, 2015 and therefore had no gain on sale of investment property for such period.
51
Gain on Sale of Investment Securities
Gain on sale of investments for the nine months ended September 30, 2016 of $0.1 million resulted from selling our investments in preferred stock with a cost basis of $1.1 million. Gain on sale of investments for the nine months ended September 30, 2015 of $0.4 million resulted from our selling of certain of our investments in preferred stock, common stock and real estate income funds and our investment in a senior note with a cost basis of $18.8 million.
Income Tax Benefit
Income tax benefit of $1.2 million and $0.4 million for the nine months ended September 30, 2016 and September 30, 2015, respectively, related to deferred tax assets generated by current period net operating losses associated with our TRS. These deferred tax assets are partially offset by other income tax expenses incurred during the same period. Income taxes generally relate to our SHOPs, which are leased by our TRS.
Net Loss Attributable to Non-Controlling Interests
Net loss attributable to non-controlling interests was approximately $54,000 and $0.2 million for the nine months ended September 30, 2016 and 2015, respectively, which represents the portion of our net income or net loss that is related to OP Unit and non-controlling interest holders.
Cash Flows for the Nine Months Ended September 30, 2016
During the nine months ended September 30, 2016, net cash provided by operating activities was $63.9 million. The level of cash flows provided by operating activities is affected by the number of properties owned, the performance of those properties, the timing of interest payments and the amount of borrowings outstanding during the period, as well as the receipt of scheduled rent payments and the level of operating expenses. Cash inflows related to a net loss adjusted for non-cash items of $72.2 million (net loss of $13.3 million adjusted for non-cash items including depreciation and amortization of tangible and identifiable intangible real estate assets, deferred financing costs and mortgage premiums and discounts, equity based compensation, bad debt expense, gain or loss on sale of real estate investments and gain on sale of investment securities of $85.5 million), an increase in accounts payable and accrued expenses of $1.9 million primarily related to accrued professional fees, real estate taxes and property operating expenses for our MOBs and SHOPs, as well as accrued related party fees and reimbursements, an increase of $1.4 million in deferred rent, and a $0.1 million decrease in restricted cash related to tenant deposits, real estate tax and insurance escrows on mortgaged properties. These cash inflows were partially offset by a net increase in prepaid and other assets of $5.1 million due to rent, other receivables and prepaid real estate taxes and insurance and a net increase in unbilled receivables recorded in accordance with straight-line basis accounting of $6.5 million.
Net cash used in investing activities during the nine months ended September 30, 2016 was $0.2 million. The cash used in investing activities included $21.8 million to fund the ongoing development of a skilled nursing facility in Jupiter, Florida as well as $5.7 million of capital expenditures. These cash outflows were partially offset by proceeds from the sale of real estate of $26.1 million, proceeds from the sale of investment securities of $1.1 million and proceeds from a deposit for a potential real estate sale of $0.1 million.
Net cash used in financing activities of $37.8 million during the nine months ended September 30, 2016 related to distributions to stockholders of $55.5 million, common stock repurchases of $12.2 million, mortgage principal repayments of $15.1 million, payments of deferred financing costs of $1.0 million and distributions to non-controlling interest holders of $0.5 million. These cash outflows were partially offset by proceeds from the Credit Facility of $46.5 million.
Cash Flows for the Nine Months Ended September 30, 2015
During the nine months ended September 30, 2015, net cash provided by operating activities was $56.4 million. The level of cash flows used in or provided by operating activities is affected by the volume of acquisition activity, the timing of interest payments and the amount of borrowings outstanding during the period, as well as the receipt of scheduled rent payments and the level of operating expenses. Cash flows provided by operating activities during the nine months ended September 30, 2015 included $8.5 million of acquisition and transaction costs. Cash inflows related to a net loss adjusted for non-cash items of $66.8 million (net loss of $34.9 million adjusted for non-cash items including depreciation and amortization of tangible and identifiable intangible real estate assets, deferred financing costs and mortgage premiums, equity based compensation, bad debt expense and gain on sale of investments of $101.7 million) and an increase in accounts payable and accrued expenses of $7.0 million primarily related to accrued professional fees, real estate taxes and property operating expenses for our MOBs and SHOPs, as well as accrued related party property management fees and reimbursements and interest expense. These cash inflows were partially offset by a net increase in prepaid and other assets of $8.1 million due to rent, other receivables, prepaid real estate taxes and insurance and utility deposits, a net increase in unbilled receivables recorded in accordance with straight-line basis accounting of $7.3 million, a $1.2 million increase in restricted cash related to tenant deposits, real estate tax and insurance escrows on mortgaged properties and $0.7 million in deferred rent.
52
Net cash used in investing activities during the nine months ended September 30, 2015 was $301.9 million. The cash used in investing activities primarily included $313.0 million to acquire 31 properties. Net cash used in investing activities also included $3.2 million in deposits for future potential real estate acquisitions, $5.0 million of capital expenditures and $0.1 million for the purchase of investment securities, partially offset by $19.3 million in proceeds from the sale of investment securities.
Net cash provided by financing activities of $110.6 million during the nine months ended September 30, 2015 related to proceeds from the Credit Facility of $185.0 million to fund acquisitions and contributions from non-controlling interest holders of $0.5 million. These cash inflows were partially offset by distributions to stockholders, net of proceeds received pursuant to the DRIP of $49.4 million, common stock repurchases of $5.9 million, payments of deferred financing costs of $12.4 million, mortgage payments of $6.0 million, offering costs paid of $0.6 million and distributions to non-controlling interest holders of $0.5 million.
Liquidity and Capital Resources
As of September 30, 2016, we had $50.4 million of cash and cash equivalents. We closed our IPO on November 17, 2014, which resulted in net proceeds of $2.2 billion.
We acquired our first property and commenced real estate operations in May 2013. As of September 30, 2016, we owned 163 properties with real estate investments, at cost, of $2.3 billion. Our principal demands for cash will be for acquisition costs, including the purchase price of any properties, loans and securities we acquire, funding our ongoing development project, improvement costs, the payment of our operating and administrative expenses, debt service obligations and distributions to our stockholders. We generally intend to acquire assets with mortgage or other debt proceeds, such as proceeds from our Credit Facility.
We expect to fund our future short-term operating liquidity requirements through a combination of cash on hand, net cash provided by our current property operations and the operations of properties to be acquired in the future, and proceeds from secured mortgage financings, our Credit Facility and our credit facilities with KeyBank National Association (the “KeyBank Facility”) and Capital One Multifamily Finance, LLC (the “Capital One Facility”, and, together with the KeyBank Facility, the “Fannie Credit Facilities”), which closed on October 31, 2016.
We expect to utilize proceeds from secured financings and our Credit Facility and Fannie Credit Facilities to complete future property acquisitions. Specifically, we may incur mortgage debt and pledge all or some of our properties as security for that debt to obtain funds to acquire additional properties. Once we have used all the availability under our Credit Facility and Fannie Credit Facilities to acquire properties, we expect that cash flow from our properties will be sufficient to fund operating expenses and the payment of our monthly distributions. Other potential future sources of capital include proceeds from secured and unsecured financings from banks or other lenders, proceeds from public and private offerings, proceeds from the sale of properties and undistributed funds from operations, if any. We may borrow if we need funds to satisfy the REIT tax qualifications requirement that we generally distribute annually to our stockholders at least 90% of our REIT taxable income (which does not equal net income, as calculated in accordance with GAAP, determined without regard to the deduction for dividends paid and excluding net capital gain). We also may borrow if we otherwise deem it necessary or advisable to assure that we maintain our qualification as a REIT.
As of September 30, 2016, the balance outstanding under the Credit Facility was $476.5 million. Our unused borrowing capacity was $41.5 million, based on assets assigned to the Credit Facility as of September 30, 2016. Availability of borrowings is based on a pool of eligible unencumbered real estate assets. As of September 30, 2016, we had the ability to borrow up to $565.0 million on a revolving basis under the Credit Facility and the Credit Facility also contains a subfacility for letters of credit of up to $25.0 million. Additionally, the Credit Facility contains an "accordion" feature to allow the Company, under certain circumstances, to increase the aggregate borrowings under the Credit Facility to a maximum of $750.0 million. The Credit Facility matures on March 21, 2019. As of September 30, 2016, our secured debt leverage ratio (total secured debt divided by total assets) was approximately 28.0% and we had total secured borrowings of $620.9 million and no unsecured borrowings.
On October 31, 2016, we, through wholly-owned subsidiaries of our OP, entered into the Fannie Credit Facilities that provide for initial aggregate borrowings of $60.0 million. We may request future advances under the Fannie Credit Facilities by borrowing against the value of the initial mortgaged properties or adding eligible properties to the collateral pool, subject to customary conditions, including satisfaction of minimum debt service coverage and maximum loan-to-value tests. The initial advances under the Fannie Credit Facilities will mature on November 1, 2026.
53
To the extent that we maintain borrowing capacity under our Credit Facility and Fannie Credit Facilities, such available amount will be included in calculating our liquid assets. Our Advisor will consider various factors in determining the amount of liquid assets we should maintain, including, but not limited to, our receipt of proceeds received from common stock issued under the DRIP, our cash flow from operations, available borrowing capacity under our Credit Facility and Fannie Credit Facilities, if any, our receipt of proceeds from any asset sale, and the use of cash to fund repurchases. The Board will review the amount and sources of liquid assets on a quarterly basis.
The Board has adopted a Share Repurchase Program (as amended, the "SRP") which enables our stockholders to sell their shares to us under limited circumstances. At the time a stockholder requests a repurchase, we may, subject to certain conditions, repurchase the shares presented for repurchase for cash. On January 26, 2016, the Board approved and amended the SRP (the "First SRP Amendment") to supersede and replace the existing SRP. Under the First SRP Amendment, repurchases of shares of our common stock, when requested, are at the sole discretion of the Board and generally will be made semiannually (each six-month period ending June 30 or December 31, a “fiscal semester”). On June 28, 2016, the Board of the Company further amended the SRP (the "Second SRP Amendment") to provide for one twelve-month repurchase period for calendar year 2016 (the “2016 Repurchase Period”) instead of two semi-annual periods ending June 30 and December 31. There are limits on the number of shares we may repurchase under this program during any fiscal semester and the 2016 Repurchase Period. Further, we are only authorized to repurchase shares in a given fiscal semester or the 2016 Repurchase Period up to the amount of proceeds received from our DRIP in that same period.
The following table reflects the number of shares repurchased cumulatively through September 30, 2016:
Number of Shares Repurchased | Average Price per Share | ||||||
Cumulative repurchases as of December 31, 2015 (1) | 968,370 | $ | 23.72 | ||||
Nine months ended September 30, 2016 (2) | 6,660 | 24.36 | |||||
Cumulative repurchases as of September 30, 2016 (2) | 975,030 | $ | 23.73 | ||||
_____________________________
(1) | Excludes rejected repurchases of 201,367 shares for $4.6 million at an average price per share of $23.04, which were unfulfilled as of December 31, 2015 and remain rejected as of September 30, 2016. There were no other rejected share repurchase requests for the period from October 15, 2012 (date of inception) to September 30, 2016. |
(2) | Excludes 2.4 million shares that have been requested for repurchase and are not yet fulfilled as of September 30, 2016. These shares, and all additional shares requested prior to December 31, 2016, will be considered for repurchase, to the extent the requests are not withdrawn by December 31, 2016. All requested shares will be subject to the annual limitations set forth in the SRP. The 6,660 shares above represent unaccrued repurchases for the year ended December 31, 2015 that were finalized in January 2016. |
Non-GAAP Financial Measures
This section includes non-GAAP financial measures including Funds from Operations, Modified Funds from Operations and Net Operating Income. A description of these non-GAAP financial measures and reconciliations to the most directly comparable GAAP measure, which is net income, are provided below:
Funds from Operations and Modified Funds from Operations
The historical accounting convention used for real estate assets requires straight-line depreciation of buildings, improvements, and straight-line amortization of intangibles, which implies that the value of a real estate asset diminishes predictably over time. We believe that, because real estate values historically rise and fall with market conditions, including, but not limited to, inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using the historical accounting convention for depreciation and certain other items may be less informative.
Because of these factors, the National Association of Real Estate Investment Trusts ("NAREIT"), an industry trade group, has published a standardized measure of performance known as funds from operations ("FFO"), which is used in the REIT industry as a supplemental performance measure. We believe FFO, which excludes certain items such as real estate-related depreciation and amortization, is an appropriate supplemental measure of a REIT's operating performance. FFO is not equivalent to our net income or loss as determined under GAAP.
We define FFO, a non-GAAP measure, consistent with the standards set forth in the White Paper on FFO approved by the Board of Governors of NAREIT, as revised in February 2004 (the "White Paper"). The White Paper defines FFO as net income or loss computed in accordance with GAAP, but excluding gains or losses from sales of property and real estate related impairments, plus real estate related depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures, if any, are calculated to reflect FFO on the same basis.
54
We believe that the use of FFO provides a more complete understanding of our performance to investors and to management, and reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income.
Changes in the accounting and reporting promulgations under GAAP that were put into effect in 2009 subsequent to the establishment of NAREIT's definition of FFO, such as the change to expense as incurred rather than capitalize and depreciate acquisition fees and expenses incurred for business combinations, have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses, as items that are expensed under GAAP across all industries. These changes had a particularly significant impact on publicly registered, non-listed REITs, which typically have a significant amount of acquisition activity in the early part of their existence, particularly during the period when they are raising capital through ongoing initial public offerings.
Because of these factors, the Investment Program Association ("IPA"), an industry trade group, has published a standardized measure of performance known as modified funds from operations ("MFFO"), which the IPA has recommended as a supplemental measure for publicly registered, non-listed REITs. MFFO is designed to be reflective of the ongoing operating performance of publicly registered, non-listed REITs by adjusting for those costs that are more reflective of acquisitions and investment activity, along with other items the IPA believes are not indicative of the ongoing operating performance of a publicly registered, non-listed REIT, such as straight-lining of rents as required by GAAP. We believe it is appropriate to use MFFO as a supplemental measure of operating performance because we believe that, when compared year-over-year, both before and after we have deployed all of our offering proceeds and are no longer incurring a significant amount of acquisition fees or other related costs, it reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income. MFFO is not equivalent to our net income or loss as determined under GAAP.
We define MFFO, a non-GAAP measure, consistent with the IPA's Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations (the "Practice Guideline") issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for acquisition fees and expenses and other items. In calculating MFFO, we follow the Practice Guideline and exclude acquisition fees and expenses, amortization of above and below market and other intangible lease assets and liabilities, amounts relating to straight-line rent adjustments (in order to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the lease and rental payments), contingent purchase price consideration, accretion of discounts and amortization of premiums on debt investments, mark-to-market adjustments included in net income, gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and adjustments for unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. We also exclude other non-operating items in calculating MFFO, such as transaction-related fees and expenses (which include costs associated with the Strategic Review) and capitalized interest.
We believe that, because MFFO excludes costs that we consider more reflective of acquisition activities and other non-operating items, MFFO can provide, on a going-forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our operating performance once our portfolio is stabilized. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry and allows for an evaluation of our performance against other publicly registered, non-listed REITs.
Not all REITs, including publicly registered, non-listed REITs, calculate FFO and MFFO the same way. Accordingly, comparisons with other REITs, including publicly registered, non-listed REITs, may not be meaningful. Furthermore, FFO and MFFO are not indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as determined under GAAP as an indication of our performance, as an alternative to cash flows from operations as an indication of our liquidity, or indicative of funds available to fund our cash needs including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with GAAP measurements as an indication of our performance. The methods utilized to evaluate the performance of a publicly registered, non-listed REIT under GAAP should be construed as more relevant measures of operational performance and considered more prominently than the non-GAAP measures, FFO and MFFO, and the adjustments to GAAP in calculating FFO and MFFO.
Neither the SEC, NAREIT, the IPA nor any other regulatory body or industry trade group has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, NAREIT, the IPA or another industry trade group may publish updates to the White Paper or the Practice Guideline or the SEC or another regulatory body could standardize the allowable adjustments across the publicly registered, non-listed REIT industry and we would have to adjust our calculation and characterization of FFO or MFFO accordingly.
55
The table below reflects the items deducted from or added to net loss attributable to stockholders in our calculation of FFO and MFFO for the periods indicated. In calculating our FFO and MFFO, we exclude the impact of amounts attributable to our non-controlling interests.
Three Months Ended | Nine Months Ended | |||||||||||||||
(In thousands) | March 31, 2016 | June 30, 2016 | September 30, 2016 | September 30, 2016 | ||||||||||||
Net loss attributable to stockholders (in accordance with GAAP) | $ | (1,555 | ) | $ | (3,000 | ) | $ | (8,664 | ) | $ | (13,219 | ) | ||||
Depreciation and amortization | 24,408 | 24,084 | 27,125 | 75,617 | ||||||||||||
Impairment (gain) on sale of real estate investments | — | 389 | (1,330 | ) | (941 | ) | ||||||||||
Adjustments for non-controlling interests(1) | (124 | ) | (118 | ) | (124 | ) | (366 | ) | ||||||||
FFO attributable to stockholders | 22,729 | 21,355 | 17,007 | 61,091 | ||||||||||||
Acquisition and transaction-related fees and expenses | 42 | 2,059 | 958 | 3,059 | ||||||||||||
Amortization of market lease and other lease intangibles, net | 27 | 34 | 50 | 111 | ||||||||||||
Straight-line rent adjustments | (2,417 | ) | (413 | ) | 543 | (2,287 | ) | |||||||||
Amortization and accretion of mortgage premiums and discounts, net | (514 | ) | (488 | ) | (483 | ) | (1,485 | ) | ||||||||
Gain on sale of investment securities | — | — | (56 | ) | (56 | ) | ||||||||||
Contingent purchase price consideration | (6 | ) | (219 | ) | 83 | (142 | ) | |||||||||
Capitalized construction interest costs | (173 | ) | (203 | ) | (267 | ) | (643 | ) | ||||||||
Adjustments for non-controlling interests(1) | 18 | (14 | ) | 7 | 11 | |||||||||||
MFFO attributable to stockholders | $ | 19,706 | $ | 22,111 | $ | 17,842 | $ | 59,659 | ||||||||
_______________
(1) | Represents the portion of the adjustments allocable to non-controlling interests. |
Net Operating Income
NOI is a non-GAAP financial measure used by us to evaluate the operating performance of our real estate. NOI is equal to total revenues, excluding contingent purchase price consideration, less property operating and maintenance expense. NOI excludes all other items of expense and income included in the financial statements in calculating net income (loss).
We believe NOI provides useful and relevant information because it reflects only those income and expense items that are incurred at the property level and presents such items on an unlevered basis. We use NOI to assess and compare property level performance and to make decisions concerning the operation of the properties. Further, we believe NOI is useful to investors as a performance measure because, when compared across periods, NOI reflects the impact on operations from trends in occupancy rates, rental rates, operating expenses and acquisition activity on an unleveraged basis, providing perspective not immediately apparent from net income (loss).
NOI excludes certain components from net income (loss) in order to provide results that are more closely related to a property's results of operations. For example, interest expense is not necessarily linked to the operating performance of a real estate asset and is often incurred at the corporate level. In addition, depreciation and amortization, because of historical cost accounting and useful life estimates, may distort operating performance at the property level. NOI presented by us may not be comparable to NOI reported by other REITs that define NOI differently. We believe that in order to facilitate a clear understanding of our operating results, NOI should be examined in conjunction with net income (loss) as presented in our consolidated financial statements. NOI should not be considered as an alternative to net income (loss) as an indication of our performance or to cash flows as a measure of our liquidity or ability to make distributions.
56
The following table reflects the items deducted from or added to net loss attributable to stockholders in our calculation of Same Store and Acquisitions NOI for the three months ended March 31, 2016:
(In thousands) | Same Store | Acquisitions | Non-Property Specific | Total | ||||||||||||
Net income (loss) attributable to stockholders (in accordance with GAAP) | $ | 11,290 | $ | (739 | ) | $ | (12,106 | ) | $ | (1,555 | ) | |||||
Contingent purchase price consideration | (4 | ) | (2 | ) | — | (6 | ) | |||||||||
Operating fees to related parties | — | — | 5,155 | 5,155 | ||||||||||||
Acquisition and transaction related | — | 6 | 36 | 42 | ||||||||||||
General and administrative | — | — | 3,987 | 3,987 | ||||||||||||
Depreciation and amortization | 14,160 | 10,322 | 133 | 24,615 | ||||||||||||
Interest expense | 758 | 922 | 3,304 | 4,984 | ||||||||||||
Interest and other income | — | (3 | ) | (19 | ) | (22 | ) | |||||||||
Income tax benefit | — | — | (483 | ) | (483 | ) | ||||||||||
Net income (loss) attributable to non-controlling interests | — | 1 | (7 | ) | (6 | ) | ||||||||||
NOI | $ | 26,204 | $ | 10,507 | $ | — | $ | 36,711 | ||||||||
The following table reflects the items deducted from or added to net loss attributable to stockholders in our calculation of Same Store and Acquisitions NOI for the three months ended March 31, 2015:
(In thousands) | Same Store | Acquisitions | Non-Property Specific | Total | ||||||||||||
Net income (loss) attributable to stockholders (in accordance with GAAP) | $ | 486 | $ | (3,073 | ) | $ | (2,633 | ) | $ | (5,220 | ) | |||||
Acquisition and transaction related | — | 1,904 | 95 | 1,999 | ||||||||||||
General and administrative | — | 2 | 2,597 | 2,599 | ||||||||||||
Depreciation and amortization | 449 | 28,998 | — | 29,447 | ||||||||||||
Interest expense | — | 877 | 496 | 1,373 | ||||||||||||
Interest and other income | — | — | (273 | ) | (273 | ) | ||||||||||
Gain on sale of investment securities | — | — | (286 | ) | (286 | ) | ||||||||||
Income tax expense | — | — | 29 | 29 | ||||||||||||
Net income (loss) attributable to non-controlling interests | — | — | (25 | ) | (25 | ) | ||||||||||
NOI | $ | 935 | $ | 28,708 | $ | — | $ | 29,643 | ||||||||
57
The following table reflects the items deducted from or added to net loss attributable to stockholders in our calculation of Same Store and Acquisitions NOI for the three months ended June 30, 2016:
(In thousands) | Same Store | Acquisitions | Non-Property Specific | Total | ||||||||||||
Net income (loss) attributable to stockholders (in accordance with GAAP) | $ | 9,960 | $ | (566 | ) | $ | (12,394 | ) | $ | (3,000 | ) | |||||
Contingent purchase price consideration | (221 | ) | 2 | — | (219 | ) | ||||||||||
Impairment on sale of real estate investments | — | — | 389 | 389 | ||||||||||||
Operating fees to related parties | — | — | 5,172 | 5,172 | ||||||||||||
Acquisition and transaction related | 3 | 5 | 2,051 | 2,059 | ||||||||||||
General and administrative | — | 40 | 2,376 | 2,416 | ||||||||||||
Depreciation and amortization | 14,999 | 9,151 | 133 | 24,283 | ||||||||||||
Interest expense | 1,023 | 548 | 3,305 | 4,876 | ||||||||||||
Interest and other income | (1 | ) | — | (20 | ) | (21 | ) | |||||||||
Income tax benefit | — | — | (992 | ) | (992 | ) | ||||||||||
Net income (loss) attributable to non-controlling interests | — | 1 | (20 | ) | (19 | ) | ||||||||||
NOI | $ | 25,763 | $ | 9,181 | $ | — | $ | 34,944 | ||||||||
The following table reflects the items deducted from or added to net loss attributable to stockholders in our calculation of Same Store and Acquisitions NOI for the three months ended June 30, 2015:
(In thousands) | Same Store | Acquisitions | Non-Property Specific | Total | ||||||||||||
Net income (loss) attributable to stockholders (in accordance with GAAP) | $ | 506 | $ | (6,931 | ) | $ | (6,996 | ) | $ | (13,421 | ) | |||||
Contingent purchase price consideration | — | (450 | ) | — | (450 | ) | ||||||||||
Operating fees to related parties | — | — | 3,410 | 3,410 | ||||||||||||
Acquisition and transaction related | 8 | 2,978 | 202 | 3,188 | ||||||||||||
General and administrative | — | 5 | 2,528 | 2,533 | ||||||||||||
Depreciation and amortization | 712 | 32,837 | 34 | 33,583 | ||||||||||||
Interest expense | — | 1,242 | 1,142 | 2,384 | ||||||||||||
Interest and other income | — | (7 | ) | (209 | ) | (216 | ) | |||||||||
Income tax benefit | — | — | (47 | ) | (47 | ) | ||||||||||
Net income (loss) attributable to non-controlling interests | — | (13 | ) | (64 | ) | (77 | ) | |||||||||
NOI | $ | 1,226 | $ | 29,661 | $ | — | $ | 30,887 | ||||||||
58
The following table reflects the items deducted from or added to net loss attributable to stockholders in our calculation of Same Store and Acquisitions NOI for the three months ended September 30, 2016:
(In thousands) | Same Store | Acquisitions | Non-Property Specific | Total | ||||||||||||
Net income (loss) attributable to stockholders (in accordance with GAAP) | 3,948 | (1,143 | ) | $ | (11,469 | ) | $ | (8,664 | ) | |||||||
Contingent purchase price consideration | 83 | — | — | 83 | ||||||||||||
Operating fees to related parties | — | — | 5,199 | 5,199 | ||||||||||||
Acquisition and transaction related | (32 | ) | — | 990 | 958 | |||||||||||
General and administrative | — | — | 2,874 | 2,874 | ||||||||||||
Depreciation and amortization | 19,819 | 7,395 | 133 | 27,347 | ||||||||||||
Interest expense | 1,046 | 451 | 3,426 | 4,923 | ||||||||||||
Interest and other income | (2 | ) | — | — | (2 | ) | ||||||||||
Gain on sale of real estate investment | — | — | (1,330 | ) | (1,330 | ) | ||||||||||
Gain on sale of investment securities | — | — | (56 | ) | (56 | ) | ||||||||||
Income tax expense | — | — | 260 | 260 | ||||||||||||
Net income (loss) attributable to non-controlling interests | (2 | ) | — | (27 | ) | (29 | ) | |||||||||
NOI | $ | 24,860 | $ | 6,703 | $ | — | $ | 31,563 | ||||||||
The following table reflects the items deducted from or added to net loss attributable to stockholders in our calculation of Same Store and Acquisitions NOI for the three months ended September 30, 2015:
(In thousands) | Same Store | Acquisitions | Non-Property Specific | Total | ||||||||||||
Net income (loss) attributable to stockholders (in accordance with GAAP) | 417 | (8,307 | ) | $ | (8,218 | ) | $ | (16,108 | ) | |||||||
Operating fees to related parties | — | — | 4,312 | 4,312 | ||||||||||||
Acquisition and transaction related | — | 3,199 | 116 | 3,315 | ||||||||||||
General and administrative | — | 3 | 2,439 | 2,442 | ||||||||||||
Depreciation and amortization | 2,147 | 31,889 | 126 | 34,162 | ||||||||||||
Interest expense | 742 | 446 | 1,893 | 3,081 | ||||||||||||
Interest and other income | — | (3 | ) | (63 | ) | (66 | ) | |||||||||
Gain on sale of investment securities | — | — | (160 | ) | (160 | ) | ||||||||||
Income tax benefit | — | — | (369 | ) | (369 | ) | ||||||||||
Net income (loss) attributable to non-controlling interests | — | (9 | ) | (76 | ) | (85 | ) | |||||||||
NOI | $ | 3,306 | $ | 27,218 | $ | — | $ | 30,524 | ||||||||
59
The following table reflects the items deducted from or added to net loss attributable to stockholders in our calculation of Same Store and Acquisitions NOI for the nine months ended September 30, 2016:
(In thousands) | Same Store | Acquisitions | Non-Property Specific | Total | ||||||||||||
Net income (loss) attributable to stockholders (in accordance with GAAP) | $ | 24,354 | $ | (1,603 | ) | $ | (35,970 | ) | $ | (13,219 | ) | |||||
Contingent purchase price consideration | (142 | ) | — | — | (142 | ) | ||||||||||
Impairment on sale of real estate investments | — | — | 389 | 389 | ||||||||||||
Operating fees to related parties | — | — | 15,526 | 15,526 | ||||||||||||
Acquisition and transaction related | (31 | ) | 14 | 3,076 | 3,059 | |||||||||||
General and administrative | — | 40 | 9,237 | 9,277 | ||||||||||||
Depreciation and amortization | 45,887 | 29,958 | 400 | 76,245 | ||||||||||||
Interest expense | 2,116 | 2,631 | 10,036 | 14,783 | ||||||||||||
Interest and other income | (3 | ) | (3 | ) | (39 | ) | (45 | ) | ||||||||
Gain on sale of real estate investment | — | — | (1,330 | ) | (1,330 | ) | ||||||||||
Gain on sale of investment securities | — | — | (56 | ) | (56 | ) | ||||||||||
Income tax benefit | — | — | (1,215 | ) | (1,215 | ) | ||||||||||
Net income (loss) attributable to non-controlling interests | — | — | (54 | ) | (54 | ) | ||||||||||
NOI | $ | 72,181 | $ | 31,037 | $ | — | $ | 103,218 | ||||||||
The following table reflects the items deducted from or added to net loss attributable to stockholders in our calculation of Same Store and Acquisitions NOI for the nine months ended September 30, 2015:
(In thousands) | Same Store | Acquisitions | Non-Property Specific | Total | ||||||||||||
Net income (loss) attributable to stockholders (in accordance with GAAP) | $ | 1,427 | $ | (18,329 | ) | $ | (17,847 | ) | $ | (34,749 | ) | |||||
Contingent purchase price consideration | — | (487 | ) | — | (487 | ) | ||||||||||
Operating fees to related parties | — | — | 7,722 | 7,722 | ||||||||||||
Acquisition and transaction related | — | 8,089 | 413 | 8,502 | ||||||||||||
General and administrative | — | 9 | 7,565 | 7,574 | ||||||||||||
Depreciation and amortization | 1,343 | 95,689 | 161 | 97,193 | ||||||||||||
Interest expense | — | 3,308 | 3,530 | 6,838 | ||||||||||||
Interest and other income | — | (9 | ) | (546 | ) | (555 | ) | |||||||||
Gain on sale of investment securities | — | — | (446 | ) | (446 | ) | ||||||||||
Income tax benefit | — | — | (387 | ) | (387 | ) | ||||||||||
Net income (loss) attributable to non-controlling interests | — | (22 | ) | (165 | ) | (187 | ) | |||||||||
NOI | $ | 2,770 | $ | 88,248 | $ | — | $ | 91,018 | ||||||||
Refer to Note 15 — Segment Reporting for a reconciliation of NOI to net loss attributable to stockholders by reportable segment.
Distributions
In April 2013, our directors authorized, and we declared, a distribution payable on a monthly basis to stockholders of record on a daily basis at a rate equal to $0.0046575343 per day, which is equivalent to $1.70 per annum, per share of common stock, which began in May 2013. In March 2016, the Board ratified the existing distribution amount equivalent to $1.70 per annum, and, for calendar year 2016, affirmed a change to the daily distribution payable to stockholders of record each day during the applicable period to $0.0046448087 per day per share of common stock to accurately reflect that 2016 is a leap year. Distributions are payable by the 5th day following each month end to stockholders of record at the close of business each day during the prior month.
60
The amount of distributions payable to our stockholders is determined by the Board and is dependent on a number of factors, including funds available for distribution, our financial condition, capital expenditure requirements, as applicable, requirements of Maryland law and annual distribution requirements needed to maintain our status as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"). Distribution payments are dependent on the availability of funds. The Board may reduce the amount of distributions paid or suspend distribution payments at any time and therefore distribution payments are not assured.
During the nine months ended September 30, 2016, distributions paid to common stockholders and OP Unit holders totaled $112.0 million, including $56.0 million which was reinvested through our DRIP.
The following table shows the sources for the payment of distributions to common stockholders, including distributions on unvested restricted stock and OP Units, but excluding distributions related to Class B Units as these distributions are recorded as an expense in our consolidated statement of operations and comprehensive loss, for the periods indicated:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||
March 31, 2016 | June 30, 2016 | September 30, 2016 | September 30, 2016 | |||||||||||||||||||||||||
(In thousands) | Percentage of Distributions | Percentage of Distributions | Percentage of Distributions | Percentage of Distributions | ||||||||||||||||||||||||
Distributions: | ||||||||||||||||||||||||||||
Distributions to stockholders | $ | 36,630 | $ | 37,269 | $ | 37,616 | $ | 111,515 | ||||||||||||||||||||
Distributions on OP Units | 172 | 173 | 174 | 519 | ||||||||||||||||||||||||
Total distributions | $ | 36,802 | $ | 37,442 | $ | 37,790 | $ | 112,034 | ||||||||||||||||||||
Source of distribution coverage: | ||||||||||||||||||||||||||||
Cash flows provided by operations | $ | 26,084 | 70.8 | % | $ | 21,622 | 57.8 | % | $ | 16,227 | 42.9 | % | $ | 63,933 | 57.0 | % | ||||||||||||
Offering proceeds from issuance of common stock | — | — | % | — | — | % | — | — | % | — | — | % | ||||||||||||||||
Proceeds received from common stock issued under the DRIP | 7,105 | 19.3 | % | 18,550 | 49.5 | % | 18,132 | 48.0 | % | 43,787 | 39.1 | % | ||||||||||||||||
Proceeds from the sale of investment securities | 535 | 1.5 | % | — | — | % | 1,140 | 3.0 | % | 1,675 | 1.5 | % | ||||||||||||||||
Proceeds from the sale of real estate investments | — | — | % | 348 | 0.9 | % | 2,291 | 6.1 | % | 2,639 | 2.4 | % | ||||||||||||||||
Proceeds from financings | 3,078 | 8.4 | % | (3,078 | ) | (8.2 | )% | — | — | % | — | — | % | |||||||||||||||
Total source of distribution coverage | $ | 36,802 | 100.0 | % | $ | 37,442 | 100.0 | % | $ | 37,790 | 100.0 | % | $ | 112,034 | 100.0 | % | ||||||||||||
Cash flows provided by operations (in accordance with GAAP) | $ | 26,084 | $ | 21,622 | $ | 16,227 | $ | 63,933 | ||||||||||||||||||||
Net loss attributable to stockholders (in accordance with GAAP) | $ | (1,555 | ) | $ | (3,000 | ) | $ | (8,664 | ) | $ | (13,219 | ) | ||||||||||||||||
For the nine months ended September 30, 2016, cash flows provided by operations were $63.9 million. As shown in the table above, we funded distributions with cash flows provided by operations as well as proceeds received from common stock issued under our DRIP, the sale of investment securities, the sale of real estate investments and financings. To the extent we pay distributions in excess of cash flows provided by operations, our stockholders' investment may be adversely impacted. Since inception, our cumulative distributions have exceeded our cumulative FFO. Distributions paid from sources other than our cash flows from operations will result in us having fewer funds available for other needs such as property acquisitions and other real estate-related investments.
We may not generate sufficient cash flow from operations in 2016 to pay distributions at our current level and we may not generate sufficient cash flows from operations to pay future distributions. The amount of cash available for distributions is affected by many factors, such as rental income from acquired properties and our operating expense levels, as well as many other variables. Actual cash available for distributions may vary substantially from estimates. Since inception, our cumulative distributions have exceeded our cumulative FFO. We cannot give any assurance that future acquisitions of real properties, if any, will increase our cash available for distributions to stockholders. Our actual results may differ significantly from the assumptions used by the Board in establishing a distribution rate to stockholders.
61
If we do not generate sufficient cash flows from our operations, we expect to use a portion of our cash on hand and the proceeds from our DRIP to pay distributions. A decrease in the level of stockholder participation in our DRIP could have an adverse impact on our ability to meet these expectations. If these sources are insufficient, we may use other sources, such as from borrowings, the sale of additional securities, advances from our Advisor, and our Advisor's deferral, suspension or waiver of its fees and expense reimbursements, as to which it has no obligation, to fund distributions.
The following table compares cumulative distributions paid to cumulative net loss and cumulative cash flows provided by operations (in accordance with GAAP) for the period from October 15, 2012 (date of inception) through September 30, 2016:
For the Period from October 15, 2012 (date of inception) to | ||||
(In thousands) | September 30, 2016 | |||
Distributions paid: | ||||
Common stockholders(1) | $ | 335,625 | ||
OP Units | 1,217 | |||
Total distributions paid | $ | 336,842 | ||
Reconciliation of net loss: | ||||
Revenues | $ | 534,633 | ||
Acquisition and transaction related | (52,091 | ) | ||
Depreciation and amortization | (227,135 | ) | ||
Other operating expenses | (326,715 | ) | ||
Other non-operating expenses | (25,496 | ) | ||
Income tax benefit | 3,623 | |||
Net income attributable to non-controlling interests | 307 | |||
Net loss attributable to stockholders (in accordance with GAAP)(2) | $ | (92,874 | ) | |
Net cash flows provided by operating activities | $ | 122,515 | ||
FFO attributable to stockholders | $ | 131,286 | ||
_____________________
(1) | For the period from October 15, 2012 (date of inception) to September 30, 2016, we received $177.4 million of proceeds from common stock issued under the DRIP. |
(2) | Net loss as defined by GAAP includes the non-cash impact of depreciation and amortization expense as well as costs incurred relating to acquisitions and related transactions. |
Loan Obligations
The payment terms of our mortgage notes payable generally require principal and interest amounts payable monthly with all unpaid principal and interest due at maturity. The payment terms of our Credit Facility require interest only amounts payable monthly with all unpaid principal and interest due at maturity. Our loan agreements require us to comply with specific reporting covenants. As of September 30, 2016, we were in compliance with the debt covenants under our loan agreements.
Our Advisor may cause us, with approval from our independent directors, to seek to borrow short-term capital that, combined with secured mortgage financing, exceeds our targeted leverage ratio.
62
Contractual Obligations
The following table reflects contractual debt obligations under our mortgage notes payable and Credit Facility and minimum base rental cash payments due for leasehold interests over the next five years and thereafter as of September 30, 2016. The minimum base rental cash payments due for leasehold interests amounts exclude contingent rent payments, as applicable, that may be payable based on provisions related to increases in annual rent based on exceeding certain economic indexes, among other items. As of September 30, 2016, the outstanding mortgage notes payable and loans under the Credit Facility had weighted-average effective interest rates of 5.3% and 2.0%, respectively.
Years Ended December 31, | ||||||||||||||||||||
(In thousands) | Total | October 1, 2016 — December 31, 2016 | 2017 — 2018 | 2019 — 2020 | Thereafter | |||||||||||||||
Principal on mortgage notes payable | $ | 144,371 | $ | 567 | $ | 66,725 | $ | 37,603 | $ | 39,476 | ||||||||||
Interest on mortgage notes payable | 39,820 | 1,895 | 10,525 | 4,522 | 22,878 | |||||||||||||||
Credit Facility | 476,500 | — | — | 476,500 | — | |||||||||||||||
Interest on Credit Facility | 25,337 | 2,587 | 20,528 | 2,222 | — | |||||||||||||||
Lease rental payments due (1) | 44,254 | 187 | 1,486 | 1,506 | 41,075 | |||||||||||||||
Development project funding commitment (2) | 28,930 | 28,930 | — | — | — | |||||||||||||||
Total | $ | 759,212 | $ | 34,166 | $ | 99,264 | $ | 522,353 | $ | 103,429 | ||||||||||
_______________________________
(1) | Lease rental payments due includes $3.4 million of imputed interest related to our capital lease obligations. |
(2) | In August 2015, the Company entered into an asset purchase agreement and development agreement to acquire and subsequently fund the remaining construction of a skilled nursing facility in Jupiter, Florida for $82.0 million. |
Election as a REIT
We elected and qualified to be taxed as a REIT under Sections 856 through 860 of the Code, effective for our taxable year ended December 31, 2013. Commencing with such taxable year, we were organized and operated in a manner so that we qualify for taxation as a REIT under the Code. We intend to continue to operate in such a manner but no assurance can be given that we will operate in a manner so as to remain qualified for taxation as a REIT. In order to continue to qualify for taxation as a REIT, we must, among other things, distribute annually at least 90% of our REIT taxable income (which does not equal net income as calculated in accordance with GAAP) determined without regard to the deduction for dividends paid and excluding net capital gains, and must comply with a number of other organizational and operational requirements. If we continue to qualify for taxation as a REIT, we generally will not be subject to federal corporate income tax on that portion of our REIT taxable income that we distribute to our stockholders. Even if we continue to qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and properties as well as federal income and excise taxes on our undistributed income.
Inflation
We may be adversely impacted by inflation on any leases that do not contain indexed escalation provisions. In addition, we may be required to pay costs for maintenance and operation of properties, which may adversely impact our results of operations due to potential increases in costs and operating expenses resulting from inflation.
Related-Party Transactions and Agreements
Please see Note 9 — Related Party Transactions and Arrangements of the accompanying consolidated financial statements.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
63
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The market risk associated with financial instruments and derivative financial instruments is the risk of loss from adverse changes in market prices or interest rates. Our long-term debt, which consists of secured financings and our Credit Facility, bears interest at fixed rates and variable rates. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, from time to time, we may enter into interest rate hedge contracts such as swaps, collars, and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We will not hold or issue these derivative contracts for trading or speculative purposes. As of September 30, 2016, we did not have any derivative financial instruments. We do not have any foreign operations and thus we are not exposed to foreign currency fluctuations.
As of September 30, 2016, our debt consisted of both fixed and variable-rate debt. We had fixed-rate secured mortgage financings with an aggregate carrying value of $145.3 million and a fair value of $149.2 million. Changes in market interest rates on our fixed-rate debt impact the fair value of the mortgage notes, but it has no impact on interest due on the mortgage notes. For instance, if interest rates rise 100 basis points and our fixed rate debt balance remains constant, we expect the fair value of our obligation to decrease, the same way the price of a bond declines as interest rates rise. The sensitivity analysis related to our fixed–rate debt assumes an immediate 100 basis point move in interest rates from their September 30, 2016 levels, with all other variables held constant. A 100 basis point increase in market interest rates would result in a decrease in the fair value of our fixed-rate debt by $6.1 million. A 100 basis point decrease in market interest rates would result in an increase in the fair value of our fixed-rate debt by $6.8 million.
At September 30, 2016, our variable-rate Credit Facility had a carrying and fair value of $476.5 million. Interest rate volatility associated with this variable-rate Credit Facility affects interest expense incurred and cash flow. The sensitivity analysis related to all other variable-rate debt assumes an immediate 100 basis point move in interest rates from their September 30, 2016 levels, with all other variables held constant. A 100 basis point increase or decrease in variable interest rates on our variable-rate Credit Facility would increase or decrease our interest expense by $4.8 million.
These amounts were determined by considering the impact of hypothetical interest rate changes on our borrowing costs, and assuming no other changes in our capital structure. The information presented above includes only those exposures that existed as of September 30, 2016 and does not consider exposures or positions arising after that date. The information represented herein has limited predictive value. Future actual realized gains or losses with respect to interest rate fluctuations will depend on cumulative exposures, hedging strategies employed and the magnitude of the fluctuations.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
In accordance with Rules 13a-15(b) and 15d-15(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), we, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q and determined that our disclosure controls and procedures are effective.
Changes in Internal Control Over Financial Reporting
No change occurred in our internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the three months ended September 30, 2016 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
64
PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
We are not a party to, and none of our properties are subject to, any material pending legal proceedings.
Item 1A. Risk Factors.
Our potential risks and uncertainties are presented in the section entitled "Item 1A. Risk Factors," disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015. The following additional risk factors should be considered regarding our potential risks and uncertainties:
Distributions paid from sources other than our cash flows from operations result in us having fewer funds available for the acquisition of properties and other real estate-related investments and may dilute our stockholders' interests in us, which may adversely affect our ability to fund future distributions with cash flows from operations and may adversely affect our stockholders' overall return.
Our cash flows provided by operations were $63.9 million for the nine months ended September 30, 2016. During the nine months ended September 30, 2016, we paid distributions of $112.0 million, of which $63.9 million, or 57.0%, was funded from cash flows from operations, $43.8 million, or 39.1%, was funded from proceeds received from our DRIP, $2.6 million, or 2.4%, was funded from the sale of real estate and $1.7 million, or 1.5%, was funded from the sale of investment securities. During the nine months ended September 30, 2016, cash flow from operations included an increase in accounts payable and accrued expenses of $1.9 million, as reflected on the statement of cash flows. Accordingly, if these accounts payable and accrued expenses had been paid during the nine months ended September 30, 2016, there would have been $1.9 million less in cash flow from operations available to pay distributions.
We may not generate sufficient cash flows from operations to pay future distributions. Moreover, the Board may change our distribution policy, in its sole discretion, at any time. In accordance with our organizational documents and Maryland law, we may not make distributions that would: (1) cause us to be unable to pay our debts as they become due in the usual course of business; (2) cause our total assets to be less than the sum of our total liabilities plus senior liquidation preferences, if any; or (3) jeopardize our ability to continue to qualify as a REIT.
Funding distributions from borrowings could restrict the amount we can borrow for investments, which may affect our profitability. Funding distributions with the sale of assets may affect our ability to generate additional operating cash flows. Funding distributions from the sale of additional securities could dilute each stockholder's interest in us if we sell shares of our common stock or securities that are convertible or exercisable into shares of our common stock to third-party investors. Payment of distributions from the mentioned sources could restrict our ability to generate sufficient cash flows from operations, affect our profitability or affect the distributions payable to stockholders upon a liquidity event, any or all of which may have an adverse effect on an investment in our shares.
Our property portfolio has a high concentration of properties located in seven states. Our properties may be adversely affected by economic cycles and risks inherent to those states.
As of September 30, 2016, the following seven states represented 5% or more of our consolidated annualized rental income on a straight-line basis for the fiscal year ended September 30, 2016:
State | Percentage of Straight-Line Rental Income | |
Arkansas | 7.5% | |
Florida | 17.6% | |
Georgia | 10.9% | |
Illinois | 5.4% | |
Iowa | 9.5% | |
Michigan | 6.0% | |
Pennsylvania | 11.0% | |
65
Any adverse situation that disproportionately affects the states listed above may have a magnified adverse effect on our portfolio. Real estate markets are subject to economic downturns, as they have been in the past, and we cannot predict how economic conditions will impact this market in both the short and long term. Declines in the economy or a decline in the real estate market in these states could hurt our financial performance and the value of our properties. Factors that may negatively affect economic conditions in these states include:
• | business layoffs or downsizing; |
• | industry slowdowns; |
• | relocations of businesses; |
• | changing demographics; |
• | increased telecommuting and use of alternative work places; |
• | infrastructure quality; |
• | any oversupply of, or reduced demand for, real estate; |
• | concessions or reduced rental rates under new leases for properties where tenants defaulted; |
• | increased insurance premiums; |
• | state budgets and payment to providers under Medicaid or other state healthcare programs; and |
• | changes in reimbursement for healthcare services from commercial insurers. |
Item 2. Unregistered Sales of Equity Securities.
Unregistered Sales of Equity Securities
On July 28, 2016, we granted 5,388 shares of restricted stock that vest over a period of five years to our independent directors, pursuant to our employee and director incentive restricted share plan. No selling commissions or other consideration were paid in connection with such issuances, which were made without registration under the Securities Act of 1933, as amended (the "Securities Act") in reliance upon the exemption from registration in Section 4(a)(2) of the Securities Act.
Issuer Purchases of Equity Securities
The following table reflects the number of shares repurchased under the SRP cumulatively through September 30, 2016:
Number of Shares Repurchased | Average Price per Share | ||||||
Cumulative repurchases as of December 31, 2015 (1) | 968,370 | $ | 23.72 | ||||
Nine months ended September 30, 2016 (2) | 6,660 | 24.36 | |||||
Cumulative repurchases as of September 30, 2016 (2) | 975,030 | $ | 23.73 | ||||
_____________________________
(1) | Excludes rejected repurchases of 201,367 shares for $4.6 million at an average price per share of $23.04, which were unfulfilled as of December 31, 2015 and remain rejected as of September 30, 2016. There were no other rejected share repurchase requests for the period from October 15, 2012 (date of inception) to September 30, 2016. |
(2) | Excludes 2.4 million shares that have been requested for repurchase and are not yet fulfilled as of September 30, 2016. These shares, and all additional shares requested prior to December 31, 2016, will be considered for repurchase, to the extent the requests are not withdrawn by December 31, 2016. All requested shares will be subject to the annual limitations set forth in the SRP. The 6,660 shares above represent unaccrued repurchases for the year ended December 31, 2015 that were finalized in January 2016. |
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
66
Item 6. Exhibits.
The exhibits listed on the Exhibit Index (following the signatures section of this report) are included, or incorporated by reference, in this Quarterly Report on Form 10-Q.
67
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
HEALTHCARE TRUST, INC. | ||
By: | /s/ W. Todd Jensen | |
W. Todd Jensen | ||
Interim Chief Executive Officer and President (Principal Executive Officer) | ||
By: | /s/ Katie P. Kurtz | |
Katie P. Kurtz | ||
Chief Financial Officer, Secretary and Treasurer (Principal Financial Officer and Principal Accounting Officer) | ||
Dated: November 10, 2016
68
EXHIBITS INDEX
The following exhibits are included, or incorporated by reference, in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2016 (and are numbered in accordance with Item 601 of Regulation S-K):
Exhibit No. | Description | |
10.58 (1) | Indemnification Agreement, dated October 6, 2016, with Edward M. Weil, Jr. | |
10.59 (2) | Consulting Agreement, dated as of October 11, 2016, by and between International Capital Markets Group, Inc. and Healthcare Trust, Inc. | |
10.60 * | Fourth Amendment to Senior Secured Revolving Credit Agreement, dated as of October 20, 2016, by and among Healthcare Trust Operating Partnership, L.P., Healthcare Trust, Inc., KeyBank National Association, individually and as agent for itself and the other lenders party from time to time to the Senior Secured Revolving Credit Agreement by and among the same parties, dated as of March 21, 2014. | |
10.61 * | Master Credit Facility Agreement, dated as of October 31, 2016, by and among the borrowers party thereto and KeyBank National Association. | |
10.62 * | Master Credit Facility Agreement, dated as of October 31, 2016, by and among the borrowers party thereto and Capital One Multifamily Finance, LLC. | |
31.1 * | Certification of the Principal Executive Officer of the Company pursuant to Securities Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 * | Certification of the Principal Financial Officer of the Company pursuant to Securities Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32 * | Written statements of the Principal Executive Officer and Principal Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101 * | XBRL (eXtensible Business Reporting Language). The following materials from Healthcare Trust, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2016, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations and Comprehensive Loss, (iii) the Consolidated Statement of Changes in Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to the Consolidated Financial Statements. | |
____________________
* | Filed herewith |
(1) | Filed as an exhibit to the Company's Form 8-K, filed with the SEC on October 6, 2016 |
(2) | Filed as an exhibit to the Company's Form 8-K, filed with the SEC on October 11, 2016 |
69