Healthcare Trust, Inc. - Quarter Report: 2017 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, 2017
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., 4th 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, a smaller reporting company or an emerging growth company. See definition of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | |
Non-accelerated filer x | (Do not check if a smaller reporting company) | Smaller reporting company o |
Emerging growth company o | ||
If an emerging growth company indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act o
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, 2017, the registrant had 90,571,271 shares of common stock outstanding.
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page | |
2
Item 1. Financial Statements.
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
September 30, | December 31, | |||||||
2017 | 2016 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Real estate investments, at cost: | ||||||||
Land | $ | 189,889 | $ | 187,868 | ||||
Buildings, fixtures and improvements | 1,862,403 | 1,872,590 | ||||||
Construction in progress | 67,926 | 60,055 | ||||||
Acquired intangible assets | 239,503 | 234,749 | ||||||
Total real estate investments, at cost | 2,359,721 | 2,355,262 | ||||||
Less: accumulated depreciation and amortization | (294,655 | ) | (241,027 | ) | ||||
Total real estate investments, net | 2,065,066 | 2,114,235 | ||||||
Cash and cash equivalents | 67,113 | 29,225 | ||||||
Restricted cash | 5,104 | 3,962 | ||||||
Assets held for sale | 37,822 | — | ||||||
Derivative assets, at fair value | 20 | 61 | ||||||
Straight-line rent receivable, net | 14,051 | 12,026 | ||||||
Prepaid expenses and other assets | 24,394 | 22,073 | ||||||
Deferred costs, net | 12,071 | 12,123 | ||||||
Total assets | $ | 2,225,641 | $ | 2,193,705 | ||||
LIABILITIES AND EQUITY | ||||||||
Mortgage notes payable, net | $ | 351,976 | $ | 142,754 | ||||
Credit facilities | 422,616 | 481,500 | ||||||
Market lease intangible liabilities, net | 18,466 | 20,187 | ||||||
Derivative liabilities, at fair value | 124 | — | ||||||
Accounts payable and accrued expenses (including $1,040 and $862 due to related parties as of September 30, 2017 and December 31, 2016, respectively) | 36,741 | 27,080 | ||||||
Deferred rent | 5,242 | 4,986 | ||||||
Distributions payable | 10,763 | 12,872 | ||||||
Total liabilities | 845,928 | 689,379 | ||||||
Preferred stock, $0.01 par value, 50,000,000 authorized, none issued and outstanding as of September 30, 2017 and December 31, 2016 | — | — | ||||||
Common stock, $0.01 par value, 300,000,000 shares authorized, 90,356,431 and 89,368,899 shares of common stock issued and outstanding as of September 30, 2017 and December 31, 2016, respectively | 904 | 894 | ||||||
Additional paid-in capital | 1,995,013 | 1,981,136 | ||||||
Accumulated other comprehensive loss | (124 | ) | — | |||||
Accumulated deficit | (624,289 | ) | (486,574 | ) | ||||
Total stockholders' equity | 1,371,504 | 1,495,456 | ||||||
Non-controlling interests | 8,209 | 8,870 | ||||||
Total equity | 1,379,713 | 1,504,326 | ||||||
Total liabilities and equity | $ | 2,225,641 | $ | 2,193,705 | ||||
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 share and per share data)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Revenues: | ||||||||||||||||
Rental income | $ | 23,118 | $ | 24,980 | $ | 71,221 | $ | 77,984 | ||||||||
Operating expense reimbursements | 3,906 | 4,196 | 11,896 | 11,677 | ||||||||||||
Resident services and fee income | 52,048 | 46,428 | 146,336 | 137,084 | ||||||||||||
Contingent purchase price consideration | — | (83 | ) | — | 142 | |||||||||||
Total revenues | 79,072 | 75,521 | 229,453 | 226,887 | ||||||||||||
Expenses: | ||||||||||||||||
Property operating and maintenance | 48,443 | 44,041 | 135,414 | 123,527 | ||||||||||||
Impairment charges | 18,958 | — | 18,993 | 389 | ||||||||||||
Operating fees to related parties | 5,635 | 5,199 | 16,573 | 15,526 | ||||||||||||
Acquisition and transaction related | (261 | ) | 958 | 4,327 | 3,059 | |||||||||||
General and administrative | 3,540 | 2,874 | 11,116 | 9,277 | ||||||||||||
Depreciation and amortization | 19,089 | 27,347 | 58,911 | 76,245 | ||||||||||||
Total expenses | 95,404 | 80,419 | 245,334 | 228,023 | ||||||||||||
Operating income | (16,332 | ) | (4,898 | ) | (15,881 | ) | (1,136 | ) | ||||||||
Other income (expense): | ||||||||||||||||
Interest expense | (8,838 | ) | (4,923 | ) | (20,908 | ) | (14,783 | ) | ||||||||
Interest and other income | 302 | 2 | 305 | 45 | ||||||||||||
Gain on sale of real estate investment | — | 1,330 | 438 | 1,330 | ||||||||||||
Loss on non-designated derivatives | (22 | ) | — | (129 | ) | — | ||||||||||
Gain on sale of investment securities | — | 56 | — | 56 | ||||||||||||
Total other expenses | (8,558 | ) | (3,535 | ) | (20,294 | ) | (13,352 | ) | ||||||||
Loss before income taxes | (24,890 | ) | (8,433 | ) | (36,175 | ) | (14,488 | ) | ||||||||
Income tax benefit (expense) | 652 | (260 | ) | 1,049 | 1,215 | |||||||||||
Net loss | (24,238 | ) | (8,693 | ) | (35,126 | ) | (13,273 | ) | ||||||||
Net income attributable to non-controlling interests | 102 | 29 | 135 | 54 | ||||||||||||
Net loss attributable to stockholders | (24,136 | ) | (8,664 | ) | (34,991 | ) | (13,219 | ) | ||||||||
Other comprehensive income (loss): | ||||||||||||||||
Unrealized gain (loss) on designated derivative | 172 | — | (124 | ) | — | |||||||||||
Unrealized gain (loss) on investment securities, net | — | (43 | ) | — | 6 | |||||||||||
Comprehensive loss attributable to stockholders | $ | (23,964 | ) | $ | (8,707 | ) | $ | (35,115 | ) | $ | (13,213 | ) | ||||
Basic and diluted weighted-average shares outstanding | 89,821,799 | 88,285,390 | 89,599,655 | 87,472,855 | ||||||||||||
Basic and diluted net loss per share | $ | (0.27 | ) | $ | (0.10 | ) | $ | (0.39 | ) | $ | (0.15 | ) | ||||
Distributions declared per share | $ | 0.37 | $ | 0.43 | $ | 1.15 | $ | 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 EQUITY
For the Nine Months Ended September 30, 2017
(In thousands, except share data)
(Unaudited)
Common Stock | Accumulated Other Comprehensive Loss | |||||||||||||||||||||||||||||
Number of Shares | Par Value | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders' Equity | Non-controlling Interests | Total Equity | ||||||||||||||||||||||||
Balance, December 31, 2016 | 89,368,899 | $ | 894 | $ | 1,981,136 | $ | — | $ | (486,574 | ) | $ | 1,495,456 | $ | 8,870 | $ | 1,504,326 | ||||||||||||||
Common stock issued through distribution reinvestment plan | 2,167,300 | 22 | 47,320 | — | — | 47,342 | — | 47,342 | ||||||||||||||||||||||
Common stock repurchases | (1,554,768 | ) | (16 | ) | (33,583 | ) | — | — | (33,599 | ) | (31 | ) | (33,630 | ) | ||||||||||||||||
Share-based compensation | 375,000 | 4 | 140 | — | — | 144 | — | 144 | ||||||||||||||||||||||
Distributions declared | — | — | — | — | (102,724 | ) | (102,724 | ) | — | (102,724 | ) | |||||||||||||||||||
Distributions to non-controlling interest holders | — | — | — | — | — | — | (495 | ) | (495 | ) | ||||||||||||||||||||
Other comprehensive loss | — | — | — | (124 | ) | — | (124 | ) | — | (124 | ) | |||||||||||||||||||
Net loss | — | — | — | — | (34,991 | ) | (34,991 | ) | (135 | ) | (35,126 | ) | ||||||||||||||||||
Balance, September 30, 2017 | 90,356,431 | $ | 904 | $ | 1,995,013 | $ | (124 | ) | $ | (624,289 | ) | $ | 1,371,504 | $ | 8,209 | $ | 1,379,713 | |||||||||||||
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, | ||||||||
2017 | 2016 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (35,126 | ) | $ | (13,273 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 58,911 | 76,245 | ||||||
Amortization of deferred financing costs | 4,271 | 3,373 | ||||||
Amortization of mortgage premiums and discounts, net | (1,279 | ) | (1,485 | ) | ||||
Amortization of market lease and other intangibles, net | 222 | 113 | ||||||
Bad debt expense | 9,945 | 8,157 | ||||||
Share-based compensation | 144 | 73 | ||||||
Gain on sale of investment securities | — | (56 | ) | |||||
Gain on sale of real estate investments, net | (438 | ) | (941 | ) | ||||
Loss on non-designated derivatives | 129 | — | ||||||
Impairment charges | 18,993 | — | ||||||
Changes in assets and liabilities: | ||||||||
Straight-line rent receivable | (4,537 | ) | (6,534 | ) | ||||
Prepaid expenses and other assets | (9,969 | ) | (5,146 | ) | ||||
Accounts payable, accrued expenses and other liabilities | 7,216 | 1,897 | ||||||
Deferred rent | (488 | ) | 1,434 | |||||
Restricted cash | (1,142 | ) | 76 | |||||
Net cash provided by operating activities | 46,852 | 63,933 | ||||||
Cash flows from investing activities: | ||||||||
Investments in real estate | (61,788 | ) | (21,761 | ) | ||||
Deposits paid for unconsummated acquisitions | (540 | ) | — | |||||
Deposits received for unconsummated dispositions | 1,125 | 100 | ||||||
Capital expenditures | (5,569 | ) | (5,727 | ) | ||||
Proceeds from sale of investment securities | — | 1,140 | ||||||
Cash received in asset acquisition | 865 | — | ||||||
Proceeds from sale of real estate investment | 757 | 26,065 | ||||||
Net cash used in investing activities | (65,150 | ) | (183 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from credit facilities | 128,116 | 46,500 | ||||||
Payments of credit facilities | (187,000 | ) | — | |||||
Proceeds from mortgage notes payable | 250,000 | — | ||||||
Payments on mortgage notes payable | (34,417 | ) | (15,085 | ) | ||||
Payments for derivative instruments | (88 | ) | — | |||||
Payments of deferred financing costs | (8,840 | ) | (958 | ) | ||||
Common stock repurchases | (33,599 | ) | (12,184 | ) | ||||
Distributions paid | (57,491 | ) | (55,544 | ) | ||||
Distributions to non-controlling interest holders | (495 | ) | (519 | ) | ||||
Net cash provided by (used in) financing activities | 56,186 | (37,790 | ) | |||||
Net change in cash and cash equivalents | 37,888 | 25,960 | ||||||
Cash and cash equivalents, beginning of period | 29,225 | 24,474 | ||||||
Cash and cash equivalents, end of period | $ | 67,113 | $ | 50,434 | ||||
6
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid for interest | $ | 18,187 | $ | 13,883 | ||||
Cash paid for income taxes | $ | 64 | $ | 339 | ||||
Non-cash investing and financing activities: | ||||||||
Common stock issued through distribution reinvestment plan | $ | 47,342 | $ | 55,971 | ||||
Capital expenditures assumed in asset acquisition | $ | 605 | $ | — | ||||
Liabilities assumed in real estate acquisitions | $ | 60 | $ | — | ||||
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, 2017
(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, focusing on seniors housing and medical office buildings ("MOB") located in the United States. As of September 30, 2017, the Company owned 166 properties located in 29 states and comprised of 8.6 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 ("REIT") for U.S. federal income tax purposes 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, 2017, the Company had 90.4 million shares of common stock outstanding, including unvested restricted shares of common stock ("restricted shares") and shares issued pursuant to the Company's distribution reinvestment plan (the "DRIP"), and had received total net proceeds from the IPO and DRIP of $2.2 billion, net of share repurchases.
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 real estate 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. The results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the results for the entire year or any subsequent interim period.
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, 2016, which are included in the Company's Annual Report on Form 10-K filed with the SEC on March 20, 2017. There have been no significant changes to the Company's significant accounting policies during the nine months ended September 30, 2017 other than the updates described below.
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Company, the OP and its subsidiaries. All intercompany accounts and transactions are eliminated in consolidation. In determining whether the Company has a controlling financial interest in a joint venture and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, authority to make decisions and contractual and substantive participating rights of the other partners or members as well as whether the entity is a variable interest entity ("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.
Impairment of Long-Lived Assets
When circumstances indicate the carrying value of a property may not be recoverable, we review the property 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
8
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
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.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued an update (“ASU 2014-09”) establishing Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”). ASU 2014-09, as amended by subsequent ASUs on the topic, establishes a comprehensive model for entities to use in accounting for revenue arising from contracts with customers. Under ASC 606, 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. ASC 606 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. A reporting entity may apply the amendments in ASC 606 using either a modified retrospective approach, by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption or a full retrospective approach. The Company will adopt this guidance effective January 1, 2018 and currently expects to utilize the modified retrospective approach upon adoption and does not expect that this will result in a significant cumulative-effect adjustment to equity.
The Company has progressed in its project plan in evaluating its various revenue streams in order to identify any differences in the timing, measurement or presentation of revenue recognition under ASC 606 and ASC Topic 842, Leases (“ASC 842”). Based on the Company’s evaluation of its various revenue streams, the Company believes that certain elements of resident services and fees in its seniors housing - operating properties ("SHOP") segment as well as gains on the sale of real estate could be impacted by the adoption of ASC 606.
Resident services and fees that may be affected by ASC 606 are generated through services the Company provides to residents of its seniors housing communities that are in addition to the residents’ contractual rights to occupy living and common-area space at the communities, such as care, meals, transportation, and activities. ASC 606 requires an entity to recognize revenue to depict the transfer of 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. While these revenue streams may be subject to the application of ASC 606, the Company believes that the timing of revenue recognition will be consistent with the current accounting model because the revenues associated with these services are generally recognized on a monthly basis.
As it relates to gains on the sale of real estate, the Company expects that this standard could have an impact on the timing of gains on certain sales of real estate as a result of more transactions generally qualifying as sales of real estate and revenue being recognized at an earlier date than under current accounting guidance. Specifically, the Company expects that this would impact partial sales of real estate in situations where the Company no longer retains a controlling financial interest. If the Company were to enter into partial sales of real estate, the Company would derecognize the real estate asset consistent with the principles outlined in ASC 606 and any retained non-controlling ownership interest would be measured at fair value consistent with the guidance on noncash consideration in ASC 606.
Lastly, upon adoption of ASC 606, the Company believes that it will likely have to separately disclose the components of its total revenue between lease revenue accounted for under existing lease guidance and service revenue accounted for under ASC 606. The Company is continuing to evaluate any differences in the timing, measurement, or presentation of revenue recognition and the impact on the Company's consolidated financial statements and internal accounting processes resulting from ASC 606 as well as ASC Topic 842, Leases as discussed below.
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 Company will adopt this guidance effective January 1, 2018. The Company expects that there will be no impact to the Company's consolidated financial position, results of operations and cash flows.
In February 2016, the FASB issued an update ASU 2016-02 establishing ASC Topic 842, Leases (“ASC 842”), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. ASC 842 supersedes previous leasing standards and is effective for reporting periods beginning after December 15, 2018. Early adoption
9
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
is permitted. ASC 842 will impact the lease accounting model for both lessees and lessors. The Company will adopt this guidance effective January 1, 2019.
The Company is a lessee for 19 of its properties for which it has ground leases as of September 30, 2017. For these leases, the Company will be required to record a right-of-use asset and lease liability equal to the present value of the remaining lease payments upon adoption of this update. The new standard requires lessees to apply a dual lease classification 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.
From a lessor perspective the Company expects that the new standard will impact the presentation of lease and non-lease components of revenue such as rent, and operating expense reimbursements including common area maintenance, taxes, and insurance from leases for which the Company is a lessor. The Company does not expect this guidance to impact its existing lessor revenue recognition pattern. The Company anticipates that it will elect the following practical expedients, which must be elected as a package and applied consistently by an entity to all of its leases, which allow the Company to not have to reassess the following upon adoption: (i) whether any expired or existing contract contains a lease, (ii) lease classification related to expired or existing leases, or (iii) whether costs incurred on existing leases qualify as initial direct costs. The Company is continuing to evaluate any differences in the timing, measurement, or presentation of lessor revenues as well as the impact of the new lessee accounting model on the Company’s consolidated financial position, results of operations and disclosures.
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. The Company will adopt this guidance effective January 1, 2018. The Company expects that there will be no impact to the Company's consolidated financial position, results of operations and cash flows.
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 Company will adopt this guidance effective January 1, 2018. The Company expects that there will be no impact to the Company's consolidated financial position, results of operations and cash flows.
In November 2016, the FASB issued guidance on the classification of restricted cash in the statement of cash flows. The amendment requires restricted cash to be included in the beginning-of-period and end-of-period total cash amounts. Therefore, transfers between cash and restricted cash will no longer be shown on the statement of cash flows. The Company will adopt this guidance effective January 1, 2018, using a retrospective transition method. As a result, the Company will restate its statements of cash flows for all periods presented to include restricted cash in the beginning and ending cash balances and remove all transfers between cash and restricted cash from operating, investing and financing activities.
In January 2017, the FASB issued guidance on simplifying subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The amendments in this update modify the concept of impairment from the condition that exists to when the carrying amount of a reporting unit exceeds its fair value. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. The revised guidance is effective for reporting periods beginning after December 15, 2019, and the amendments will be applied prospectively. Early application is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of this new guidance.
In February 2017, the FASB issued guidance on the derecognition of nonfinancial assets. The guidance clarifies the definition of in substance non-financial assets, unifies guidance related to partial sales of non-financial assets, eliminates rules specifically addressing the sales of real estate, removes the exception to the financial asset derecognition model and clarifies the accounting for contributions of non-financial assets to joint ventures. The Company will adopt this guidance effective January 1, 2018. The Company expects that any future sales of real estate in which the Company retains a non-controlling interest in the property would result in the full gain amount being recognized at the time of the partial sale. Historically, the Company has not retained any interest in properties it has sold.
10
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
In May 2017, the FASB issued guidance that clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The update states that modification accounting should be used unless the fair value of the award, the vesting terms of the award and the classification of the award as either equity or liability, all do not change as a result of the modification. The Company will adopt this guidance effective January 1, 2018. The Company expects that any future modifications to our issued share-based awards will be accounted for using modification accounting, unless the modification meets all of the exception criteria noted above. As a result, the modification would be treated as an exchange of the original award for a new award, with any incremental fair value being treated as additional compensation cost.
In August 2017, the FASB issued guidance to better align cash flow and fair value hedge accounting with the corresponding risk management activities. Among other things, the amendments expand which hedging strategies are eligible for hedge accounting, align the timing of recognition of hedge results with the earnings effect of the hedged item and allow companies to include the change in fair value of the derivative in the same income statement line item as the earnings effect of the hedged item. Additionally, for cash flow hedges that are highly effective, the update allows for all changes in fair value of the derivative to be recorded in other comprehensive income. The revised guidance is effective for reporting periods beginning after December 15, 2018. Early application is permitted. The Company is currently evaluating the impact of this new guidance.
Recently Adopted Accounting Pronouncements
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 has adopted the provisions of this guidance beginning January 1, 2017 and determined that there is no impact to our consolidated financial position, results of operations and cash flows.
In January 2017, the FASB issued guidance that revises the definition of a business. This new guidance is applicable when evaluating whether an acquisition should be treated as either a business acquisition or an asset acquisition. Under the revised guidance, when substantially all of the fair value of gross assets acquired is concentrated in a single asset or group of similar assets, the assets acquired would not be considered a business. The revised guidance is effective for reporting periods beginning after December 15, 2017, and the amendments will be applied prospectively. Early application is permitted only for transactions that have not previously been reported in issued financial statements. The Company has assessed this revised guidance and expects, based on historical acquisitions, that, in most cases, a future property acquisition would be treated as an asset acquisition rather than a business acquisition, which would result in the capitalization of related transaction costs. The Company has adopted the provisions of this guidance beginning January 1, 2017.
11
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
Note 3 — Real Estate Investments
The Company owned 166 properties as of September 30, 2017. 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.
During the nine months ended September 30, 2017, the Company, through wholly-owned subsidiaries of the OP, completed its acquisitions of three single tenant MOBs for an aggregate contract purchase price of $33.0 million and one SHOP property for a contract purchase price of $20.8 million. The following table presents the allocation of real estate assets acquired and liabilities assumed during the nine months ended September 30, 2017 as well as capitalized construction in progress during the nine months ended September 30, 2017 and 2016:
Nine Months Ended September 30, | ||||||||
(In thousands) | 2017 | 2016 | ||||||
Real estate investments, at cost: | ||||||||
Land | $ | 6,960 | $ | — | ||||
Buildings, fixtures and improvements | 40,344 | — | ||||||
Construction in progress | 7,871 | 21,761 | ||||||
Total tangible assets | 55,175 | 21,761 | ||||||
Acquired intangibles: | ||||||||
In-place leases(1) | 6,566 | — | ||||||
Below-market lease liabilities(1) | (13 | ) | — | |||||
Total assets and liabilities acquired, net | 61,728 | 21,761 | ||||||
Other liabilities | (60 | ) | — | |||||
Cash paid for real estate investments | $ | 61,788 | $ | 21,761 | ||||
Number of properties purchased | 4 | — | ||||||
(1) | Weighted-average remaining amortization periods for in-place leases and a below-market lease liability acquired during the nine months ended September 30, 2017 were 7.6 and 8.9 years, respectively. |
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, 2017. 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, 2017 — December 31, 2017 | $ | 21,743 | ||
2018 | 84,077 | |||
2019 | 79,300 | |||
2020 | 74,293 | |||
2021 | 69,351 | |||
Thereafter | 382,070 | |||
Total | $ | 710,834 | ||
12
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
As of September 30, 2017 and 2016, 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. 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, 2017 and 2016:
September 30, | ||||
State | 2017 | 2016 | ||
Florida | 17.2% | 17.6% | ||
Georgia | 10.3% | 10.9% | ||
Michigan | 15.2% | * | ||
Pennsylvania | 10.8% | 11.0% | ||
_______________
* | 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 date specified. |
Intangible Assets and Liabilities
Acquired intangible assets and liabilities consisted of the following as of the periods presented:
September 30, 2017 | December 31, 2016 | |||||||||||||||||||||||
(In thousands) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||
Intangible assets: | ||||||||||||||||||||||||
In-place leases | $ | 200,704 | $ | 127,167 | $ | 73,537 | $ | 195,940 | $ | 115,641 | $ | 80,299 | ||||||||||||
Intangible market lease assets | 28,210 | 7,420 | 20,790 | 28,220 | 5,798 | 22,422 | ||||||||||||||||||
Other intangible assets | 10,589 | 772 | 9,817 | 10,589 | 574 | 10,015 | ||||||||||||||||||
Total acquired intangible assets | $ | 239,503 | $ | 135,359 | $ | 104,144 | $ | 234,749 | $ | 122,013 | $ | 112,736 | ||||||||||||
Intangible market lease liabilities | $ | 25,080 | $ | 6,614 | $ | 18,466 | $ | 25,614 | $ | 5,427 | $ | 20,187 | ||||||||||||
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) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Amortization of in-place leases and other intangible assets(1) | $ | 3,925 | $ | 12,595 | $ | 13,491 | $ | 31,343 | ||||||||
Amortization and (accretion) of above- and below-market leases, net(2) | $ | (64 | ) | $ | (44 | ) | $ | (230 | ) | $ | (171 | ) | ||||
Amortization and (accretion) of above- and below-market ground leases, net(3) | $ | 43 | $ | 43 | $ | 129 | $ | 129 | ||||||||
_______________
(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, 2017
(Unaudited)
The following table provides the projected amortization expense and adjustments to revenues for the next five years:
(In thousands) | October 1, 2017 — December 31, 2017 | 2018 | 2019 | 2020 | 2021 | |||||||||||||||
In-place lease assets | $ | 3,753 | $ | 13,606 | $ | 11,109 | $ | 9,365 | $ | 7,817 | ||||||||||
Other intangible assets | 153 | 612 | 568 | 414 | 414 | |||||||||||||||
Total to be added to amortization expense | $ | 3,906 | $ | 14,218 | $ | 11,677 | $ | 9,779 | $ | 8,231 | ||||||||||
Above-market lease assets | $ | (403 | ) | $ | (1,357 | ) | $ | (1,068 | ) | $ | (742 | ) | $ | (532 | ) | |||||
Below-market lease liabilities | 503 | 1,852 | 1,572 | 1,415 | 1,266 | |||||||||||||||
Total to be added to rental income | $ | 100 | $ | 495 | $ | 504 | $ | 673 | $ | 734 | ||||||||||
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 | ||||||||||
Transfer of Operations
On June 8, 2017, the Company's taxable REIT subsidiary, through 12 separately executed membership interest or stock transfer agreements, acquired 12 operating entities that leased 12 healthcare facilities previously included in the Company's triple-net leased healthcare facilities segment. Concurrently with the acquisition of the 12 operating entities, the Company transitioned the management of the healthcare facilities to a third-party management company that manages other healthcare facilities in the Company's SHOP segment. As a part of the transition, the Company's subsidiary property companies executed leases with the acquired operating entities and the acquired operating entities executed management agreements with the management company under a structure permitted by the REIT Investment Diversification and Empowerment Act of 2007 ("RIDEA"). As part of the transition of operations, the Company now controls the operating entities that hold the operating licenses for the healthcare facilities. The Company determined the transition of operations to be an asset acquisition and accounted for such transfer accordingly.
At closing of the transfer of operations, the Company assumed the following assets and liabilities which are included in the consolidated balance sheet within the line items as shown below. The amounts below reflect the fair values of these assets and liabilities, as of the transfer closing date, to the appropriate financial statement line as shown below during the nine months ended September 30, 2017.
(In thousands) | June 8, 2017 | |||
Buildings, fixtures and improvements | $ | 538 | ||
Cash and cash equivalents | 865 | |||
Prepaid expenses and other assets | 690 | |||
Total assets acquired | $ | 2,093 | ||
Accounts payable and accrued expenses | $ | 1,349 | ||
Deferred rent | 744 | |||
Total liabilities acquired | $ | 2,093 | ||
Real Estate Sale
During the nine months ended September 30, 2017, the Company sold the Dental Arts Building located in Peoria, Arizona for an aggregate contract sales price of $0.8 million, exclusive of closing costs. The sale of this property resulted in a gain of $0.4 million for the nine months ended September 30, 2017, which is reflected within gain on sale of real estate investment in the consolidated statements of operations and comprehensive loss.
14
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
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. The sale of these properties resulted in an impairment charge of $0.4 million for the nine months ended September 30, 2016, which is reflected within impairment charges in the consolidated statements of operations and comprehensive loss.
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 for an aggregate contract price of $17.5 million. The sale of this property resulted in a gain of $1.3 million for the three and nine months ended September 30, 2016, which is reflected within gain on sale of real estate investments in the consolidated statements of operations and comprehensive loss.
The following table summarizes the four properties sold during the nine months ended September 30, 2016 and September 30, 2017.
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 Center 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 | |||||||
Dental Arts Building - Peoria, AZ | May 16, 2017 | 825 | 438 | |||||||
Total | $ | 27,075 | $ | 1,379 | ||||||
Less: disposal costs (1) | (428 | ) | ||||||||
Proceeds from the sale of real estate investments | $ | 26,647 | ||||||||
_______________
(1) As of September 30, 2016 the Company had $0.2 million of unpaid brokerage commissions.
The sales of Gregory Ridge, Parkway, Redwood Radiology, and the Dental Arts Building 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, Redwood Radiology, and the Dental Arts Building remain classified within continuing operations for all periods presented until the respective sale dates.
Assets Held For Sale
When assets are identified by management as held for sale, the Company stops recognizing depreciation and amortization expense on the identified assets and estimates the sales price, net of costs to sell, of those assets. If the carrying amount of the assets classified as held for sale exceeds the estimated net sales price, the Company records an impairment charge equal to the amount by which the carrying amount of the assets exceeds the Company's estimate of the net sales price of the assets.
In January 2017, the Company entered into an agreement to sell eight of its skilled nursing facility properties in Missouri (the "Missouri SNF Properties") for an aggregate contract purchase price of $42.0 million if closing occurs in 2017, and $44.1 million if closing occurs in 2018 (including any amendments thereto, the "Missouri SNF PSA"). Subsequently, in February 2017, the due diligence period of the Missouri SNF PSA expired and, concurrently with the expiration of the due diligence period, the Company stopped recognizing depreciation and amortization expense and reclassified the Missouri SNF Properties as held for sale on the consolidated balance sheet. The Missouri SNF PSA provides for an extended closing period to include seven closing adjournment periods, each requiring a non-refundable deposit through the final closing adjournment date, September 28, 2018. The Company does not have a material relationship with the potential buyer, and the disposition will not be an affiliated transaction. Although the Company believes the disposition of the Missouri SNF Properties is probable, there can be no assurance that the disposition will be consummated per the terms of the Missouri SNF PSA or at all. While the Company continues to expect the disposition to be consummated before December 31, 2017, see Note 18 — Subsequent Events for further details on the Missouri SNF Properties. In connection with the Missouri SNF Properties being classified as held for sale, the Company recognized an impairment charge of approximately $35,000 on one of the eight Missouri SNF Properties.
15
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
In February 2017, the Company's then-existing operator entered into an agreement to transfer the operations of the Missouri SNF Properties to a new operator (the "Missouri SNF OTA"). The Missouri SNF OTA permanently transferred all aspects of operations to the new operator effective February 15, 2017 and was not dependent on closing on the sale of the Missouri SNF Properties as outlined in the Missouri SNF PSA. On March 1, 2017, in connection with the new operator assuming the leases of the Missouri SNF Properties from the old operator pursuant to the Missouri SNF OTA, the Company paid its third-party broker a leasing commission of $0.4 million. The Company capitalized this cost to deferred costs, net on the consolidated balance sheet as of September 30, 2017 and is amortizing the cost through December 31, 2017, the expected disposition date of the Missouri SNF Properties.
Additionally, on March 1, 2017, in connection with the Missouri SNF PSA and Missouri SNF OTA, the Company reached an agreement with the prior tenants of the Missouri SNF Properties to provide a one-time payment of $2.8 million by the Company to a creditor of the prior tenants in order to close on the transfer of operations of the Missouri SNF Properties. This payment was made in March 2017 and is included in the Company's acquisition and transaction related expenses in the consolidated statements of operations and comprehensive loss for the nine months ended September 30, 2017.
The following table details the major classes of assets associated with the properties that have been classified as held for sale as of September 30, 2017:
(In thousands) | September 30, 2017 | |||
Real estate held for sale, at cost: | ||||
Land | $ | 3,131 | ||
Buildings, fixtures and improvements | 38,596 | |||
Total real estate held for sale, at cost | 41,727 | |||
Less accumulated depreciation and amortization | (3,870 | ) | ||
Real estate assets held for sale, net | 37,857 | |||
Impairment charges related to properties reclassified as held for sale | (35 | ) | ||
Assets held for sale | $ | 37,822 | ||
Impairment of Held for Use Real Estate Investments
As of September 30, 2017, the Company owned 37 held for use properties for which the Company had reconsidered the projected cash flows due to continued declining performance. As a result, the Company evaluated the impact on its ability to recover the carrying value of such properties based on the expected cash flows over its intended holding period. The Company primarily used a discounted cash flow approach to estimate the future cash flows expected to be generated. The Company made certain assumptions in this approach including, among others, the market and economic conditions, expected cash flow projections, intended holding periods, assessment of terminal values, property capitalization rates, and discount rates. As these factors are difficult to predict and are subject to future events that may alter management's assumptions, the future cash flows estimated by management in its impairment analysis may not be achieved, and actual losses for impairment may be realized in the future.
For some of the held for use properties noted above, the Company used a broker opinion of value to estimate future cash flows expected to be generated. The Company made certain assumptions in this approach as well, mainly that the sale of these properties would close at this value and within a specified time in the future. There can be no guarantee that the sales of these properties will close under these terms or at all.
As a result of its consideration of impairment, the Company determined that the carrying value of six held for use properties noted above exceeded their estimated fair values and recognized an aggregate impairment charge of $19.0 million, which is included on the consolidated statement of operations and comprehensive loss for the three and nine months ended September 30, 2017. The estimated fair value of the remaining properties evaluated was greater than their carrying value.
Note 4 — Investment Securities
As of September 30, 2017 and December 31, 2016, the Company had no investment securities. Investment securities previously owned were sold during the third quarter 2016. During the three and nine months ended September 30, 2016, the Company had unrealized gain/(loss) on investment securities of approximately ($43,000) and $6,000, respectively, which is reflected in the consolidated statements of operations and comprehensive loss.
16
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
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.
Note 5 — Credit Facilities
The Company has the following credit facilities outstanding as of September 30, 2017 and December 31, 2016:
Outstanding Facility Amount as of | Effective Interest Rate | |||||||||||||||||
Credit Facility | Encumbered Properties(1) | September 30, 2017 | December 31, 2016 | September 30, 2017 | December 31, 2016 | Maturity | ||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||
Revolving Credit Facility | 45 | (2) | $ | 280,500 | $ | 421,500 | 2.25 | % | 2.00 | % | Mar. 2019 | |||||||
Fannie Mae Master Credit Facilities: | ||||||||||||||||||
Capital One Facility | 2 | (3) | 83,439 | 30,000 | 3.48 | % | 3.24 | % | Nov. 2026 | |||||||||
KeyBank Facility | 4 | (4) | 58,677 | 30,000 | 3.50 | % | 3.24 | % | Nov. 2026 | |||||||||
Total Fannie Mae Master Credit Facilities | 142,116 | 60,000 | ||||||||||||||||
Total Credit Facilities | 51 | $ | 422,616 | $ | 481,500 | 2.67 | % | (5) | 2.15 | % | (5) | |||||||
_______________
(1) | Encumbered as of September 30, 2017. |
(2) | The equity interests and related rights in the Company's wholly owned subsidiaries that directly own or lease the eligible unencumbered real estate assets comprising the borrowing base of the Revolving Credit Facility have been pledged for the benefit of the lenders thereunder. |
(3) | Secured by first-priority mortgages on two of the Company’s seniors housing properties located in Florida as of September 30, 2017. |
(4) | Secured by first-priority mortgages on four of the Company’s seniors housing properties located in Michigan, Missouri and Kansas as of September 30, 2017. |
(5) | Calculated on a weighted average basis for all credit facilities outstanding as of September 30, 2017 and December 31, 2016. |
Revolving Credit Facility
On March 21, 2014, the Company entered into a senior secured revolving credit facility in the amount of $50.0 million (as amended from time to time, the "Revolving Credit Facility"). The Company amended the Revolving Credit Facility in 2014 and 2015, which, among other things, allowed for borrowings of up to $565.0 million. The Revolving Credit Facility also contains a sub-facility for letters of credit of up to $25.0 million and an "accordion" feature to allow the Company, under certain circumstances, to increase the aggregate borrowings under the Revolving Credit Facility to a maximum of $750.0 million, subject to borrowing base availability. On February 24, 2017, the Company further amended its Revolving Credit Facility, which, among other things, amended the method and inputs used in the calculation of certain financial covenants contained within the Revolving Credit Facility.
The Company has the option, based upon its leverage, to have the Revolving 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%. The Base Rate is defined in the Revolving 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 Revolving Credit Facility provides for monthly interest payments for each Base Rate loan and periodic interest 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 Revolving Credit Facility may be prepaid at any time, in whole or in part, without premium or penalty (subject to standard breakage costs). The Revolving Credit Facility requires the Company to meet certain financial covenants. In the event of a default, the lender has the right to terminate its obligations under the Revolving Credit Facility and to accelerate the payment on any unpaid principal amount of all outstanding loans.
In October 2017, the Company paid down $104.8 million of the outstanding balance on the Revolving Credit Facility in conjunction with the expansion of its master credit facility issued through Fannie Mae’s Multifamily MBS program and the sixth amendment of the Revolving Credit Facility. Additionally, in November 2017, the Company pledged 13 real estate assets to the Revolving Credit Facility and subsequently borrowed $54.0 million on the Revolving Credit Facility.
17
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
As of November 9, 2017, the Company's unused borrowing capacity under the Revolving Credit Facility was $11.3 million, based on a pool of eligible unencumbered real estate assets comprising the borrowing base thereunder. The Company, with agreement of the administrative agent and the requisite lenders under the Revolving Credit Facility, calculated the borrowing capacity on such date rather than as of September 30, 2017, due to the decline in occupancy of four properties. Three of these properties had already been removed from the borrowing base under the Revolving Credit Facility subsequent to September 30, 2017 and financed through a master credit facility issued through Fannie Mae’s Multifamily MBS program. As a result of the agreement of the administrative agent and the requisite lenders described above and giving effect to the sixth amendment to the Revolving Credit Facility, the Company is in compliance with the financial covenants under the Revolving Credit Facility.
Fannie Mae Master Credit Facilities
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 secured credit facility (the "Key Bank 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 “Fannie Mae Master Credit Agreements”) for a secured credit facility (the "Capital One Facility" the Capital One Facility and the Key Bank Facility are referred to herein individually as a "Fannie Mae Master Credit Facility" and together as the "Fannie Mae Master Credit Facilities") with Capital One Multifamily Finance, LLC (“Capital One”). The Fannie Mae Master 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.
Each Fannie Mae Master Credit Facility provides for an initial $30.0 million of advances. The Fannie Mae Master Credit Facilities are secured by six properties, in aggregate. The Company may request future advances under the Fannie Mae Master Credit Facilities by borrowing against the value of the initial mortgaged properties, as described below, or by 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 Mae Master Credit Facilities will mature on November 1, 2026. Beginning December 1, 2016, the annual interest rates under the Fannie Mae Master Credit Facilities changed to vary on a monthly basis and are equal to the sum of the current one month LIBOR and 2.62%, with a floor of 2.62%. Prior to December 1, 2016, borrowings under the KeyBank Facility and the Capital One Facility bore interest at rates of 3.15% and 3.16%, respectively, per annum. Effective October 31, 2016, in conjunction with the execution of the Fannie Mae Master Credit Facilities, the OP entered into two interest rate cap agreements (the "IR Caps") with an unrelated third party, which caps interest paid on amounts outstanding under the Fannie Mae Master Credit Facilities at a maximum of 3.5%. The IR Caps terminate on November 1, 2019. The Fannie Mae Master Credit Agreements require the Company 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. See Note 8 — Derivatives and Hedging Activities for further disclosure over the Company's derivatives.
The KeyBank Facility is 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 secured by first-priority mortgages on two of the Company’s seniors housing properties located in Florida. Each Fannie Mae Master Credit Facility is cross-defaulted and cross-collateralized with the other notes and security agreements securing such Fannie Mae Master Credit Facility. The Fannie Mae Master Credit Facilities are non-recourse, subject to standard carve-outs and environmental indemnities, which obligations are guaranteed by the OP on an unsecured basis.
The initial advances under the Fannie Mae Master 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 Fannie Mae Master Credit Agreements provide for optional acceleration by the Lender upon an event of default. The Fannie Mae Master Credit Agreements contain customary events of default, including the breach of transfer prohibitions, principal or interest payment defaults and bankruptcy-related defaults.
On March 30, 2017, the Company increased its advances under the Capital One Facility by $53.4 million (the "2017 Capital One Advance"). The 2017 Capital One Advance was secured by the value of the initial mortgaged properties securing the Capital One Facility. In connection with the 2017 Capital One Advance, the OP entered into an additional interest rate cap agreement (the "2017 Capital One IR Cap") with an unrelated third party, which caps interest paid on amounts outstanding on the 2017 Capital One Advance at a maximum of 3.5%. The 2017 Capital One IR Cap terminates on April 1, 2020. See Note 8 — Derivatives and Hedging Activities for further disclosure over the Company's derivatives.
18
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
On April 26, 2017, the Company increased its advances under the KeyBank Facility by $28.7 million (the "2017 KeyBank Advance"). The 2017 KeyBank Advance was secured by the value of the initial mortgaged properties subject to the KeyBank Facility. In connection with the 2017 KeyBank Advance, the OP entered into an additional interest rate cap agreement (the "2017 KeyBank IR Cap") with an unrelated third party, which caps interest paid on amounts outstanding on the 2017 KeyBank Advance at a maximum of 3.5%. The 2017 KeyBank IR Cap terminates on November 1, 2019. See Note 8 — Derivatives and Hedging Activities for further disclosure over the Company's derivatives.
Upon an event of default under each Fannie Mae Master Credit Agreement, payment of any unpaid amounts under the applicable Fannie Mae Master 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 applicable Fannie Mae Master Credit Facility.
19
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
Note 6 — Mortgage Notes Payable
The following table reflects the Company's mortgage notes payable as of September 30, 2017 and December 31, 2016:
Outstanding Loan Amount as of | Effective Interest Rate as of | ||||||||||||||||
Portfolio | Encumbered Properties (1) | September 30, 2017 | December 31, 2016 | September 30, 2017 | Interest Rate | Maturity | |||||||||||
(In thousands) | (In thousands) | ||||||||||||||||
Medical Center of New Windsor - New Windsor, NY | — | $ | — | $ | 8,602 | — | % | Fixed | Sep. 2017 | ||||||||
Plank Medical Center - Clifton Park, NY | — | — | 3,414 | — | % | Fixed | Sep. 2017 | ||||||||||
Countryside Medical Arts - Safety Harbor, FL | 1 | 5,808 | 5,904 | 5.94 | % | Variable | (2) | Apr. 2019 | |||||||||
St. Andrews Medical Park - Venice, FL | 3 | 6,419 | 6,526 | 5.94 | % | Variable | (2) | Apr. 2019 | |||||||||
Slingerlands Crossing Phase I - Bethlehem, NY | — | — | 6,589 | — | % | Fixed | Sep. 2017 | ||||||||||
Slingerlands Crossing Phase II - Bethlehem, NY | — | — | 7,671 | — | % | Fixed | Sep. 2017 | ||||||||||
Benedictine Cancer Center - Kingston, NY | — | — | 6,719 | — | % | Fixed | Sep. 2017 | ||||||||||
Aurora Healthcare Center Portfolio - WI (5) | 6 | 30,539 | 30,858 | 6.55 | % | Fixed | Jan. 2018 | ||||||||||
Palm Valley Medical Plaza - Goodyear, AZ | 1 | 3,353 | 3,428 | 4.15 | % | Fixed | Jun. 2023 | ||||||||||
Medical Center V - Peoria, AZ | 1 | 3,087 | 3,151 | 4.75 | % | Fixed | Sep. 2023 | ||||||||||
Courtyard Fountains - Gresham, OR | 1 | 24,486 | 24,820 | 3.87 | % | Fixed | Jan. 2020 | ||||||||||
Fox Ridge Bryant - Bryant, AR | 1 | 7,598 | 7,698 | 3.98 | % | Fixed | May 2047 | ||||||||||
Fox Ridge Chenal - Little Rock, AR | 1 | 17,338 | 17,540 | 3.98 | % | Fixed | May 2049 | ||||||||||
Fox Ridge North Little Rock - North Little Rock, AR | 1 | 10,758 | 10,884 | 3.98 | % | Fixed | May 2049 | ||||||||||
MOB Loan | 32 | 250,000 | — | 4.43 | % | Fixed | (4) | June 2022 | |||||||||
Gross mortgage notes payable | 48 | 359,386 | 143,804 | 4.58 | % | (3) | |||||||||||
Deferred financing costs, net of accumulated amortization | (6,597 | ) | (1,516 | ) | |||||||||||||
Mortgage premiums and discounts, net | (813 | ) | 466 | ||||||||||||||
Mortgage notes payable, net | $ | 351,976 | $ | 142,754 | |||||||||||||
_______________
(1) | Does not include eligible unencumbered real estate assets comprising the borrowing base of the Revolving Credit Facility. The equity interests and related rights in the Company's wholly owned subsidiaries that directly own or lease these real estate assets have been pledged for the benefit of the lenders thereunder. See Note 5 — Credit Facilities for further details. |
(2) | Weighted average interest rate changed from a fixed to a variable rate beginning in June 2017 and will remain variable throughout the remaining term of the mortgage. |
(3) | Calculated on a weighted average basis for all mortgages outstanding as of September 30, 2017. |
(4) | Variable rate loan which is fixed as a result of entering into interest rate swap agreements. Note 8 — Derivatives and Hedging Activities. |
(5) | On November 1, 2017, the Company paid off mortgage notes secured by the six properties comprising the Aurora Healthcare Center Portfolio and reduced the Company’s outstanding mortgage notes payable by $30.5 million. See Note 18 — Subsequent Events for further details. |
On June 30, 2017, Capital One, National Association ("Capital One, NA"), as administrative agent and lender, and certain other lenders (collectively, the "MOB Lenders"), made a loan in the aggregate amount of $250.0 million (the “MOB Loan”) to certain subsidiaries of the OP. In connection with the MOB Loan, the OP entered into a Guaranty of Recourse Obligations (the “Guaranty”) and a Hazardous Materials Indemnity Agreement (the “Environmental Indemnity”) in favor of Capital One, NA and the MOB Lenders. Pursuant to the Guaranty, the OP has guaranteed, among other things, specified losses arising from certain actions of any of the OP's subsidiaries, including fraud, willful misrepresentation, certain intentional acts, misapplication of funds, physical waste, and failure to pay taxes. The Guaranty requires the Company to maintain a certain minimum of shareholders’ equity on its balance sheet. Pursuant to the Environmental Indemnity, the OP and the Company's subsidiaries that directly own or lease the mortgaged properties have indemnified the MOB Lenders against losses, costs or liabilities related to certain environmental matters.
20
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
The MOB Loan bears interest at a variable rate equal to LIBOR plus 2.5% and requires the Company to pay interest on a monthly basis with the principal balance due on the maturity date of June 30, 2022. In connection with the closing of the MOB Loan, the OP executed an interest rate swap on the full amount of the MOB Loan, fixing the interest rate exposure at 4.38%. See Note 8 — Derivatives and Hedging Activities for additional information on the Company's outstanding derivatives.
The Company may pre-pay the MOB Loan, in whole or in part, at any time, with payment of a prepayment premium equal to (a) 2.0% of principal outstanding if prepayment is made during the first 12 months of the MOB Loan and (b) 1.0% of principal outstanding if prepayment is made during the second 12 months of the MOB Loan. Thereafter, no prepayment premium is applicable.
As of September 30, 2017, the Company had pledged $672.3 million in total real estate investments as collateral for its $359.4 million of mortgage notes payable. This real estate is not available to satisfy other debts and obligations unless first satisfying the mortgage notes payable secured by these 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, 2017 and thereafter:
(In thousands) | Future Principal Payments | |||
October 1, 2017 — December 31, 2017 | $ | 508 | ||
2018 | 32,053 | |||
2019 | 13,072 | |||
2020 | 24,279 | |||
2021 | 892 | |||
Thereafter | 288,582 | |||
Total | $ | 359,386 | ||
Some of the Company's mortgage note agreements (including the MOB Loan) require the compliance with certain property-level financial covenants, including debt service coverage ratios. As of September 30, 2017, the Company was in compliance with these financial covenants.
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.
21
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with those derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. However, as of September 30, 2017, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of the Company's derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
The valuation of derivative instruments is determined using a discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, as well as observable market-based inputs, including interest rate curves and implied volatilities. In addition, credit valuation adjustments are incorporated into the fair values to account for the Company's potential nonperformance risk and the performance risk of the counterparties.
The Company had impaired real estate investments held for sale, which were carried at fair value on the consolidated balance sheet as of September 30, 2017. Impaired real estate investments held for sale were valued using the sale price from the Missouri SNF PSA less costs to sell, which is an observable input. As a result, the Company's impaired real estate investments held for sale are classified in Level 2 of the fair value hierarchy. There were no impaired real estate investments held for sale as of December 31, 2016.
The Company also had impaired real estate investments held for use, which were carried at fair value on a non-recurring basis on the consolidated balance sheet as of September 30, 2017. As of September 30, 2017, the Company owned 37 held for use properties for which the Company had reconsidered the projected cash flows due to continued declining performance. As a result, the Company evaluated the impact on its ability to recover the carrying value of such properties based on the expected cash flows over its intended holding period. The Company primarily used a discounted cash flow approach to estimate the future cash flows expected to be generated. As a result of this evaluation and its consideration of impairment, the Company determined that the carrying value of six held for use properties noted above exceeded their estimated fair values and recognized an aggregate impairment charge of $19.0 million, which is included on the consolidated statement of operations and comprehensive loss for the three and nine months ended September 30, 2017. The Company made certain assumptions in this approach including, among others, the market and economic conditions, expected cash flow projections, intended holding periods, assessment of terminal values, property capitalization rates, and discount rates, all of which are unobservable inputs. As a result, the impaired properties that the Company evaluated using this approach are classified in Level 3 of the fair value hierarchy.
The following table presents information about the Company's assets and liabilities measured at fair value as of September 30, 2017 and December 31, 2016, aggregated by the level in the fair value hierarchy within which those instruments fall.
(In thousands) | Basis of Measurement | Quoted Prices in Active Markets Level 1 | Significant Other Observable Inputs Level 2 | Significant Unobservable Inputs Level 3 | Total | |||||||||||||
September 30, 2017 | ||||||||||||||||||
Derivatives, net | Recurring | $ | — | $ | (104 | ) | $ | — | $ | (104 | ) | |||||||
Impaired assets held for use | Non-recurring | — | — | 16,586 | 16,586 | |||||||||||||
Impaired assets held for sale | Non-recurring | — | 1,323 | — | 1,323 | |||||||||||||
Total | $ | — | $ | 1,219 | $ | 16,586 | $ | 17,805 | ||||||||||
December 31, 2016 | ||||||||||||||||||
Derivatives, net | Recurring | $ | — | $ | 61 | $ | — | $ | 61 | |||||||||
A review of the fair value hierarchy classification is conducted on a quarterly basis. Changes in the type of inputs may result in a reclassification for certain assets. There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the nine months ended September 30, 2017.
22
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
The Company is required to disclose the fair value of financial instruments for which it is practicable to estimate that value. The fair values 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 approximate 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 at | Fair Value at | Carrying Amount at | Fair Value at | |||||||||||||||
(In thousands) | Level | September 30, 2017 | September 30, 2017 | December 31, 2016 | December 31, 2016 | |||||||||||||
Gross mortgage notes payable and mortgage premium and discounts, net | 3 | $ | 358,573 | $ | 359,935 | $ | 144,270 | $ | 144,261 | |||||||||
Revolving Credit Facility | 3 | $ | 280,500 | $ | 280,500 | $ | 421,500 | $ | 421,500 | |||||||||
Fannie Mae Master Credit Facilities | 3 | $ | 142,116 | $ | 142,895 | $ | 60,000 | $ | 60,000 | |||||||||
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 Revolving Credit Facility are considered to be reported at fair value, because their interest rates vary with changes in LIBOR and there has not been a significant change in credit risk of the Company or credit markets since origination.
Note 8 — Derivatives and Hedging Activities
Risk Management Objective of Using Derivatives
The Company may use derivative financial instruments including interest rate swaps, caps, collars, options, floors and other interest rate derivative contracts to hedge all or a portion of the interest rate risk associated with its borrowings. The principal objective of such arrangements is to minimize the risks and/or costs associated with the Company's operating and financial structure. The Company does not intend to utilize derivatives for speculative purposes or purposes other than interest rate risk management. The use of derivative financial instruments carries certain risks, including the risk that the counterparties to these contractual arrangements are not able to perform under the agreements. To mitigate this risk, the Company only enters into derivative financial instruments with counterparties with high credit ratings and with major financial institutions with which the Company, and its affiliates, may also have other financial relationships. The Company does not anticipate that any of the counterparties will fail to meet their obligations.
Derivatives Designated as Cash Flow Hedges of Interest Rate Risk
The Company currently has two interest rate swaps that are designated as cash flow hedges. The interest rate swaps are used as part of the Company's interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. During 2017, such derivatives were used to hedge the variable cash flows associated with variable-rate debt.
The Company tests the effectiveness of its designated hedges. The effective portion of the changes in fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive loss. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings.
Amounts reported in accumulated other comprehensive loss related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the next twelve months, from October 1, 2017 through September 30, 2018, the Company estimates that $1.1 million will be reclassified from other comprehensive loss as an increase to interest expense.
As of September 30, 2017, the Company had the following derivatives that were designated as cash flow hedges of interest rate risk. The Company did not have any derivatives designated as cash flow hedges as of December 31, 2016.
23
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
September 30, 2017 | December 31, 2016 | |||||||||||||
Interest Rate Derivative | Number of Instruments | Notional Amount | Number of Instruments | Notional Amount | ||||||||||
(In thousands) | (In thousands) | |||||||||||||
Interest rate swap | 2 | $ | 250,000 | — | $ | — | ||||||||
The table below details the location in the financial statements of the loss recognized on interest rate derivatives designated as cash flow hedges for the three and nine months ended September 30, 2017. The Company did not have any derivatives designated as cash flow hedges as of September 30, 2016.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(In thousands) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Amount of loss recognized into accumulated other comprehensive loss on designated derivatives (effective portion) | $ | (243 | ) | $ | — | $ | (539 | ) | $ | — | ||||||
Amount of loss reclassified out of accumulated other comprehensive loss on designated derivatives (effective portion) | $ | (415 | ) | $ | — | $ | (415 | ) | $ | — | ||||||
Derivatives Not Designated as Hedges
The Company currently has four interest rate caps that are not designated as hedges in qualified hedging relationships. The interest rate caps are used as part of the Company's interest rate risk management strategy. Changes in the fair value of the Company's interest rate caps are recorded directly in earnings, which resulted in a loss of approximately $22 thousand and $0.1 million for the three and nine months ended September 30, 2017, respectively. The Company did not have any derivatives not designated as hedges outstanding as of September 30, 2016.
The Company had the following outstanding interest rate derivatives that were not designated as hedges in qualified hedging relationships as of September 30, 2017 and December 31, 2016:
September 30, 2017 | December 31, 2016 | |||||||||||||
Interest Rate Derivative | Number of Instruments | Notional Amount | Number of Instruments | Notional Amount | ||||||||||
(In thousands) | (In thousands) | |||||||||||||
Interest rate caps | 4 | $ | 142,116 | 2 | $ | 60,000 | ||||||||
Balance Sheet Classification
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the consolidated balance sheets as of September 30, 2017 and December 31, 2016:
(In thousands) | Balance Sheet Location | September 30, 2017 | December 31, 2016 | |||||||
Derivatives designated as hedging instruments: | ||||||||||
Interest rate swap | Derivative liabilities, at fair value | $ | (124 | ) | $ | — | ||||
Derivatives not designated as hedging instruments: | ||||||||||
Interest rate caps | Derivative assets, at fair value | $ | 20 | $ | 61 | |||||
Credit-risk-related Contingent Features
The Company has an ISDA Master Agreement in place with each of its interest rate swap counterparties that contains a cross-default provision. Under this cross-default provision, if the Company defaults on its loan obligations in an amount equal to$50,000,000.00 or more and such default results in an acceleration of the Company’s obligation to repay such borrowed amounts,
24
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
an event of default with respect to the Company under these ISDA Master Agreements will be triggered and give the Company’s derivative counterparties the right to terminate their derivatives transactions with the Company. Generally, a default related to obligations for borrowed money that is caused solely due to a technical or administrative error that has been remedied within three (3) business days after notice of such default will not result in an event of default under the Company’s ISDA Master Agreements.
As of September 30, 2017, the fair value of derivatives in a net liability position, including accrued interest but excluding any adjustment for nonperformance risk related to these agreements, was $0.3 million. As of September 30, 2017, the Company has not posted any collateral related to these agreements and was not in breach of any agreement provisions. If the Company had breached any of these provisions, it could have been required to settle its obligations under the agreements at their aggregate termination value.
Note 9 — Common Stock
As of September 30, 2017 and December 31, 2016, the Company had 90.4 million and 89.4 million shares of common stock outstanding, respectively, including unvested restricted shares and shares issued pursuant to the DRIP, net of shares repurchases. As of September 30, 2017 and December 31, 2016, the Company had received total net proceeds from the IPO and DRIP, net of shares repurchases, of $2.2 billion.
In April 2013, the Company's board of directors (the "Board") authorized, and the Company began paying distributions on a monthly basis at a rate equivalent to $1.70 per annum, per share of common stock, which began in May 2013. In March 2017, the Board authorized a decrease in the rate at which the Company pays monthly distributions to stockholders, effective as of April 1, 2017, to a rate equivalent to $1.45 per annum per share of common stock. 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.
On March 30, 2017, the Board approved an updated estimate of per-share net asset value ("Estimated Per-Share NAV") as of December 31, 2016. The Company intends to publish Estimated Per-Share NAV periodically at the discretion of the Company's Board, provided that such estimates will be made at least once annually.
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, 2017, the Company issued 2.2 million shares of common stock pursuant to the DRIP, generating aggregate proceeds of $47.3 million.
Until April 7, 2016 (the "Original NAV Pricing Date"), the first date the Company published an Estimated Per-Share NAV, the Company offered shares pursuant to the DRIP at $23.75, which was 95.0% of the initial offering price of shares of common stock in the IPO. Effective on the Original NAV Pricing Date, the Company began offering shares pursuant to the DRIP at the then-current Estimated Per-Share NAV approved by the Board. Effective March 30, 2017, the Company began offering shares pursuant to the DRIP at the Estimated Per-Share NAV as of December 31, 2016.
Share Repurchase Program
The Board has adopted the share repurchase program (as amended and restated, 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.
On June 14, 2017, the Company announced that its Board had adopted an amendment and restatement of the SRP that superseded and replaced the existing SRP effective as of July 14, 2017. Under the amended and restated SRP, subject to certain conditions, only repurchase requests made following the death or qualifying disability of stockholders that purchased shares of the Company’s common stock or received their shares from the Company (directly or indirectly) through one or more non-cash transactions would be considered for repurchase. Other terms and provisions of the amended and restated SRP remained consistent with the existing SRP.
25
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
In cases of requests for death and disability, the repurchase price is equal to then-current Estimated Per-Share NAV at the time of repurchase. Prior to the Original NAV Pricing Date, the repurchase price under these circumstances was equal to the price paid to acquire the shares.
Prior to the Original NAV Pricing Date, the repurchase price per share other than with respect to requests for death and disability was as follows (in each case, as adjusted for any stock distributions, combinations, splits and recapitalizations):
• | the lower of $23.13 or 92.5% of the price paid to acquire the shares, for stockholders who had continuously held their shares for a period greater than one year and less than two years; |
• | the lower of $23.75 or 95.0% of the price paid to acquire the shares, for stockholders who had continuously held their shares for greater than two years and less than three years; |
• | the lower of $24.38 or 97.5% of the price paid to acquire the shares, for stockholders who had continuously held their shares for greater than three years and less than four years; and |
• | the lower of $25.00 or 100.0% of the price paid to acquire the shares, for stockholders who had continuously held their shares for greater than four years. |
Beginning with the Original NAV Pricing Date, the repurchase price per share, other than with respect to requests for death and disability was as follows (in each case, as adjusted for any stock distributions, combinations, splits and recapitalizations):
• | 92.5% of the then-current (at the time of repurchase) Estimated Per-Share NAV for stockholders who had continuously held their shares for a period greater than one year and less than two years; |
• | 95.0% of the then-current Estimated Per-Share NAV for stockholders who had continuously held their shares for a period greater than two years and less than three years; |
• | 97.5% of the then-current Estimated Per-Share NAV for stockholders who had continuously held their shares for a period greater than three years and less than four years; and |
• | 100.0% of the then-current Estimated Per-Share NAV for stockholders who had continuously held their shares for a period greater than four years. |
Under the SRP, repurchases of shares of the Company's common stock, when requested, are at the sole discretion of the Board and generally are made semiannually (each six-month period ending June 30 or December 31, a “fiscal semester”). Repurchases for any fiscal semester are 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.
On June 28, 2016, the Board amended the Company’s SRP (the "Special 2016 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 remained unchanged and continued to be limited to a maximum of 5.0% of the Prior Year Outstanding Shares and was subject to the terms and limitations set forth in the SRP. Accordingly, the 2016 Repurchase Period was limited to a maximum of 5.0% of the Prior Year Outstanding Shares and continues to be subject to the terms and conditions set forth in the SRP, as amended. Following calendar year 2016, the repurchase periods return to two semi-annual periods and applicable limitations set forth in the SRP. On January 25, 2017, the Board further amended the Company’s SRP for calendar year 2016, changing the date on which any repurchases were to be made in respect of requests made during the calendar year 2016 to no later than March 15, 2017, rather than on or before the 31st day following December 31, 2016. All other terms of the SRP remained in effect, including that repurchases pursuant to the SRP are at the sole discretion of the Board.
26
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
When a stockholder requests repurchases and the repurchases are approved, the Company reclassifies such an obligation from equity to a liability based on the settlement value of the obligation. Shares repurchased have the status of authorized but unissued shares. The following table reflects the number of shares repurchased cumulatively through September 30, 2017:
Number of Shares Repurchased | Weighted-Average Price per Share | ||||||
Cumulative repurchases as of December 31, 2016 | 975,030 | $ | 23.73 | ||||
Nine months ended September 30, 2017 (1) | 1,554,768 | 21.61 | |||||
Cumulative repurchases as of September 30, 2017 | 2,529,798 | $ | 22.43 | ||||
_____________________________
(1) | Includes (i) 1,273,179 shares repurchased during the three months ended March 31, 2017 for approximately $27.5 million at a weighted average price per share of $21.61, (ii) 13,866 shares repurchased during the three months ended June 30, 2017 for approximately $0.3 million at a weighted average price per share of $23.93, and (iii) 267,723 shares repurchased during the three months ended September 30, 2017 for approximately $5.7 million at a weighted average price per share of $21.47. Excludes rejected repurchases received during 2016 with respect to 2.3 million shares for $48.7 million at a weighted average price per share of $21.27. In July 2017, following the effectiveness of the amendment and restatement of the SRP, the Board approved 100% of the repurchase requests made following the death or qualifying disability of stockholders during the period from January 1, 2017 to September 30, 2017, which was equal to 267,723 shares repurchased for approximately $5.7 million at an average price per share of $21.47. No repurchases have been or will be made with respect to requests received during 2017 that are not valid requests in accordance with the amended and restated SRP. |
Note 10 — Related Party Transactions and Arrangements
As of September 30, 2017 and December 31, 2016, 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. As of September 30, 2017 and December 31, 2016, the Advisor held 90 partnership units in the OP designated as "OP Units" ("OP Units").
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 Sponsor. In May 2016, RCAP and its affiliated debtors emerged from bankruptcy under the new name Aretec Group, Inc. On March 8, 2017, the creditor trust established in connection with the RCAP bankruptcy filed suit against AR Global, the Advisor, advisors of other entities sponsored by AR Global, and AR Global’s principals (including Mr. Weil, a member of the Board). The suit alleges, among other things, certain breaches of duties to RCAP. The Company is not named in the suit, nor are there any allegations related to the services the Advisor provides to the Company. On May 26, 2017, the defendants moved to dismiss. The Advisor has informed the Company that it believes that the suit is without merit and intends to defend against it vigorously.
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.
27
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
Purchase Agreement
On June 16, 2017, the Company entered into a purchase agreement (the “Purchase Agreement”) with American Realty Capital Healthcare Trust III, Inc. (“HT III”). HT III is sponsored and advised by affiliates of the Advisor. Pursuant to the Purchase Agreement, the Company has agreed to purchase membership interests in HT III’s subsidiaries that collectively own all 19 properties owned by HT III and comprise substantially all of HT III’s assets (together with the other transactions contemplated by the Purchase Agreement, the “Asset Purchase”) for a purchase price of $120.0 million (the “Purchase Price”). The Purchase Price will be payable on the date the Asset Purchase is consummated (the “Closing Date”), subject to closing adjustments for customary prorations and reduced for debt assumption or repayment, all as provided in the Purchase Agreement. The only indebtedness being assumed or repaid is the loan secured by HT III's Philip Center property (the “Philip Center Loan”), which had an outstanding principal balance of approximately $4.9 million as of September 30, 2017. The Company will deposit $6.0 million (the “Escrow Amount”) of the Purchase Price payable into an escrow account on the Closing Date, and the Escrow Amount will be released in installments thereafter over a period of 14 months following the Closing Date.
Pursuant to the terms of the Purchase Agreement, the Company has agreed to use commercially reasonable efforts (including paying early termination fees not to exceed $200,000) to assume the Philip Center Loan and to cause HT III to be released from the guaranty associated with the Philip Center Loan. If the Company does not assume the Philip Center Loan on the Closing Date or if HT III is not released from the guaranty associated with the Philip Center Loan, the Philip Center Loan will be repaid in full by HT III on the Closing Date and any early termination fee in excess of $200,000 will be subtracted from the Purchase Price.
In connection with its approval of the Purchase Agreement, HT III’s board of directors also approved a plan of liquidation, which is subject to stockholder approval. The closing of the Asset Purchase is conditioned upon stockholder approval of both the Asset Purchase and the plan of liquidation. Thus, if HT III’s stockholders do not approve the plan of liquidation, the Asset Purchase will not be completed even if HT III’s stockholders approve the Asset Purchase.
On October 23, 2017, HT III filed a definitive proxy statement related to its 2017 annual meeting of stockholders at which stockholder approval of the Asset Purchase will be sought. The annual meeting is scheduled to be held on December 21, 2017.
Fees Incurred in Connection With the Operations of the Company
On February 17, 2017, the members of a special committee of the Board unanimously approved certain amendments to the Amended and Restated Advisory Agreement, as amended (the "Original A&R Advisory Agreement"), by and among the Company, the OP and the Advisor (the "Second A&R Advisory Agreement"). The Second A&R Advisory Agreement, which superseded the Original A&R Advisory Agreement, took effect on February 17, 2017. The initial term of the Second A&R Advisory Agreement is ten years beginning on February 17, 2017, and is automatically renewable for another ten-year term upon each ten-year anniversary unless the Second A&R Advisory Agreement is terminated (i) with notice of an election not to renew at least 365 days prior to the applicable tenth anniversary, (ii) in accordance with a change in control or a transition to self-management (see the section titled "Termination Fees" included within this footnote), (iii) by 67% of the independent directors of the Board for cause, without penalty, with 45 days' notice or (iv) with 60 days prior written notice by the Advisor for (a) a failure to obtain a satisfactory agreement for any successor to the Company to assume and agree to perform obligations under the Second A&R Advisory Agreement or (b) any material breach of the Second A&R Advisory Agreement of any nature whatsoever by the Company.
28
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
Acquisition Fees
Under the Original A&R Advisory Agreement and until February 17, 2017, the Advisor was 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 was also reimbursed for services provided for which it incurred investment-related expenses, or insourced expenses. The amount reimbursed for insourced expenses was not permitted to exceed 0.5% of the contract purchase price of each acquired property or 0.5% of the amount advanced for a loan or other investment. Additionally, the Company reimbursed the Advisor for third party acquisition expenses. The aggregate amount of acquisition fees and financing coordination fees (as described below) could not exceed 1.5% of the contract purchase price and the amount advanced for a loan or other investment for all the assets acquired. As of September 30, 2017, aggregate acquisition fees and financing fees did not exceed the 1.5% threshold. In no event was 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 permitted to 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. As of September 30, 2017, the total of all cumulative acquisition fees, acquisition expenses and financing coordination fees did not exceed the 4.5% threshold.
The Second A&R Advisory Agreement does not provide for an acquisition fee, however the Advisor may continue to be 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 or 0.5% of the amount advanced for a loan or other investment. Additionally, the Company reimburses the Advisor for third party acquisition expenses.
Financing Coordination Fees
Under the Original A&R Advisory Agreement and until February 17, 2017, if the Advisor provided services in connection with the origination or refinancing of any debt that the Company obtained and used to acquire properties or to make other permitted investments, or that was assumed, directly or indirectly, in connection with the acquisition of properties, the Company paid the Advisor a financing coordination fee equal to 0.75% of the amount available and/or outstanding under such financing, subject to certain limitations.
The Second A&R Advisory Agreement does not provide for a financing coordination fee.
Asset Management Fees and Variable Management/Incentive Fees
Under an advisory agreement that was superseded by the Original A&R Advisory Agreement and 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 partnership units of the OP designated as "Class B Units" ("Class B Units"). The Class B Units were intended to be profit interests and vest, and no longer are 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.
Subject to approval 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 was initially equal 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, 2017, the Company cannot determine the probability of achieving the performance condition. The Advisor receives cash distributions on each issued Class B Units equal to the distribution rate received on the Company's common stock. Such distributions on 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, 2017, the Board had approved the issuance of 359,250 Class B Units to the Advisor in connection with this arrangement.
29
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
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 to the Advisor with respect 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 was 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 was 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 Original NAV Pricing Date, each share was valued at $22.50, (b) after the Original 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 Estimated Per-Share NAV and (c) at all other times, each share shall be valued by the Board in good faith at the fair market value.
Effective February 17, 2017, the Second A&R Advisory Agreement requires the Company to pay the Advisor a base management fee, which is payable on the first business day of each month. The fixed portion of the base management fee is equal to $1.625 million per month, while the variable portion of the base management fee is equal to one-twelfth of 1.25% of the cumulative net proceeds of any equity (including convertible debt) raised subsequent to February 17, 2017 per month. The base management fee is payable to the Advisor or its assignees in cash, OP Units or shares, or a combination thereof, the form of payment to be determined at the discretion of the Advisor.
In addition, the Second A&R Advisory Agreement requires the Company to pay the Advisor a variable management/incentive fee quarterly in arrears equal to (x) 15.0% of the applicable prior quarter's Core Earnings (as defined below) per share in excess of $0.375 per share plus (y) 10.0% of the applicable prior quarter's Core Earnings per share in excess of $0.47 per share. Core Earnings is defined as, for the applicable period, net income or loss, computed in accordance with GAAP, excluding non-cash equity compensation expense, the variable management/incentive fee, acquisition and transaction related fees and expenses, financing related fees and expenses, depreciation and amortization, realized gains and losses on the sale of assets, any unrealized gains or losses or other non-cash items recorded in net income or loss for the applicable period, regardless of whether such items are included in other comprehensive income or loss, or in net income, one-time events pursuant to changes in GAAP and certain non-cash charges, impairment losses on real estate related investments and other than temporary impairments of securities, amortization of deferred financing costs, amortization of tenant inducements, amortization of straight-line rent and any associated bad debt reserves, amortization of market lease intangibles, provision for loss loans, and other non-recurring revenue and expenses. The variable management/incentive fee is payable to the Advisor or its assignees in cash or shares, or a combination of both, the form of payment to be determined in the sole discretion of the Advisor.
Property Management Fees
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 incurred by the Property Manager. 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.
On February 17, 2017, the Company entered into the Amended and Restated Property Management and Leasing Agreement (the “A&R Property Management Agreement”) with the OP and the Property Manager. The A&R Property Management Agreement was entered into to reflect amendments to the original agreement between the parties and further amends the original agreement by extending the term of the agreement from one to two years, until February 17, 2019. The A&R Property Management Agreement will automatically renew for successive one-year terms unless any party provides written notice of its intention to terminate the A&R Property Management Agreement at least ninety days prior to the end of the term. The Property Manager may assign the A&R Property Management Agreement to any party with expertise in commercial real estate which has, together with its affiliates, over $100.0 million in assets under management.
30
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
Professional Fees and Other Reimbursements
The Company reimburses the Advisor's costs of providing administrative services. Until June 2015, reimbursement of these expenses was 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. This limitation ceased to exist after June 2015, when the Original A&R Advisory Agreement became effective. Additionally, the Company reimburses the Advisor for personnel costs, excluding any compensation paid to individuals who also serve as the Company’s executive officers, or the executive officers of the Advisor, the Property Manager or their respective affiliates. During the three and nine months ended September 30, 2017, the Company incurred $1.9 million and $4.9 million, respectively, of reimbursement expenses from the Advisor for providing administrative services. During the three and nine months ended September 30, 2016, the Company incurred $1.1 million and $3.0 million, respectively, of reimbursement expenses from the Advisor for providing administrative services.
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. There were no such fees forgiven during the three and nine months ended September 30, 2017 or 2016. 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, 2017 or 2016.
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 | ||||||||||||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | September 30, | December 31, | |||||||||||||||||||||||||||||||||||
(In thousands) | Incurred | Forgiven | Incurred | Forgiven | Incurred | Forgiven | Incurred | Forgiven | 2017 | 2016 | ||||||||||||||||||||||||||||||
One-time fees and reimbursements: | ||||||||||||||||||||||||||||||||||||||||
Acquisition cost reimbursements | $ | 77 | $ | — | $ | — | $ | — | $ | 99 | $ | — | $ | — | $ | — | $ | 61 | $ | — | ||||||||||||||||||||
Ongoing fees and reimbursements: | ||||||||||||||||||||||||||||||||||||||||
Asset management fees | 4,875 | — | 4,396 | — | 14,314 | — | 13,177 | — | — | — | ||||||||||||||||||||||||||||||
Property management fees | 758 | — | 803 | — | 2,257 | — | 2,349 | — | (23 | ) | (163 | ) | ||||||||||||||||||||||||||||
Professional fees and other reimbursements | 1,889 | — | 1,090 | — | 4,922 | — | 2,999 | — | 1,002 | 1,025 | ||||||||||||||||||||||||||||||
Distributions on Class B Units | 131 | — | 153 | — | 412 | — | 457 | — | — | — | ||||||||||||||||||||||||||||||
Total related party operation fees and reimbursements | $ | 7,730 | $ | — | $ | 6,442 | $ | — | $ | 22,004 | $ | — | $ | 18,982 | $ | — | $ | 1,040 | $ | 862 | ||||||||||||||||||||
The predecessor to AR Global was a party to a services agreement with RCS Advisory Services, LLC (“RCS Advisory”), a subsidiary of RCAP, 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 RCAP, 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. ("DST"), a third-party transfer agent. 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).
31
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
Fees and Participations Incurred in Connection with a Listing or the Liquidation of the Company's Real Estate Assets
Fees Incurred in Connection with a Listing
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 market value of all issued and outstanding shares of common stock 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, 2017 or 2016. Neither the Special Limited Partner nor any of its affiliates can earn both the subordinated participation in net sales proceeds and the subordinated incentive listing distribution.
Annual Subordinated Performance Fees and Brokerage Commissions
Under the Original A&R Advisory Agreement and until February 17, 2017, the Advisor was entitled to 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 exceeded 6.0% per annum, the Advisor was 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 would have been payable only upon the sale of assets, distributions or another event which resulted 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, 2017 or 2016.
Under the Original A&R Advisory Agreement and until February 17, 2017, the Advisor was entitled to a brokerage commission on the sale of property, not to exceed the lesser of (a) 2.0% of the contract sale price of the property and (b) 50.0% of the total brokerage commission paid if a third party broker was also involved; provided, however, that in no event could the real estate commissions paid to the Advisor, its affiliates and unaffiliated third parties exceed the lesser of (a) 6.0% of the contract sales price and (b) a reasonable, customary and competitive real estate commission. The brokerage commission payable to the Advisor was 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. No such fees were incurred during the three and nine months ended September 30, 2017 or 2016.
The Second A&R Advisory Agreement does not provide for the annual subordinated performance fee and brokerage commissions payable to the Advisor, (all as defined in the Original A&R Advisory Agreement) effective February 17, 2017 and no such fees or commissions were incurred prior thereto.
Subordinated Participation in Real Estate Sales
The Special Limited Partner is 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 is not entitled to the subordinated participation in net sale proceeds unless the Company's investors have received their capital contributions, plus 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, 2017 or 2016. Neither the Special Limited Partner nor any of its affiliates can earn both the subordinated participation in net sales proceeds and the subordinated incentive listing distribution described above.
Termination Fees
Under the operating partnership agreement of the OP, upon termination or non-renewal of the advisory agreement with the Advisor, with or without cause, the Special Limited Partner is 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 is able to 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.
Under the Second A&R Advisory Agreement, upon the termination or non-renewal of the agreement, the Advisor will be entitled to receive from the Company all amounts due to the Advisor, including any change in control fee and transition fee (both described below), as well as the then-present fair market value of the Advisor's interest in the Company. All fees will be due within 30 days after the effective date of the termination of the Second A&R Advisory Agreement.
32
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
Upon a change in control, the Company would pay a change in control fee equal to the product of (a) four (4) and (b) the "Subject Fees." The Subject Fees are equal to (i) the product of four (4) multiplied by the actual base management fee plus (ii) the product of four (4) multiplied by the actual variable management/incentive fee, in each of clauses (i) and (ii), payable for the fiscal quarter immediately prior to the fiscal quarter in which the change in control occurs or the transition is consummated (see below), plus (iii) without duplication, the annual increase in the base management fee resulting from the cumulative net proceeds of any equity raised in respect to the fiscal quarter immediately prior to the fiscal quarter in which the change in control occurs.
Upon a transition to self-management, the Company would pay a transition fee equal to (i) $15.0 million plus (ii) the product of (a) four (4) multiplied by (b) subject fees (as defined above), provided that the transition fee shall not exceed an amount equal (i) 4.5 multiplied by (ii) subject fees.
Termination of the Second A&R Advisory Agreement due to a change in control or transition to self-management is subject to a lockout period that ends on February 14, 2019.
Note 11 — 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 and legal services, human resources and information technology.
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 12 — Share-Based Compensation
Restricted Share Plan
The Company has adopted an employee and director incentive restricted share plan (as amended from time to time, the "RSP"), which 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 shares of common stock that may be subject to awards 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).
For restricted share awards granted as annual automatic awards 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 as annual automatic awards 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 are, in general and in accordance with the terms of the applicable award agreement, subject to acceleration of vesting and forfeiture under certain circumstances related to termination of service (with or without cause) and changes of control. 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.
Prior to August 2017, the RSP provided for an automatic grant of 1,333 restricted shares to each of the independent directors, without any further approval by the Board or the stockholders, on the date of his or her initial election to the Board and thereafter on the date of each annual stockholder meeting. The restricted shares awards granted as annual automatic awards prior to August 2017 were subject to vesting over a five-year period following the date of grant.
In August 2017, the Board amended the RSP to provide that the number of restricted shares comprising the automatic annual award to each of the independent directors would be equal to the quotient of $30,000 divided by the then-current Estimated Per-Share NAV. These restricted shares vest annually over a five-year period in increments of 20.0% per annum beginning with the one-year anniversary of initial election to the Board and the date of the next annual meeting, respectively.
33
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
In September 2017, the Board subsequently amended and restated the RSP to eliminate the automatic annual awards and to make other revisions related to the implementation of a new independent director equity compensation program. As part of this new independent director equity compensation program, the Board approved a one-time grant of restricted share awards to the independent directors as follows: (i) 300,000 restricted shares to the chairman, with one-seventh of the shares vesting annually in equal increments over a seven-year period with initial vesting on August 4, 2018; and (ii) 25,000 restricted shares to each of the three other independent directors, with one-fifth of the shares vesting annually in equal increments over a five-year period with initial vesting on August 4, 2018. In connection with these one-time grants, the restricted shares awards granted as automatic annual awards in connection with the Company’s 2017 annual meeting of stockholders on July 21, 2017 were forfeited. 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 Shares of Common Stock | Weighted Average Issue Price | ||||||
Unvested, December 31, 2016 | 9,921 | $ | 22.42 | ||||
Granted | 380,592 | 21.45 | |||||
Vested | (1,608 | ) | 22.38 | ||||
Forfeitures | (5,592 | ) | 21.45 | ||||
Unvested, September 30, 2017 | 383,313 | $ | 21.47 | ||||
As of September 30, 2017, the Company had $8.1 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 6.4 years.
Compensation expense related to restricted shares was approximately $117,000 and $144,000 during the three and nine months ended September 30, 2017, respectively. Compensation expense related to restricted shares was approximately $43,000 and $73,000 during the three and nine months ended September 30, 2016, respectively. Compensation expense related to restricted shares is recorded as general and administrative expense in the accompanying consolidated statements of operations and comprehensive loss.
Other Share-Based Compensation
Prior to September 2017, under the RSP, the Company could issue common stock in lieu of cash compensation to pay fees earned by the Company's independent directors at the respective director's election. There were no restrictions on shares issued in lieu of cash compensation 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, 2017 or 2016. Subsequent to September 2017, no further issuances of common stock in lieu of cash compensation to fees earned by the Company’s independent directors are permitted.
Note 13 — Accumulated Other Comprehensive Loss
The following table illustrates the changes in accumulated other comprehensive loss as of and for the period presented:
(In thousands) | Unrealized gain (loss) on designated derivative | |||
Balance, December 31, 2016 | $ | — | ||
Other comprehensive loss, before reclassifications | (124 | ) | ||
Balance, September 30, 2017 | $ | (124 | ) | |
Note 14 — Non-controlling Interests
The Company is the sole general partner and holds substantially all of the OP Units. As of September 30, 2017 and December 31, 2016, the Advisor held 90 OP Units, which represents a nominal percentage of the aggregate OP ownership.
34
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
In November 2014, the Company partially funded the purchase of a 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. After holding the OP Units for a period of one year or upon liquidation of the OP or sale of substantially all of the assets of the OP, a holder of OP Units has the right, at the option of the OP, to redeem OP Units for the cash value of a corresponding number of shares of the Company's common stock or a corresponding number of shares of the Company's common stock. 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 and nine months ended September 30, 2017, OP Unit non-controlling interest holders were paid distributions of $0.1 million and $0.5 million, respectively. During the three and nine months ended September 30, 2016, OP Unit non-controlling interest holders were paid distributions of $0.2 million and $0.5 million, respectively.
The Company has investment arrangements 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 these arrangements 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 these arrangements and therefore the entities related to these arrangements 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 for the three and nine months ended September 30, 2017 and 2016:
As of September 30, 2017 | As of December 31, 2016 | Distributions for the Three Months Ended September 30 | Distributions for the Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||
Property Name (In thousands) | Investment Date | Third Party Net Investment Amount as of September 30, 2017 | Non-Controlling Ownership Percentage as of September 30, 2017 | 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 | 2017 | 2016 | 2017 | 2016 | ||||||||||||||||||||||||||||||
Plaza Del Rio Medical Office Campus Portfolio - Peoria, AZ | May 2015 | $ | 409 | 4.1 | % | $ | 10,416 | $ | — | $ | 10,429 | $ | — | $ | — | $ | — | $ | 52 | $ | — | ||||||||||||||||||||
Note 15 — 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, 2017 and 2016:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net loss attributable to stockholders (in thousands) | $ | (24,136 | ) | $ | (8,664 | ) | $ | (34,991 | ) | $ | (13,219 | ) | ||||
Basic and diluted weighted-average shares outstanding | 89,821,799 | 88,285,390 | 89,599,655 | 87,472,855 | ||||||||||||
Basic and diluted net loss per share | $ | (0.27 | ) | $ | (0.10 | ) | $ | (0.39 | ) | $ | (0.15 | ) | ||||
35
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
Diluted net loss per share assumes the conversion of all common stock equivalents into an equivalent number of common shares, unless the effect is antidilutive. The Company considers unvested restricted shares, OP Units and Class B Units to be common share equivalents. The Company had the following common share equivalents on a weighted-average basis that were excluded from the calculation of diluted net loss per share attributable to stockholders as their effect would have been antidilutive for the period presented:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||
Unvested restricted shares (1) | 114,920 | 10,615 | 45,131 | 10,976 | ||||||||
OP Units (2) | 405,998 | 405,998 | 405,998 | 405,998 | ||||||||
Class B Units (3) | 359,250 | 359,250 | 359,250 | 359,250 | ||||||||
Total weighted average antidilutive common stock equivalents | 880,168 | 775,863 | 810,379 | 776,224 | ||||||||
(1) | Weighted average number of antidilutive unvested restricted shares outstanding for the periods presented. There were 383,313 and 12,587 unvested restricted shares outstanding as of September 30, 2017 and 2016, respectively. |
(2) | Weighted average number of antidilutive OP Units outstanding for the periods presented. There were 405,998 OP Units outstanding as of September 30, 2017 and 2016. |
(3) | Weighted average number of antidilutive Class B Units outstanding for the periods presented. There were 359,250 Class B Units outstanding as of September 30, 2017 and 2016. |
Note 16 — Segment Reporting
During the nine months ended September 30, 2017 and 2016, the Company operated in three reportable business segments for management and internal financial reporting purposes: MOBs, triple-net leased healthcare facilities, and SHOP.
The Company evaluates performance and makes resource allocations based on its three business segments. The MOB 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.
On June 8, 2017, the Company's taxable REIT subsidiary, through 12 separately executed membership interest or stock transfer agreements, acquired 12 operating entities that leased 12 healthcare facilities included in the Company's triple-net leased healthcare facilities segment. Concurrently with the acquisition of the 12 operating entities, the Company transitioned the management of the healthcare facilities to a third-party management company that manages other healthcare facilities in the Company's SHOP operating segment. See Note 3 — Real Estate Investments for additional disclosure. The segment reporting results of these 12 operating entities is included in the Company's triple-net leased healthcare facilities segment through June 8, 2017. Subsequent to June 8, 2017, these operating entities are operated under the RIDEA structure and are included in the Company's SHOP segment. There were no intersegment sales or transfers during the three and nine months ended September 30, 2016.
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 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 loss.
36
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
NOI excludes certain components from net 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 loss as presented in the Company's consolidated financial statements. NOI should not be considered as an alternative to net 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.
37
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
The following tables reconcile the segment activity to consolidated net loss for the three and nine months ended September 30, 2017 and 2016:
Three Months Ended September 30, 2017 | Nine Months Ended September 30, 2017 | |||||||||||||||||||||||||||||||
(In thousands) | Medical Office Buildings | Triple-Net Leased Healthcare Facilities (1) | Seniors Housing — Operating Properties (1) | Consolidated | Medical Office Buildings | Triple-Net Leased Healthcare Facilities (1) | Seniors Housing — Operating Properties (1) | Consolidated | ||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||
Rental income | $ | 16,879 | $ | 6,236 | $ | 3 | $ | 23,118 | $ | 49,876 | $ | 21,337 | $ | 8 | $ | 71,221 | ||||||||||||||||
Operating expense reimbursements | 4,009 | (103 | ) | — | 3,906 | 11,583 | 313 | — | 11,896 | |||||||||||||||||||||||
Resident services and fee income | — | — | 52,048 | 52,048 | — | — | 146,336 | 146,336 | ||||||||||||||||||||||||
Total revenues | 20,888 | 6,133 | 52,051 | 79,072 | 61,459 | 21,650 | 146,344 | 229,453 | ||||||||||||||||||||||||
Property operating and maintenance | 6,338 | 3,742 | 38,363 | 48,443 | 18,219 | 13,255 | 103,940 | 135,414 | ||||||||||||||||||||||||
NOI | $ | 14,550 | $ | 2,391 | $ | 13,688 | 30,629 | $ | 43,240 | $ | 8,395 | $ | 42,404 | 94,039 | ||||||||||||||||||
Impairment charges | (18,958 | ) | (18,993 | ) | ||||||||||||||||||||||||||||
Operating fees to related parties | (5,635 | ) | (16,573 | ) | ||||||||||||||||||||||||||||
Acquisition and transaction related | 261 | (4,327 | ) | |||||||||||||||||||||||||||||
General and administrative | (3,540 | ) | (11,116 | ) | ||||||||||||||||||||||||||||
Depreciation and amortization | (19,089 | ) | (58,911 | ) | ||||||||||||||||||||||||||||
Interest expense | (8,838 | ) | (20,908 | ) | ||||||||||||||||||||||||||||
Interest and other income | 302 | 305 | ||||||||||||||||||||||||||||||
Gain on sale of real estate investment | — | 438 | ||||||||||||||||||||||||||||||
Gain on sale of investment securities | — | — | ||||||||||||||||||||||||||||||
Loss on non-designated derivatives | (22 | ) | (129 | ) | ||||||||||||||||||||||||||||
Income tax benefit (expense) | 652 | 1,049 | ||||||||||||||||||||||||||||||
Net income attributable to non-controlling interests | 102 | 135 | ||||||||||||||||||||||||||||||
Net loss attributable to stockholders | $ | (24,136 | ) | $ | (34,991 | ) | ||||||||||||||||||||||||||
(1) Three and nine months ended September 30, 2017 includes 12 properties that were transitioned from our triple-net leased healthcare facilities segment to our SHOP segment in June 2017.
38
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
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 charges | — | (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 income attributable to non-controlling interests | 29 | 54 | ||||||||||||||||||||||||||||||
Net loss attributable to stockholders | $ | (8,664 | ) | $ | (13,219 | ) | ||||||||||||||||||||||||||
39
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
The following table reconciles the segment activity to consolidated total assets as of the periods presented:
September 30, | December 31, | |||||||
(In thousands) | 2017 | 2016 | ||||||
ASSETS | ||||||||
Investments in real estate, net: | ||||||||
Medical office buildings | $ | 796,237 | $ | 788,023 | ||||
Triple-net leased healthcare facilities | 357,251 | 418,819 | ||||||
Construction in progress (1) | 77,926 | 70,055 | ||||||
Seniors housing — operating properties | 833,652 | 837,338 | ||||||
Total investments in real estate, net | 2,065,066 | 2,114,235 | ||||||
Cash and cash equivalents | 67,113 | 29,225 | ||||||
Restricted cash | 5,104 | 3,962 | ||||||
Assets held for sale | 37,822 | — | ||||||
Derivative assets, at fair value | 20 | 61 | ||||||
Straight-line rent receivable, net | 14,051 | 12,026 | ||||||
Prepaid expenses and other assets | 24,394 | 22,073 | ||||||
Deferred costs, net | 12,071 | 12,123 | ||||||
Total assets | $ | 2,225,641 | $ | 2,193,705 | ||||
(1) Includes $10.0 million of land related to a property under construction.
The following table reconciles capital expenditures by reportable business segment, excluding corporate non-real estate expenditures, for the periods presented:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
(In thousands) | 2017 | 2016 | 2017 | 2016 | ||||||||||
Medical office buildings | 1,120 | 1,279 | $ | 2,712 | $ | 2,720 | ||||||||
Triple-net leased healthcare facilities | 64 | — | 64 | 103 | ||||||||||
Seniors housing — operating properties (1) | 905 | 1,020 | 3,398 | 2,904 | ||||||||||
Total capital expenditures | 2,089 | 2,299 | $ | 6,174 | $ | 5,727 | ||||||||
_______________
(1) Three and nine months ended September 30, 2017 includes capital expenditures assumed through asset acquisitions which are reflected in the Company's non-cash investing activity on the consolidated statements of cash flows.
40
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
Note 17 — 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, 2017 — December 31, 2017 | $ | 204 | $ | 19 | ||||
2018 | 668 | 78 | ||||||
2019 | 673 | 80 | ||||||
2020 | 671 | 82 | ||||||
2021 | 658 | 84 | ||||||
Thereafter | 32,570 | 7,764 | ||||||
Total minimum lease payments | $ | 35,444 | 8,107 | |||||
Less: amounts representing interest | (3,287 | ) | ||||||
Total present value of minimum lease payments | $ | 4,820 | ||||||
Total rental expense from operating leases was $0.2 million during the three months ended September 30, 2017 and 2016. Total rental expense was $0.6 million for the nine months ended September 30, 2017 and 2016. During the three and nine months ended September 30, 2017 and 2016, interest expense related to capital leases was approximately $21,000 and approximately $63,000, respectively.
Purchase Agreement
The Company entered into the Purchase Agreement with HT III on June 16, 2017. Pursuant to the Purchase Agreement, the Company will be required to fund the Purchase Price on the Closing Date. The consummation of the Asset Purchase pursuant to the Purchase Agreement is subject to certain conditions, including, among others, HT III obtaining the approval of the holders of at least a majority of all the votes entitled to be cast in connection with the Asset Purchase and HT III's plan of liquidation. See Note 10 — Related Party Transactions and Arrangements for further disclosure on the Purchase Agreement.
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, 2017, 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, 2017, the Company had funded $10.0 million and $67.9 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, 2017, there were no amounts outstanding due to the Company pursuant to the loan agreement.
Under the terms of the development agreement, the developer was required to complete construction of the improvements on or before December 31, 2016, subject to force majeure. As of September 30, 2017, the construction of the improvements
41
HEALTHCARE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
had not been completed. Under the terms of the development agreement, the developer is obligated to pay the Company a certain amount for each day that elapses between March 31, 2017 and the rent commencement date under the Company’s lease agreement with the developer affiliate.
Note 18 — 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 the following disclosures:
Sixth Amendment to Senior Secured Revolving Credit Agreement
On October 20, 2017, the Revolving Credit Facility was amended with respect to provisions relating to, among other things, the definition of Modified FFO (as defined in the Credit Agreement) and stockholder distributions. The amendment also added a covenant regarding minimum liquidity. See Note 5 — Credit Facilities.
Fannie Mae Master Credit Facility Advances
On October 26, 2017, the Company through wholly owned subsidiaries of the OP, incurred approximately $153 million in aggregate additional indebtedness under its master credit facility with KeyBank and its master credit facility with Capital One. Advances under the Fannie Mae Master Credit Facilities were made pursuant to two master credit facility agreements dated as of October 31, 2016, one between wholly owned subsidiaries of the OP and KeyBank and one between wholly owned subsidiaries of the OP and Capital One. See Note 5 — Credit Facilities.
Mortgage Note Paydowns
On November 1, 2017, the Company paid off mortgage notes secured by the six properties comprising the Aurora Healthcare Center Portfolio and reduced the Company’s outstanding mortgage notes payable by $30.5 million. See Note 6 — Mortgage Notes Payable.
Illinois Skilled Nursing Facility Portfolio Leases
On November 1, 2017, the Company, through wholly owned subsidiaries of the OP, entered into separate triple-net leases for seven skilled nursing facilities located in the state of Illinois. The operators under the new leases are affiliates of Aperion Care, Inc., an operator of over thirty skilled nursing, rehabilitation and long term care facilities located in the states of Illinois, Indiana, and Missouri. Six of the seven skilled nursing facilities had previously been under the possession and control of a receiver pursuant to a consensual order appointing receiver issued by the United States District Court for the Northern District of Illinois, Eastern Division on November 1, 2016. On November 1, 2017, the Court ordered the termination of the receiver’s possession and control of the skilled nursing facilities and the transition of operations to the operators under the new leases. Each of the seven new leases have an initial term of ten years and are guaranteed by Aperion Care, Inc. and certain affiliated individuals and trusts.
In connection with the execution of the leases, the OP agreed to indemnify and hold harmless the tenants under the new leases with respect to all claims, demands, obligations, losses, liabilities, damages, recoveries, and deficiencies that such tenants may suffer as a result of the prior tenants’ failure to discharge certain tax liabilities or to pay certain assessments, recoupments, claims, fines or penalties accrued or payable with respect to the facilities that accrued between December 31, 2014 and October 31, 2017. The OP’s indemnity obligation is capped at $2,500,000 and expires on the earlier of the date of termination of a lease or April 1, 2020.
Medella SNF Properties
On November 13, 2017, the Company received copies of notices, each dated November 1, 2017, from the Missouri Department of Health and Senior Services, Section for Long-Term Care Regulation, addressed to the tenants of the Missouri SNF Properties, stating that such tenants’ licenses to operate the facilities will be null and void on December 1, 2017. The notices provide the tenants the right to file an administrative appeal of the license revocations within fifteen days after the date of the mailing of the notices.
42
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, employees 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. |
• | Our acquisition (the “Asset Purchase”) of all or substantially all of the assets of American Realty Capital Healthcare Trust III, Inc. (“HT III”), which is sponsored and advised by an affiliate of our Advisor, is subject to conditions. Failure to complete the Asset Purchase could have adverse consequences for 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 seek a listing of 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 and owning 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 continue to achieve 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 and its affiliates or our relationship with our Advisor could adversely affect us. |
• | 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. |
43
• | Increases in interest rates could increase the amount of our debt payments and limit our ability to pay distributions. |
• | There can be no assurance we will continue to pay distributions at our current level or at all. |
• | We have not generated sufficient cash flows from operations in 2017 to fund distributions at our current level, and we have used proceeds from common stock reinvested under the DRIP, proceeds from our investment activities and cash from borrowings to fund a portion of our distributions. Borrowings required to fund distributions may not be available at favorable rates, or at all, and could restrict the amount we can borrow for investments and other purposes. |
• | 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 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 ("REIT") for U.S. federal income tax purposes, 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 under our distribution reinvestment plan (the "DRIP") and our share repurchase program (as amended, the "SRP") may not, among other things, accurately reflect the value of our assets and may not represent what a stockholder may receive on a sale of the shares, what they may receive upon a liquidation of our assets and distribution of the net proceeds or what a third party may pay to acquire the Company. |
Overview
We invest in healthcare real estate, focusing on seniors housing and medical office buildings ("MOB"), located in the United States. As of September 30, 2017, we owned 166 properties located in 29 states and comprised of 8.6 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 our 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 and as of such date we had received cumulative proceeds of $2.0 billion from our IPO. As of September 30, 2017, we have received total net proceeds of $2.2 billion, net of shares repurchased under our SRP and including $242.4 million in proceeds received under the DRIP.
On March 30, 2017, our board of directors (the "Board") approved a new estimate of per share net asset value ("Estimated Per-Share NAV") equal to $21.45 as of December 31, 2016. We intend to publish Estimated Per-Share NAV periodically at the discretion of the Board, provided that such estimates will be made at least once annually.
We have no employees. The Advisor has been retained by us to manage our affairs on a day-to-day basis. We have retained Healthcare Trust Properties, LLC (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 (the "Special Limited Partner") 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.
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Significant Accounting Estimates and Critical Accounting Policies
Our Annual Report on Form 10-K for the year ended December 31, 2016 contains a discussion of our significant accounting estimates and critical accounting policies. There have been no significant changes in our significant accounting estimates and critical accounting policies since December 31, 2016. See also Note 2 — Summary of Significant Accounting Policies to our unaudited consolidated financial statements for the nine-month period ended September 30, 2017, set forth herein.
Properties
The following table presents certain additional information about the properties we owned as of September 30, 2017:
Portfolio | Number of Properties | Rentable Square Feet | Percentage Leased (1) | Weighted Average Remaining Lease Term in Years(2) | Gross Asset Value(4) | ||||||||
(In thousands) | |||||||||||||
Medical Office Buildings | 82 | 3,264,669 | 92.4% | 5.7 | $ | 883,001 | |||||||
Triple-Net Leased Healthcare Facilities(3): | |||||||||||||
Seniors Housing — Triple Net Leased | 8 | 194,659 | 100.0% | 13.0 | 74,066 | ||||||||
Hospitals | 4 | 428,620 | 88.8% | 8.9 | 86,912 | ||||||||
Post-Acute / Skilled Nursing | 18 | 777,071 | 68.7% | 11.9 | 200,307 | ||||||||
Total Triple-Net Leased Healthcare Facilities | 30 | 1,400,350 | 79.2% | 11.6 | 361,285 | ||||||||
Seniors Housing — Operating Properties | 51 | 3,913,715 | 87.4% | N/A | 1,046,586 | ||||||||
Land | 2 | N/A | N/A | N/A | 3,665 | ||||||||
Construction in Progress | 1 | N/A | N/A | N/A | 77,926 | ||||||||
Portfolio, September 30, 2017 | 166 | 8,578,734 | $ | 2,372,463 | |||||||||
_______________
(1) | Inclusive of leases signed but not yet commenced as of September 30, 2017. |
(2) | Based on annualized rental income calculated on a straight-line basis. |
(3) | 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. |
(4) | Gross Asset Value represents the total real estate investments, at cost, assets held for sale at carrying value, net of gross market lease intangible liabilities. |
N/A | Not applicable. |
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Results of Operations
As of September 30, 2017, we operated in three reportable business segments for management and internal financial reporting purposes: MOBs, triple-net leased healthcare facilities, and seniors housing operating properties ("SHOP"). In our MOB operating segment, we own, manage and lease, either directly 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 REIT Investment Diversification and 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, 2017, we had 12 eligible independent contractors operating 51 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 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 loss attributable to stockholders, as computed in accordance with GAAP.
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As of September 30, 2017, we owned 166 properties. There were 162 properties (our "Same Store" properties) owned for the entire nine months ended September 30, 2017, including two vacant land parcels and one property under development. During the nine months ended September 30, 2017, we acquired three MOBs and one SHOP (our "Acquisitions"). We disposed of one MOB and two triple-net leased healthcare facilities during the year ended December 31, 2016 and one MOB during the nine months ended September 30, 2017 (four properties in total, our "Dispositions").
The following table presents a roll-forward of our properties owned from January 1, 2016 to September 30, 2017:
Number of Properties | ||
Number of properties, January 1, 2016 | 166 | |
Disposition activity during the year ended December 31, 2016 | (3 | ) |
Number of properties, December 31, 2016 | 163 | |
Acquisition activity during the nine months ended September 30, 2017 | 4 | |
Disposition activity during the nine months ended September 30, 2017 | (1 | ) |
Number of properties, September 30, 2017 | 166 | |
Number of Same Store Properties (1) | 162 | |
_______________
(1) Includes 12 properties that were transitioned from our triple-net leased healthcare facilities segment to our SHOP segment during the nine months ended September 30, 2017. For purposes of the segment reporting below, these properties were treated as Acquisitions in the SHOP segment and Dispositions in the triple-net leased healthcare facilities segment. See below for further details on the transition of these properties.
On June 8, 2017, our TRS acquired 12 operating entities that leased twelve healthcare facilities included in our triple-net leased healthcare facilities segment. Concurrently with the acquisition of the 12 operating entities, we transitioned the management of the healthcare facilities to a third-party management company that manages other healthcare facilities in our SHOP segment. As a part of the transition, our subsidiary property companies executed leases with the acquired operating entities and the acquired operating entities executed management agreements with the management company under the RIDEA structure. As a part of the transition of operations, we now control the operating entities that hold the operating licenses for these healthcare facilities. The results of operations of these properties are included in the Dispositions under our triple-net leased healthcare facilities segment through June 7, 2017 and results of operations since June 8, 2017 are included in Acquisitions under our SHOP segment. We may in the future, through similar transactions, transition other triple-net leased facilities to third-party managed facilities under a structure permitted by RIDEA, in connection with which they would also transition from our triple-net leased healthcare facilities segment to our SHOP operating segment.
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Comparison of the Three Months Ended September 30, 2017 to the Three Months Ended September 30, 2016
Information based on Same Store, Acquisition and Dispositions allows us to evaluate the performance of our portfolio based on a consistent population of properties. Net loss attributable to stockholders was $24.1 million and $8.7 million for the three months ended September 30, 2017 and 2016, respectively. The following table shows our results of operations for the three months ended September 30, 2017 and 2016 and the period to period change by line item of the consolidated statements of operations:
Three Months Ended September 30, | Increase (Decrease) | ||||||||||||||
2017 | 2016 | $ | % | ||||||||||||
Revenues: | |||||||||||||||
Rental income | $ | 23,118 | $ | 24,980 | $ | (1,862 | ) | (7.5 | )% | ||||||
Operating expense reimbursements | 3,906 | 4,196 | (290 | ) | (6.9 | )% | |||||||||
Resident services and fee income | 52,048 | 46,428 | 5,620 | 12.1 | % | ||||||||||
Contingent purchase price consideration | — | (83 | ) | 83 | NM | ||||||||||
Total revenues | 79,072 | 75,521 | 3,551 | 4.7 | % | ||||||||||
Expenses: | |||||||||||||||
Property operating and maintenance | 48,443 | 44,041 | 4,402 | 10.0 | % | ||||||||||
Impairment charges | 18,958 | — | 18,958 | NM | |||||||||||
Operating fees to related parties | 5,635 | 5,199 | 436 | 8.4 | % | ||||||||||
Acquisition and transaction related | (261 | ) | 958 | (1,219 | ) | NM | |||||||||
General and administrative | 3,540 | 2,874 | 666 | 23.2 | % | ||||||||||
Depreciation and amortization | 19,089 | 27,347 | (8,258 | ) | (30.2 | )% | |||||||||
Total expenses | 95,404 | 80,419 | 14,985 | 18.6 | % | ||||||||||
Operating income | (16,332 | ) | (4,898 | ) | (11,434 | ) | (233.4 | )% | |||||||
Other income (expense): | |||||||||||||||
Interest expense | (8,838 | ) | (4,923 | ) | (3,915 | ) | (79.5 | )% | |||||||
Interest and other income | 302 | 2 | 300 | NM | |||||||||||
Gain on sale of real estate investment | — | 1,330 | (1,330 | ) | NM | ||||||||||
Gain on sale of investment securities | — | 56 | (56 | ) | NM | ||||||||||
Loss on non-designated derivatives | (22 | ) | — | (22 | ) | NM | |||||||||
Total other expenses | (8,558 | ) | (3,535 | ) | (5,023 | ) | (142.1 | )% | |||||||
Loss before income taxes | (24,890 | ) | (8,433 | ) | (16,457 | ) | (195.2 | )% | |||||||
Income tax benefit (expense) | 652 | (260 | ) | 912 | NM | ||||||||||
Net loss | (24,238 | ) | (8,693 | ) | (15,545 | ) | (178.8 | )% | |||||||
Net income attributable to non-controlling interests | 102 | 29 | 73 | 251.7 | % | ||||||||||
Net loss attributable to stockholders | $ | (24,136 | ) | $ | (8,664 | ) | $ | (15,472 | ) | (178.6 | )% | ||||
_______________
NM — Not Meaningful
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Segment Results — Medical Office Buildings
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, 2017 and 2016:
Same Store(1) | Acquisitions(2) | Dispositions(3) | Segment Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Three Months Ended September 30, | Increase (Decrease) | Three Months Ended September 30, | Increase (Decrease) | Three Months Ended September 30, | Increase (Decrease) | Three Months Ended September 30, | Increase (Decrease) | |||||||||||||||||||||||||||||||||||||||||||||||||||
(In thousands) | 2017 | 2016 | $ | % | 2017 | 2016 | $ | % | 2017 | 2016 | $ | % | 2017 | 2016 | $ | % | ||||||||||||||||||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Rental income | $ | 16,358 | $ | 16,270 | $ | 88 | 0.5 | % | $ | 521 | $ | — | $ | 521 | NM | $ | — | $ | 320 | $ | (320 | ) | NM | $ | 16,879 | $ | 16,590 | $ | 289 | 1.7 | % | |||||||||||||||||||||||||||
Operating expense reimbursements | 3,908 | 3,764 | 144 | 3.8 | % | 101 | — | 101 | NM | — | 61 | (61 | ) | NM | 4,009 | 3,825 | 184 | 4.8 | % | |||||||||||||||||||||||||||||||||||||||
Total revenues | 20,266 | 20,034 | 232 | 1.2 | % | 622 | — | 622 | NM | — | 381 | (381 | ) | NM | 20,888 | 20,415 | 473 | 2.3 | % | |||||||||||||||||||||||||||||||||||||||
Property operating and maintenance | 6,247 | 6,144 | 103 | 1.7 | % | 90 | — | 90 | NM | 1 | 110 | (109 | ) | NM | 6,338 | 6,254 | 84 | 1.3 | % | |||||||||||||||||||||||||||||||||||||||
NOI | $ | 14,019 | $ | 13,890 | $ | 129 | 0.9 | % | $ | 532 | $ | — | $ | 532 | NM | $ | (1 | ) | $ | 271 | $ | (272 | ) | NM | $ | 14,550 | $ | 14,161 | $ | 389 | 2.7 | % | ||||||||||||||||||||||||||
_______________
(1) | Our MOB segment included 79 Same Store properties. |
(2) | Our MOB segment included three Acquisition properties acquired in 2017. |
(3) | Our MOB segment included two Disposition properties, in which one sold in 2017 and one sold in 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(1), | Annualized Straight Line Rental Income Per Rented Square Foot as of September 30, | |||||||||||||||
Type of Same Store MOB | 2017 | 2016 | 2017 | 2016 | |||||||||||||
Single-tenant MOBs | 27 | 100.0 | % | 100.0 | % | $ | 22.07 | $ | 22.07 | ||||||||
Multi-tenant MOBs | 52 | 89.0 | % | 87.4 | % | 23.67 | 22.44 | ||||||||||
Total/Weighted-Average | 79 | 92.5 | % | 91.4 | % | $ | 23.12 | $ | 22.31 | ||||||||
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(1) | Inclusive of leases signed but not yet commenced. |
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.
During the three months ended September 30, 2017, we acquired two properties within our MOB segment. Same Store rental income increased as result of increased occupancy during the three months ended September 30, 2017 compared to the three months ended September 30, 2016, mainly related to increased occupancies in certain MOBs located in Arizona. Our property operating and maintenance expenses increased during the three months ended September 30, 2017 due to legal fees incurred in one of our Same Store properties, in addition to increases in property operating and maintenance expenses that are reimbursable by our tenants.
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Segment Results — Triple Net Leased Healthcare Facilities
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, 2017 and 2016:
Same Store(1) | Dispositions(2) | Segment Total | |||||||||||||||||||||||||||||||||||||||||||
Three Months Ended September 30, | Increase (Decrease) | Three Months Ended September 30, | Increase (Decrease) | Three Months Ended September 30, | Increase (Decrease) | ||||||||||||||||||||||||||||||||||||||||
(In thousands) | 2017 | 2016 | $ | % | 2017 | 2016 | $ | % | 2017 | 2016 | $ | % | |||||||||||||||||||||||||||||||||
Revenues: | |||||||||||||||||||||||||||||||||||||||||||||
Rental income | $ | 6,236 | $ | 6,708 | $ | (472 | ) | (7.0 | )% | $ | — | $ | 1,679 | $ | (1,679 | ) | NM | $ | 6,236 | $ | 8,387 | $ | (2,151 | ) | (25.6 | )% | |||||||||||||||||||
Operating expense reimbursements | (102 | ) | 371 | (473 | ) | NM | (1 | ) | — | (1 | ) | NM | (103 | ) | 371 | (474 | ) | (127.8 | )% | ||||||||||||||||||||||||||
Total revenues | 6,134 | 7,079 | (945 | ) | (13.3 | )% | (1 | ) | 1,679 | (1,680 | ) | NM | 6,133 | 8,758 | (2,625 | ) | (30.0 | )% | |||||||||||||||||||||||||||
Property operating and maintenance | 3,740 | 4,669 | (929 | ) | (19.9 | )% | 2 | 489 | (487 | ) | NM | 3,742 | 5,158 | (1,416 | ) | (27.5 | )% | ||||||||||||||||||||||||||||
NOI | $ | 2,394 | $ | 2,410 | $ | (16 | ) | (0.7 | )% | $ | (3 | ) | $ | 1,190 | $ | (1,193 | ) | (100.3 | )% | $ | 2,391 | $ | 3,600 | $ | (1,209 | ) | (33.6 | )% | |||||||||||||||||
_______________
(1) | Our triple-net leased healthcare facilities segment included 30 Same Store properties. |
(2) | Our triple-net leased healthcare facilities included two Dispositions in 2016 and 12 properties that are deemed Dispositions as they were transitioned to our SHOP operating segment during the nine months ended September 30, 2017. |
NM — Not Meaningful
Rental income is 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 should typically include minimal activity in our triple-net leased healthcare facilities segment, as such expenses are typically paid directly by the tenants; however, real estate taxes and insurance may be included. Such expenses are normally reimbursed by the tenants in this segment. Bad debt expense is also reflected in our property operating and maintenance expenses.
During the three months ended September 30, 2017, rental income in our Same Store triple-net leased healthcare facilities segment decreased $0.5 million as compared to the same period in 2016. $0.4 million of this decrease mainly relates to the early termination of six triple-net healthcare facilities located in Illinois in October 2016, in which a receiver was appointed by a court to manage and conserve these properties in November 2016 (the "Receiver"). According to the receivership order, the Receiver is only obligated to pay rental payments in the event that they produce excess cash flow from operations. No such rents have been received from the Receiver.
Operating expense reimbursements during the three months ended September 30, 2017 reflect prior period adjustments to operating expense reimbursements previously recorded that related to real estate taxes, in which the corresponding expense was also reflected in our property operating and maintenance expenses.
Our property operating and maintenance for the segment decreased $1.4 million during the three months ended September 30, 2017 as compared to the same period in 2016 and decreased by $0.9 million on a Same Store basis. The Same Store decline in property operating and maintenance expense includes a $2.3 million increase in bad debt expense during the three months ended September 30, 2017 due to two triple-net leased healthcare facilities located in Florida with an inconsistent payment history, offset by a $3.0 million decrease in bad debt expense related to tenants that previously occupied eight triple-net leased healthcare facilities located in Missouri and six facilities located in Illinois and a $0.3 million adjustment to bad debt expense recorded in period periods.
During the three months ended September 30, 2017, bad debt expense related to the triple-net leased portfolio decreased by $2.1 million to $2.5 million compared with the three months ended September 30, 2016. As of September 30, 2017, we had reserved $13.8 million or 85.2% against $16.2 million of outstanding rent receivables due from certain tenants within our triple-net leased portfolio. The $16.2 million in receivables was comprised of $11.2 million in outstanding cash rents and $5.0 million in straight-line rent receivables.
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Segment Results — Seniors Housing Operating Properties ("SHOPs")
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, 2017 and 2016:
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) | |||||||||||||||||||||||||||||||||||||||
(In thousands) | 2017 | 2016 | $ | % | 2017 | 2016 | $ | % | 2017 | 2016 | $ | % | ||||||||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||||||||||||||
Resident services and fee income | $ | 45,923 | $ | 46,428 | $ | (505 | ) | (1.1 | )% | $ | 6,125 | $ | — | $ | 6,125 | NM | $ | 52,048 | $ | 46,428 | $ | 5,620 | 12.1 | % | ||||||||||||||||||||
Rental income | 3 | 3 | — | NM | — | — | — | NM | 3 | 3 | — | NM | ||||||||||||||||||||||||||||||||
Total revenues | 45,926 | 46,431 | (505 | ) | (1.1 | )% | 6,125 | — | 6,125 | NM | 52,051 | 46,431 | 5,620 | 12.1 | % | |||||||||||||||||||||||||||||
Property operating and maintenance | 32,431 | 32,629 | (198 | ) | (0.6 | )% | 5,932 | — | 5,932 | NM | 38,363 | 32,629 | 5,734 | 17.6 | % | |||||||||||||||||||||||||||||
NOI | $ | 13,495 | $ | 13,802 | $ | (307 | ) | (2.2 | )% | $ | 193 | $ | — | $ | 193 | NM | $ | 13,688 | $ | 13,802 | $ | (114 | ) | (0.8 | )% | |||||||||||||||||||
_______________
(1) | Our SHOP segment included 38 Same Store properties. |
(2) | Our SHOP segment included 12 properties that are deemed Acquisitions as they were transitioned from our triple-net leased healthcare facilities segment during the nine months ended September 30, 2017, in addition to one property acquired during 2017. |
NM — Not Meaningful
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 staffing to provide care for the residents in our SHOPs, as well as food, marketing, real estate taxes, management fees paid to our third party operators and costs associated with maintaining the physical site.
During the three months ended September 30, 2017, resident services and fee income and rental income increased by $5.6 million in our SHOP segment as compared to the three months ended September 30, 2016. Acquisitions contributed to an increase of $6.1 million, offset by a $0.5 million decrease in revenues in our Same Store properties. The decrease in Same Store resident services and fee income was primarily due to lower occupancies in a portfolio of SHOPs located in Georgia throughout the three months ended September 30, 2017.
Contingent Purchase Price Consideration
During the three months ended September 30, 2016, we recognized $(0.1) million of contingent purchase price consideration that was related to the settlement of certain property operating expenses pertaining to vacancy escrow agreements in one of our MOBs that resulted in us making payments to the seller. We did not recognize any contingent purchase price consideration during the three months ended September 30, 2017.
Impairment Charges
We incurred $19.0 million of impairment charges for the three months ended September 30, 2017. As of September 30, 2017, there were six held for use properties for which we reconsidered the projected cash flows for these properties. As a result, we evaluated the impact on our ability to recover the carrying value of such properties based on the expected cash flows over our intended holding period. We determined that the carrying value of six of the held for use properties exceeded their estimated fair values and, as a result, recognized the impairment charge during the three months ended September 30, 2017. We did not have any impairments on held for use properties during the three months ended September 30, 2016.
Operating Fees to Related Parties
Operating fees to related parties increased $0.4 million to $5.6 million for the three months ended September 30, 2017 from $5.2 million for the three months ended September 30, 2016.
Our Advisor and Property Manager are paid for asset management and property management services for managing our properties on a day-to-day basis. Effective February 17, 2017, we pay a base management fee equal to $1.625 million per month, while the variable portion of the base management fee is equal, per month, to one twelfth per month of 1.25% of the cumulative net proceeds of any equity raised subsequent to February 17, 2017. During the three months ended September 30, 2016, our asset management fee was based on a percentage of the lesser of (a) cost of assets and (b) fair value of assets. Asset management fees increased $0.5 million to $4.9 million for the three months ended September 30, 2017 from $4.4 million for the three months ended September 30, 2016.
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We incurred $0.8 million in property management fees during the three months ended September 30, 2016 and September 30, 2017. Property management fees increase or decrease in direct correlation with gross revenues of the properties managed.
Note 10 - Related Party Transactions and Arrangements to our consolidated financial statements provides detail on our fees and expense reimbursements.
Acquisition and Transaction Related Expenses
Acquisition and transaction related expenses generally increase in direct correlation with the number and contract purchase price of properties acquired or sold during the period and the level of activity surrounding any contemplated transaction or strategic process. Acquisition and transaction related expenses of $(0.3) million for the three months ended September 30, 2017 includes a $(0.4) million adjustment for previously recorded legal fees associated with the negotiation and execution of the purchase agreement related to the Asset Purchase (the "Purchase Agreement"), offset by costs incurred related to our Acquisitions. Acquisition and transaction related expenses of approximately $1.0 million for the three months ended September 30, 2016, primarily related to our board of director's evaluation of potential strategic alternatives available to us at the time.
General and Administrative Expenses
General and administrative expenses increased $0.6 million to $3.5 million for the three months ended September 30, 2017 compared to $2.9 million for the three months ended September 30, 2016, which includes $2.0 million and $1.2 million incurred in expense reimbursements and distributions on partnership units of the OP designated as "Class B Units" ("Class B Units") to related parties. General and administrative expenses primarily relate to professional fees for audit, transfer agent and legal services as well as certain expenses reimbursed to related parties.
Depreciation and Amortization Expenses
Depreciation and amortization expense decreased $8.2 million to $19.1 million for the three months ended September 30, 2017 from $27.3 million for the three months ended September 30, 2016. Same Store depreciation and amortization decreased $8.6 million, of which $3.8 million was related to higher amortization expense incurred during the three months ended September 30, 2016 due to the write off of intangible assets associated with leases with the prior tenant of the six triple-net leased healthcare facilities located in Illinois. The remaining decrease for the three months ended September 30, 2017 mainly relates to the expiration of the estimated useful lives of in-place leases recorded at acquisition, in addition to our Disposition properties.
Interest Expense
Interest expense increased $3.9 million to $8.8 million for the three months ended September 30, 2017 from $4.9 million for the three months ended September 30, 2016. The increase in interest expense is related to higher overall outstanding debt including new borrowings under our secured credit facilities with KeyBank National Association and with Capital One Multifamily Finance, LLC, the ("Fannie Mae Master Credit Facilities"). Our increased outstanding debt also includes a loan with Capital One, National Association, along with certain other lenders, that was entered into June 30, 2017 for $250.0 million (the "MOB Loan").
We view our mix of 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 increased to approximately $0.3 million for the three months ended September 30, 2017 from approximately $2,000 for the three months ended September 30, 2016. Interest and other income includes income from our investment securities and interest income earned on cash and cash equivalents held during the period. The increase resulted from the recognition of a prospective buyer's non-refundable deposit on an unconsummated sale of a vacant land parcel during the three months ended September 30, 2017.
Gain on Sale of Real Estate Investment
We had no sales of real estate investments during the three months ended September 30, 2017. The gain on sale of real estate investment for the three months ended September 30, 2016 related to the sale of an MOB located in Santa Rosa, California for $17.5 million, which resulted in a gain of $1.3 million during the period.
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Loss on Non-Designated Derivatives
Loss on non-designated derivative instruments for the three months ended September 30, 2017 related to interest rate caps that are designed to protect us from adverse interest rate changes in connection with our Fannie Mae Master Credit Facilities, which have floating interest rates. The loss of approximately $22,000 reflects mark-to-market fair value adjustments for the interest rate caps, which have not been designated as cash flow hedges. We did not have any interest rate caps or other derivative instruments during the three months ended September 30, 2016.
Gain on Sale of Investment Securities
Gain on sale of investment securities for the three months ended September 30, 2016 of $0.1 million resulted from the sale of our investments in preferred stock with a cost basis of $1.1 million. We sold all of our investment securities in 2016 and, therefore, no longer have any investment securities as of September 30, 2017
Income Tax Benefit (Expense)
Income tax benefit (expense) of approximately $0.7 million and $(0.3) million for the three months ended September 30, 2017 and 2016 primarily related to deferred tax assets generated by temporary differences and current period net operating income 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 income attributable to non-controlling interests was approximately $0.1 million and approximately $29,000 for the three months ended September 30, 2017 and 2016, respectively, which represents the portion or our net income that is related to limited partner interests in the OP ("OP Units") and non-controlling interest holders.
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Comparison of the Nine Months Ended September 30, 2017 to the Nine Months Ended September 30, 2016
Information based on Same Store, Acquisition and Dispositions allows us to evaluate the performance of our portfolio based on a consistent population of properties. Net loss attributable to stockholders was $35.0 million and $13.2 million for the nine months ended September 30, 2017 and 2016, respectively. The following table shows our results of operations for the nine months ended September 30, 2017 and 2016 and the period to period change by line item of the consolidated statements of operations:
Nine Months Ended September 30, | Increase (Decrease) | ||||||||||||||
2017 | 2016 | $ | % | ||||||||||||
Revenues: | |||||||||||||||
Rental income | $ | 71,221 | $ | 77,984 | $ | (6,763 | ) | (8.7 | )% | ||||||
Operating expense reimbursements | 11,896 | 11,677 | 219 | 1.9 | % | ||||||||||
Resident services and fee income | 146,336 | 137,084 | 9,252 | 6.7 | % | ||||||||||
Contingent purchase price consideration | — | 142 | (142 | ) | (100.0 | )% | |||||||||
Total revenues | 229,453 | 226,887 | 2,566 | 1.1 | % | ||||||||||
Expenses: | |||||||||||||||
Property operating and maintenance | 135,414 | 123,527 | 11,887 | 9.6 | % | ||||||||||
Impairment charges | 18,993 | 389 | 18,604 | NM | |||||||||||
Operating fees to related parties | 16,573 | 15,526 | 1,047 | 6.7 | % | ||||||||||
Acquisition and transaction related | 4,327 | 3,059 | 1,268 | 41.5 | % | ||||||||||
General and administrative | 11,116 | 9,277 | 1,839 | 19.8 | % | ||||||||||
Depreciation and amortization | 58,911 | 76,245 | (17,334 | ) | (22.7 | )% | |||||||||
Total expenses | 245,334 | 228,023 | 17,311 | 7.6 | % | ||||||||||
Operating income | (15,881 | ) | (1,136 | ) | (14,745 | ) | (1,298.0 | )% | |||||||
Other income (expense): | |||||||||||||||
Interest expense | (20,908 | ) | (14,783 | ) | (6,125 | ) | (41.4 | )% | |||||||
Interest and other income | 305 | 45 | 260 | 577.8 | % | ||||||||||
Gain on sale of real estate investment | 438 | 1,330 | (892 | ) | (67.1 | )% | |||||||||
Loss on non-designated derivatives | (129 | ) | — | (129 | ) | NM | |||||||||
Gain on sale of investment securities | — | 56 | (56 | ) | NM | ||||||||||
Total other expenses | (20,294 | ) | (13,352 | ) | (6,942 | ) | (52.0 | )% | |||||||
Loss before income taxes | (36,175 | ) | (14,488 | ) | (21,687 | ) | (149.7 | )% | |||||||
Income tax benefit (expense) | 1,049 | 1,215 | (166 | ) | (13.7 | )% | |||||||||
Net loss | (35,126 | ) | (13,273 | ) | (21,853 | ) | (164.6 | )% | |||||||
Net income attributable to non-controlling interests | 135 | 54 | 81 | 150.0 | % | ||||||||||
Net loss attributable to stockholders | $ | (34,991 | ) | $ | (13,219 | ) | $ | (21,772 | ) | (164.7 | )% | ||||
_______________
NM — Not Meaningful
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Segment Results — Medical Office Buildings
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, 2017 and 2016:
Same Store(1) | Acquisition(2) | Disposition(3) | Segment Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Nine Months Ended September 30, | Increase (Decrease) | Nine Months Ended September 30, | Increase (Decrease) | Nine Months Ended September 30, | Increase (Decrease) | Nine Months Ended September 30, | Increase (Decrease) | |||||||||||||||||||||||||||||||||||||||||||||||||||
(In thousands) | 2017 | 2016 | $ | % | 2017 | 2016 | $ | % | 2017 | 2016 | $ | % | 2017 | 2016 | $ | % | ||||||||||||||||||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Rental income | $ | 49,093 | $ | 48,743 | $ | 350 | 0.7 | % | $ | 747 | $ | — | $ | 747 | NM | $ | 36 | $ | 966 | $ | (930 | ) | NM | $ | 49,876 | $ | 49,709 | $ | 167 | 0.3 | % | |||||||||||||||||||||||||||
Operating expense reimbursements | 11,460 | 11,034 | 426 | 3.9 | % | 121 | — | 121 | NM | 2 | 219 | (217 | ) | NM | 11,583 | 11,253 | 330 | 2.9 | % | |||||||||||||||||||||||||||||||||||||||
Total revenues | 60,553 | 59,777 | 776 | 1.3 | % | 868 | — | 868 | NM | 38 | 1,185 | (1,147 | ) | NM | 61,459 | 60,962 | 497 | 0.8 | % | |||||||||||||||||||||||||||||||||||||||
Property operating and maintenance | 18,042 | 17,521 | 521 | 3.0 | % | 140 | — | 140 | NM | 37 | 401 | (364 | ) | NM | 18,219 | 17,922 | 297 | 1.7 | % | |||||||||||||||||||||||||||||||||||||||
NOI | $ | 42,511 | $ | 42,256 | $ | 255 | 0.6 | % | $ | 728 | $ | — | $ | 728 | NM | $ | 1 | $ | 784 | $ | (783 | ) | NM | $ | 43,240 | $ | 43,040 | $ | 200 | 0.5 | % | |||||||||||||||||||||||||||
_______________
(1) | Our MOB segment included 79 Same Store properties. |
(2) | Our MOB segment included three Acquisition properties acquired in 2017. |
(3) | Our MOB segment included two Disposition properties, in which one sold in 2017 and the other in 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(1), | Annualized Straight Line Rental Income Per Rented Square Foot as of September 30, | |||||||||||||||
Type of Same Store MOB | 2017 | 2016 | 2017 | 2016 | |||||||||||||
Single-tenant MOBs | 27 | 100.0 | % | 100.0 | % | $ | 22.07 | $ | 22.07 | ||||||||
Multi-tenant MOBs | 52 | 88.9 | % | 87.6 | % | 23.67 | 22.44 | ||||||||||
Total/Weighted-Average | 79 | 92.4 | % | 91.5 | % | $ | 23.12 | $ | 22.31 | ||||||||
_______________
(1) Inclusive of leases signed but not yet commenced.
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.
During the nine months ended September 30, 2017, we acquired three properties and sold one property. Our Same Store average occupancy increased during the nine months ended September 30, 2017 as compared to the same period in 2016, which was mainly attributable to a multi-tenant MOB located in Arizona and another multi-tenant MOB located in Pennsylvania. Our Same Store property operating and maintenance expenses increased $0.5 million, of which $0.2 million relates to higher legal fees incurred in one of our MOBs located in Texas during the nine months ended September 30, 2017, as well as increased property operating and maintenance expenses that are reimbursable by our tenants.
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Segment Results — Triple Net Leased Healthcare Facilities
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, 2017 and 2016:
Same Store (1) | Dispositions (2) | Segment Total | |||||||||||||||||||||||||||||||||||||||||||
Nine Months Ended September 30, | Increase (Decrease) | Nine Months Ended September 30, | Increase (Decrease) | Nine Months Ended September 30, | Increase (Decrease) | ||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | $ | % | 2017 | 2016 | $ | % | 2017 | 2016 | $ | % | ||||||||||||||||||||||||||||||||||
Revenues: | |||||||||||||||||||||||||||||||||||||||||||||
Rental income | $ | 18,720 | $ | 22,456 | $ | (3,736 | ) | (16.6 | )% | $ | 2,617 | $ | 5,815 | $ | (3,198 | ) | (55.0 | )% | $ | 21,337 | $ | 28,271 | $ | (6,934 | ) | (24.5 | )% | ||||||||||||||||||
Operating expense reimbursements | 314 | 424 | (110 | ) | NM | (1 | ) | — | (1 | ) | NM | 313 | 424 | (111 | ) | NM | |||||||||||||||||||||||||||||
Total revenues | 19,034 | 22,880 | (3,846 | ) | (16.8 | )% | 2,616 | 5,815 | (3,199 | ) | (55.0 | )% | 21,650 | 28,695 | (7,045 | ) | (24.6 | )% | |||||||||||||||||||||||||||
Property operating and maintenance | 10,330 | 8,089 | 2,241 | 27.7 | % | 2,925 | 826 | 2,099 | NM | 13,255 | 8,915 | 4,340 | 48.7 | % | |||||||||||||||||||||||||||||||
NOI | $ | 8,704 | $ | 14,791 | $ | (6,087 | ) | (41.2 | )% | $ | (309 | ) | $ | 4,989 | $ | (5,298 | ) | (106.2 | )% | $ | 8,395 | $ | 19,780 | $ | (11,385 | ) | (57.6 | )% | |||||||||||||||||
_______________
(1) | Our triple-net leased healthcare facilities segment included 30 Same Store properties. |
(2) | Our triple-net leased healthcare facilities segment included two Dispositions in 2016 and 12 properties that are deemed Dispositions as they were transitioned to our SHOP operating segment during the nine months ended September 30, 2017. |
NM — Not Meaningful
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 generally should typically include minimal activity in our triple-net leased healthcare facilities segment, as such expenses are typically paid directly by the tenants; however, real estate taxes and insurance may be included. Such expenses are typically reimbursed by the tenants in this segment. Bad debt expense is also included in our property operating and maintenance.
Rental income in our Same Store triple-net leased healthcare facilities segment decreased $3.7 million, of which $3.4 million of this decrease mainly relates to the early termination of six triple-net healthcare facilities located in Illinois in October 2016, in which a receiver was appointed by a court to manage and conserve these properties in November 2016. According to the receivership order, the receiver is only obligated to pay rental payments in the event that they produce excess cash flow from operations.
Property operating and maintenance in our Same Store properties increased $2.2 million compared to the nine months ended September 30, 2016. The increase in property operating and maintenance expense is mainly due to bad debt expense recorded as a result of collection issues with several of our triple-net leased healthcare facility tenants. The financial and operational challenges faced by these tenants have had, and could continue to have, an impact on rent payments that we receive.
During the nine months ended September 30, 2017, bad debt expense related to the triple-net leased portfolio increased by $1.3 million to $9.4 million compared with the nine months ended September 30, 2016. As of September 30, 2017, we had reserved $13.8 million or 85.2% against $16.2 million of outstanding rent receivables due from certain tenants within our triple-net leased portfolio. The $16.2 million in receivables was comprised of $11.2 million in outstanding cash rents and $5.0 million in straight-line rent receivables.
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Segment Results — Seniors Housing Operating Properties
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, 2017 and 2016:
Same Store (1) | Acquisitions (2) | Segment Total | ||||||||||||||||||||||||||||||||||||||||||
Nine Months Ended September 30, | Increase (Decrease) | Nine Months Ended September 30, | Increase (Decrease) | Nine Months Ended September 30, | Increase (Decrease) | |||||||||||||||||||||||||||||||||||||||
2017 | 2016 | $ | % | 2017 | 2016 | $ | % | 2017 | 2016 | $ | % | |||||||||||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||||||||||||||
Resident services and fee income | $ | 138,688 | $ | 137,084 | $ | 1,604 | 1.2 | % | $ | 7,648 | $ | — | $ | 7,648 | NM | $ | 146,336 | $ | 137,084 | $ | 9,252 | 6.7 | % | |||||||||||||||||||||
Rental income | 8 | 4 | 4 | NM | — | — | — | NM | 8 | 4 | 4 | NM | ||||||||||||||||||||||||||||||||
Total revenues | 138,696 | 137,088 | 1,608 | 1.2 | % | 7,648 | — | 7,648 | NM | 146,344 | 137,088 | 9,256 | 6.8 | % | ||||||||||||||||||||||||||||||
Property operating and maintenance | 96,528 | 96,690 | (162 | ) | (0.2 | )% | 7,412 | — | 7,412 | NM | 103,940 | 96,690 | 7,250 | 7.5 | % | |||||||||||||||||||||||||||||
NOI | $ | 42,168 | $ | 40,398 | $ | 1,770 | 4.4 | % | $ | 236 | $ | — | $ | 236 | NM | $ | 42,404 | $ | 40,398 | $ | 2,006 | 5.0 | % | |||||||||||||||||||||
_______________
(1) | Our SHOP segment included 38 Same Store properties. |
(2) | Our SHOP segment included 12 properties that are deemed Acquisitions as they were transitioned from our triple-net leased healthcare facilities segment during the nine months ended September 30, 2017, in addition to one property acquired during 2017. |
NM — Not Meaningful
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, 2017, 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, 2016. These increases are primarily attributable to higher resident service rates and/or occupancy levels.
Contingent Purchase Price Consideration
Contingent purchase price consideration for the nine months ended September 30, 2016 was $0.1 million, which related to releases from a holdback escrow for unit renovations at one of our SHOPs. These proceeds partially offset against amounts paid as part of a settlement of certain property operating expenses related to vacancy escrow agreements related to an MOB acquisition. We did not recognize any contingent purchase price consideration for the nine months ended September 30, 2017.
Impairment Charges
We incurred $19.0 million of impairment charges for the nine months ended September 30, 2017. As of September 30, 2017, there were six held for use properties for which we reconsidered the projected cash flows for these properties. As a result, we evaluated the impact on our ability to recover the carrying value of such properties based on the expected cash flows over our intended holding period. We determined that the carrying value of the six held for use properties exceeded their estimated fair values, which resulted in our recognition of the impairment charge during the nine months ended September 30, 2017. We did not have any impairments on held for use properties during the nine months ended September 30, 2016.
During the nine months ended September 30, 2017 we had one real estate investment with a held for sale classification which resulted in an impairment of approximately $35,000. During the nine months ended September 30, 2016, we had two sales of real estate investments which resulted in impairment charges of $0.4 million.
Operating Fees to Related Parties
Operating fees to related parties increased $1.1 million to $16.6 million for the nine months ended September 30, 2017 from $15.5 million for the nine months ended September 30, 2016.
Our Advisor and Property Manager are paid for asset management and property management services for managing our properties on a day-to-day basis. Effective February 17, 2017, we pay a base management fee equal to $1.625 million per month, while the variable portion of the base management fee is equal to one-twelfth per month of 1.25% of the cumulative net proceeds of any equity raised subsequent to February 17, 2017. During the nine months ended September 30, 2016, our asset management fee was based on a percentage of the lesser of (a) cost of assets and (b) fair value of assets. Asset management fees increased $1.1 million to $14.3 million for the nine months ended September 30, 2016 from $13.2 million for the nine months ended September 30, 2016.
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We incurred $2.3 million in property management fees during the nine months ended September 30, 2017 and 2016. Property management fees increase or decrease in direct correlation with gross revenues of the properties managed.
Note 10 - Related Party Transactions and Arrangements to our consolidated financial statements provides detail on our fees and expense reimbursements.
Acquisition and Transaction Related Expenses
Acquisition and transaction related expenses of $4.3 million for the nine months ended September 30, 2017 primarily related to costs associated with the negotiation and execution of the Purchase Agreement. Acquisition and transaction related expenses generally increase in direct correlation with the number and contract purchase price of properties acquired or sold during the period and the level of activity surrounding any contemplated transaction or strategic process. Acquisition and transaction related expenses of approximately $3.1 million for the nine months ended September 30, 2016, primarily related to our board of director's evaluation of potential strategic alternatives available to us at the time.
General and Administrative Expenses
General and administrative expenses increased $1.8 million to $11.1 million for the nine months ended September 30, 2017 from $9.3 million for the nine months ended September 30, 2016, including $5.3 million and $3.5 million incurred from related parties during the nine months ended September 30, 2017 and 2016, respectively. Expenses incurred primarily relate to professional fees for audit, transfer agent and legal services as well as certain expenses reimbursed to related parties and distributions on Class B Units.
Depreciation and Amortization Expenses
Depreciation and amortization expense decreased $17.3 million to $58.9 million for the nine months ended September 30, 2017 from $76.2 million for the nine months ended September 30, 2016. Same Store depreciation and amortization decreased $9.6 million primarily due to the expiration of the estimated useful lives of in-place leases recorded at acquisition.
Interest Expense
Interest expense increased $6.1 million to $20.9 million for the nine months ended September 30, 2017 from $14.8 million for the nine months ended September 30, 2016. The increase in interest expense is related to higher overall outstanding debt including new borrowings under the "Fannie Mae Master Credit Facilities). Our increased outstanding debt also includes the MOB Loan that was entered into June 30, 2017 for $250.0 million.
We view our mix of 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 increased to approximately $0.3 million for the nine months ended September 30, 2017 from approximately $45,000 for the nine months ended September 30, 2016. The increase resulted from the recognition of a prospective buyer's non-refundable deposit on an unconsummated sale of a vacant land parcel during the nine months ended September 30, 2017. Interest and other income during the nine months ended September 30, 2016 was derived from our investment securities and interest income earned on cash and cash equivalents held during the period. Throughout 2016, we sold all of our positions in preferred stock, common stock, real estate income funds and our investment in a senior note, so no such income was received during the nine months ended September 30, 2017.
Gain on Sale of Real Estate Investment
Gain on sale of investment property for the nine months ended September 30, 2017 pertained to the sale of an MOB located in Arizona, which resulted in a gain of $0.4 million during the period. The gain on sale of real estate investment for the nine months ended September 30, 2016 related to the sale of an MOB located in Santa Rosa, California for $17.5 million, which resulted in a gain of $1.3 million during the period.
Loss on Non-Designated Derivatives
Loss on non-designated derivative instruments for the nine months ended September 30, 2017 related to interest rate caps that are designed to protect us from adverse interest rate changes in connection with the Fannie Mae Master Credit Facilities, which have floating interest rates. The loss of approximately $0.1 million reflects mark-to-market fair value adjustments for the interest rate caps, which have not been designated as cash flow hedges. We did not have any interest rate caps or other derivative instruments during the nine months ended September 30, 2016.
58
Gain on Sale of Investment Securities
Gain on sale of investment securities for the nine months ended September 30, 2016 of $0.1 million resulted from the sale of our investments in preferred stock with a cost basis of $1.1 million. We sold all of our investment securities in 2016 and, therefore, no longer have any investment securities as of September 30, 2017.
Income Tax Benefit
Income tax benefit of $1.0 million and $1.2 million for the nine months ended September 30, 2017 and September 30, 2016, 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 Income Attributable to Non-Controlling Interests
Net income attributable to non-controlling interests was $0.1 million for the nine months ended September 30, 2017 and 2016, which represents the portion of our net income that is related to OP Unit and non-controlling interest holders.
Cash Flows for the Nine Months Ended September 30, 2017
During the nine months ended September 30, 2017, net cash provided by operating activities was $46.9 million. The level of cash flows provided by operating activities is affected by, among other things, 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. The decrease in net cash provided by operating activities for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 was primarily attributable to lower revenues and higher operating expenses at our triple net leased healthcare facilities and higher acquisition and transaction expenses, interest expense and general and administrative expenses. Cash inflows include non-cash items of $55.8 million (net loss of $35.1 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, share based compensation, bad debt expense, gain on real estate investment, loss on non-designated derivatives and impairment charges), an increase in accounts payable and accrued expenses of $7.2 million related to higher accrued real estate taxes, property operating expenses and professional and legal fees,and an increase of $0.5 million in deferred rent. These cash inflows were partially offset by a net increase in prepaid and other assets of $10.0 million, a net increase in unbilled receivables recorded in accordance with straight-line basis accounting of $4.5 million and a $1.1 million decrease in restricted cash.
Net cash used in investing activities during the nine months ended September 30, 2017 was $65.2 million. The cash used in investing activities included $61.8 million for the acquisition of a SHOP and three MOBs during the period and to fund the ongoing development of a skilled nursing facility in Jupiter, Florida. We also invested $5.6 million in capital expenditures and $0.5 million in deposits for real estate acquisitions. These outflows were partially offset by $0.8 million of proceeds received from a property and $0.9 million of cash received in the asset acquisition and transfer of operations of 12 SHOPs during the nine months ended September 30, 2017.
Net cash provided by financing activities of $56.2 million during the nine months ended September 30, 2017 related to proceeds from our $250.0 million secured loan (the "MOB Loan") and proceeds from our Fannie Mae Master Credit Facilities of $128.1 million, partially offset by repayments on our Revolving Credit Facility of $187.0 million, common stock repurchases of $33.6 million, distributions to stockholders of $57.5 million, payments of deferred financing costs of $8.8 million, mortgage principal repayments of $34.4 million, distributions to non-controlling interest holders of $0.5 million and payments for non-designated derivative instruments of $0.1 million.
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), an increase in accounts payable and accrued expenses of $1.9 million, an increase of $1.4 million in deferred rent, and a $0.1 million decrease in restricted cash. These cash inflows were partially offset by a net increase in prepaid and other assets of $5.1 million 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 and $5.7 million of capital expenditures. These cash outflows were offset by proceeds from the sale of real estate of $26.1
59
million, proceeds from the sale of investment securities of $1.1 million and the refund of a deposit for an unconsummated disposition 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 Revolving Credit Facility of $46.5 million.
Subsequent Events
Sixth Amendment to Senior Secured Revolving Credit Agreement
On October 20, 2017, the Revolving Credit Facility was amended with respect to provisions relating to, among other things, the definition of Modified FFO (as defined in the Credit Agreement) and stockholder distributions. The amendment also added a covenant regarding minimum liquidity. See Note 5 — Credit Facilities.
Fannie Mae Master Credit Facility Advances
On October 26, 2017, through wholly owned subsidiaries of the OP, we incurred approximately $153 million in aggregate additional indebtedness under our master credit facility with KeyBank and our master credit facility with Capital One. Advances under the Fannie Mae Master Credit Facilities were made pursuant to two master credit facility agreements dated as of October 31, 2016, one between wholly owned subsidiaries of the OP and KeyBank and one between wholly owned subsidiaries of the OP and Capital One. See Note 5 — Credit Facilities.
Mortgage Note Paydowns
On November 1, 2017, we paid off mortgage notes secured by the six properties comprising the Aurora Healthcare Center Portfolio and reduced our outstanding mortgage notes payable by $30.5 million. See Note 6 — Mortgage Notes Payable.
Illinois Skilled Nursing Facility Portfolio Leases
On November 1, 2017, we, through wholly owned subsidiaries of the OP, entered into separate triple-net leases for seven skilled nursing facilities located in the state of Illinois. The operators under the new leases are affiliates of Aperion Care, Inc., an operator of over thirty skilled nursing, rehabilitation and long term care facilities located in the states of Illinois, Indiana, and Missouri. Six of the seven skilled nursing facilities had previously been under the possession and control of a receiver pursuant to a consensual order appointing receiver issued by the United States District Court for the Northern District of Illinois, Eastern Division on November 1, 2016. On November 1, 2017, the Court ordered the termination of the receiver’s possession and control of the skilled nursing facilities and the transition of operations to the operators under the new leases. Each of the seven new leases have an initial term of ten years and are guaranteed by Aperion Care, Inc. and certain affiliated individuals and trusts.
In connection with the execution of the leases, the OP agreed to indemnify and hold harmless the tenants under the new leases with respect to all claims, demands, obligations, losses, liabilities, damages, recoveries, and deficiencies that such tenants may suffer as a result of the prior tenants’ failure to discharge certain tax liabilities or to pay certain assessments, recoupments, claims, fines or penalties accrued or payable with respect to the facilities that accrued between December 31, 2014 and October 31, 2017. The OP’s indemnity obligation is capped at $2,500,000 and expires on the earlier of the date of termination of a lease or April 1, 2020.
Medella SNF Properties
On November 13, 2017, we received copies of notices, each dated November 1, 2017, from the Missouri Department of Health and Senior Services, Section for Long-Term Care Regulation, addressed to the tenants of the Missouri SNF Properties, stating that such tenants’ licenses to operate the facilities will be null and void on December 1, 2017. The notices provide the tenants the right to file an administrative appeal of the license revocations within fifteen days after the date of the mailing of the notices.
Liquidity and Capital Resources
As of September 30, 2017, we had $67.1 million of cash and cash equivalents. Following an amendment to the Revolving Credit Facility in October 2017, we are subject to a covenant that the aggregate amount of all our unrestricted cash and cash equivalents must be equal to at least $30.0 million at all times. Our principal demands for cash will be for a funding our ongoing development project, acquisitions and capital expenditures, the payment of our operating and administrative expenses, debt service obligations (including principal repayment), share repurchases and distributions to our stockholders.
Purchase Agreement
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On June 16, 2017, we entered into the Purchase Agreement with HT III. The completion of the Asset Purchase pursuant to the Purchase Agreement is subject to conditions, including the approval of the Asset Purchase and HT III's plan of liquidation by HT III stockholders. The purchase price of $120.0 million (the “Purchase Price”) is payable on the date the Asset Purchase is consummated (the “Closing Date”) subject to closing adjustments for customary prorations and a reduction for debt assumption or repayment, all as provided in the Purchase Agreement. The only indebtedness being assumed or repaid is the loan secured by HT III’s Philip Center property (the “Philip Center Loan”). We will deposit $6.0 million (the “Escrow Amount”) of the Purchase Price payable into an escrow account on the Closing Date, and the Escrow Amount will be released in installments thereafter over a period of 14 months following the Closing Date. On October 23, 2017, HT III filed a definitive proxy statement related to its 2017 annual meeting of stockholders at which stockholder approval of the Asset Purchase will be sought. The annual meeting is scheduled to be held on December 21, 2017.
At the closing of the Asset Purchase, we plan to simultaneously add qualifying properties we are acquiring to the borrowing base of the Revolving Credit Facility, thereby increasing the borrowing capacity thereunder, and draw down approximately $50.0 million to pay a portion of the Purchase Price and other costs associated with the closing of the Asset Purchase. We intend to fund the remaining amounts payable through a combination of additional borrowings made possible by adding additional unencumbered assets we currently own to the borrowing base of the Revolving Credit Facility as well as cash on hand. Although the Asset Purchase is not subject to any financing condition, adding any property to the borrowing base of the Revolving Credit Facility requires satisfying certain conditions, including approval of the agent thereunder. There can be no assurance these conditions will be satisfied or waived when all the other conditions to the closing of the Asset Purchase have been satisfied or waived and that we will be able pay the Purchase Price when we are required to do so under the Purchase Agreement.
We have not made alternative financing arrangements and, if sufficient financing is not available through the Revolving Credit Facility on the Closing Date, we may not have sufficient cash on hand available to fund the entire Purchase Price and any other costs payable in connection with the closing of the Asset Purchase.
Financings
We expect to fund our future short-term operating liquidity requirements, including distributions, through a combination of current cash on hand, net cash provided by our property operations and proceeds from the Revolving Credit Facility, the Fannie Mae Master Credit Facilities and other secured financings. Future advances under the Revolving Credit Facility are available based on the pool of eligible otherwise unencumbered real estate assets comprising the borrowing base thereunder. The equity interests and related rights in the Company's wholly owned subsidiaries that directly own or lease the eligible unencumbered real estate assets comprising the borrowing base of the Revolving Credit Facility are pledged for the benefit of the lenders thereunder. The Revolving Credit Facility also contains a subfacility for letters of credit of up to $25.0 million. We may request future advances under the Fannie Mae Master Credit Facilities which will only be available by adding eligible properties to the collateral pool, subject to customary conditions, including satisfaction of minimum debt service coverage and maximum loan-to-value tests.
As of September 30, 2017, our total debt leverage ratio (total debt divided by total assets) was approximately 35.1% and we had total borrowings of $782.0 million, at a weighted average interest rate of 3.6%. As of December 31, 2016 we had total borrowings of $625.3 million.
We expect to increase our leverage over time and utilize proceeds from our Revolving Credit Facility and our Fannie Mae Master Credit Facilities as well as other new and current secured financings to complete future property acquisitions. Such actions may require us to pledge all or some of our unencumbered properties as security for that debt. 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.
In October 2017, we paid down $104.8 million of the outstanding balance on our Revolving Credit Facility in conjunction with the expansion of our Fannie Mae Master Credit Facilities and the sixth amendment of the Revolving Credit Facility. Additionally, in November 2017, we pledged 13 real estate assets to the Revolving Credit Facility and subsequently borrowed $54.0 million on our Revolving Credit Facility.
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As of November 9, 2017, our unused borrowing capacity under the Revolving Credit Facility was $11.3 million, based on a pool of eligible unencumbered real estate assets comprising the borrowing base thereunder. The Revolving Credit Facility matures on March 21, 2019. The Revolving Credit Facility requires us to meet certain financial covenants. In agreement with our administrative agent and the requisite lenders under the Revolving Credit Facility, we calculated the borrowing capacity on such date rather than as of September 30, 2017, due to the decline in occupancy of four properties. Three of these properties had already been removed from the borrowing base under the Revolving Credit Facility subsequent to September 30, 2017 and financed through a master credit facility issued through Fannie Mae’s Multifamily MBS program. As a result of the agreement of the administrative agent and the requisite lenders described above and giving effect to the sixth amendment to the Revolving Credit Facility, we are in compliance with the financial covenants under the Revolving Credit Facility.
On June 30, 2017, we entered into the MOB Loan and borrowed $250.0 million secured by 32 of our properties. We applied $175.0 million of the MOB Loan proceeds to repay amounts outstanding under our Revolving Credit Facility and obtained a release of certain of the mortgaged properties securing the MOB Loan from the borrowing base under the Revolving Credit Facility. The MOB Loan requires us to pay interest on a monthly basis with the principal balance due on the maturity date of June 30, 2022. As of September 30, 2017, we were in compliance with the financial covenants under the MOB Loan.
Acquisitions
On April 7, 2017, we, through a wholly-owned subsidiary of our OP, completed an acquisition of a single tenant, triple-net leased MOB for a contract purchase price of $12.5 million. The property is located in Lancaster, California and comprises 77,000 square feet. We accounted for the purchase as an asset acquisition.
On July 13, 2017, we, through a wholly-owned subsidiary of the OP, completed its acquisition of a single tenant, triple-net leased MOB for a contract purchase price of $13.5 million. The property is located in Canton, Georgia and comprises approximately 38,000 square feet. We accounted for the purchase as an asset acquisition.
On August 18, 2017, we, through a wholly-owned subsidiary of the OP, completed its acquisition of a single tenant, triple-net leased MOB for a contract purchase price of $7.0 million. The property is located in Big Rapids, Michigan and comprises approximately 20,000 square feet. We accounted for the purchase as an asset acquisition.
On September 28, 2017, we, through a wholly-owned subsidiary of the OP, completed its acquisition of a senior living facility for a contract purchase price of $20.8 million. The property is located in Evans, Georgia and comprises approximately 64,000 square feet. We accounted for the purchase as an asset acquisition.
Assets Held for Sale
In January 2017, we entered into a purchase agreement to sell eight of our skilled nursing facility properties in Missouri for an aggregate contract purchase price of $42.0 million if closing occurs in 2017, and $44.1 million if closing occurs in 2018. The purchase agreement provides for an extended closing period to include seven closing adjournment periods, each requiring a non-refundable deposit through the final closing adjournment date, September 28, 2018. Although we believe the sale of the Missouri SNF Properties is probable, there can be no assurance that the sale will be consummated per the terms of the Missouri SNF PSA or at all. See Note 18 — Subsequent Events for further details on the Missouri SNF Properties.
Share Repurchase Program
Our Board has adopted 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. There are limits on the number of shares we may repurchase under this program during any calendar year. We are only authorized to repurchase shares using the proceeds secured from our DRIP in any given period.
On June 14, 2017, we announced that our Board approved and adopted an amended and restated SRP that superseded and replaced the existing SRP, effective as of July 14, 2017. Under the amended and restated SRP, subject to certain conditions, only repurchase requests made following the death or qualifying disability of stockholders that purchased shares of our common stock or received their shares from us (directly or indirectly) through one or more non-cash transactions would be considered for repurchase. Other terms and provisions of the amended and restated SRP remained consistent with the existing SRP.
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The following table reflects the number of shares repurchased cumulatively through September 30, 2017:
Number of Shares Repurchased | Weighted-Average Price per Share | ||||||
Cumulative repurchases as of December 31, 2016 | 975,030 | $ | 23.73 | ||||
Nine months ended September 30, 2017 (1) | 1,554,768 | 21.61 | |||||
Cumulative repurchases as of September 30, 2017 | 2,529,798 | $ | 22.43 | ||||
_____________________________
(1) | Includes (i) 1,273,179 shares repurchased during the three months ended March 31, 2017 for approximately $27.5 million at a weighted average price per share of $21.61, (ii) 13,866 shares repurchased during the three months ended June 30, 2017 for approximately $0.3 million at a weighted average price per share of $23.93, and (iii) 267,723 shares repurchased during the three months ended September 30, 2017 for approximately $5.7 million at a weighted average price per share of $21.47. Excludes rejected repurchases received during 2016 with respect to 2.3 million shares for $48.7 million at a weighted average price per share of $21.27. In July 2017, following the effectiveness of the amendment and restatement of the SRP, the Board approved 100% of the repurchase requests made following the death or qualifying disability of stockholders during the period from January 1, 2017 to September 30, 2017, which was equal to 267,723 shares repurchased for approximately $5.7 million at an average price per share of $21.47. No repurchases have been or will be made with respect to requests received during 2017 that are not valid requests in accordance with the amended and restated SRP. |
Non-GAAP Financial Measures
This section reports on 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.
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.
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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.
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The tables below reflect 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, 2017 | June 30, 2017 | September 30, 2017 | September 30, 2017 | ||||||||||||
Net loss attributable to stockholders (in accordance with GAAP) | $ | (6,139 | ) | $ | (4,716 | ) | $ | (24,136 | ) | $ | (34,991 | ) | ||||
Depreciation and amortization(1) | 20,240 | 19,068 | 18,814 | 58,122 | ||||||||||||
Impairment charges | 35 | — | 18,958 | 18,993 | ||||||||||||
Gain on sale of real estate investment | — | (438 | ) | — | (438 | ) | ||||||||||
Adjustments for non-controlling interests (2) | (99 | ) | (77 | ) | (175 | ) | (351 | ) | ||||||||
FFO attributable to stockholders | 14,037 | 13,837 | 13,461 | 41,335 | ||||||||||||
Acquisition and transaction related | 2,845 | 1,743 | (261 | ) | 4,327 | |||||||||||
Amortization of market lease and other intangibles, net | 119 | 76 | 27 | 222 | ||||||||||||
Straight-line rent adjustments | (1,052 | ) | (367 | ) | (504 | ) | (1,923 | ) | ||||||||
Amortization of mortgage premiums and discounts, net | (440 | ) | (439 | ) | (400 | ) | (1,279 | ) | ||||||||
Loss on non-designated derivatives | 64 | 43 | 22 | 129 | ||||||||||||
Capitalized construction interest costs | (418 | ) | (484 | ) | (566 | ) | (1,468 | ) | ||||||||
Adjustments for non-controlling interests (2) | (5 | ) | (4 | ) | 8 | (1 | ) | |||||||||
MFFO attributable to stockholders | $ | 15,150 | $ | 14,405 | $ | 11,787 | $ | 41,342 | ||||||||
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(1) | Net of non-real estate depreciation and amortization. |
(2) | Represents the portion of the adjustments allocable to non-controlling interest. |
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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(1) | 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(2) | (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 | (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(2) | 18 | (14 | ) | 7 | 11 | |||||||||||
MFFO attributable to stockholders | $ | 19,706 | $ | 22,111 | $ | 17,842 | $ | 59,659 | ||||||||
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(1) | Net of non-real estate depreciation and amortization. |
(2) | 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 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.
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The following table reflects the items deducted from or added to net income (loss) attributable to stockholders in our calculation of Same Store and Dispositions NOI for the three months ended March 31, 2017:
(In thousands) | Same Store | Acquisitions | Dispositions | Non-Property Specific | Total | |||||||||||||||
Net income (loss) attributable to stockholders (in accordance with GAAP) | $ | 7,561 | $ | — | $ | (1 | ) | $ | (13,699 | ) | $ | (6,139 | ) | |||||||
Impairment charges | 35 | — | — | — | 35 | |||||||||||||||
Operating fees to related parties | — | — | — | 5,301 | 5,301 | |||||||||||||||
Acquisition and transaction related | 2,801 | — | — | 44 | 2,845 | |||||||||||||||
General and administrative | 1 | — | — | 4,156 | 4,157 | |||||||||||||||
Depreciation and amortization | 20,344 | — | 6 | 133 | 20,483 | |||||||||||||||
Interest expense | 1,255 | — | — | 4,227 | 5,482 | |||||||||||||||
Interest and other income | (1 | ) | — | — | — | (1 | ) | |||||||||||||
Loss on non-designated derivative instruments | — | — | — | 64 | 64 | |||||||||||||||
Income tax benefit (expense) | — | — | (195 | ) | (195 | ) | ||||||||||||||
Net income (loss) attributable to non-controlling interests | 3 | — | — | (31 | ) | (28 | ) | |||||||||||||
NOI | $ | 31,999 | $ | — | $ | 5 | $ | — | $ | 32,004 | ||||||||||
The following table reflects the items deducted from or added to net income (loss) attributable to stockholders in our calculation of Same Store and Dispositions NOI for the three months ended March 31, 2016:
(In thousands) | Same Store | Acquisitions | Dispositions | Non-Property Specific | Total | |||||||||||||||
Net income (loss) attributable to stockholders (in accordance with GAAP) | $ | 10,350 | $ | — | $ | 201 | $ | (12,106 | ) | $ | (1,555 | ) | ||||||||
Contingent purchase price consideration | (6 | ) | — | — | — | (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 | 24,208 | — | 274 | 133 | 24,615 | |||||||||||||||
Interest expense | 1,680 | — | — | 3,304 | 4,984 | |||||||||||||||
Interest and other income | (3 | ) | — | — | (19 | ) | (22 | ) | ||||||||||||
Income tax benefit (expense) | — | — | — | (483 | ) | (483 | ) | |||||||||||||
Net income (loss) attributable to non-controlling interests | 1 | — | — | (7 | ) | (6 | ) | |||||||||||||
NOI | $ | 36,236 | $ | — | $ | 475 | $ | — | $ | 36,711 | ||||||||||
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The following table reflects the items deducted from or added to net income (loss) attributable to stockholders in our calculation of Same Store and Dispositions NOI for the three months ended June 30, 2017:
(In thousands) | Same Store | Acquisition | Dispositions | Non-Property Specific | Total | |||||||||||||||
Net income (loss) attributable to stockholders (in accordance with GAAP) | $ | 10,971 | $ | 70 | $ | 413 | $ | (16,170 | ) | $ | (4,716 | ) | ||||||||
Operating fees to related parties | — | — | — | 5,637 | 5,637 | |||||||||||||||
Acquisition and transaction related | — | — | — | 1,743 | 1,743 | |||||||||||||||
General and administrative | — | — | — | 3,419 | 3,419 | |||||||||||||||
Depreciation and amortization | 19,076 | 126 | 4 | 133 | 19,339 | |||||||||||||||
Gain on sale of real estate investment | — | — | (438 | ) | — | (438 | ) | |||||||||||||
Interest expense | 1,172 | — | — | 5,416 | 6,588 | |||||||||||||||
Interest and other income | (2 | ) | — | — | — | (2 | ) | |||||||||||||
Loss on non-designated derivative instruments | — | — | — | 43 | 43 | |||||||||||||||
Income tax benefit (expense) | — | (202 | ) | (202 | ) | |||||||||||||||
Net income (loss) attributable to non-controlling interests | (4 | ) | — | 18 | (19 | ) | (5 | ) | ||||||||||||
NOI | $ | 31,213 | $ | 196 | $ | (3 | ) | $ | — | $ | 31,406 | |||||||||
The following table reflects the items deducted from or added to net income (loss) attributable to stockholders in our calculation of Same Store and Dispositions NOI for the three months ended June 30, 2016:
(In thousands) | Same Store | Dispositions | Non-Property Specific | Total | ||||||||||||
Net income (loss) attributable to stockholders (in accordance with GAAP) | $ | 9,558 | $ | (512 | ) | $ | (12,046 | ) | $ | (3,000 | ) | |||||
Contingent purchase price consideration | (219 | ) | — | — | (219 | ) | ||||||||||
Impairment on sale of real estate investments | 5 | 384 | — | 389 | ||||||||||||
Operating fees to related parties | — | — | 5,172 | 5,172 | ||||||||||||
Acquisition and transaction related | 8 | — | 2,051 | 2,059 | ||||||||||||
General and administrative | — | — | 2,416 | 2,416 | ||||||||||||
Depreciation and amortization | 23,906 | 244 | 133 | 24,283 | ||||||||||||
Interest expense | 1,571 | — | 3,305 | 4,876 | ||||||||||||
Interest and other income | (2 | ) | — | (19 | ) | (21 | ) | |||||||||
Income tax benefit (expense) | — | — | (992 | ) | (992 | ) | ||||||||||
Net income (loss) attributable to non-controlling interests | 1 | — | (20 | ) | (19 | ) | ||||||||||
NOI | $ | 34,828 | $ | 116 | $ | — | $ | 34,944 | ||||||||
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The following table reflects the items deducted from or added to net income (loss) attributable to stockholders in our calculation of Same Store and Dispositions NOI for the three months ended September 30, 2017:
(In thousands) | Same Store | Acquisition | Dispositions | Non-Property Specific | Total | |||||||||||||||
Net income (loss) attributable to stockholders (in accordance with GAAP) | $ | (8,544 | ) | $ | 224 | $ | (1 | ) | $ | (15,815 | ) | $ | (24,136 | ) | ||||||
Impairment charges | 18,958 | — | — | — | 18,958 | |||||||||||||||
Operating fees to related parties | — | — | — | 5,635 | 5,635 | |||||||||||||||
Acquisition and transaction related | — | 101 | — | (362 | ) | (261 | ) | |||||||||||||
General and administrative | — | — | — | 3,541 | 3,541 | |||||||||||||||
Depreciation and amortization | 18,714 | 242 | — | 133 | 19,089 | |||||||||||||||
Interest expense | 935 | — | — | 7,903 | 8,838 | |||||||||||||||
Interest and other income | (2 | ) | — | — | (300 | ) | (302 | ) | ||||||||||||
Loss on non-designated derivative instruments | — | — | — | 22 | 22 | |||||||||||||||
Income tax benefit (expense) | — | — | — | (652 | ) | (652 | ) | |||||||||||||
Net income (loss) attributable to non-controlling interests | 2 | — | — | (105 | ) | (103 | ) | |||||||||||||
NOI | $ | 30,063 | $ | 567 | $ | (1 | ) | $ | — | $ | 30,629 | |||||||||
The following table reflects the items deducted from or added to net income (loss) attributable to stockholders in our calculation of Same Store and Dispositions NOI for the three months ended September 30, 2016:
(In thousands) | Same Store | Dispositions | Non-Property Specific | Total | ||||||||||||
Net income (loss) attributable to stockholders (in accordance with GAAP) | $ | 2,706 | $ | 1,430 | $ | (12,800 | ) | $ | (8,664 | ) | ||||||
Contingent purchase price consideration | 83 | — | 83 | |||||||||||||
Operating fees to related parties | — | 5,199 | 5,199 | |||||||||||||
Acquisition and transaction related | (33 | ) | 991 | 958 | ||||||||||||
General and administrative | — | 2,874 | 2,874 | |||||||||||||
Depreciation and amortization | 27,030 | 184 | 133 | 27,347 | ||||||||||||
Gain on sale of real estate investments | — | (1,330 | ) | — | (1,330 | ) | ||||||||||
Gain on sale of investment securities | — | (56 | ) | (56 | ) | |||||||||||
Interest expense | 1,497 | 3,426 | 4,923 | |||||||||||||
Interest and other income | (2 | ) | — | (2 | ) | |||||||||||
Income tax benefit (expense) | — | 260 | 260 | |||||||||||||
Net income (loss) attributable to non-controlling interests | (2 | ) | (27 | ) | (29 | ) | ||||||||||
NOI | $ | 31,279 | $ | 284 | $ | — | $ | 31,563 | ||||||||
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The following table reflects the items deducted from or added to net income (loss) attributable to stockholders in our calculation of Same Store and Dispositions NOI for the nine months ended September 30, 2017:
(In thousands) | Same Store | Acquisitions | Dispositions | Non-Property Specific | Total | |||||||||||||||
Net income (loss) attributable to stockholders (in accordance with GAAP) | $ | 9,988 | $ | 294 | $ | 412 | $ | (45,685 | ) | $ | (34,991 | ) | ||||||||
Impairment charges | 18,993 | — | — | — | 18,993 | |||||||||||||||
Operating fees to related parties | — | — | — | 16,573 | 16,573 | |||||||||||||||
Acquisition and transaction related | 2,800 | 101 | — | 1,426 | 4,327 | |||||||||||||||
General and administrative | — | — | — | 11,116 | 11,116 | |||||||||||||||
Depreciation and amortization | 58,133 | 368 | 10 | 400 | 58,911 | |||||||||||||||
Interest expense | 3,362 | — | — | 17,546 | 20,908 | |||||||||||||||
Interest and other income | (5 | ) | — | — | (300 | ) | (305 | ) | ||||||||||||
Gain on sale of real estate investment | — | — | (438 | ) | — | (438 | ) | |||||||||||||
Loss on non-designated derivative instruments | — | — | — | 129 | 129 | |||||||||||||||
Income tax benefit (expense) | (1,049 | ) | (1,049 | ) | ||||||||||||||||
Net income (loss) attributable to non-controlling interests | 4 | — | 17 | (156 | ) | (135 | ) | |||||||||||||
NOI | $ | 93,275 | $ | 763 | $ | 1 | $ | — | $ | 94,039 | ||||||||||
The following table reflects the items deducted from or added to net income (loss) attributable to stockholders in our calculation of Same Store and Dispositions NOI for the nine months ended September 30, 2016:
(In thousands) | Same Store | Dispositions | Non-Property Specific | Total | ||||||||||||
Net income (loss) attributable to stockholders (in accordance with GAAP) | $ | 22,614 | $ | 1,119 | $ | (36,952 | ) | $ | (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 | (19 | ) | — | 3,078 | 3,059 | |||||||||||
General and administrative | — | — | 9,277 | 9,277 | ||||||||||||
Depreciation and amortization | 75,143 | 702 | 400 | 76,245 | ||||||||||||
Interest expense | 4,748 | — | 10,035 | 14,783 | ||||||||||||
Interest and other income | (6 | ) | — | (39 | ) | (45 | ) | |||||||||
Gain on sale of real estate investment | — | (1,330 | ) | — | (1,330 | ) | ||||||||||
Gain on sale of investment securities | — | — | (56 | ) | (56 | ) | ||||||||||
Income tax benefit (expense) | — | — | (1,215 | ) | (1,215 | ) | ||||||||||
Net income (loss) attributable to non-controlling interests | — | — | (54 | ) | (54 | ) | ||||||||||
NOI | $ | 102,338 | $ | 880 | $ | — | $ | 103,218 | ||||||||
Refer to Note 16 — Segment Reporting for a reconciliation of NOI to net loss attributable to stockholders by reportable segment.
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Distributions
In May 2013, we began paying distributions on a monthly basis at a rate equivalent to $1.70 per annum, per share of common stock. In March 2017, the Board authorized a decrease in the rate at which we pay monthly distributions to stockholders, effective as of April 1, 2017, equivalent to $1.45 per annum, per share of common stock. 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.
The amount of distributions payable to our stockholders is determined by the Board and is dependent on a number of factors, including our financial condition, acquisitions and capital expenditures, 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, 2017, distributions paid to common stockholders and OP Unit holders totaled $105.3 million, including $47.3 million which was reinvested into additional shares of common stock through our DRIP. For the nine months ended September 30, 2017, cash flows provided by operations were $46.9 million.
The following table shows the sources for the payment of distributions to common stockholders, including distributions on unvested restricted stock and OP Units for the period indicated:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||
March 31, 2017 | June 30, 2017 | September 30, 2017 | September 30, 2017 | |||||||||||||||||||||||||
(In thousands) | Percentage of Distributions | Percentage of Distributions | Percentage of Distributions | Percentage of Distributions | ||||||||||||||||||||||||
Distributions: | ||||||||||||||||||||||||||||
Distributions to stockholders | $ | 37,536 | $ | 34,538 | $ | 32,759 | $ | 104,833 | ||||||||||||||||||||
Distributions on OP Units | 169 | 177 | 129 | 475 | ||||||||||||||||||||||||
Total distributions (1) | $ | 37,705 | $ | 34,715 | $ | 32,888 | $ | 105,308 | ||||||||||||||||||||
Source of distribution coverage: | ||||||||||||||||||||||||||||
Cash flows provided by operations | $ | 18,633 | 49.4 | % | $ | 17,092 | 49.2 | % | $ | 11,128 | 33.8 | % | $ | 46,853 | 44.5 | % | ||||||||||||
Proceeds received from common stock issued under the DRIP (2) | — | — | % | 146 | 0.4 | % | 8,795 | 26.7 | % | 8,941 | 8.5 | % | ||||||||||||||||
Proceeds from the sale of real estate investments | 18,656 | 49.5 | % | 726 | 2.1 | % | — | — | % | 19,382 | 18.4 | % | ||||||||||||||||
Cash received in asset acquisition | — | — | % | 859 | 2.5 | % | 6 | — | % | 865 | 0.8 | % | ||||||||||||||||
Available cash on hand (3) | 416 | 1.1 | % | 15,892 | 45.8 | % | 12,959 | 39.5 | % | 29,267 | 27.8 | % | ||||||||||||||||
Total source of distribution coverage | $ | 37,705 | 100.0 | % | $ | 34,715 | 100.0 | % | $ | 32,888 | 100.0 | % | $ | 105,308 | 100.0 | % | ||||||||||||
Cash flows provided by operations (in accordance with GAAP) | $ | 18,633 | $ | 17,092 | $ | 11,128 | $ | 46,853 | ||||||||||||||||||||
Net loss attributable to stockholders (in accordance with GAAP) | $ | (6,139 | ) | $ | (4,716 | ) | $ | (24,136 | ) | $ | (34,991 | ) | ||||||||||||||||
(1) | Excludes distributions related to Class B Units and distributions to non-controlling interest holders other than those paid on our OP Units. |
(2) | Net of share repurchases during the period. |
(3) | Includes proceeds received from credit facilities and mortgage notes payable. |
For the nine months ended September 30, 2017, cash flows provided by operations were $46.9 million and therefore were not sufficient to fully fund our distributions during this time period. We have and may continue to use proceeds from common stock reinvested under the DRIP, proceeds from our investment activities and cash from borrowings to fund our distributions. A decrease in the level of stockholder participation in our DRIP could have an adverse impact on our ability to meet distribution expectations. To the extent we pay distributions in excess of cash flows provided by operations, our stockholders' investment may be adversely impacted. 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.
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We may not generate sufficient cash flow from operations in the remainder of 2017 and future periods to pay distributions at our current level or at all. The amount of cash available for distributions is impacted by many factors, such as rental income, the performance of our properties and our corporate operating expenses. 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 and cash available for distribution may differ significantly from the estimates used by the Board in establishing a distribution rate to stockholders.
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 Revolving Credit Facility require interest only amounts payable monthly with all unpaid principal and interest due at maturity. The payment terms of our Fannie Mae Master Credit Facilities require interest only payments through November 2021 and principal and interest payments thereafter.
Our loan agreements require us to comply with specific reporting covenants. With the agreement of our administrative agent and the requisite lenders under the Revolving Credit Facility, we calculated the borrowing capacity on such date rather than as of September 30, 2017, due to the decline in occupancy of four properties. Three of these properties had already been removed from the borrowing base under the Revolving Credit Facility subsequent to September 30, 2017 and financed through a master credit facility issued through Fannie Mae’s Multifamily MBS program. As a result of the agreement of the administrative agent and the requisite lenders described above, we are in compliance with the financial and reporting covenants under our loan agreements.
Contractual Obligations
The following table reflects contractual debt obligations under our mortgage notes payable, Revolving Credit Facility, Fannie Mae Master Credit Facilities and minimum base rental cash payments due for leasehold interests over the next five years and thereafter as of September 30, 2017. 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, 2017, the outstanding mortgage notes payable and loans under the Revolving Credit Facility and Fannie Mae Master Credit Facilities had weighted-average effective interest rates per annum of 4.6%, 2.3% and 3.5%, respectively.
Years Ended December 31, | ||||||||||||||||||||
(In thousands) | Total | October 1, 2017 — December 31, 2017 | 2018 — 2019 | 2020 — 2021 | Thereafter | |||||||||||||||
Principal on mortgage notes payable | $ | 359,386 | $ | 508 | $ | 45,125 | $ | 25,171 | $ | 288,582 | ||||||||||
Interest on mortgage notes payable | 85,654 | 4,073 | 28,319 | 25,515 | 27,747 | |||||||||||||||
Revolving Credit Facility | 280,500 | — | 280,500 | — | — | |||||||||||||||
Interest on Revolving Credit Facility | 12,496 | 2,141 | 10,355 | — | — | |||||||||||||||
Fannie Mae Master Credit Facilities | 142,116 | — | — | 130 | 141,986 | |||||||||||||||
Interest on Fannie Mae Master Credit Facilities | 44,700 | 1,268 | 10,050 | 10,064 | 23,318 | |||||||||||||||
Lease rental payments due (1) | 43,551 | 222 | 1,499 | 1,495 | 40,335 | |||||||||||||||
Development project funding commitment (2) | 4,114 | 4,114 | — | — | — | |||||||||||||||
Total | $ | 972,517 | $ | 12,326 | $ | 375,848 | $ | 62,375 | $ | 521,968 | ||||||||||
_______________________________
(1) | Lease rental payments due includes $3.3 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. |
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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 10 — 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.
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 our Revolving Credit Facility, Fannie Mae Master Credit Facilities and mortgage notes payable, bears interest at fixed 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 caps, swaps, collars, options, floors 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, 2017, we had entered into four non-designated interest rate caps with a notional amount of $142.1 million and two designated interest rate swaps with a notional amount of $250 million. We do not have any foreign operations and thus we are not exposed to foreign currency fluctuations.
As of September 30, 2017, our debt consisted of both fixed and variable rate debt. We had fixed rate secured mortgage notes payable with an aggregate gross carrying value of $347.2 million and a fair value of $347.4 million. A portion of the fixed rate mortgage notes are comprised of variable rate debt that is fixed as a result of the interest rate swap described above. Changes in market interest rates on our fixed rate debt impacts the fair value of the mortgage notes payable, but 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, 2017 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 $5.2 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 $6.0 million.
As of September 30, 2017, our variable rate Revolving Credit Facility and Fannie Mae Master Credit Facilities had an aggregate carrying value of $422.6 million and fair value of $423.4 million. We also had variable rate mortgage notes payable with an aggregate gross carrying value of $12.2 million and a fair value of $12.6 million. Interest rate volatility associated with these variable rate borrowings affects interest expense incurred and cash flow. The sensitivity analysis related to this variable rate debt assumes an immediate 100 basis point move in interest rates from their September 30, 2017 levels, with all other variables held constant. A 100 basis point increase or decrease in variable interest rates on our variable rate debt would increase or decrease our interest expense by $4.3 million.
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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, 2017 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, 2017 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
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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.
There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016, except for the update described below:
We have historically not generated sufficient cash flows from operations to fund distributions and there can be no assurance we will continue to pay distributions at our current level or at all.
We have historically not generated sufficient cash flow from operations to fund distributions. If we do not generate sufficient cash flows from our operations to fund distributions, we may have to further reduce or suspend distributions. We have funded a portion of our distributions from, among other things, borrowings and proceeds from the sale of real estate investments. Borrowings required to fund distributions may not be available at favorable rates, or at all, and could restrict the amount we can borrow for investments and other purposes. Likewise, the proceeds from any property sale may not be available to fund distributions. Further, paying distributions from sources other than operating cash flow is not sustainable particularly where limited by the terms of instruments governing borrowings. For example, the terms of our Revolving Credit Facility, includes a covenant limiting distributions to stockholders, with certain exceptions, to a percentage of Modified FFO as defined in the credit agreement related to the Revolving Credit Facility. This covenant has been amended twice during 2017 to permit us to pay a certain level of distributions, but there is no assurance that our lenders will agree to future amendments.
Further, in March 2017, we decreased the rate at which we pay distributions from an annual rate of $1.70 per share to $1.45 per share. There is no assurance, however, that we will continue to pay distributions at this level or at all. Distributions paid from sources other than our cash flows from operations also reduce the funds available for other needs such as property acquisitions, capital expenditures and other real estate-related investments.
Failure to complete the Asset Purchase, which is subject to conditions, could have adverse consequences for us.
The Asset Purchase is subject to certain conditions, some of which are out of our control, including, among other things, approval by HT III’s stockholders of both the Asset Purchase and HT III’s plan of liquidation and dissolution and customary closing conditions. HT III's annual stockholder meeting, at which these approvals will be sought, has been scheduled for December 21, 2017; however, there still can be no assurance when or whether these conditions will be satisfied or, to the extent waivable, waived or the occurrence of any effect, event, development or change will not transpire. If these conditions are not satisfied or waived, if permitted, by the March 16, 2018 outside date, the Purchase Agreement may be terminated and the Asset Purchase would not be completed. There can be no assurance with respect to the timing of the completion of the Asset Purchase or whether the Asset Purchase will be completed on its current terms, or at all. Regardless of whether the Asset Purchase is completed, we are required to pay our expenses in connection with the Asset Purchase, including financial advisory, legal and accounting fees. If the Asset Purchase is not completed on a timely basis, or at all, we also will not realize any of the benefits expected from its completion. This loss of benefits, or the increase in risks, could have a material adverse effect on our business.
Moreover, at the closing of the Asset Purchase, we plan to simultaneously add qualifying properties we are acquiring to the borrowing base of the Revolving Credit Facility, thereby increasing the borrowing capacity thereunder, and draw down approximately $50.0 million to pay a portion of the Purchase Price and other costs associated with the closing of the Asset Purchase. We intend to fund the remaining amounts payable through a combination of additional borrowings made possible by adding additional unencumbered assets we currently own to the borrowing base of the Revolving Credit Facility as well as cash on hand. Adding any property to the borrowing base of the Revolving Credit Facility requires satisfying certain conditions, including approval of the agent thereunder. There can be no assurance these conditions will be satisfied or waived when all the other conditions to the closing of the Asset Purchase have been satisfied or waived and that we will be able pay the Purchase Price when we are required to do so under the Purchase Agreement.
We have not made alternative financing arrangements and, if sufficient financing is not available through the Revolving Credit Facility on the Closing Date, we may not have sufficient cash on hand available to fund the entire Purchase Price and any other costs payable in connection with the closing of the Asset Purchase. As of September 30, 2017, we had approximately $67.1 million in cash and cash equivalents. Our cash on hand may decline between the date of this Quarterly Report on Form 10-Q and the Closing Date. In addition we are subject to a covenant requiring the aggregate amount of all our restricted cash and cash equivalents to be equal to at least $30.0 million at all times. Failure to complete the Asset Purchase, due to lack of financing or for any other reason, could have adverse consequences for us.
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Our pending sale of eight skilled nursing facility assets may not be completed on its current terms or at all, which may have a material adverse effect on our business, financial condition and results of operation.
In January 2017, we entered into an agreement to sell the Missouri SNF Properties to affiliates of the tenant-operators of the facilities for $42 million. Pursuant to their rights under the purchase agreement, the contract purchasers have seven options to adjourn the closing date for the sale through December 31, 2018. As of the date of this filing, the contract purchasers have adjourned the original closing date three times. The current scheduled closing date is December 29, 2017. The tenants of the skilled nursing facilities have not been paying rent due to us since August 2017. As a result, we have been deducting the past due rent from existing security deposits. On November 13, 2017, we received copies of notices, each dated November 1, 2017, from the Missouri Department of Health and Senior Services, Section for Long-Term Care Regulation, addressed to the tenants of the Missouri SNF Properties, stating that the license to operate each of the facilities held by the tenants will be null and void on December 1, 2017. Although the tenants have the right to appeal the revocations (and have advised us that they intend to do so) there is no assurance that an appeal will be successful. Revocation of the licenses or failure to complete the sale of the Missouri SNF Properties in accordance with the terms of the existing agreement each may have a material adverse effect on our business, financial condition and results of operations.
Item 2. Unregistered Sales of Equity Securities.
Unregistered Sales of Equity Securities
On July 21, 2017, we awarded each of our four independent directors 1,398 restricted shares of common stock (“restricted shares”) under our employee and director incentive restricted share plan (as amended and restated from time to time, the "RSP"). All of these restricted shares were forfeited on September 8, 2017.
On September 8, 2017, we awarded our chairman 300,000 restricted shares under the RSP and awarded each of our three other independent directors 25,000 restricted shares under the RSP.
All of these awards of restricted shares were exempt from registration under Section 4(a)(2) of the Securities Act of 1933, as amended.
Please see Note 12 - Share-Based Compensation to of the accompanying consolidated financial statements for further details.
Issuer Purchases of Equity Securities
The following table reflects the number of shares repurchased under the SRP cumulatively through September 30, 2017:
Number of Shares Repurchased | Weighted-Average Price per Share | ||||||
Cumulative repurchases as of December 31, 2016 | 975,030 | $ | 23.73 | ||||
Nine months ended September 30, 2017 (1) | 1,554,768 | 21.61 | |||||
Cumulative repurchases as of September 30, 2017 | 2,529,798 | $ | 22.43 | ||||
_____________________________
(1) | Includes (i) 1,273,179 shares repurchased during the three months ended March 31, 2017 for approximately $27.5 million at a weighted average price per share of $21.61, (ii) 13,866 shares repurchased during the three months ended June 30, 2017 for approximately $0.3 million at a weighted average price per share of $23.93, and (iii) 267,723 shares repurchased during the three months ended September 30, 2017 for approximately $5.7 million at a weighted average price per share of $21.47. Excludes rejected repurchases received during 2016 with respect to 2.3 million shares for $48.7 million at a weighted average price per share of $21.27. In July 2017, following the effectiveness of the amendment and restatement of the SRP, the Board approved 100% of the repurchase requests made following the death or qualifying disability of stockholders during the period from January 1, 2017 to September 30, 2017, which was equal to 267,723 shares repurchased for approximately $5.7 million at an average price per share of $21.47. No repurchases have been or will be made with respect to requests received during 2017 that are not valid requests in accordance with the amended and restated SRP. |
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
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Item 5. Other Information.
Articles Supplementary
On November 7, 2017, the Company’s board of directors, upon recommendation of its nominating and corporate governance committee (which is comprised entirely of independent directors), unanimously approved a resolution electing to be subject to Section 3-803 of the Maryland General Corporation Law (“MGCL”), so that the board of directors will be classified into three classes each initially comprised of no more than two directors. On November 9, 2017, the Company filed Articles Supplementary with the State Department of Assessments and Taxation of Maryland to implement this change (the "Articles Supplementary"). The Articles Supplementary were effective upon the acceptance for record of the filing.
Effective upon the acceptance for record of the Articles Supplementary, the Board will be divided into three classes as follows: (i) Lee M. Elman in Class I with a term of office lasting until the Company’s annual meeting of stockholders to be held in 2018 and until his successor is duly elected and qualifies; (ii) Elizabeth K. Tuppeny and Edward G. Rendell in Class II with a term of office lasting until the Company’s annual meeting of stockholders to be held in 2019 and until their respective successor is duly elected and qualifies; and (iii) Leslie D. Michelson and Edward M. Weil, Jr. in Class III each with a term of office lasting until the Company’s annual meeting of stockholders to be held in 2020 and until his successor is duly elected and qualifies. At each annual meeting of the stockholders, the successors to the class of directors
The number of directors in each class may be changed from time to time by the board of directors to reflect an increase or decrease in the total number of directors so that each class, to the extent possible, will have the same number of directors.
The decision by the Company’s board of directors to adopt a classified board was not taken in response to any known takeover attempt or threat, but rather because the Company’s board of directors, in considering various arguments for and against having a classified board, believed it is in the best interest of the Company to promote its operating stability and the implementation of the Company’s long-term business strategy.
The foregoing description of the Articles Supplementary does not purport to be complete and is qualified in its entirety by reference to the full text of the Articles Supplementary, which is filed as an exhibit to this Quarterly Report on Form 10-Q.
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.
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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 | ||
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 14, 2017
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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, 2017 (and are numbered in accordance with Item 601 of Regulation S-K):
Exhibit No. | Description | |
3.1 * | Articles Supplementary of Healthcare Trust, Inc. | |
10.1 (1) | First Amendment to Employee and Director Incentive Restricted Share Plan, effective as of August 8, 2017. | |
10.2 * | Amended and Restated Employee and Director Incentive Restricted Share Plan of Healthcare Trust, Inc., effective as of August 31, 2017. | |
10.3 * | Form of Restricted Stock Award Agreement Pursuant to the Amended and Restated Employee and Director Incentive Restricted Share Plan of Healthcare Trust, Inc. | |
10.4 (2) | Sixth Amendment to Senior Secured Revolving Credit Agreement, dated as of October 20, 2017. | |
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, 2017, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations and Comprehensive Loss, (iii) the Consolidated Statements 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 Quarterly Report on Form 10-Q for the quarter ended June 30, 2017 filed with the Securities and Exchange Commission on August 14, 2017. |
(2) | Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 20, 2017. |
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