Company Quick10K Filing
Quick10K
Global Medical REIT
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$9.24 35 $319
10-Q 2019-09-30 Quarter: 2019-09-30
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-Q 2014-11-30 Quarter: 2014-11-30
10-K 2014-08-31 Annual: 2014-08-31
10-Q 2014-05-31 Quarter: 2014-05-31
10-Q 2014-02-28 Quarter: 2014-02-28
10-Q 2013-11-30 Quarter: 2013-11-30
8-K 2019-11-06 Earnings, Exhibits
8-K 2019-09-30 Enter Agreement, Off-BS Arrangement, Regulation FD, Exhibits
8-K 2019-09-27 Regulation FD, Exhibits
8-K 2019-08-13 Amend Bylaw, Exhibits
8-K 2019-08-07 Earnings, Exhibits
8-K 2019-06-21 Enter Agreement, Exhibits
8-K 2019-05-29 Officers, Shareholder Vote, Regulation FD, Exhibits
8-K 2019-05-08 Earnings, Exhibits
8-K 2019-04-15 Enter Agreement, M&A, Off-BS Arrangement, Regulation FD, Exhibits
8-K 2019-04-08 Accountant, Exhibits
8-K 2019-03-14 Enter Agreement, Regulation FD, Exhibits
8-K 2019-03-12 Enter Agreement, Exhibits
8-K 2019-03-05 Earnings, Officers, Other Events, Exhibits
8-K 2018-12-13 Regulation FD, Other Events, Exhibits
8-K 2018-12-12 Enter Agreement, Regulation FD, Exhibits
8-K 2018-11-07 Regulation FD, Exhibits
8-K 2018-11-05 Earnings, Exhibits
8-K 2018-09-09 Regulation FD, Other Events, Exhibits
8-K 2018-08-17 Enter Agreement, Leave Agreement, Exhibits
8-K 2018-08-07 Earnings, Exhibits
8-K 2018-07-02 Regulation FD, Exhibits
8-K 2018-06-26 Regulation FD
8-K 2018-06-14 Officers, Regulation FD, Other Events, Exhibits
8-K 2018-05-30 Shareholder Vote, Regulation FD, Exhibits
8-K 2018-05-08 Earnings, Exhibits
8-K 2018-04-19 Enter Agreement, M&A, Off-BS Arrangement, Regulation FD, Exhibits
8-K 2018-04-09 Officers, Exhibits
8-K 2018-03-05 Enter Agreement, Earnings, Off-BS Arrangement, Officers, Regulation FD, Other Events, Exhibits
8-K 2018-01-31 Regulation FD, Exhibits
NNN National Retail Properties 9,029
DOC Physicians Realty Trust 3,224
QTS QTS Realty Trust 2,476
AAT American Assets Trust 2,227
ALEX Alexander & Baldwin 1,645
TRTX TPG Real Estate Finance Trust 1,397
DX Dynex Capital 1,049
JCAP Jernigan Capital 394
MRT Medequities Realty Trust 359
PLYM Plymouth Industrial REIT 99
GMRE 2019-09-30
Part I Financial Information
Note 1 - Organization
Note 2 - Summary of Significant Accounting Policies
Note 3 - Property Portfolio
Note 4 - Credit Facility, Notes Payable and Derivative Instruments
Note 5 - Equity
Note 6 - Related Party Transactions
Note 7 - Stock-Based Compensation
Note 8 - Leases
Note 9 - Rent Concentration
Note 10 - Commitments and Contingencies
Note 11 - Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part II Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-10.2 tm1919556d1_ex10-2.htm
EX-31.1 tm1919556d1_ex31-1.htm
EX-31.2 tm1919556d1_ex31-2.htm
EX-32.1 tm1919556d1_ex32-1.htm

Global Medical REIT Earnings 2019-09-30

GMRE 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 tm1919556-1_10q.htm FORM 10-Q

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2019

 

OR

 

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

 

For the transition period from ___________ to ___________.

 

Commission file number: 001-37815

 

Global Medical REIT Inc.

(Exact name of registrant as specified in its charter)

 

Maryland   46-4757266
(State or other jurisdiction of incorporation or
organization)
  (I.R.S. Employer Identification No.)
     

2 Bethesda Metro Center, Suite 440

Bethesda, MD

 

 

20814

(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code: (202) 524-6851

 

N/A
(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class:    Trading Symbol:    Name of each exchange on which registered:
Common Stock, par value $0.001 per share   GMRE   NYSE
Series A Preferred Stock, par value $0.001 per share   GMRE PrA   NYSE

 

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.  þ Yes ¨ No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).      Yes þ  No ¨

 

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

 

  Large accelerated filer  ¨ Accelerated filer þ
  Non-accelerated filer ¨ Smaller reporting company þ
      Emerging growth company ¨

 

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

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date.

 

The number of shares of the registrant’s common stock outstanding at November 1, 2019 was 36,371,564.

 

 

 

 

 

 

TABLE OF CONTENTS

PART I   FINANCIAL INFORMATION

 

Item 1. Financial Statements (Unaudited)  
  Condensed Consolidated Balance Sheets – September 30, 2019 and December 31, 2018 3
  Condensed Consolidated Statements of Operations – Three and Nine Months Ended September 30, 2019 and 2018 4
  Condensed Consolidated Statements of Comprehensive (Loss) Income – Three and Nine Months Ended September 30, 2019 and 2018 5
  Condensed Consolidated Statements of Equity – Three and Nine Months Ended September 30, 2019 and 2018 6
  Condensed Consolidated Statements of Cash Flows  – Nine Months Ended September 30, 2019 and 2018 8
  Notes to the Unaudited Condensed Consolidated Financial Statements 9
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 31
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 42
     
Item 4. Controls and Procedures 42
 
PART II   OTHER INFORMATION
     
Item 1. Legal Proceedings 43
     
Item 1A. Risk Factors 43
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 43
     
Item 3. Defaults Upon Senior Securities 43
     
Item 4. Mine Safety Disclosures 43
     
Item 5. Other Information 43
     
Item 6. Exhibits 43
   
Signatures 45

 

- 2 -

 

 

GLOBAL MEDICAL REIT INC.

Condensed Consolidated Balance Sheets

(unaudited and in thousands, except par values)

 

   As of 
  

September 30,

2019

   December 31,
2018
 
Assets        
Investment in real estate:          
   Land  $86,878   $63,710 
   Building   637,505    518,451 
   Site improvements   9,100    6,880 
   Tenant improvements   31,465    15,357 
   Acquired lease intangible assets   65,498    43,152 
    830,446    647,550 
   Less: accumulated depreciation and amortization   (48,731)   (30,625)
Investment in real estate, net   781,715    616,925 
Cash and cash equivalents   2,815    3,631 
Restricted cash   3,011    1,212 
Tenant receivables   4,167    2,905 
Due from related parties   75    - 
Escrow deposits   2,865    1,752 
Deferred assets   13,307    9,352 
Other assets   4,363    322 
Total assets  $812,318   $636,099 
           
Liabilities and Equity          
Liabilities:          
Credit facility, net of unamortized discount of $3,983 and $3,922 at September 30, 2019 and December 31, 2018, respectively  $363,242   $276,353 
Notes payable, net of unamortized discount of $701 and $799 at September 30, 2019 and December 31, 2018, respectively   38,651    38,654 
Accounts payable and accrued expenses   5,501    3,664 
Dividends payable   9,470    6,981 
Security deposits and other   6,362    4,152 
Due to related parties, net   1,584    1,030 
Derivative liability   10,399    3,487 
Other liability   2,379    - 
Acquired lease intangible liability, net   3,287    2,028 
   Total liabilities   440,875    336,349 
Commitments and Contingencies          
Equity:          
Preferred stock, $0.001 par value, 10,000 shares authorized; 3,105 issued and outstanding at September 30, 2019 and December 31, 2018, respectively (liquidation preference of $77,625 at September 30, 2019 and December 31, 2018, respectively)   74,959    74,959 
Common stock, $0.001 par value, 500,000 shares authorized; 36,290 shares and 25,944 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively   36    26 
Additional paid-in capital   340,435    243,038 
Accumulated deficit   (63,846)   (45,007)
Accumulated other comprehensive loss   (10,596)   (3,721)
    Total Global Medical REIT Inc. stockholders' equity   340,988    269,295 
Noncontrolling interest   30,455    30,455 
    Total equity   371,443    299,750 
Total liabilities and equity  $812,318   $636,099 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

- 3 -

 

 

GLOBAL MEDICAL REIT INC.

Condensed Consolidated Statements of Operations

(unaudited and in thousands, except per share amounts)

 

  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
   2019   2018   2019   2018 
Revenue                    
Rental revenue  $18,117   $13,995   $50,093   $38,790 
Other income   78    8    182    27 
   Total revenue   18,195    14,003    50,275    38,817 
                     
Expenses                    
General and administrative   1,681    1,395    4,928    4,169 
Operating expenses   1,362    941    3,826    2,726 
Management fees – related party   1,621    1,104    4,539    3,280 
Depreciation expense   5,006    3,614    13,481    9,965 
Amortization expense   1,500    953    3,757    2,645 
Interest expense   4,549    4,055    12,707    10,681 
Preacquisition fees   168    168    224    294 
   Total expenses   15,887    12,230    43,462    33,760 
                     
   Net income  $2,308   $1,773   $6,813   $5,057 
        Less: Preferred stock dividends   (1,455)   (1,455)   (4,366)   (4,366)
        Less: Net income attributable to noncontrolling interest   (83)   (32)   (246)   (59)
   Net income attributable to common stockholders  $770   $286   $2,201   $632 
                     
Net income attributable to common stockholders per share – basic and diluted  $0.02   $0.01   $0.07   $0.03 
                     
Weighted average shares outstanding – basic and diluted   35,512    21,797    32,514    21,687 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

- 4 -

 

 

GLOBAL MEDICAL REIT INC.

Condensed Consolidated Statements of Comprehensive (Loss) Income

(unaudited and in thousands)

 

  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
   2019   2018   2019   2018 
Net income  $2,308   $1,773   $6,813   $5,057 
Other comprehensive loss:                    
Decrease in fair value of interest rate swap agreement   (1,303)   (109)   (6,875)   (109)
Total other comprehensive loss   (1,303)   (109)   (6,875)   (109)
Comprehensive income (loss)   1,005    1,664    (62)   4,948 
Less: Preferred stock dividends   (1,455)   (1,455)   (4,366)   (4,366)
Less: Comprehensive loss (income) attributable to noncontrolling interest   44    (21)   442    (48)
Comprehensive (loss) income attributable to common stockholders  $(406)  $188   $(3,986)  $534 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

- 5 -

 

 

GLOBAL MEDICAL REIT INC.

Condensed Consolidated Statements of Equity

(unaudited and in thousands)

 

For the Nine Months Ended September 30, 2019:

 

   Common Stock   Preferred Stock  

Additional
Paid-in

  

Accumulated

  

Accumulated
Other
Comprehensive

  

Global
Medical
REIT Inc.
Stockholders’

   Non-
controlling
  

Total

 
   Shares   Amount   Shares   Amount   Capital   Deficit   Loss   Equity   Interest   Equity 
Balances, December 31, 2018   25,944   $26    3,105   $74,959   $243,038   $(45,007)  $(3,721)  $269,295   $30,455   $299,750 
Net income   -    -    -    -    -    6,567    -    6,567    246    6,813 
Issuance of shares of common stock, net   10,284    10    -    -    96,767    -    -    96,777    -    96,777 
LTIP Units and OP Units redeemed for common stock   62    -    -    -    630    -    -    630    (630)   - 
Change in fair value of interest rate swap agreements   -    -    -    -    -    -    (6,875)   (6,875)   -    (6,875)
Stock-based compensation expense   -    -    -    -    -    -    -    -    2,493    2,493 
Dividends to common stockholders   -    -    -    -    -    (21,040)   -    (21,040)   -    (21,040)
Dividends to preferred stockholders   -    -    -    -    -    (4,366)   -    (4,366)   -    (4,366)
Dividends to noncontrolling interest   -    -    -    -    -    -    -    -    (2,615)   (2,615)
OP Units issued to third parties   -    -    -    -    -    -    -    -    506    506 
Balances, September 30, 2019   36,290   $36    3,105   $74,959   $340,435   $(63,846)  $(10,596)  $340,988   $30,455   $371,443 

 

For the Three Months Ended September 30, 2019:

 

   Common Stock   Preferred Stock  

Additional
Paid-in

  

Accumulated

  

Accumulated
Other
Comprehensive

  

Global
Medical
REIT Inc.
Stockholders’

  

Non-
controlling

  

Total

 
   Shares   Amount   Shares   Amount   Capital   Deficit   Loss   Equity   Interest   Equity 
Balances, June 30, 2019   34,653   $35    3,105   $74,959   $322,872   $(57,397)  $(9,293)  $331,176   $30,427   $361,603 
Net income   -    -    -    -    -    2,225    -    2,225    83    2,308 
Issuance of shares of common stock, net   1,632    1    -    -    17,509    -    -    17,510    -    17,510 
LTIP Units and OP Units redeemed for common stock   5    -    -    -    54    -    -    54    (54)   - 
Change in fair value of interest rate swap agreements   -    -    -    -    -    -    (1,303)   (1,303)   -    (1,303)
Stock-based compensation expense   -    -    -    -    -    -    -    -    868    868 
Dividends to common stockholders   -    -    -    -    -    (7,219)   -    (7,219)   -    (7,219)
Dividends to preferred stockholders   -    -    -    -    -    (1,455)   -    (1,455)   -    (1,455)
Dividends to noncontrolling interest   -    -    -    -    -    -    -    -    (869)   (869)
Balances, September 30, 2019   36,290   $36    3,105   $74,959   $340,435   $(63,846)  $(10,596)  $340,988   $30,455   $371,443 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

- 6 -

 

 

GLOBAL MEDICAL REIT INC.

Condensed Consolidated Statements of Equity - Continued

(unaudited and in thousands)

 

For the Nine Months Ended September 30, 2018:

 

   Common Stock   Preferred Stock  

Additional
Paid-in

  

Accumulated

  

Accumulated
Other
Comprehensive

  

Global
Medical
REIT Inc.
Stockholders’

  

Non-
controlling

  

Total

 
   Shares   Amount   Shares   Amount   Capital   Deficit   Loss   Equity   Interest   Equity 
Balances, December 31, 2017   21,631   $22    3,105   $74,959   $205,788   $(34,434)  $-   $246,335   $12,678   $259,013 
Net income   -    -    -    -    -    4,998    -    4,998    59    5,057 
Issuance of shares of common stock   372    -    -    -    3,452    -    -    3,452    -    3,452 
Reclassification of deferred offering costs   -    -    -    -    (302)   -    -    (302)   -    (302)
Change in fair value of interest rate swap   -    -    -    -    -    -    (109)   (109)   -    (109)
Stock-based compensation expense   -    -    -    -    -    -    -    -    1,978    1,978 
Dividends to common stockholders   -    -    -    -    -    (13,053)   -    (13,053)   -    (13,053)
Dividends to preferred stockholders   -    -    -    -    -    (4,366)   -    (4,366)   -    (4,366)
Dividends to noncontrolling interest   -    -    -    -    -    -    -    -    (1,493)   (1,493)
OP Units issued to third parties   -    -    -    -    -    -    -    -    4,742    4,742 
LTIP Units redeemed in cash   -    -    -    -    -    -    -    -    (263)   (263)
Balances, September 30, 2018   22,003   $22    3,105   $74,959   $208,938   $(46,855)  $(109)  $236,955   $17,701   $254,656 

 

For the Three Months Ended September 30, 2018:

 

   Common Stock   Preferred Stock  

Additional
Paid-in

  

Accumulated

  

Accumulated
Other
Comprehensive

  

Global
Medical
REIT Inc.
Stockholders’

  

Non-
controlling

  

Total

 
   Shares   Amount   Shares   Amount   Capital   Deficit   Loss   Equity   Interest   Equity 
Balances, June 30, 2018   21,631   $ 22    3,105   $ 74,959    $205,798   $ (42,739)  $-   $ 238,030   $ 17,483   $ 255,513 
Net income   -    -    -    -    -    1,741    -    1,741    32    1,773 
Issuance of shares of common stock   372    -    -    -    3,452    -    -    3,452    -    3,452 
Reclassification of deferred offering costs   -    -    -    -    (302)   -    -    (302)   -    (302)
Change in fair value of interest rate swap   -    -    -    -    -    -    (109)   (109)   -    (109)
Stock-based compensation expense   -    -    -    -    -    -    -    -    741    741 
Dividends to common stockholders   -    -    -    -    -    (4,402)   -    (4,402)   -    (4,402)
Dividends to preferred stockholders   -    -    -    -    -    (1,455)   -    (1,455)   -    (1,455)
Dividends to noncontrolling interest   -    -    -    -    -    -    -    -    (555)   (555)
Balances, September 30, 2018   22,003   $22    3,105   $74,959   $208,938   $(46,855)  $(109)  $236,955   $17,701   $254,656 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

- 7 -

 

 

GLOBAL MEDICAL REIT INC.

Condensed Consolidated Statements of Cash Flows

(unaudited and in thousands)

   Nine Months Ended September 30, 
   2019   2018 
Operating activities          
Net income  $6,813   $5,057 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation expense   13,481    9,965 
Amortization of acquired lease intangible assets   3,757    2,645 
Amortization of above market leases, net   634    484 
Amortization of deferred financing costs and other   1,000    1,327 
Stock-based compensation expense   2,493    1,978 
Capitalized preacquisition costs charged to expense   162    132 
Other   82    - 
Changes in operating assets and liabilities:          
Tenant receivables   (1,232)   (1,040)
Deferred assets   (3,955)   (4,597)
Other assets   (154)   (126)
Accounts payable and accrued expenses   911    1,434 
Security deposits and other   2,210    1,800 
Accrued management fees due to related party   479    41 
Net cash provided by operating activities   26,681    19,100 
           
Investing activities          
Purchase of land, buildings, and other tangible and intangible assets and liabilities   (181,440)   (133,851)
Escrow deposits for purchase of properties   (897)   (774)
Loans to related parties   -    (49)
Capital expenditures on existing real estate investments   (337)   (2,014)
Preacquisition costs   -    257 
Net cash used in investing activities   (182,674)   (136,431)
           
Financing activities          
Net proceeds received from common equity offerings   96,799    3,209 
Escrow deposits required by third party lenders   (216)   (216)
Repayment of note payable   (101)   - 
Proceeds from Credit Facility   164,450    142,900 
Repayment of Credit Facility   (77,500)   (10,400)
Payments of deferred financing costs   (924)   (2,750)
Redemption of LTIP Units   -    (263)
Dividends paid to common stockholders, and OP Unit and LTIP Unit holders   (21,167)   (14,075)
Dividends paid to preferred stockholders   (4,365)   (4,366)
Net cash provided by financing activities   156,976    114,039 
Net increase (decrease) in cash and cash equivalents and restricted cash   983    (3,292)
Cash and cash equivalents and restricted cash—beginning of period   4,843    7,114 
Cash and cash equivalents and restricted cash—end of period  $5,826   $3,822 
           
Supplemental cash flow information:          
Cash payments for interest  $11,687   $9,106 
           
Noncash financing and investing activities:          
Accrued dividends payable  $9,470   $5,995 
Initial recognition of lease liability related to right of use asset  $3,143   $- 
OP Units issued for property acquisition  $506   $4,742 
Interest rate swap agreements fair value change recognized in other comprehensive loss  $6,875   $109 
Accrued common stock offering costs  $22   $302 
LTIP Units and OP Units redeemed for common stock  $630   $- 
Accrued preacquisition costs for purchase of properties and tenant improvements  $901   $774 
Construction-in-process completed and transferred to real estate investments  $100   $2,043 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

- 8 -

 

 

GLOBAL MEDICAL REIT INC.

Notes to the Condensed Consolidated Financial Statements

(unaudited and in thousands, except per share amounts)

 

Note 1 – Organization

 

Global Medical REIT Inc. (the “Company”) is a Maryland corporation engaged primarily in the acquisition of purpose-built healthcare facilities and the leasing of those facilities to strong healthcare systems and physician groups with leading market share. The Company is externally managed and advised by Inter-American Management, LLC (the “Advisor”), a Delaware limited liability company and an affiliate of the Company.

 

The Company holds its facilities and conducts its operations through a Delaware limited partnership subsidiary named Global Medical REIT L.P. (the “Operating Partnership”). The Company serves as the sole general partner of the Operating Partnership through a wholly-owned subsidiary of the Company named Global Medical REIT GP LLC, a Delaware limited liability company. As of September 30, 2019, the Company was the 90.22% limited partner of the Operating Partnership, with an aggregate of 9.78% of the Operating Partnership owned by holders of long-term incentive plan units (“LTIP Units”) and third-party limited partners who contributed properties or services to the Operating Partnership in exchange for common limited partnership units (“OP Units”).

 

Note 2 – Summary of Significant Accounting Policies

 

Basis of presentation

 

The accompanying condensed consolidated financial statements are unaudited and include the accounts of the Company, the Operating Partnership and its wholly-owned subsidiaries. The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures required for annual consolidated financial statements have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, the accompanying consolidated financial statements do not include all of the information and footnotes required by GAAP for complete consolidated financial statements and should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 2018. In the opinion of management, all adjustments of a normal and recurring nature necessary for a fair presentation of the condensed consolidated financial statements for the interim periods have been made.

 

Principles of Consolidation

 

The accompanying condensed consolidated financial statements include the accounts of the Company, including the Operating Partnership and its wholly-owned subsidiaries. The Company presents the portion of any equity it does not own but controls (and thus consolidates) as noncontrolling interest. Noncontrolling interest in the Company includes the LTIP Units that have been granted to the Company’s and Advisor’s directors, officers and employees and the OP Units held by third parties. Refer to Note 5 – “Equity” and Note 7 – “Stock-Based Compensation” for additional information regarding the OP Units and LTIP Units.

 

The Company classifies noncontrolling interest as a component of consolidated equity on its Condensed Consolidated Balance Sheets, separate from the Company’s total equity. The Company’s net income or loss is allocated to noncontrolling interests based on the respective ownership or voting percentage in the Operating Partnership associated with such noncontrolling interests and is removed from consolidated income or loss on the Condensed Consolidated Statements of Operations in order to derive net income or loss attributable to common stockholders. The noncontrolling ownership percentage is calculated by dividing the aggregate number of LTIP Units and OP Units held by third parties by the total number of shares of common stock, LTIP Units and OP Units outstanding. Any future issuances of additional shares of common stock, LTIP Units or OP Units could change the noncontrolling ownership interest.

 

Use of Estimates

 

The preparation of the condensed consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and footnotes. Actual results could differ from those estimates.

 

- 9 -

 

 

Investment in Real Estate

 

The Company determines when an acquisition meets the definition of a business or alternatively should be accounted for as an asset acquisition in accordance with ASU 2017-01 – “Business Combinations (Topic 805): Clarifying the Definition of a Business” (“ASU 2017-01”). ASU 2017-01 requires that, when substantially all of the fair value of an acquisition is concentrated in a single identifiable asset or a group of similar identifiable assets, the asset or group of similar identifiable assets does not meet the definition of a business and therefore is required to be accounted for as an asset acquisition. Transaction costs are capitalized for asset acquisitions and expensed as incurred for business combinations. ASU 2017-01 results in most, if not all, of the Company’s acquisitions being accounted for as asset acquisitions because substantially all of the fair value of the gross assets the Company acquires are concentrated in a single asset or group of similar identifiable assets. For asset acquisitions that are “owner occupied” (meaning that the seller either is the tenant or controls the tenant), the purchase price, including capitalized acquisition costs, will be allocated to land and building based on their relative fair values with no value allocated to intangible assets or liabilities. For asset acquisitions where there is a lease in place but not “owner occupied,” the Company will also allocate the purchase price to tangible assets and any intangible assets acquired or liabilities assumed based on their relative fair values.

 

Real estate and related assets are stated net of accumulated depreciation. Renovations, replacements and other expenditures that improve or extend the life of assets are capitalized and depreciated over their estimated useful lives. Expenditures for ordinary maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-line method over the estimated useful life of the buildings, which are generally between 23 and 50 years, tenant improvements, which are generally between one and 19 years, and site improvements, which are generally between three and 14 years.

 

Revenue Recognition

 

The Company’s operations primarily consist of rental revenue earned from tenants under leasing arrangements which provide for minimum rent and escalations. The leases have been accounted for as operating leases. For operating leases with contingent rental escalators, revenue is recorded based on the contractual cash rental payments due during the period. Revenue from leases with fixed annual rental escalators are recognized on a straight-line basis over the initial lease term, subject to a collectability assessment, with the difference between the contractual rental receipts and the straight-line amounts recorded as a “deferred rent receivable.” Additionally, rental revenue includes expense recoveries, which represents revenue recognized related to tenant reimbursement of real estate taxes, insurance, and certain other operating expenses. The Company recognizes these reimbursements and related expenses on a gross basis in its Condensed Consolidated Statements of Operations. Expense required to be paid directly by the tenant are not subject to reimbursement.

 

For all leases where rent collection has been deemed probable, the Company assesses the need for an allowance for doubtful accounts, including an allowance for operating lease straight-line rent receivables, for estimated losses resulting from tenant defaults, or the inability of tenants to make contractual rent and tenant recovery payments at each reporting date. The Company also monitors the liquidity and creditworthiness of its tenants and operators on a continuous basis. This evaluation considers industry and economic conditions, property performance, credit enhancements and other factors. For operating lease straight-line rent amounts, the Company's assessment is based on amounts estimated to be recoverable over the term of the lease. As of September 30, 2019 and December 31, 2018, based on the Company’s assessment, no allowance was recorded as one was not deemed necessary. However, because future events may adversely affect the Company’s tenants, a valuation allowance may need to be established in the future.

 

Cash and Cash Equivalents and Restricted Cash

 

The Company considers all demand deposits, cashier’s checks, money market accounts, and certificates of deposit with an original maturity of three months or less to be cash equivalents. Amounts included in restricted cash represent (1) certain security deposits received from tenants at the inception of their leases; (2) cash required to be held by a third-party lender as a reserve for debt service; and (3) funds held by the Company that were received from certain tenants that the Company collected to pay specific tenant expenses, such as real estate taxes and insurance, on the tenant’s behalf (“tenant reimbursements”). The following table provides a reconciliation of the Company’s cash and cash equivalents and restricted cash that sums to the total of those amounts at the end of the periods presented on the Company’s accompanying Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018:

 

   As of September 30, 
   2019   2018 
Cash and cash equivalents  $2,815   $3,005 
Restricted cash   3,011    817 
   Total cash and cash equivalents and restricted cash  $5,826   $3,822 

 

- 10 -

 

 

Escrow Deposits

 

The escrow deposits balance as of September 30, 2019 and December 31, 2018 was $2,865 and $1,752, respectively. Escrow deposits include funds held in escrow to be used for the acquisition of properties in the future and for the payment of taxes, insurance, and other amounts as stipulated by the Company’s Cantor Loan, as hereinafter defined.

 

Deferred Assets

 

The deferred assets balance as of September 30, 2019 and December 31, 2018 was $13,307 and $9,352, respectively. The balance as of September 30, 2019 consisted of $13,020 in deferred rent receivables resulting from the recognition of revenue from leases with fixed annual rental escalations on a straight-line basis and $287 of other deferred costs. The balance as of December 31, 2018 consisted of $8,706 in deferred rent receivables resulting from the recognition of revenue from leases with fixed annual rental escalations on a straight-line basis and $646 of other deferred costs.

 

Other Assets

 

The other assets balance was $4,363 as of September 30, 2019, which consisted of $3,094 for a right of use asset that was recorded in connection with the implementation of ASC Topic 842 on January 1, 2019 (refer to Note 8 – “Leases” for additional details), $930 in deferred preacquisition and construction in process costs, and $339 in a prepaid asset. The other assets balance was $322 as of December 31, 2018, which consisted of $139 in capitalized costs related to property acquisitions and $183 in a prepaid asset.

 

Security Deposits and Other

 

The security deposits and other liability balance as of September 30, 2019 and December 31, 2018 was $6,362 and $4,152, respectively. The balance as of September 30, 2019 consisted of security deposits of $4,942 and a tenant impound liability of $1,420 related to amounts owed for specific tenant expenses. The balance as of December 31, 2018 consisted of security deposits of $3,272 and a tenant impound liability of $880 related to amounts owed for specific tenant expenses.

 

Derivative Instruments - Interest Rate Swaps

 

As of September 30, 2019 and December 31, 2018, the Company had three interest rate swaps that were designated as cash flow hedges of interest rate risk. In accordance with the Company’s risk management strategy, the purpose of the interest rate swaps is to manage interest rate risk for a portion of the Company’s variable-rate debt. The interest rate swaps involve the Company’s receipt of variable-rate amounts from three counterparties in exchange for the Company making fixed-rate payments over the life of the agreement. The Company accounts for derivative instruments in accordance with the provisions of ASC Topic 815, “Derivatives and Hedging” and ASU No. 2017-12, “Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities.” As of September 30, 2019 and December 31, 2018, the Company’s liability balance related to these interest rate swaps was $10,399 and $3,487, respectively. Refer to Note 4 – “Credit Facility, Notes Payable and Derivative Instruments” for additional details regarding these interest rate swaps. Additionally, as discussed in Note 11 – “Subsequent Events,” on October 3, 2019, the Company executed two additional interest rate swaps with a combined notional amount of $130 million.

 

Other Liability

 

The Company adopted ASC Topic 842 on January 1, 2019, and had an other liability balance of $2,379 as of September 30, 2019, based on the provisions of that standard (refer to Note 8 – “Leases” for additional details).

 

Reclassification

 

The Company reclassified the line item “Expense Recoveries” on its Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2018, of $884 and $2,610, respectively, to present this amount as a component of “Rental Revenue,” in order to conform to the current period presentation.

 

Note 3 – Property Portfolio

 

Summary of Properties Acquired During the Nine Months Ended September 30, 2019

 

During the nine months ended September 30, 2019 the Company completed 13 acquisitions. For each acquisition, substantially all of the fair value was concentrated in a single identifiable asset or group of similar identifiable assets and, therefore, each acquisition represents an asset acquisition. Accordingly, transaction costs for these acquisitions were capitalized.

 

- 11 -

 

 

A rollforward of the gross investment in land, building and improvements as of September 30, 2019 resulting from these acquisitions as well as other tenant improvements and the implementation of ASC 842 is as follows:

 

   Land   Building   Site & Tenant
Improvements
   Acquired Lease
Intangible Assets
   Gross Investment
in Real Estate
 
Balances as of December 31, 2018  $63,710   $518,451   $22,237   $43,152   $647,550 
Facility Acquired – Date Acquired:                         
   Zachary – 2/28/19   -    3,336    512    835    4,683 
   Gilbert and Chandler – 3/19/19   4,616    11,643    -    -    16,259 
   Las Vegas – 4/15/19   2,479    15,277    2,449    2,297    22,502 
   Oklahoma Northwest – 4/15/19   2,364    19,501    3,187    3,155    28,207 
   Mishawaka – 4/15/19   1,924    10,084    1,872    2,223    16,103 
   Surprise – 4/15/19   1,738    18,737    4,347    3,860    28,682 
   San Marcos – 7/12/19   2,322    6,934    530    2,188    11,974 
   Lansing – 8/1/19   1,202    7,681    852    1,633    11,368 
   Bannockburn – 8/5/19   731    3,419    1,214    1,325    6,689 
   Aurora – 8/6/19   1,521    7,446    911    2,679    12,557 
   Livonia – 8/14/19   980    7,629    643    1,340    10,592 
   Gilbert – 8/23/19   2,408    2,027    424    733    5,592 
   Morgantown – 9/26/19   883    5,286    879    902    7,950 
ASC 842 Reclassification   -    -    -    (824)   (824)
Site and Tenant improvements(1)   -    -    508    -    508 
Capitalized costs(2)   -    54    -    -    54 
Total Additions:   23,168    119,054    18,328    22,346    182,896 
Balances as of September 30, 2019  $86,878   $637,505   $40,565   $65,498   $830,446 

 

(1)Represents tenant improvements that were completed and placed in service during the nine months ended September 30, 2019 related to the Sherman facility that was acquired in June 2017 and the Bountiful facility that was acquired in October 2018. Also includes site improvements at the Watertown facility that was acquired in September 2016.
(2)Represents capitalized costs incurred during the nine months ended September 30, 2019 at the Derby facility that was acquired in August 2018.

 

Depreciation expense was $5,006 and $13,481 for the three and nine months ended September 30, 2019, respectively, and $3,614 and $9,965 for the three and nine months ended September 30, 2018, respectively.

 

As of September 30, 2019, the Company had aggregate capital improvement commitments and obligations to improve, expand, and maintain the Company’s existing facilities of $19,137. Many of these amounts are subject to contingencies that make it difficult to predict when they will be utilized, if at all. In accordance with the terms of the Company’s leases, capital improvement obligations in the next 12 months could total up to approximately $10,867.

 

The following is a summary of the acquisitions completed during the nine months ended September 30, 2019. The purchase price allocations are preliminary and subject to revision within the measurement period, not to exceed one year from the date of the acquisition.

 

Zachary Facility

 

On February 28, 2019, the Company assumed the following leasehold interests in the real property located in Zachary, Louisiana for a purchase price of $4.6 million: (i) the interest, as ground lessee, in an existing ground lease of the facility, with approximately 46 years remaining in the initial term with no extension options; and (ii) the interest, as landlord, in an existing lease of the facility with LTAC Hospital of Feliciana, LLC, as tenant, with approximately 16 years remaining in the initial term, exclusive of tenant renewal options. The following table presents the details of the tangible and intangible assets acquired and liabilities assumed:

 

Land and site improvements  $103 
Building and tenant improvements   3,745 
In-place leases   305 
Above-market lease intangibles   117 
Leasing costs   413 
Below-market lease intangibles   (34)
   Total purchase price  $4,649 

 

- 12 -

 

 

Gilbert and Chandler Facilities

 

On March 19, 2019, the Company purchased the following facilities located in Gilbert, Arizona and Chandler, Arizona for a total purchase price of $16.3 million: (i) a medical office building located in Gilbert, Arizona; (ii) a medical office building located in Gilbert, Arizona; (iii) a medical office suite located in Chandler, Arizona; and (iv) a medical office suite located in Chandler, Arizona (collective, the “Gilbert and Chandler Facilities”). Upon the closing of the acquisition, the Company assumed the seller’s interest, as lessor, in two existing leases and entered into three new leases, as lessor, at the Gilbert and Chandler Facilities. The Gilbert and Chandler Leases have a weighted average remaining lease term of 10.5 years, exclusive of tenant renewal options.

 

IRF Portfolio

 

On April 15, 2019, the Company purchased four in-patient rehabilitation facilities located in Las Vegas, Nevada; Surprise, Arizona; Oklahoma City, Oklahoma and Mishawaka, Indiana (collectively, the “IRF Portfolio”) for a total purchase price of approximately $94.6 million. Upon the closing of the acquisition, the Company assumed the sellers’ interest, as lessor, in four existing leases at the properties (collectively, the “IRF Portfolio Leases”) with (i) Encompass Health (Las Vegas, Nevada facility); (ii) a joint venture between Cobalt Rehabilitation and Tenet Healthcare (the Surprise, Arizona facility); (iii) a joint venture between Mercy Health and Kindred Healthcare (the Oklahoma City, Oklahoma facility); and (iv) St. Joseph’s Health System (the Mishawaka, Indiana facility). The IRF Portfolio leases have a weighted average remaining lease term of approximately 8.3 years, exclusive of tenant renewal options. The following table presents the details of the tangible and intangible assets acquired and liabilities assumed:

 

   Las Vegas   Surprise   Oklahoma
Northwest
   Mishawaka 
Land and site improvements  $2,723   $1,966   $2,507   $1,998 
Building and tenant improvements   17,482    22,856    22,545    11,882 
In-place leases   1,778    1,845    1,890    1,465 
Above-market lease intangibles   -    938    367    236 
Leasing costs   519    1,077    898    522 
Below-market lease intangibles   (863)   -    -    - 
   Total purchase price  $21,639   $28,682   $28,207   $16,103 

 

San Marcos Facility

 

On July 12, 2019, the Company purchased a medical office building located in San Marcos, California (the “San Marcos Facility”), for a purchase price of $12.0 million. Upon closing, the Company assumed the existing lease of the San Marcos Facility with California Cancer Associates for Research and Excellence, Inc., as tenant. The lease has eight years remaining in the initial term, exclusive of tenant renewal options. The following table presents the details of the tangible and intangible assets acquired and liabilities assumed:

 

Land and site improvements  $2,448 
Building and tenant improvements   7,338 
In-place leases   698 
Above-market lease intangibles   1,101 
Leasing costs   389 
   Total purchase price  $11,974 

 

Lansing Facilities

 

On August 1, 2019, the Company purchased the following real property and buildings thereon located in Lansing, Michigan for a total purchase price of $11.1 million: (i) 3390 East Jolly Road; (ii) 3955 Patient Care Drive; and (iii) 3400 East Jolly Road (“collectively, the “Lansing Facilities”). Upon closing, the Company assumed sellers’ interest, as lessor, in four existing leases and entered into two new leases at the Lansing Facilities (the “Lansing Leases”). The Lansing Leases have a weighted-average remaining term of 8.5 years, exclusive of tenant renewal options. The following table presents the details of the tangible and intangible assets acquired and liabilities assumed:

 

Land and site improvements  $1,387 
Building and tenant improvements   8,348 
In-place leases   953 
Above-market lease intangibles   130 
Leasing costs   550 
Below-market lease intangibles   (248)
   Total purchase price  $11,120 

 

- 13 -

 

 

Bannockburn Facility

 

On August 5, 2019, the Company purchased an office building located in Bannockburn, Illinois (the “Bannockburn Facility”), for a purchase price of $6.6 million. Upon closing, the Company assumed seller’s interest, as lessor, in 14 existing leases at the Bannockburn Facility (the “Bannockburn Leases”). The Bannockburn Leases have a weighted-average remaining term of 6.3 years, exclusive of tenant renewal options. The following table presents the details of the tangible and intangible assets acquired and liabilities assumed.

 

Land and site improvements  $858 
Building and tenant improvements   4,506 
In-place leases   763 
Above-market lease intangibles   240 
Leasing costs   322 
Below-market lease intangibles   (138)
   Total purchase price  $6,551 

 

Aurora Facility

 

On August 6, 2019, the Company purchased a medical office building located in Aurora, Illinois (the “Aurora Facility”), for a purchase price of $12.6 million. Upon closing, the Company assumed the existing lease of the Aurora Facility with Dreyer Clinic Inc., as tenant (the “Dreyer Lease”). The Dreyer Lease has approximately six years remaining in the initial term, exclusive of tenant renewal options. The following table presents the details of the tangible and intangible assets acquired and liabilities assumed:

 

Land and site improvements  $1,829 
Building and tenant improvements   8,049 
In-place leases   1,417 
Above-market lease intangibles   861 
Leasing costs   401 
   Total purchase price  $12,557 

 

Livonia Facility

 

On August 14, 2019, the Company purchased a medical office building located in Livonia, Michigan (the “Livonia Facility”) for a purchase price of $10.4 million. Upon closing, the Company assumed 10 existing leases at the Livonia Facility (the “Livonia Leases”). The Livonia Leases have a weighted-average remaining term of 3.2 years, exclusive of tenant renewal options. The following table presents the details of the tangible and intangible assets acquired and liabilities assumed:

 

Land and site improvements  $1,181 
Building and tenant improvements   8,071 
In-place leases   1,252 
Above-market lease intangibles   53 
Leasing costs   35 
Below-market lease intangibles   (236)
   Total purchase price  $10,356 

 

Gilbert Facility

 

On August 23, 2019, the Company purchased certain condominium units within two medical office buildings located in Gilbert, Arizona (the “Gilbert Facility”) for a total purchase price of $5.6 million. Upon closing, the Company leased the Gilbert Facility to Covenant Surgical Partners, Inc., a Delaware corporation (the “Covenant Lease”). The Covenant Lease has approximately ten (10) years remaining in the initial term, exclusive of tenant renewal options. The following table presents the details of the tangible and intangible assets acquired and liabilities assumed:

 

Land and site improvements  $2,470 
Building and tenant improvements   2,389 
In-place leases   121 
Above-market lease intangibles   300 
Leasing costs   312 
   Total purchase price  $5,592 

 

- 14 -

 

 

 

Morgantown Facility

 

On September 26, 2019, the Company purchased a parcel of land and an office building that is being constructed thereon, located in Morgantown, West Virginia (the “Morgantown Facility”) for a total purchase price of $8.0 million. Upon closing, the Company assumed the existing lease of the Morgantown Facility with Urgent Care MSO, LLC, as tenant (the “Urgent Care Lease”). The Urgent Care Lease has approximately ten years remaining in the initial term, exclusive of tenant renewal options. The following table presents the details of the tangible and intangible assets acquired and liabilities assumed:

 

Land and site improvements  $1,256 
Building and tenant improvements   5,792 
In-place leases   457 
Leasing costs   445 
Total purchase price  $7,950 

 

Summary of Properties Acquired During the Nine Months Ended September 30, 2018

 

During the nine months ended September 30, 2018, the Company completed eight acquisitions. For all eight acquisitions, substantially all of the fair value of the acquisitions was concentrated in a single identifiable asset or group of similar identifiable assets and, therefore, all of the acquisitions represent asset acquisitions under the guidance provided by ASU 2017-01. Accordingly, transaction costs for these acquisitions were capitalized.

 

A rollforward of the gross investment in land, building and improvements as of September 30, 2018, resulting from these acquisitions is as follows:

 

   Land   Building   Site & Tenant
Improvements
   Acquired Lease
Intangibles
   Gross
Investment in
Real Estate
 
Balances as of January 1, 2018  $42,701   $384,338   $12,818   $31,650   $471,507 
Facility Acquired – Date Acquired:                         
Moline / Silvis – 1/24/18   -    4,895    1,216    989    7,100 
Freemont – 2/9/18   162    8,335    -    -    8,497 
Gainesville – 2/23/18   625    9,885    -    -    10,510 
Dallas – 3/1/18   6,272    17,012    -    -    23,284 
Orlando – 3/22/18   2,543    11,720    756    1,395    16,414 
Belpre – 4/19/18   3,025    50,526    3,966    7,166    64,683 
McAllen – 7/3/18   1,099    4,296              5,395 
Derby – 8/3/18   412    2,496    243    453    3,604 
Tenant improvements(1)   -    -    2,043    -    2,043 
Total Additions:   14,138    109,165    8,224    10,003    141,530 
Balances as of September 30, 2018  $56,839   $493,503   $21,042   $41,653   $613,037 

 

(1)Represents tenant improvements that were completed and placed in service during the three months ended September 30, 2018 related to the Silvis and Sherman facilities that were acquired in January 2018 and June 2017, respectively. These amounts were recorded as construction-in-process within the “Other Assets” line item in the Company’s Consolidated Balance Sheet as of September 30, 2018, and reclassified to investment in real estate once completed.

 

The following is a summary of the acquisitions completed during the nine months ended September 30, 2018.

 

Moline / Silvis Facilities

 

Moline Facility - On January 24, 2018, the Company purchased a medical office building located in Moline, Illinois, which included the seller’s interest, as ground lessee, in an existing ground lease. The ground lease has approximately 10 years remaining in the initial term, with 12 consecutive five-year renewal options. Upon the closing of this acquisition, the Company assumed two subleases: one sublease with Fresenius Medical Care Quad Cities, LLC (“Fresenius”) with approximately 13 years remaining in the initial term, exclusive of tenant renewal options; and one sublease with Quad Cities Nephrology Associates, P.L.C. with approximately 15 years remaining in the initial term, exclusive of tenant renewal options. 

 

Silvis Facility - On January 24, 2018, the Company purchased a medical office building located in Silvis, Illinois from the same seller as the Moline facility, which included the seller’s interest, as ground lessee, in an existing ground lease. The ground lease has approximately 67 years remaining in the initial term, with no renewal options. Upon the closing of this acquisition, the Company assumed one sublease with Fresenius with approximately 13 years remaining in the initial term, exclusive of tenant renewal options.

 

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The aggregate purchase price for the Moline/Silvis facilities was $6.9 million. The following table presents the details of the tangible and intangible assets acquired and liabilities assumed for this acquisition:

 

Site improvements  $249 
Building and tenant improvements   5,862 
In-place leases   343 
Above market ground lease intangibles   219 
Leasing costs   427 
Below market lease intangibles   (229)
Total purchase price  $6,871 

 

Fremont Facility - On February 9, 2018, the Company purchased a medical office building located in Fremont, Ohio for a purchase price of approximately $8.5 million. Upon the closing of this acquisition, the Company entered into a new 12-year lease with Northern Ohio Medical Specialists, LLC (NOMS), exclusive of tenant renewal options.

 

Gainesville Facility - On February 23, 2018, the Company purchased a medical office building and ambulatory surgery center located in Gainesville, Georgia for a purchase price of approximately $10.5 million. Upon the closing of this acquisition, the Company entered into a new 12-year lease with SCP Eye Care Services, LLC , exclusive of tenant renewal options.

 

Dallas Facility - On March 1, 2018, the Company purchased a hospital, a three-story parking garage, and land all located in Dallas, Texas for an aggregate purchase price of $23.3 million. In addition to the hospital and the parking garage, the land underlays two medical office buildings that are not owned by the Company, each of which is ground leased to the hospital. Upon the closing of this acquisition, the Company entered into two leases with Pipeline East Dallas, LLC, with one lease relating to the hospital and the other lease relating to the underlying land and parking garage.

 

Orlando Facilities - On March 22, 2018, the Company purchased five medical office buildings from five affiliated sellers for an aggregate purchase price of $16.4 million. Upon the closing of this acquisition, the Company assumed five existing leases with Orlando Health, Inc. (the “Orlando Leases”) The Orlando Leases have a weighted average remaining term of 4.5 years, exclusive of tenant renewal options. The following table presents the details of the tangible and intangible assets acquired and liabilities assumed:

 

Land and site improvements  $3,075 
Building and tenant improvements   11,944 
In-place leases   808 
Above market lease intangibles   229 
Leasing costs   358 
Below market lease intangibles   (10)
Total purchase price  $16,404 

 

Belpre Portfolio - On April 19, 2018, the Company purchased a portfolio of four medical office buildings and a right of first refusal to purchase a fifth, yet to be built, medical office building on the same campus, for an aggregate purchase price of $64.1 million. Upon the closing of the acquisition the Company assumed the existing leases with Marietta Memorial Hospital, a subsidiary of Memorial Health System and such leases had a weighted average remaining lease term of approximately 11.35 years, exclusive of tenant renewal options. The following table presents the details of the tangible and intangible assets acquired and liabilities assumed:

 

Land and site improvements  $3,997 
Building and tenant improvements   53,520 
In-place leases   2,660 
Above market lease intangibles   2,527 
Leasing costs   1,979 
Below market lease intangibles   (632)
Total purchase price  $64,051 

 

McAllen Facility - On July 3, 2018, the Company purchased a medical office building (and adjacent condominium) located in McAllen, Texas for a purchase price of $5.4 million. Upon the closing of this acquisition, the Company entered into a new 11-year lease with Valley Ear, Nose, and Throat Specialists, PA, exclusive of tenant renewal options.

 

Derby Facility - On August 3, 2018, the Company purchased a medical office building located in Derby, Kansas for a purchase price of $3.6 million. Upon the closing of this acquisition, the Company assumed the existing lease with Rock Surgery Center, LLC. The lease has approximately nine years remaining in its initial term, exclusive of a tenant renewal option. The following table presents the details of the tangible and intangible assets acquired and liabilities assumed:

 

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Land and site improvements  $566 
Building and tenant improvements   2,585 
In-place leases   299 
Above market lease intangibles     
Leasing costs   154 
Below market lease intangibles   (23)
Total purchase price  $3,581 

 

Intangible Assets and Liabilities

 

The following is a summary of the carrying amount of intangible assets and liabilities as of the dates presented:

 

   As of September 30, 2019 
   Cost  

Accumulated

Amortization

   Net 
Assets            
In-place leases  $34,697   $(6,599)  $28,098 
Above market leases   12,236    (1,991)   10,245 
Leasing costs   18,565    (2,899)   15,666 
   $65,498   $(11,489)  $54,009 
Liabilities               
Below market leases  $3,855   $(568)  $3,287 

 

   As of December 31, 2018 
   Cost  

Accumulated

Amortization

   Net 
Assets            
In-place leases  $21,753   $(4,037)  $17,716 
Above market ground lease   707    (28)   679 
Above market leases   8,009    (1,096)   6,913 
Leasing costs   12,683    (1,703)   10,980 
   $43,152   $(6,864)  $36,288 
Liability               
Below market leases  $2,336   $(308)  $2,028 

 

  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
   2019   2018   2019   2018 
Amortization expense related to in-place leases  $1,033   $647   $2,562   $1,797 
Amortization expense related to leasing costs  $467   $307   $1,195   $848 
Decrease in rental revenue related to above market leases  $343   $240   $895   $620 
Increase in rental revenue related to below market leases  $114   $56   $261   $152 

 

The following is a summary of the acquired lease intangible amortization:

 

As of September 30, 2019, scheduled future aggregate net amortization of the acquired lease intangible assets and liabilities for each fiscal year ended December 31 is listed below:

 

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   Net Decrease
in Revenue
   Net Increase in
Expenses
 
2019 (three months remaining)  $(246)  $1,655 
2020   (986)   6,601 
2021   (988)   5,987 
2022   (998)   5,620 
2023   (1,024)   5,004 
Thereafter   (2,716)   18,897 
Total  $(6,958)  $43,764 

 

As of September 30, 2019, the weighted average amortization periods for asset lease intangibles and liability lease intangibles were 6.42 years and 6.41 years, respectively.

 

Note 4 – Credit Facility, Notes Payable and Derivative Instruments

 

Credit Facility

 

The Company, the Operating Partnership, as borrower, and certain of its subsidiaries (such subsidiaries, the “Subsidiary Guarantors”) are parties to a syndicated credit facility with BMO Harris Bank N.A. (“BMO”), as administrative agent (the “Credit Facility”). Amounts outstanding under the Credit Facility bear interest at a floating rate that is based on LIBOR, plus a specified margin based on the Company’s leverage. On September 30, 2019, the Company entered into an amendment to the Credit Facility that, among other things, (i) increased the borrowings under the term-loan component (the “Term Loan”) from $175 million to $300 million, representing the exercise of the remaining $75 million accordion feature and a re-allocation of $50 million from the revolver component (the “Revolver”) to the Term Loan and (ii) added a new $150 million accordion feature. Upon execution of the first amendment to the Company’s Credit Facility, the Credit Facility consisted of a $200 million capacity Revolver, a $300 million Term Loan and a $150 million accordion. The term of the Company’s Credit Facility expires in August 2022, subject to a one-year extension option. The amendment also amends the restricted payments financial covenant by deferring implementation of the 95% AFFO payout limitation contained in Section 8.24(a) of the Credit Facility from the fourth quarter of 2019 to the fourth quarter of 2020 and provides a mechanism for determining an alternative benchmark rate to LIBOR.

 

The Subsidiary Guarantors and the Company are guarantors of the obligations under the Credit Facility. The amount available to borrow from time to time under the Credit Facility is limited according to a quarterly borrowing base valuation of certain properties owned by the Subsidiary Guarantors.

 

The Operating Partnership is subject to ongoing compliance with a number of customary affirmative and negative covenants, including limitations with respect to liens, indebtedness, distributions, mergers, consolidations, investments, restricted payments and asset sales. The Operating Partnership must also maintain (i) a maximum consolidated leverage ratio as of the end of each fiscal quarter of less than (y) 0.65:1.00 for each fiscal quarter ending prior to October 1, 2019 and (z) thereafter, 0.60:1.00, (ii) a minimum fixed charge coverage ratio of 1.50:1.00, (iii) a minimum net worth of $203,795 plus 75% of all net proceeds raised through equity offerings subsequent to March 31, 2018, and (iv) a ratio of total secured recourse debt to total asset value of not greater than 0.10:1.00. The Company was in compliance with the Credit Facility covenants as of September 30, 2019.

 

The Company has entered into interest rate swaps to hedge its interest rate risk on the Term Loan. For additional information related to the interest rate swaps, see the “Derivative Instruments - Interest Rate Swaps” and “Subsequent Events” sections herein.

 

During the nine months ended September 30, 2019, the Company borrowed $164,450 under the Credit Facility and repaid $77,500, for a net amount borrowed of $86,950. During the nine months ended September 30, 2018 the Company borrowed $142,900 under the Credit Facility and repaid $10,400, for a net amount borrowed of $132,500. Interest expense incurred on the Credit Facility was $3,716 and $10,268 for the three and nine months ended September 30, 2019, respectively, and $3,211 and $7,872 for the three and nine months ended September 30, 2018, respectively. As of September 30, 2019 and December 31, 2018, the Company had the following outstanding borrowings under the Credit Facility:

 

   September 30,
2019
   December 31,
2018
 
Revolver  $67,225   $180,275 
Term Loan   300,000    100,000 
Less: Unamortized deferred financing costs   (3,983)   (3,922)
Credit Facility, net  $363,242   $276,353 

 

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Costs incurred related to the Credit Facility, net of accumulated amortization, are netted against the Company’s “Credit Facility, net of unamortized discount” balance in the accompanying Condensed Consolidated Balance Sheets. The Company paid $924 and $2,750 during the nine months ended September 30, 2019 and 2018, respectively, related to modifications to the Credit Facility and borrowing base additions. Amortization expense incurred was $303 and $863 for the three and nine months ended September 30, 2019, respectively, and $455 and $1,373 for the three and nine months ended September 30, 2018, respectively, and is included in the “Interest Expense” line item in the accompanying Condensed Consolidated Statements of Operations.

 

In July 2017, the Financial Conduct Authority (the “FCA”) that regulates LIBOR announced its intention to stop compelling banks to submit rates for the calculation of LIBOR after 2021. As a result, the Federal Reserve Board and the Federal Reserve Bank of New York organized the Alternative Reference Rates Committee ("ARRC") which identified the Secured Overnight Financing Rate ("SOFR") as its preferred alternative to USD-LIBOR in derivatives and other financial contracts. The Credit Facility provides that, on or about the LIBOR cessation date (subject to an early opt-in election), LIBOR shall be replaced as a benchmark rate in the Credit Facility with a new benchmark rate to be agreed upon by the Company and BMO, with such adjustments to cause the new benchmark rate to be economically equivalent to LIBOR. The Company is not able to predict when LIBOR will cease to be available or when there will be sufficient liquidity in the SOFR markets.

 

The Company has interest rate swap agreements that are indexed to LIBOR and is monitoring and evaluating the related risks. These risks arise in connection with transitioning contracts to a new alternative rate, including any resulting value transfer that may occur. The value of loans, securities, or derivative instruments tied to LIBOR could also be impacted if LIBOR is limited or discontinued. For some instruments, the method of transitioning to an alternative rate may be challenging, as they may require negotiation with the respective counterparty.

 

If a contract is not transitioned to an alternative rate and LIBOR is discontinued, the impact on our interest rate swap agreements is likely to vary by agreement. If LIBOR is discontinued or if the methods of calculating LIBOR change from their current form, interest rates on our current or future indebtedness may be adversely affected.

 

While we expect LIBOR to be available in substantially its current form until the end of 2021, it is possible that LIBOR will become unavailable prior to that point. This could result, for example, if sufficient banks decline to make submissions to the LIBOR administrator. In that case, the risks associated with the transition to an alternative reference rate will be accelerated and magnified.

 

Notes Payable, Net of Discount

 

The Company’s notes payable, net, includes two loans: (1) the Cantor Loan and (2) the West Mifflin Note, described in detail below. The following table sets forth the aggregate balances of these loans as of September 30, 2019 and December 31, 2018.

 

   September 30,
2019
   December 31,
2018
 
Notes payable, gross  $39,475   $39,475 
Less: Unamortized debt discount   (701)   (799)
Cumulative principal repayments   (123)   (22)
Notes payable, net  $38,651   $38,654 

 

Amortization expense incurred related to the debt discount was $32 and $98 for the three and nine months ended September 30, 2019, respectively, and $33 and $98 for the three and nine months ended September 30, 2018, respectively, and is included in the “Interest Expense” line item in the accompanying Condensed Consolidated Statements of Operations.

 

Cantor Loan

 

On March 31, 2016, through certain of its wholly-owned subsidiaries, the Company entered into a $32,097 portfolio commercial mortgage-backed securities loan (the “Cantor Loan”) with Cantor Commercial Real Estate Lending, LP (“CCRE”). The subsidiaries are GMR Melbourne, LLC, GMR Westland, LLC, GMR Memphis, LLC, and GMR Plano, LLC (the “GMR Loan Subsidiaries”). The Cantor Loan has cross-default and cross-collateral terms. The Cantor Loan has a maturity date of April 6, 2026 and accrues annual interest at 5.22%. The first five years of the term require interest-only payments and thereafter payments will include interest and principal, amortized over a 30-year schedule. Prepayment can only occur within four months prior to the maturity date, except that the Cantor Loan can be fully or partially defeased upon payment of amounts due under the Cantor Loan and payment of a defeasance amount that is sufficient to purchase U.S. government securities equal to the scheduled payments of principal, interest, fees, and any other amounts due related to a full or partial defeasance under the Cantor Loan.

 

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The Company secured the payment of the Cantor Loan with the assets, including property, facilities, and rents, held by the GMR Loan Subsidiaries and has agreed to guarantee certain customary recourse obligations, including findings of fraud, gross negligence, or breach of environmental covenants by the GMR Loan Subsidiaries. The GMR Loan Subsidiaries are required to maintain an aggregate monthly debt service coverage ratio of 1.35:1.00 for all of the collateral properties.

 

The note balance as of September 30, 2019 and December 31, 2018 was $32,097. Interest expense incurred on this note was $429 and $1,271 for the three and nine months ended September 30, 2019, respectively, and $428 and $1,271 for the three and nine months ended September 30, 2018, respectively. As of September 30, 2019, scheduled principal payments due for each fiscal year ended December 31 are listed below as follows:

 

2019  $- 
2020   - 
2021   282 
2022   447 
2023   471 
Thereafter   30,897 
Total  $32,097 

 

West Mifflin Note

 

On September 25, 2015, the Company, through its wholly-owned subsidiary GMR Pittsburgh LLC, as borrower, entered into a Term Loan and Security Agreement with Capital One to borrow $7,378. The note bears interest at 3.72% per annum and all unpaid interest and principal is due on September 25, 2020. Interest is paid in arrears and interest payments began on November 1, 2015 and have continued on the first day of each calendar month thereafter. Principal payments began on November 1, 2018 and have continued on the first day of each calendar month thereafter based on an amortization schedule with the remaining principal balance due on the maturity date. The Company, at its option, may prepay the note at any time in whole (but not in part) with advanced written notice. The West Mifflin facility serves as collateral for the note. The note requires a quarterly fixed charge coverage ratio of at least 1:1, a quarterly minimum debt yield of 0.09:1.00, and annualized Operator EBITDAR (as defined in the note) measured on a quarterly basis of not less than $6,000. The Operators are Associates in Ophthalmology, Ltd. and Associates Surgery Centers, LLC.

 

The Company made principal payments of $101 during the nine months ended September 30, 2019. The note balance as of September 30, 2019 and December 31, 2018 was $7,255 and $7,356, respectively. Interest expense incurred on this note was $69 and $207 for the three and nine months ended September 30, 2019, respectively, and $72 and $211 for the three and nine months ended September 30, 2018, respectively. As of September 30, 2019, scheduled principal payments due for each fiscal year ended December 31 are listed below as follows:

 

2019 (three months remaining)  $35 
2020   7,220 
Total  $7,255 

 

Derivative Instruments - Interest Rate Swaps

 

As of September 30, 2019, the Company had three interest rate swaps that are used to manage the interest rate risk and fix the LIBOR component of certain of its floating rate debt as follows: (i) on August 7, 2018 the Company executed an interest rate swap with BMO that was designated as a cash flow hedge on the Term Loan, with a notional amount of $100 million, a fixed interest rate of 2.88%, and a maturity date of August 8, 2023; and (ii) on November 16, 2018 the Company executed separate interest rate swaps with SunTrust Bank (“SunTrust”) and Citizens Bank of Pennsylvania (“Citizens”) that were each designated as cash flow hedges. The swap with SunTrust has a notional amount of $40 million and the swap with Citizens has a notional amount of $30 million and both have a fixed interest rate of 2.93% and a maturity date of August 7, 2024. Additionally, as discussed in Note 11 – “Subsequent Events,” on October 3, 2019, the Company executed two additional interest rate swaps with a combined notional amount of $130 million.

 

In accordance with the provisions of ASC Topic 815, the Company records the swaps either as an asset or a liability measured at its fair value at each reporting period. When hedge accounting is applied, the change in the fair value of derivatives designated and that qualify as cash flow hedges is (i) recorded in accumulated other comprehensive loss in the equity section of the Company’s Condensed Consolidated Balance Sheets and (ii) subsequently reclassified into earnings as interest expense for the period that the hedged forecasted transactions affect earnings. If specific hedge accounting criteria are not met, changes in the Company’s derivative instruments’ fair value are recognized currently as an adjustment to net income.

 

The Company’s interest rate swaps are not traded on an exchange. The Company’s interest rate swaps are recorded at fair value based on a variety of observable inputs including contractual terms, interest rate curves, yield curves, measure of volatility, and correlations of such inputs. The Company measures its derivatives at fair value on a recurring basis based on the expected size of future cash flows on a discounted basis and incorporating a measure of non-performance risk. The fair values are based on Level 2 inputs within the framework of ASC Topic 820, “Fair Value Measurement.” The Company considers its own credit risk, as well as the credit risk of its counterparty, when evaluating the fair value of its derivative instruments.

 

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The fair value of the Company’s interest rate swaps was a liability of $10,399 and $3,487 as of September 30, 2019 and December 31, 2018, respectively. These amounts are included in the “Derivative Liability” line item on the Company’s Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018.

 

The table below details the components of the loss presented on the accompanying Condensed Consolidated Statements of Comprehensive (Loss) Income recognized on the Company’s interest rate swaps designated as cash flow hedges for the three and nine months ended September 30, 2019 and 2018:

 

  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
   2019   2018   2019   2018 
Amount of loss recognized in other comprehensive loss  $1,603   $122   $7,559   $122 
Amount of loss reclassified from accumulated other comprehensive loss into interest expense   (300)   (13)   (684)   (13)
Total change in accumulated other comprehensive loss  $1,303   $109   $6,875   $109 

 

During the next twelve months, the Company estimates that an additional $2,193 will be reclassified as an increase to interest expense. Additionally, during the three and nine months ended September 30, 2019, the Company recorded total interest expense in its Condensed Consolidated Statements of Operations of $4,549 and $12,707.

 

Weighted-Average Interest Rate and Term

 

The weighted average interest rate and term of the Company’s debt was 4.19% and 3.85 years at September 30, 2019, compared to 4.64% and 4.24 years as of December 31, 2018.

 

Note 5 – Equity

 

Preferred Stock

 

The Company’s charter authorizes the issuance of 10,000 shares of preferred stock, par value $0.001 per share. As of September 30, 2019 and December 31, 2018, there were 3,105 shares of Series A Cumulative Redeemable Preferred Stock (“Series A Preferred Stock”), issued and outstanding. The Series A Preferred Stock has a liquidation preference of $25 per share.

 

Preferred stock dividend activity for the nine months ended September 30, 2019 is summarized in the following table:

 

Date Announced  Record Date  Applicable Quarter  Payment Date  Quarterly
Dividend
   Dividends per
Share
 
December 13, 2018  January 15, 2019  Q4 2018  January 31, 2019  $1,455   $0.46875 
March 6, 2019  April 15, 2019  Q1 2019  April 30, 2019  $1,455   $0.46875 
June 14, 2019  July 15, 2019  Q2 2019  July 31, 2019  $1,455   $0.46875 
September 13, 2019  October 15, 2019  Q3 2019  October 31, 2019  $1,455(1)  $0.46875 

 

(1) Two months of this amount, equal to $970, was accrued at September 30, 2019.

 

The holders of the Series A Preferred Stock are entitled to receive dividend payments only when, as and if declared by the Board (or a duly authorized committee of the Board). Dividends will accrue or be payable in cash from the original issue date, on a cumulative basis, quarterly in arrears on each dividend payment date at a fixed rate per annum equal to 7.50% of the liquidation preference of $25.00 per share (equivalent to $1.875 per share on an annual basis). Dividends on the Series A Preferred Stock will be cumulative and will accrue whether or not (i) funds are legally available for the payment of those dividends, (ii) the Company has earnings or (iii) those dividends are declared by the Board. The quarterly dividend payment dates on the Series A Preferred Stock are January 31, April 30, July 31 and October 31 of each year. During the nine month periods ended September 30, 2019 and 2018, the Company paid preferred dividends of $4,365 and $4,366, respectively. The Company may, at its option, redeem the Serial A Preferred Stock for cash in whole or in part, from time-to-time, on or after September 15, 2022 at a cash redemption price of $25.00 per share, plus any accrued and unpaid dividends up to, but not including, the date of redemption.

 

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Common Stock

 

The Company has 500,000 authorized shares of common stock, $0.001 par value. As of September 30, 2019 and December 31, 2018, there were 36,290 and 25,944 outstanding shares of common stock, respectively.

 

On March 18, 2019, the Company closed an underwritten public offering of its common stock and on March 25, 2019 the Company closed on part of the related over-allotment option granted to the underwriters, resulting in $75,191 in net proceeds.

 

On August 17, 2018, the Company, its Advisor, and the Operating Partnership entered into a Sales Agreement, as amended on June 21, 2019, with a number of financial institutions, pursuant to which the Company may offer and sell, from time to time, up to $50 million of its common stock (the “ATM Program”). During the nine months ended September 30, 2019, pursuant to the ATM Program, the Company sold and issued 2,051 shares of its common stock at an average price of $10.73 per share, receiving net proceeds of $21,608.

 

Common stock dividend activity for the nine months ended September 30, 2019 is summarized in the following table:

 

Date Announced   Record Date   Applicable
Quarter
  Payment Date   Dividend
Amount(1)
    Dividends
per Share
 
December 13, 2018   December 26, 2018   Q4 2018   January 10, 2019   $ 5,695     $ 0.20  
March 6, 2019   March 26, 2019   Q1 2019   April 10, 2019   $ 7,688     $ 0.20  
June 14, 2019   June 26, 2019   Q2 2019   July 11, 2019   $ 7,699     $ 0.20  
September 13, 2019   September 25, 2019   Q3 2019   October 10, 2019   $ 8,004     $ 0.20  

 

(1) Includes distributions on LTIP Units and OP Units.

 

During the nine months ended September 30, 2019 and 2018, the Company paid total dividends on its common stock, LTIP Units and OP Units in the aggregate amount of $21,167 and $14,075, respectively.

 

As of September 30, 2019 and December 31, 2018, the Company had an accrued dividend balance of $496 and $316 for dividends payable on the aggregate annual and long-term LTIP Units that are subject to retroactive receipt of dividends on the amount of LTIP Units ultimately earned. During the nine months ended September 30, 2019, $265 of dividends were accrued and $85 of dividends were paid related to these units. During the nine months ended September 30, 2018, $180 of dividends were accrued and $46 of dividends were paid.

 

The amount of the dividends paid to the Company’s stockholders is determined by the Company’s Board and is dependent on a number of factors, including funds available for payment of dividends, the Company’s financial condition and capital expenditure requirements except that, in accordance with the Company’s organizational documents and Maryland law, the Company may not make dividend distributions that would: (i) cause it to be unable to pay its debts as they become due in the usual course of business; (ii) cause its total assets to be less than the sum of its total liabilities plus senior liquidation preferences; or (iii) jeopardize its ability to maintain its qualification as a REIT.

 

OP Units

 

OP Units are limited partnership interests in the Company’s Operating Partnership. OP Units are redeemable by the holder for cash or, at the Company’s option, an equivalent number of shares of the Company’s common stock. During the nine months ended September 30, 2019, the Company issued an aggregate of 49 OP Units with a value of $506 in connection with a facility acquisition. Additionally, during the nine months ended September 30, 2019, two OP Unit holders redeemed an aggregate of 51 OP Units that were issued during 2017 in connection with a facility acquisition. The Company redeemed such OP Units for shares of its common stock with a value of $519. During the year ended December 31, 2018, the Company issued an aggregate of 1,899 OP Units with a value of $16,363 in connection with three facility acquisitions. As of September 30, 2019 and December 31, 2018, there were 3,143 and 3,145 OP Units issued and outstanding, respectively, with an aggregate value of $27,881 and $27,894, respectively. The OP Unit value is based on the Company’s closing share price on the date of the respective transaction and is included as a component of noncontrolling interest equity in the Company’s Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018.

 

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Note 6 – Related Party Transactions

 

Management Agreement

 

Upon completion of the Company’s initial public offering on July 1, 2016, the Company and the Advisor entered into an amended and restated management agreement (the “Management Agreement”). Certain material terms of the Management Agreement are summarized in the section titled “Business — Our Advisor and our Management Agreement,” contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on March 11, 2019.

 

Management Fees and Accrued Management Fees

 

The Company’s management fee to the Advisor is calculated in accordance with the terms of the Management Agreement, which requires an annual base management fee equal to 1.5% of our stockholders’ equity (as defined in the Management Agreement). For the three and nine months ended September 30, 2019, management fees of $1,621 and $4,539, respectively, were incurred and expensed by the Company. For the three and nine months ended September 30, 2018, management fees of $1,104 and $3,280, respectively, were incurred and expensed by the Company. Accrued management fees due to the Advisor were $1,622 and $1,143 as of September 30, 2019 and December 31, 2018, respectively. No incentive management fee was incurred by the Company during the three and nine months ended September 30, 2019 or 2018.

 

Allocated General and Administrative Expenses

 

Effective May 8, 2017, the Company and the Advisor entered into an agreement pursuant to which, for a period of one year commencing on May 8, 2017, the Company agreed to reimburse the Advisor for $125 of the annual salary of the General Counsel and Secretary of the Company for so long as he continues to be primarily dedicated to the Company in his capacity as its General Counsel and Secretary. This agreement expired in May 2018 and was not renewed. In the future, the Company may receive additional allocations of general and administrative expenses from the Advisor that are either clearly applicable to or were reasonably allocated to the operations of the Company. There were no allocated general and administrative expenses from the Advisor for the three and nine months ended September 30, 2019. Other than via the terms of the reimbursement agreement noted above, there were no allocated general and administrative expenses from the Advisor for the three and nine months ended September 30, 2018.

 

Related Party Balances

 

A rollforward of the due from related parties and due to related party balance, net, as of September 30, 2019 is as follows:

 

   Due From
Related Parties
   Due to Related Party, Net 
   Funds for
Various
Purposes
   Mgmt. Fees
due to
Advisor
   Other
Funds due
from
Advisor
   Due to
Related
Party, net
 
Balance as of January 1, 2019  $61   $(1,143)   52   $(1,091)
Management fee expense incurred   -    (4,539)   -    (4,539)
Management fees paid to Advisor   -    4,060    -    4,060 
Loans to Advisor   -    -    (14)   (14)
Loans to other related parties   14    -    -    - 
Balance as of September 30, 2019  $75   $(1,622)   38   $(1,584)

 

Note 7 – Stock-Based Compensation

 

2016 Equity Incentive Plan

 

The 2016 Equity Incentive Plan, as amended (the “Plan”) is intended to assist the Company and its affiliates in recruiting and retaining employees of the Manager, members of the Board, executive officers of the Company, and individuals who provide services to those entities or affiliates of those entities.

 

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The Plan is intended to permit the grant of both qualifying and non-qualified options and the grant of stock appreciation rights, restricted stock, unrestricted stock, awards of restricted stock units, performance awards and other equity-based awards (including LTIP Units) for up to an aggregate of 2,232 shares of common stock, subject to increase under certain provisions of the Plan. On May 29, 2019, the Company’s stockholders approved an amendment to the Plan to increase the number of authorized shares available for issuance under the Plan by 1,000 shares from 1,232 to 2,232. Based on the grants outstanding as of September 30, 2019, there are 1,020 units that remain available to be granted under the Plan. Units subject to awards under the Plan that are forfeited, cancelled, lapsed, settled in cash or otherwise expired (excluding shares withheld to satisfy exercise prices or tax withholding obligations) are available for grant.

 

Time-Based Grants

 

The time-based vesting LTIP unit activity under the Plan during the nine months ended September 30, 2019 was as follows:

 

LTIP Units outstanding as of December 31, 2018   588 
LTIP Units earned and granted via the 2018 performance program – Annual Awards (1)   108 
LTIP Units granted on a discretionary basis related to the Annual Awards (2)   28 
LTIP Units granted as 2019 long-term time based awards (3)   54 
LTIP Units granted to independent directors of the Board (4)   22 
LTIP Units – other grant and forfeitures, net (5)   (9)
   LTIP Units outstanding as of September 30, 2019   791 

 

(1)The 108 LTIP Units represents earned and granted units from the previously disclosed 2018 annual awards (the “Annual Awards”). On March 5, 2019 the Compensation Committee of the Board (the “Compensation Committee”) determined the extent to which the Company achieved the performance goals related to the 2018 Annual Awards and determined the number of LTIP Units that each grantee was entitled to receive. These grants vested 50% on March 5, 2019, the determination date, and 50% vest on March 5, 2020.
(2)The 28 LTIP Units represents a discretionary grant by the Board. These grants vested 50% on March 5, 2019, the grant date, and 50% vest on March 5, 2020.
(3)The 54 LTIP Units represent grants approved by the Board on March 5, 2019 pursuant to the Company’ 2019 Long-Term Incentive Plan. These grants are valued based on the Company’s share price at the date of grant of $10.07 and vest in equal one-third increments on each of March 5, 2020, March 5, 2021, and March 5, 2022.
(4)The 22 LTIP Units represent a grant to the independent directors of the Board made on May 29, 2019, which vest on May 29, 2020.
(5)The decrease of nine LTIP Units net represents 11 LTIP Units redeemed for the Company’s common stock with a value of $110 and one LTIP Unit that was forfeited, partially offset by three LTIP Units that were granted on March 15, 2019 related to a new hire. These three LTIP Units vest in equal one-third increments on each of March 15, 2020, March 15, 2021, and March 5, 2022.

 

A detail of the vested and unvested LTIP units outstanding as of September 30, 2019 is as follows:

 

Total vested units   483 
Unvested units:     
    Granted to employees of the Advisor   286 
    Granted to the Company’s independent directors   22 
    Total unvested units   308 
     LTIP Units outstanding as of September 30, 2019   791 

 

Performance Based Awards

 

For each of the past three years the Company’s Board has approved annual performance-based LTIP awards (“Annual Awards”) and long-term performance-based LTIP awards (“Long-Term Awards”) to the executive officers of the Company and other employees of the Advisor who perform services for the Company. As described in detail below the Annual Awards have one-year performance periods and the Long-Term Awards have three-year performance periods. In addition to meeting specified performance metrics, vesting in both the Annual Awards and the Long-Term Awards is subject to service requirements.

 

A detail of the Annual Awards and Long-Term Awards under the 2017, 2018, and 2019 programs as of September 30, 2019 is as follows:

 

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   2017 Program   2018 Program   2019 Program     
   Long-Term   Annual   Long-Term   Annual   Long-Term   Total 
                         
Net annual and long-term LTIP awards as of December 31, 2018 (at target)   96    161    110    -    -    367 
LTIP Unit target grants via the 2019 Performance Program – Annual Awards and Long-Term Awards (1)            -             -            -    133    82    215 
LTIP Units earned and granted via the 2018 Performance Program – Annual Awards (2)   -    (108)   -         -    -    (108)
LTIP Units granted on a discretionary basis via the 2018 Performance Program – Annual Awards (2)   -    (28)   -    -    -    (28)
LTIP Units not earned under the 2018 Performance Program – Annual Awards (3)   -    (25)   -    -    -    (25)
Net annual and long-term LTIP awards as of September 30, 2019 (at target)   96    -    110    133    82    421 

 

(1) These target Annual Awards and Long-Term Awards were approved by the Board on March 5, 2019.

(2) These amounts represent grants from the 2018 program Annual Awards. Refer to the “Time-Based Grants” table above which presents these grants as earned and time-based.

(3) On March 5, 2019 the Compensation Committee determined the extent to which the Company achieved the performance goals and concluded that these target awards were not achieved.

 

The number of target LTIP Units comprising each 2019 program Annual Award target grant was based on the closing price of the Company’s common stock reported on the New York Stock Exchange (“NYSE”) on the date of grant. The number of target LTIP Units comprising each Long-Term Award target grant was based on the fair value of the Long-Term Awards as determined by an independent valuation consultant, in each case rounded to the nearest whole LTIP unit in order to eliminate fractional units.

 

Annual Awards. The Annual Awards are subject to the terms and conditions of LTIP Annual Award Agreements (“LTIP Annual Award Agreements”) between the Company and each grantee.

 

The Compensation Committee and Board established performance goals for fiscal year 2019, as set forth in Exhibit A to the 2019 LTIP Annual Award Agreements (the “Performance Goals”) that will be used to determine the number of LTIP Units earned by each grantee. As of September 30, 2019, management estimated that the Performance Goals would be met at a 100% level, and accordingly, applied 100% to the net target 2019 program Annual Awards to estimate the 2019 program Annual Awards expected to be earned at the end of the performance period. Cumulative stock-based compensation expense during the nine months ended September 30, 2019 reflects management’s estimate that 100% of these awards will be earned. As soon as reasonably practicable following the last day of the 2019 fiscal year, the Compensation Committee and Board will determine the extent to which the Company has achieved each of the Performance Goals (expressed as a percentage) and, based on such determination, will calculate the number of LTIP Units that each grantee is entitled to receive. Each grantee may earn up to 150% of the number of his/her target LTIP Units. Any 2019 Annual Award LTIP Units that are not earned will be forfeited and cancelled.

 

Vesting. LTIP Units that are earned as of the end of the applicable performance period will be subject to vesting, subject to continued employment through each vesting date, in two installments as follows: 50% of the earned LTIP Units will become vested on the date in 2020 that the Board approves the number of LTIP Units to be awarded pursuant to the performance components set forth in the 2019 LTIP Annual Award Agreements and 50% of the earned LTIP Units become vested on the one year anniversary of the initial vesting date. Vesting may be accelerated under certain circumstances such as a “change-in-control” transaction or a “qualified termination” event.

 

Distributions. Distributions equal to the dividends declared and paid by the Company will accrue during the applicable performance period on the maximum number of LTIP Units that the grantee could earn and will be paid with respect to all of the earned LTIP Units at the conclusion of the applicable performance period, in cash or by the issuance of additional LTIP Units at the discretion of the Compensation Committee.

 

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Long-Term Awards. The Long-Term Awards are subject to the terms and conditions of 2017, 2018 and 2019 LTIP Long-Term Award Agreements (collectively the “LTIP Long-Term Award Agreements”) between the Company and each grantee. The number of LTIP Units that each grantee is entitled to earn under the LTIP Long-Term Award Agreements will be determined following the conclusion of a three-year performance period based on the Company’s total stockholder return (“TSR”), which is determined based on a combination of appreciation in stock price and dividends paid during the performance period. Each grantee may earn up to 200% of the number of target LTIP Units covered by the grantee’s Long-Term Award. Any target LTIP Units that are not earned will be forfeited and cancelled. The number of LTIP Units earned under the Long-Term Awards will be determined as soon as reasonably practicable following the end of the applicable three-year performance period (2020, 2021, or 2022 depending on the program) based on the Company’s TSR on an absolute basis (as to 75% of the Long-Term Award) and relative to the SNL Healthcare REIT Index (as to 25% of the Long-Term Award).

 

Vesting. LTIP Units that are earned as of the end of the applicable three year performance period will be subject to forfeiture restrictions that will lapse (“vesting”), subject to continued employment through each vesting date as follows; 50% of the earned LTIP Units will vest upon the third anniversary of the respective grant dates and the remaining 50% will vest on the fourth anniversary of the respective grant dates. Vesting may be accelerated under certain circumstances such as a “change-in-control” transaction or a “qualified termination” event.

 

Distributions. Pursuant to the LTIP Long-Term Award Agreements, distributions equal to the dividends declared and paid by the Company will accrue during the applicable performance period on the maximum number of LTIP Units that the grantee could earn and will be paid with respect to all of the earned LTIP Units at the conclusion of the applicable performance period, in cash or by the issuance of additional LTIP Units at the discretion of the Compensation Committee.

 

Stock-Based Compensation Expense

 

In July 2018, the Company implemented the provisions of ASU 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting” (“ASU 2018-07”). This standard simplifies several aspects of the accounting for non-employee transactions by stipulating that the existing accounting guidance for share-based payments to employees (accounted for under ASC Topic 718, “Compensation-Stock Compensation”) will also apply to non-employee share-based transactions (accounted for under ASC Topic 505, “Equity”). Under the provisions of ASU 2018-07, the Company’s prospective compensation expense for all unvested LTIP Units, Annual Awards, and Long-Term Awards is recognized using the adoption date fair value of the awards, with no remeasurement required. Compensation expense for future LTIP Unit grants, Annual Awards, and Long-Term Awards is based on the grant date fair value of the units/awards, with no subsequent remeasurement required.

 

As the Long-Term Awards involve market-based performance conditions, the Company utilizes a Monte Carlo simulation to provide a grant date fair value for expense recognition. The Monte Carlo simulation is a generally accepted statistical technique used, in this instance, to simulate a range of possible future stock prices for the Company and the members of the SNL Healthcare REIT Index (the “Index”) over the Performance Periods. The purpose of this modeling is to use a probabilistic approach for estimating the fair value of the performance share award for purposes of accounting under ASC Topic 718.

 

The assumptions used in the Monte Carlo simulation include beginning average stock price, valuation date stock price, expected volatilities, correlation coefficients, risk-free rate of interest, and expected dividend yield. The beginning average stock price is the beginning average stock price for the Company and each member of the Index for the five trading days leading up to the grant date of the Long-Term Award. The valuation date stock price is the closing stock price of the Company and each of the peer companies in the Index on the grant dates of the Long-Term Awards. The expected volatilities are modeled using the historical volatilities for the Company and the members of the Index. The correlation coefficients are calculated using the same data as the historical volatilities. The risk-free rate of interest is taken from the U.S. Treasury website and relates to the expected life of the remaining performance period on valuation or revaluation. Lastly, the dividend yield assumption is 0.0%, which is mathematically equivalent to reinvesting dividends in the issuing entity, which is part of the Company’s award agreement assumptions.

 

Below are details regarding certain of the assumptions for the Long-Term Awards using Monte Carlo simulations:

 

   2019 Long-Term
Awards
   2018 Long-Term
Awards
   2017 Long-Term
Awards
 
Share price   $10.07    $8.86    $8.86 
Target awards   82    110    96 
Volatility   31.7%    33.8%    33.8% - 35.4% 
Risk-free rate   2.5%    2.6%    2.4% - 2.6% 
Dividend assumption   reinvested    reinvested    reinvested 
Expected term in years   3    2.7    1.7 – 2.7 

 

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The Company incurred stock compensation expense of $868 and $2,493, for the three and nine months ended September 30, 2019, respectively, and $741 and $1,978, for the three and nine months ended September 30, 2018, respectively, related to the grants awarded under the Plan. Compensation expense is included within “General and Administrative” expense in the Company’s Condensed Consolidated Statements of Operations.

 

As of September 30, 2019, total unamortized compensation expense related to these awards of approximately $3.5 million is expected to be recognized over a weighted average remaining period of 1.5 years.

 

Note 8 – Leases

 

On January 1, 2019, the Company adopted ASC Topic 842, which supersedes Accounting Standards Codification Topic 840 “Leases” (“ASC Topic 840”). Information in this note with respect to the Company’s leases and lease-related costs as both lessee and lessor and lease-related receivables as lessor is presented under ASC Topic 842 as of and for the three and nine months ended September 30, 2019 and under ASC Topic 840 as of and for the year ended December 31, 2018.

 

The Company adopted ASC Topic 842 using the modified retrospective approach whereby the cumulative effect of adoption was recognized on the adoption date and prior periods were not restated. There was no net cumulative effect adjustment to accumulated deficit as of January 1, 2019 as a result of this adoption. ASC Topic 842 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The Company operates as both a lessor and a lessee. As a lessor, the Company is required under ASC Topic 842 to account for leases using an approach that is substantially similar to ASC Topic 840's guidance for operating leases and other leases such as sales-type leases and direct financing leases. In addition, ASC Topic 842 requires lessors to capitalize and amortize only incremental direct leasing costs. As a lessee, the Company is required under the new standard to apply a dual approach, classifying leases, such as ground leases, as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase. This classification determines whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. ASC Topic 842 also requires lessees to record a right of use asset and a lease liability for all leases with a term of greater than a year regardless of their classification. The Company has also elected the practical expedient not to recognize right of use assets and lease liabilities for leases with a term of a year or less.

 

On adoption of the standard, we elected the package of practical expedients provided for in ASC Topic 842, including:

 

·     No reassessment of whether any expired and existing contracts were or contained leases;

·     No reassessment of the lease classification for any expired and existing leases; and

·     No reassessment of initial direct costs for any existing leases.

 

The package of practical expedients was made as a single election and was consistently applied to all existing leases as of January 1, 2019. We also elected the practical expedient provided to lessors in a subsequent amendment to ASC Topic 842 that removed the requirement to separate lease and nonlease components, provided certain conditions were met.

 

Information as Lessor Under ASC Topic 842 (As of and for the three and nine months ended September 30, 2019)

 

To generate positive cash flow, as a lessor, the Company leases its facilities to tenants in exchange for fixed monthly payments that cover rent, property taxes, insurance and certain cost recoveries, primarily common area maintenance (“CAM”). The Company’s leases were determined to be operating leases and have a portfolio average lease years remaining of approximately 10 years. Payments from the Company’s tenants for CAM are considered nonlease components that are separated from lease components and are generally accounted for in accordance with the revenue recognition standard. However, the Company qualified for and elected the practical expedient related to combining the components because the lease component is classified as an operating lease and the timing and pattern of transfer of CAM income, which is not the predominant component, is the same as the lease component. As such, consideration for CAM is accounted for as part of the overall consideration in the lease. Payments from customers for property taxes and insurance are considered noncomponents of the lease and therefore no consideration is allocated to them because they do not transfer a good or service to the customer. Fixed contractual payments from the Company’s leases are recognized on a straight-line basis over the terms of the respective leases. This means that, with respect to a particular lease, actual amounts billed in accordance with the lease during any given period may be higher or lower than the amount of rental revenue recognized for the period. Straight-line rental revenue is commenced when the tenant assumes control of the leased premises. Accrued straight-line rents receivable represents the amount by which straight-line rental revenue exceeds rents currently billed in accordance with lease agreements.

 

Some of the Company’s leases are subject to annual changes in the Consumer Price Index (“CPI”). Although increases in CPI are not estimated as part of the Company’s measurement of straight-line rental revenue, for leases with base rent increases based on CPI, the amount of rent revenue recognized is adjusted in the period the changes in CPI are measured and effective. Additionally, some of the Company’s leases have extension options.

 

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Initial direct costs, primarily commissions, related to the leasing of our facilities are capitalized when material as incurred. Capitalized leasing costs are amortized on a straight-line basis over the remaining useful life of the respective leases. All other costs to negotiate or arrange a lease are expensed as incurred.

 

Lease-related receivables, which include accounts receivable and accrued straight-line rents receivable, are reduced for credit losses, if applicable. To date the Company’s receivables have not had any credit losses. Such amounts would be recognized as a reduction to rental and other revenues. The Company regularly evaluates the collectability of its lease-related receivables. The Company’s evaluation of collectability primarily consists of reviewing past due account balances and considering such factors as the credit quality of our tenant, historical trends of the tenant and changes in tenant payment terms. If the Company’s assumptions regarding the collectability of lease-related receivables prove incorrect, the Company could experience credit losses in excess of what was recognized in rental and other revenues.

 

The Company recognized $18,117 and $50,093 of rental and other revenues related to operating lease payments for the three and nine months ended September 30, 2019, respectively. Of these amounts $1,202 and $3,597 was for variable lease payments related to expense recoveries for the three and nine months ended September 30, 2019, respectively. The aggregate annual minimum cash to be received by the Company on the noncancelable operating leases related to its portfolio as of September 30, 2019 is as follows for the subsequent years ended December 31:

 

2019 (three months remaining)  $16,507 
2020   66,310 
2021   64,947 
2022   63,461 
2023   62,040 
Thereafter   391,576 
    Total  $664,841 

 

Information as Lessor Under ASC Topic 840 (As of and for the year ended December 31, 2018)

 

The Company adopted the provisions of ASU 2014-09 “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”) effective January 1, 2018 using the modified retrospective transition method.  Rental income from leasing arrangements is specifically excluded from the standard. The Company analyzed its remaining revenue streams and concluded there were no changes in revenue recognition with the adoption of the new standard. 

 

The Company’s operations consist of rental revenue earned from tenants under leasing arrangements which provide for minimum rent and escalations. These leases were accounted for as operating leases. For operating leases with contingent rental escalators, revenue was recorded based on the contractual cash rental payments due during the period. Revenue from leases with fixed annual rental escalators were recognized on a straight-line basis over the initial lease term, subject to a collectability assessment. If the Company determined that collectability of rents was not reasonably assured, future revenue recognition was limited to amounts contractually owed and paid, and, when appropriate, an allowance for estimated losses was established.

 

The Company consistently assessed the need for an allowance for doubtful accounts, including an allowance for operating lease straight-line rent receivables, for estimated losses resulting from tenant defaults, or the inability of tenants to make contractual rent and tenant recovery payments. The Company also monitored the liquidity and creditworthiness of its tenants and operators on a continuous basis. This evaluation considered industry and economic conditions, property performance, credit enhancements and other factors. For operating lease straight-line rent amounts, the Company’s assessment was based on amounts estimated to be recoverable over the term of the lease. As of December 31, 2018, no allowance was recorded as it was not deemed necessary.

 

The Company’s real estate assets are leased to tenants under operating leases. The minimum rental amounts under the leases were generally subject to scheduled fixed increases. The aggregate annual minimum cash to be received by the Company on its noncancelable operating leases as of December 31, 2018 were as follows:

 

2019  $50,527 
2020   51,450 
2021   49,926 
2022   48,862 
2023   47,743 
Thereafter   330,180 
    Total  $578,688 

 

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Information as Lessee Under ASC Topic 842 (As of and for the three and nine months ended September 30, 2019)

 

The Company has four facilities subject to operating ground leases with a weighted average remaining term of 24 years. Rental payments on these leases are adjusted periodically based on either the CPI or on a pre-determined schedule. The monthly payments on a pre-determined schedule are recognized on a straight-line basis over the terms of the respective leases. Changes in the CPI are not estimated as part of our measurement of straight-line rental expense. Upon initial adoption of ASC Topic 842, the Company recognized a lease liability of $2.2 million (included in “Other Liabilities”) and a related right of use asset of $2.2 million (included in “Other Assets”) on our Condensed Consolidated Balance Sheets equal to the present value of the minimum lease payments required under each ground lease. During the nine months ended September 30, 2019, the Company recorded an additional $0.1 million right of use asset and recognized an additional lease liability of $0.1 million. The Company used a weighted average discount rate of approximately 4.4%, which was derived from our assessment of the credit quality of the Company and adjusted to reflect secured borrowing, estimated yield curves and long-term spread adjustments over appropriate tenors. Some of our ground leases contain extension options and, where we determined it was reasonably certain that an extension would occur, they were included in our calculation of the right of use asset and liability. We recognized approximately $35 and $66 of ground lease expense, which was paid in cash, during the three and nine months ended September 30, 2019, respectively.

 

The following table sets forth the undiscounted cash flows of our scheduled obligations for future minimum payments on operating ground leases at September 30, 2019 and a reconciliation of those cash flows to the operating lease liability at September 30, 2019:

 

2019 (three months remaining)  $28 
2020   116 
2021   116 
2022   116 
2023   120 
Thereafter   4,476 
Total   4,972 
Discount   (2,593)
    Lease liability  $2,379 

 

Information as Lessee Under ASC Topic 840 (As of and for the year ended December 31, 2018)

 

The Company acquired an interest, as ground lessee, in the ground lease related to the Omaha and Clermont facilities at their dates of acquisition. In connection with the acquisitions of the Moline facility the Company acquired the seller’s interest, as ground lessee, in an existing ground lease that has approximately 10 years remaining in the initial term, with 12 consecutive five-year renewal options. In connection with the acquisition of the Silvis facility the Company acquired the seller’s interest, as ground lessee, in an existing ground lease that has approximately 67 years remaining in the initial term, with no renewal options.

 

The aggregate minimum cash payments to be made by the Company on these land leases as of December 31, 2018, were as follows:

 

2019  $109 
2020   109 
2021   109 
2022   109 
2023   113 
Thereafter   2,121 
    Total  $2,670 

 

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Note 9 – Rent Concentration

 

The Company’s facilities with a concentration of rental revenue of 5% or greater is as follows for the periods below:

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
Facility   2019     2018     2019     2018  
Encompass (four facilities and four locations)     10 %     11 %     10 %     12 %
Belpre     8       11       8       7  
OCOM     7       9       6       10  
Sherman     5       6       5       6  
Austin     5       6       5       7  
Aggregate of all other facilities     65       57       66       58  
     Total     100 %     100 %     100 %     100 %

 

Note 10 – Commitments and Contingencies

 

Litigation

 

The Company is not presently subject to any material litigation nor, to its knowledge, is any material litigation threatened against the Company, which if determined unfavorably to the Company, would have a material adverse effect on the Company’s financial position, results of operations, or cash flows.

 

Environmental Matters

 

The Company follows a policy of monitoring its properties for the presence of hazardous or toxic substances. While there can be no assurance that a material environmental liability does not exist at its properties, the Company is not currently aware of any environmental liability with respect to its properties that would have a material effect on its financial position, results of operations, or cash flows. Additionally, the Company is not aware of any material environmental liability or any unasserted claim or assessment with respect to an environmental liability that management believes would require additional disclosure or the recording of a loss contingency.

 

Note 11 – Subsequent Events

 

Subsequent events have been evaluated through November 7, 2019, the date the financial statements were issued.

 

Interest Rate Swaps

 

On October 3, 2019, the Company hedged its interest rate risk on the Term Loan by entering into two interest rate swaps with an aggregate notional amount of $130 million and a term of approximately five years, which effectively fixed the LIBOR component of the interest rate on a corresponding amount of the Term Loan at 1.21%.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion should be read in conjunction with our financial statements included herein, including the notes to those financial statements, included elsewhere in this Quarterly Report on Form 10-Q (this “Report”). Some of the comments we make in this section are forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, see the section below entitled “Special Note Regarding Forward-Looking Statements.” Certain risk factors may cause actual results, performance or achievements to differ materially from those expressed or implied by the following discussion. For a discussion of such risk factors, see Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2018, that was filed with the U.S. Securities and Exchange Commission (the “SEC” or the “Commission”) on March 11, 2019. Unless otherwise indicated all dollar and share amounts in the following discussion are presented in thousands.

 

Special Note Regarding Forward-Looking Statements

 

This Report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). In particular, statements pertaining to our trends, liquidity, capital resources, and the healthcare industry and healthcare real estate opportunity, among others, contain forward-looking statements. You can identify forward-looking statements by the use of forward-looking terminology including, but not limited to, “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates” or “anticipates” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans or intentions.

 

Forward-looking statements involve numerous risks and uncertainties and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise and we may not be able to realize them. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:

 

  · defaults on or non-renewal of leases by tenants;

  · decreased rental rates or increased vacancy rates, including expected rent levels on acquired properties;

  · difficulties in identifying healthcare facilities to acquire and completing such acquisitions;

  · adverse economic or real estate conditions or developments, either nationally or in the markets in which our facilities are located;

  · our failure to generate sufficient cash flows to service our outstanding obligations;

  · fluctuations in interest rates and increased operating costs;
  · our failure to effectively hedge our interest rate risk;
  · our ability to satisfy our short and long-term liquidity requirements;

  · our ability to deploy the debt and equity capital we raise;

  · our ability to raise additional equity and debt capital on terms that are attractive or at all;

  · our ability to make distributions on shares of our common and preferred stock;
  · expectations regarding the timing and/or completion of any acquisition;

  · general volatility of the market price of our common and preferred stock;

  · changes in our business or our investment or financing strategy;

  · changes in our management internalization plans;

  · our dependence upon key personnel whose continued service is not guaranteed;

  · the ability of our external manager, Inter-American Management, LLC’s (the “Advisor”), to identify, hire and retain highly qualified personnel in the future;

· the degree and nature of our competition;

  · changes in healthcare laws, governmental regulations, tax rates and similar matters;
  · changes in current healthcare and healthcare real estate trends;
  · changes in expected trends in Medicare, Medicaid and commercial insurance reimbursement trends;

  · competition for investment opportunities;

  · our failure to successfully integrate acquired healthcare facilities;
  · our expected tenant improvement expenditures;

  · changes in accounting policies generally accepted in the United States of America (“GAAP”);

  · lack of or insufficient amounts of insurance;

· other factors affecting the real estate industry generally;

 

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  · changes in the tax treatment of our distributions;

  · our failure to qualify and maintain our qualification as a real estate investment trust (“REIT”) for U.S. federal income tax purposes;
  · our ability to qualify for the safe harbors from the “100% Prohibited Transactions Tax” under the REIT rules with respect to our property dispositions; and

  · limitations imposed on our business and our ability to satisfy complex rules relating to REIT qualification for U.S. federal income tax purposes.

 

See Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2018 for further discussion of these and other risks, as well as the risks, uncertainties and other factors discussed in this Report and identified in other documents we may file with the SEC from time to time. You should carefully consider these risks before making any investment decisions in our company. New risks and uncertainties may also emerge from time to time that could materially and adversely affect us. While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We disclaim any obligation to update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events or other changes after the date of this Report, except as required by applicable law. You should not place undue reliance on any forward-looking statements that are based on information currently available to us or the third parties making the forward-looking statements.

 

 Overview

 

Global Medical REIT Inc. (the “Company,” “us,” “we,” or “our”) is an externally-managed, Maryland corporation engaged primarily in the acquisition of purpose-built healthcare facilities and the leasing of those facilities to strong healthcare systems and physician groups with leading market share. The Company is externally managed and advised by the Advisor.

  

We elected to be taxed as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2016. We conduct our business through an umbrella partnership real estate investment trust, or UPREIT, structure in which our properties are owned by wholly-owned subsidiaries of our operating partnership, Global Medical REIT L.P. (the “Operating Partnership”). Our wholly-owned subsidiary, Global Medical REIT GP, LLC, is the sole general partner of our Operating Partnership and, as of September 30, 2019, we owned 90.22% of the outstanding common operating partnership units (“OP Units”) of our Operating Partnership.

 

Executive Summary

 

The following table summarizes certain financial information during the periods presented:

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2019   2018   2019   2018 
   (in thousands, except per share and unit amounts) 
Rental revenue  $18,117   $13,995   $50,093   $38,790 
Interest expense  $4,549   $4,055   $12,707   $10,681 
General and administrative expense  $1,681   $1,395   $4,928   $4,169 
Preferred stock dividends  $1,455   $1,455   $4,366   $4,366 
                     
Net income attributable to common stockholders per share  $0.02   $0.01   $0.07   $0.03 
FFO per share and unit(1)  $0.19   $0.20   $0.54   $0.56 
AFFO per share and unit(1)  $0.19   $0.20   $0.54   $0.56 
Dividends per common share  $0.20   $0.20   $0.60   $0.60 
                     
Weighted average common shares   35,512    21,797    32,514    21,687 
Weighted average OP Units   3,143    1,857    3,144    1,615 
Weighted average LTIP Units   794    588    737    512 
   Total weighted average shares and units outstanding   39,449    24,242    36,395    23,814 

 

(1)See “—Non-GAAP Financial Measures,” for a description of our non-GAAP financial measures and a reconciliation of our non-GAAP financial measures.

 

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   As of 
   September 30, 2019   December 31, 2018 
   (dollars in thousands) 
Total investment in real estate, gross  $830,446   $647,550 
Total debt, net of unamortized discount  $401,893   $315,007 
Weighted average interest rate   4.19%   4.64%
Total equity (including noncontrolling interest)  $371,443   $299,750 
Net leasable square feet   2,595,631    2,078,915 

 

Our Properties

 

During the nine months ended September 30, 2019, we made 13 acquisitions encompassing an aggregate of 516,716 leasable square feet for an aggregate contractual purchase price of $180.7 million with annualized base rent of $13.5 million. As of September 30, 2019, our portfolio consisted of gross investment in real estate of $830.4 million, which was comprised of 63 facilities with an aggregate of approximately 2.6 million leasable square feet and approximately $64.6 million of annualized base rent.

 

Capital Raising Activity

 

During the nine months ended September 30, 2019, we raised $102.8 million of equity through a combination of common stock and OP Unit issuances at an average offering price of $9.95 per share. Our equity issuances during the nine months ended September 30, 2019 included the following:

 

·an underwritten public offering of our common stock in March 2019, which resulted in the issuance of 8.2 million shares of our common stock at a public offering price of $9.75 per share, generating gross proceeds of $80.3 million;
·at-the-market (“ATM”) offering issuances of 2.1 million shares of our common stock at an average offering price of $10.73 per share, generating gross proceeds of $22.0 million, of which 1.6 million shares were issued at an average offering price of $10.94, generating gross proceeds of $17.9 million during the three months ended September 30, 2019; and
·an OP Unit issuance of 49 thousand units with a value of $506 in connection with a facility acquisition. The per unit valuation of this OP Unit issuance was $10.30.

 

Recent Developments

 

Since September 30, 2019, we have closed and placed under contract the following properties:

 

Closed Acquisitions

 

Property  City, State  Leasable
Square Feet
  

Purchase
Price(1)

(in thousands)

  

Annualized
Base Rent(2)
(in thousands)

   Capitalization
Rate(3)
 
Steward Surgical Hospital  Beaumont, TX   84,675   $33,600   $2,574    7.7%
St. Davis Emergency Center  Bastrop, TX   28,500    11,828    917    7.8%
Eye Center of NoFL  Panama City, FL   34,624    12,900    907    7.0%
Total/Weighted Average      147,799   $58,328   $4,398    7.5%

 

(1) Represents contractual purchase price.

(2) Month of acquisition base rent, multiplied by 12.

(3) Capitalization rates are calculated based on current lease terms and do not give effect to future rent escalations.

 

Properties Under Contract

 

We have three properties under contract for an aggregate purchase price of approximately $26 million. We are currently in the due diligence period for our properties under contract. If we identify problems with one or more of these properties or the operator of the property during our due diligence review, we may not close the transaction on a timely basis or we may terminate the purchase agreement and not close the transaction.

 

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Trends Which May Influence Our Results of Operations

 

We believe the following trends may positively impact our results of operations:

 

  · Growing healthcare expenditures – According to the U.S. Department of Health and Human Services, overall healthcare expenditures are expected to grow at an average rate of 5.5% per year through 2027.  We believe the long-term growth in healthcare expenditures will correlate with the long-term leases at our properties and help maintain or increase the value of our healthcare real estate portfolio;

  · An aging population – According to the 2010 U.S. Census, the segment of the population consisting of people 65 years or older comprise the fastest growing segment of the overall U.S. population.  We believe this segment of the U.S. population will utilize many of the services provided at our healthcare facilities such as orthopedics, cardiac, gastroenterology and rehabilitation;
  · A continuing shift towards outpatient care – According to the American Hospital Association, patients are demanding more outpatient operations.  We believe this shift in patient preference from inpatient to outpatient facilities will benefit our tenants as most of our properties consist of outpatient facilities;
  · Physician practice group and hospital consolidation – We believe the trend towards physician group consolidation will serve to strengthen the credit quality of our tenants if our tenants merge or are consolidated with larger health systems;
  · A highly fragmented healthcare real estate market – Despite the move toward consolidation with respect to healthcare services, we believe the healthcare real estate market continues to be highly fragmented, which will provide us with significant acquisition opportunities;

        

We believe the following trends may negatively impact our results of operations:

 

  · Changes in third party reimbursement methods and policies – As the price of healthcare services continues to increase, we believe third-party payors, such as Medicare and commercial insurance companies, will continue to scrutinize and reduce the types of healthcare services eligible for, and the amounts of, reimbursement under their health insurance plans.  Additionally, many employer-based insurance plans have continued to increase the percentage of insurance premiums for which covered individuals are responsible.  If these trends continue, our tenants may experience lower patient volumes as well as higher patient credit risks, which could negatively impact their business as well as their ability to pay rent to us.

 

Qualification as a REIT

 

We elected to be taxed as REIT commencing with our taxable year ended December 31, 2016. Subject to a number of significant exceptions, a corporation that qualifies as a REIT generally is not subject to U.S. federal corporate income taxes on income and gains that it distributes to its stockholders, thereby reducing its corporate-level taxes. In order to qualify as a REIT, a substantial percentage of our assets must be qualifying real estate assets and a substantial percentage of our income must be rental revenue from real property or interest on mortgage loans. We believe that we have organized and have operated in such a manner as to qualify for taxation as a REIT, and we intend to continue to operate in such a manner. However, we cannot provide assurances that we will continue to operate in a manner so as to qualify or remain qualified as a REIT.

 

Critical Accounting Policies

 

The preparation of financial statements in conformity with GAAP requires us to use judgment in the application of accounting policies, including making estimates and assumptions. We base estimates on the best information available to us at the time, our experience and on various other assumptions believed to be reasonable under the circumstances. These estimates affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to various transactions or other matters had been different, it is possible that different accounting would have been applied, resulting in a different presentation of our financial statements. From time to time, we re-evaluate our estimates and assumptions. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current estimates and assumptions about matters that are inherently uncertain. Please refer to our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Commission on March 11, 2019, for further information regarding the critical accounting policies that affect our more significant estimates and judgments used in the preparation of our consolidated financial statements included in Part I, Item 1 of this Report.

 

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Consolidated Results of Operations

 

The major factor that resulted in variances in our results of operations for each revenue and expense category for the three and nine months ended September 30, 2019 compared to the same periods in 2018 was the increase in the size of our property portfolio. Our total investments in real estate, net of accumulated depreciation and amortization, was $781.7 million and $586.2 million as of September 30, 2019 and 2018, respectively.

 

Three Months Ended September 30, 2019 Compared to Three Months Ended September 30, 2018

 

   Three Months Ended September 30,     
   2019   2018   $ Change 
   (in thousands)     
Revenue            
Rental revenue  $18,117   $13,995   $4,122 
Other income   78    8    70 
    Total revenue   18,195    14,003    4,192 
                
Expenses               
General and administrative   1,681    1,395    286 
Operating expenses   1,362    941    421 
Management fees – related party   1,621    1,104    517 
Depreciation expense   5,006    3,614    1,392 
Amortization expense   1,500    953    547 
Interest expense   4,549    4,055    494 
Preacquisition fees   168    168    - 
    Total expenses   15,887    12,230    3,657 
    Net income  $2,308   $1,773   $535 

 

Revenue 

 

Total Revenue

 

Total revenue for the three months ended September 30, 2019 was $18.2 million, compared to $14.0 million for the same period in 2018, an increase of $4.2 million. The increase was primarily the result of rental revenue earned from the facilities that we acquired subsequent to September 30, 2018, as well as from the recognition of a full three months of rental revenue in 2019 from acquisitions that were completed during the three months ended September 30, 2018. Additionally, included in rental revenue is $1.2 million in revenue that was recognized from expense recoveries during the three months ended September 30, 2019, compared to $0.9 million for the same period in 2018.

  

Expenses

 

General and Administrative

 

General and administrative expenses for the three months ended September 30, 2019 were $1.7 million, compared to $1.4 million for the same period in 2018, an increase of $0.3 million. The increase was primarily related to an increase in non-cash LTIP compensation expense, which was $0.9 million for the three months ended September 30, 2019, compared to $0.7 million for the same period in 2018.

 

Operating Expenses

 

Operating expenses for the three months ended September 30, 2019 were $1.4 million, compared to $0.9 million for the same period in 2018, an increase of $0.5 million. The increase resulted from $1.2 million of reimbursable property operating expenses incurred during the three months ended September 30, 2019, compared to $0.9 million for the same period in 2018.

 

Management Fees – related party

 

Management fee expense for the three months ended September 30, 2019 was $1.6 million, compared to $1.1 million for the same period in 2018, an increase of $0.5 million. This fee is calculated based on our stockholders’ equity balance and the increase in 2019 is the result of our larger stockholders’ equity balance during the three months ended September 30, 2019 compared to the prior year, reflecting the impact of our common stock and OP Unit issuances that were completed since September 30, 2018.

 

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Depreciation Expense

 

Depreciation expense for the three months ended September 30, 2019 was $5.0 million, compared to $3.6 million for the same period in 2018, an increase of $1.4 million. The increase resulted primarily from depreciation expense incurred on the facilities that we acquired subsequent to September 30, 2018, as well as from the recognition of a full three months of depreciation expense in 2019 from acquisitions that were completed during the three months ended September 30, 2018. 

 

Amortization Expense 

 

Amortization expense for the three months ended September 30, 2019 was $1.5 million, compared to $1.0 million for the same period in 2018, an increase of $0.5 million. The increase resulted primarily from amortization expense incurred on intangible assets acquired subsequent to September 30, 2018, as well as from the recognition of a full three months of amortization expense in 2019 from intangible assets recorded during the three months ended September 30, 2018. 

 

Interest Expense

 

Interest expense for the three months ended September 30, 2019 was $4.5 million, compared to $4.1 million for the same period in 2018, an increase of $0.4 million. This increase was primarily due to both higher average borrowings during the three months ended September 30, 2019, compared to the same period last year, the proceeds of which were used to finance our property acquisitions during that time period, as well as from higher interest rates compared to the same period in 2018.

        

The weighted average interest rate of our debt for the three months ended September 30, 2019 was 4.21%. Additionally, the weighted average interest rate and term of our debt was 4.19% and 3.85 years at September 30, 2019.

 

Preacquisition Fees

 

There were $0.2 million of preacquisition fees incurred for the three months ended September 30, 2019 and September 30, 2018. Preacquisition fees for both the three months ended September 30, 2019 and 2018 represent costs associated with acquisitions that the Company did not, or does not expect to, complete and therefore were expensed.

 

Net Income

 

Net income for three months ended September 30, 2019 was $2.3 million, compared to $1.8 million of net income for the same period in 2018, an increase of $0.5 million. The increase resulted primarily from an increase in rental revenue during the three months ended September 30, 2019, partially offset by the increase in expenses for that period.

 

Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018

 

   Nine Months Ended September 30,     
   2019   2018   $ Change 
   (in thousands)     
Revenue            
Rental revenue  $50,093   $38,790   $11,303 
Other income   182    27    155 
    Total revenue   50,275    38,817    11,458 
                
Expenses               
General and administrative   4,928    4,169    759 
Operating expenses   3,826    2,726    1,100 
Management fees – related party   4,539    3,280    1,259 
Depreciation