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EX-32.2 - EXHIBIT 32.2 - Carter Validus Mission Critical REIT, Inc.a2017q110qexhibit322reiti0.htm
EX-32.1 - EXHIBIT 32.1 - Carter Validus Mission Critical REIT, Inc.a2017q110qexhibit321reiti0.htm
EX-31.2 - EXHIBIT 31.2 - Carter Validus Mission Critical REIT, Inc.a2017q110qexhibit312reiti0.htm
EX-31.1 - EXHIBIT 31.1 - Carter Validus Mission Critical REIT, Inc.a2017q110qexhibit311reiti0.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________
FORM 10-Q
___________________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
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: 000-54675
___________________________________________
cvmcrlogonewcva16.jpg
CARTER VALIDUS MISSION CRITICAL REIT, INC. 
(Exact name of registrant as specified in its charter) 
___________________________________________
Maryland
 
27-1550167
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
4890 West Kennedy Blvd., Suite 650
Tampa, FL 33609
 
(813) 287-0101
(Address of Principal Executive Offices; Zip Code)
 
(Registrant’s Telephone Number)
Not Applicable
(Former name, former address, and former fiscal year, if changed since last report)
___________________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
  
Accelerated filer
 
Non-accelerated filer
 
☒ (Do not check if a smaller reporting company)
  
Smaller reporting company
 
 
 
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for comply with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of Securities Act.    ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒
As of May 9, 2017, there were approximately 186,120,000 shares of common stock of Carter Validus Mission Critical REIT, Inc. outstanding.
 



CARTER VALIDUS MISSION CRITICAL REIT, INC.
(A Maryland Corporation)
TABLE OF CONTENTS
 
 
Page
PART I.
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 



PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements.
CARTER VALIDUS MISSION CRITICAL REIT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
(Unaudited)
March 31, 2017
 
December 31, 2016
ASSETS
Real estate:
 
 
 
Land ($4,280 and $4,280, respectively, related to VIE)
$
181,960

 
$
181,960

Buildings and improvements, less accumulated depreciation of $166,250 and $152,486, respectively ($84,149 and $84,760, respectively, related to VIE)
1,819,566

 
1,812,769

Construction in process

 
16,143

Total real estate, net ($88,429 and $89,040, respectively, related to VIE)
2,001,526

 
2,010,872

Cash and cash equivalents ($2,440 and $2,308, respectively, related to VIE)
48,467

 
42,613

Acquired intangible assets, less accumulated amortization of $57,612 and $53,372, respectively ($6,282 and $6,465, respectively, related to VIE)
174,190

 
178,430

Other assets, net ($9,185 and $8,525, respectively, related to VIE)
106,321

 
105,739

Total assets
$
2,330,504

 
$
2,337,654

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
 
 
 
Notes payable, net of deferred financing costs of $2,160 and $2,542, respectively ($51,073 and $51,283, respectively, related to VIE)
$
476,192

 
$
484,270

Credit facility, net of deferred financing costs of $1,506 and $1,789, respectively
376,494

 
356,211

Accounts payable due to affiliates ($30 and $54, respectively, related to VIE)
2,773

 
2,635

Accounts payable and other liabilities ($4,002 and $3,825, respectively, related to VIE)
38,374

 
40,196

Intangible lease liabilities, less accumulated amortization of $17,201 and $16,332, respectively ($7,774 and $8,030, respectively, related to VIE)
48,529

 
49,398

Total liabilities
942,362

 
932,710

Stockholders’ equity:
 
 
 
Preferred stock, $0.01 par value per share, 50,000,000 shares authorized; none issued and outstanding

 

Common stock, $0.01 par value per share, 300,000,000 shares authorized; 191,592,393 and 189,848,165 shares issued, respectively; 185,421,813 and 184,909,673 shares outstanding, respectively
1,854

 
1,849

Additional paid-in capital
1,630,395

 
1,625,862

Accumulated distributions in excess of earnings
(281,968
)
 
(258,878
)
Accumulated other comprehensive income
3,326

 
1,823

Total stockholders’ equity
1,353,607

 
1,370,656

Noncontrolling interests
34,535

 
34,288

Total equity
1,388,142

 
1,404,944

Total liabilities and stockholders’ equity
$
2,330,504

 
$
2,337,654

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

3


CARTER VALIDUS MISSION CRITICAL REIT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands, except share data and per share amounts)
(Unaudited)
 
Three Months Ended
March 31,
 
2017
 
2016
Revenue:
 
 
 
Rental and parking revenue
$
47,810

 
$
52,189

Tenant reimbursement revenue
3,580

 
4,321

Total revenue
51,390

 
56,510

Expenses:
 
 
 
Rental and parking expenses
7,391

 
6,639

General and administrative expenses
1,683

 
1,581

Change in fair value of contingent consideration
(1,140
)
 
120

Asset management fees
4,819

 
4,787

Depreciation and amortization
18,067

 
16,999

Total expenses
30,820

 
30,126

Income from operations
20,570

 
26,384

Other income (expense):
 
 
 
Other interest and dividend income
563

 
2,822

Interest expense, net
(8,665
)
 
(10,614
)
Provision for loan losses
(2,484
)
 

Total other expense
(10,586
)
 
(7,792
)
Net income
9,984

 
18,592

Net income attributable to noncontrolling interests in consolidated partnerships
(1,081
)
 
(928
)
Net income attributable to common stockholders
$
8,903

 
$
17,664

Other comprehensive income (loss):
 
 
 
Unrealized income (loss) on interest rate swaps, net
$
1,503

 
$
(3,863
)
Other comprehensive income (loss)
1,503

 
(3,863
)
Comprehensive income
11,487

 
14,729

Comprehensive income attributable to noncontrolling interests in consolidated partnerships
(1,081
)
 
(928
)
Comprehensive income attributable to common stockholders
$
10,406

 
$
13,801

Weighted average number of common shares outstanding:
 
 
 
Basic
185,300,384

 
181,975,405

Diluted
185,317,075

 
181,992,093

Net income per common share attributable to common stockholders:
 
 
 
Basic
$
0.05

 
$
0.10

Diluted
$
0.05

 
$
0.10

Distributions declared per common share
$
0.17

 
$
0.17

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

4


CARTER VALIDUS MISSION CRITICAL REIT, INC. 
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except for share data)
(Unaudited) 
 
Common Stock
 
Additional
Paid in
Capital
 
Accumulated
Distributions
in Excess
of Earnings
 
Accumulated
Other
Comprehensive
Income
 
Total
Stockholders’
Equity
 
Noncontrolling
Interests
 
Total
Equity
 
No. of
Shares
 
Par
Value
 
 
 
 
 
 
Balance, December 31, 2016
184,909,673

 
$
1,849

 
$
1,625,862

 
$
(258,878
)
 
$
1,823

 
$
1,370,656

 
$
34,288

 
$
1,404,944

Vesting of restricted stock

 

 
23

 

 

 
23

 

 
23

Issuance of common stock under the distribution reinvestment plan
1,744,228

 
17

 
16,604

 

 

 
16,621

 

 
16,621

Distributions to noncontrolling interests

 

 

 

 

 

 
(834
)
 
(834
)
Distributions declared to common stockholders

 

 

 
(31,993
)
 

 
(31,993
)
 

 
(31,993
)
Other offering costs

 

 
(5
)
 

 

 
(5
)
 

 
(5
)
Repurchase of common stock
(1,232,088
)
 
(12
)
 
(12,089
)
 

 

 
(12,101
)
 

 
(12,101
)
Other comprehensive income

 

 

 

 
1,503

 
1,503

 

 
1,503

Net income

 

 

 
8,903

 

 
8,903

 
1,081

 
9,984

Balance, March 31, 2017
185,421,813

 
$
1,854

 
$
1,630,395

 
$
(281,968
)
 
$
3,326

 
$
1,353,607

 
$
34,535

 
$
1,388,142

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

5


CARTER VALIDUS MISSION CRITICAL REIT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) 
(Unaudited)
 
Three Months Ended
March 31,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income
$
9,984

 
$
18,592

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
18,067

 
16,999

Amortization of deferred financing costs
941

 
1,151

Amortization of above-market leases
93

 
116

Amortization of intangible lease liabilities
(869
)
 
(975
)
Provision for doubtful accounts
7,664

 

Provision for loan losses
2,484

 

Loss on debt extinguishment

 
1,133

Straight-line rent
(3,849
)
 
(6,551
)
Stock-based compensation
23

 
23

Change in fair value of contingent consideration
(1,140
)
 
120

Changes in operating assets and liabilities:
 
 
 
Accounts payable and other liabilities
(488
)
 
(940
)
Accounts payable due to affiliates
146

 
9

Other assets
(3,437
)
 
(509
)
Net cash provided by operating activities
29,619

 
29,168

Cash flows from investing activities:
 
 
 
Capital expenditures
(4,501
)
 
(10,432
)
Real estate deposits, net

 
16

Notes receivable advances
(500
)
 
(1,619
)
Net cash used in investing activities
(5,001
)
 
(12,035
)
Cash flows from financing activities:
 
 
 
Payments on notes payable
(8,459
)
 
(34,437
)
Proceeds from credit facility
20,000

 
50,000

Payments of deferred financing costs
(1,417
)
 
(34
)
Repurchase of common stock
(12,101
)
 
(8,393
)
Offering costs
(5
)
 
(10
)
Distributions to stockholders
(15,309
)
 
(14,559
)
Payments to escrow funds
(866
)
 
(1,457
)
Collections of escrow funds
227

 
222

Distributions to noncontrolling interests in consolidated partnerships
(834
)
 
(557
)
Net cash used in financing activities
(18,764
)
 
(9,225
)
Net change in cash and cash equivalents
5,854

 
7,908

Cash and cash equivalents - Beginning of period
42,613

 
28,527

Cash and cash equivalents - End of period
$
48,467

 
$
36,435

Supplemental cash flow disclosure:
 
 
 
Interest paid, net of interest capitalized of $861 and $251, respectively
$
8,525

 
$
8,698

Supplemental disclosure of non-cash transactions:
 
 
 
Common stock issued through distribution reinvestment plan
$
16,621

 
$
17,084

Net unrealized gain (loss) on interest rate swap
$
1,503

 
$
(3,863
)
The accompanying notes are an integral part of these condensed consolidated financial statements.

6


CARTER VALIDUS MISSION CRITICAL REIT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2017
Note 1Organization and Business Operations
Carter Validus Mission Critical REIT, Inc., or the Company, a Maryland corporation, was incorporated on December 16, 2009 and elected to be taxed and currently qualifies as a real estate investment trust, or a REIT, under the Internal Revenue Code of 1986, as amended, or the Code, for federal income tax purposes. The Company was organized to acquire and operate a diversified portfolio of income-producing commercial real estate, with a focus on the data center and healthcare property sectors, net leased to creditworthy tenants, as well as to make other real estate-related investments that relate to such property types. The Company operates through two reportable segments—commercial real estate investments in data centers and healthcare. Substantially all of the Company’s business is conducted through Carter/Validus Operating Partnership, LP, a Delaware limited partnership, or the Operating Partnership. The Company is the sole general partner of the Operating Partnership. Carter/Validus Advisors, LLC, or the Advisor, the Company’s affiliated advisor, is the sole limited partner of the Operating Partnership.
As of March 31, 2017, the Company owned 49 real estate investments (including one real estate investment owned through a consolidated partnership), consisting of 84 properties located in 46 metropolitan statistical areas, or MSAs.
The Company ceased offering shares of common stock in its initial public offering, or the Offering, on June 6, 2014. At the completion of the Offering, the Company raised gross proceeds of approximately $1,716,046,000 (including shares of common stock issued pursuant to a distribution reinvestment plan, or the DRIP). The Company will continue to issue shares of common stock under the DRIP Offering until such time as the Company sells all of the shares registered for sale under the DRIP Offering, unless the Company files a new registration statement with the Securities and Exchange Commission, or the SEC, or the DRIP Offering is terminated by the Company’s board of directors. We refer to our DRIP Offering and Offering together as the "Offerings."
Effective January 1, 2017, shares are offered pursuant to the DRIP Offering for a price per share of $9.519, which is the greater of (i) 95% of the fair market value per share as determined by our board of directors as of September 30, 2016 and (ii) $9.50 per share, until such time as our board of directors determines a new estimated share value.
As of March 31, 2017, the Company had issued approximately 191,535,000 shares of common stock in the Offerings for gross proceeds of $1,896,389,000, before share repurchases of $59,963,000 and offering costs, selling commissions and dealer manager fees of $174,798,000.
Except as the context otherwise requires, “we,” “our,” “us,” and the “Company” refer to Carter Validus Mission Critical REIT, Inc., the Operating Partnership, all majority-owned subsidiaries and controlled subsidiaries.

7


Note 2Summary of Significant Accounting Policies
The summary of significant accounting policies presented below is designed to assist in understanding the Company’s condensed consolidated financial statements. Such condensed consolidated financial statements and the accompanying notes thereto are the representation of management. The accompanying condensed consolidated unaudited financial statements of the Company have been prepared in accordance with the accounting principles generally accepted in the United States, or GAAP, for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal and recurring nature considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ended December 31, 2017.
The condensed consolidated balance sheet at December 31, 2016 has been derived from the audited consolidated financial statements at that date but does not include all of the information and notes required by GAAP for complete financial statements. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s audited consolidated financial statements as of and for the year ended December 31, 2016 and related notes thereto set forth in the Company’s Annual Report on Form 10-K, filed with the SEC on March 30, 2017.
Principles of Consolidation and Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of the Company, the Operating Partnership, all majority-owned subsidiaries and controlled subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with GAAP necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. These estimates are made and evaluated on an ongoing basis using information that is currently available as well as various other assumptions believed to be reasonable under the circumstances. Actual results could differ from those estimates.
Allowance for Uncollectible Accounts
Tenant receivables and unbilled deferred rent receivables are carried net of the allowances for uncollectible amounts. An allowance will be maintained for estimated losses resulting from the inability of certain tenants to meet the contractual obligations under their lease agreements. The Company also maintains an allowance for deferred rent receivables arising from the straight-lining of rents. The Company’s determination of the adequacy of these allowances is based primarily upon evaluations of historical loss experience, the tenant’s financial condition, security deposits, letters of credit, lease guarantees and current economic conditions and other relevant factors. For the three months ended March 31, 2017, the Company recorded $7,664,000 in provision for doubtful accounts related to reserves for rental and parking revenue and tenant reimbursement revenue, which are recognized in the accompanying condensed consolidated statements of comprehensive income as a deduction from rental and parking revenue and tenant reimbursement revenue. The provision for doubtful accounts is the result of two tenants experiencing financial difficulties, which the Company believes will result in material new lease terms.
Notes Receivable
Notes receivable are reported at their outstanding principal balance, net of any unearned income, unamortized deferred fees and costs and allowances for doubtful accounts. The unamortized deferred fees and costs are amortized over the life of the notes receivable, as applicable, and recorded in other interest and dividend income in the accompanying condensed consolidated statements of comprehensive income.
The Company evaluates the collectability of both interest and principal on each note receivable to determine whether it is collectible primarily through the evaluation of credit quality indicators, such as the tenant's financial condition, evaluations of historical loss experience, current economic conditions and other relevant factors. Impairment occurs when it is determined probable that the Company will not be able to collect principal and interest amounts due according to the contractual terms of the note. Evaluating a note receivable for potential impairment requires management to exercise significant judgment. As of March 31, 2017 and December 31, 2016, the aggregate balance on the Company's notes receivable before allowances for loan losses was $20,275,000 and $19,422,000, respectively. For the three months ended March 31, 2017 the Company recorded $2,484,000 as an allowance to reduce the carrying value of two notes receivable and accrued interest in provision for loan losses in the accompanying condensed consolidated financial statements.

8


Concentration of Credit Risk and Significant Leases
As of March 31, 2017, the Company had cash on deposit, including restricted cash, in certain financial institutions that had deposits in excess of current federally insured levels; however, the Company has not experienced any losses in such accounts. The Company limits its cash investments to financial institutions with high credit standings; therefore, the Company believes it is not exposed to any significant credit risk on its cash deposits. To date, the Company has experienced no loss of or lack of access to cash in its accounts.
As of March 31, 2017, the Company owned real estate investments in 46 MSAs, (including one real estate investment owned through a consolidated partnership), two of which accounted for 10.0% or more of contractual rental revenue. Real estate investments located in the Dallas-Ft. Worth-Arlington, Texas MSA and the Chicago-Naperville-Elgin, Illinois-Indiana-Wisconsin MSA accounted for an aggregate of 12.2% and11.8%, respectively, of contractual rental revenue for the three months ended March 31, 2017.
As of March 31, 2017, the Company had one exposure to tenant concentration that accounted for 10.0% or more of rental revenue. The leases with AT&T Services, Inc. accounted for 11.7% of rental revenue for the three months ended March 31, 2017.
Share Repurchase Program
The Company’s share repurchase program allows for repurchases of shares of the Company’s common stock when certain criteria are met. The share repurchase program provides that all repurchases during any calendar year, including those redeemable upon death or a qualifying disability of a stockholder, are limited to those that can be funded with equivalent reinvestments pursuant to the DRIP Offerings during the prior calendar year and other operating funds, if any, as the board of directors, in its sole discretion, may reserve for this purpose.
Repurchases of shares of the Company’s common stock are at the sole discretion of the Company’s board of directors. In addition, the Company’s board of directors, in its sole discretion, may amend, suspend, reduce, terminate or otherwise change the share repurchase program upon 30 days' prior notice to the Company’s stockholders for any reason it deems appropriate. The share repurchase program provides that the Company will limit the number of shares repurchased during any calendar year to 5.0% of the number of shares of common stock outstanding as of December 31st of the previous calendar year.
During the three months ended March 31, 2017, the Company received valid repurchase requests related to approximately 1,232,000 shares of common stock, all of which were repurchased in full for an aggregate purchase price of approximately $12,101,000 (an average of $9.82 per share). During the three months ended March 31, 2016, the Company received valid repurchase requests related to approximately 871,000 shares of common stock, all of which were repurchased in full for an aggregate purchase price of approximately $8,393,000 (an average of $9.64 per share).
Earnings Per Share
Basic earnings per share for all periods presented are computed by dividing net income attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Shares of non-vested restricted common stock give rise to potentially dilutive shares of common stock. Diluted earnings per share are computed based on the weighted average number of shares outstanding and all potentially dilutive securities. For the three months ended March 31, 2017 and 2016, diluted earnings per share reflected the effect of approximately 17,000 for each period of non-vested shares of restricted common stock that were outstanding as of such period.
Recently Issued Accounting Pronouncements
On May 28, 2014, the Financial Accounting Standards Board, or the FASB, issued ASU 2014-09, Revenue from Contracts with Customers, or ASU 2014-09. The objective of ASU 2014-09 is to clarify the principles for recognizing revenue and to develop a common revenue standard for GAAP. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle, which may require more judgment and estimates within the revenue recognition process than are required under existing GAAP. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606) Deferral of the Effective Date, or ASU 2015-14. ASU 2015-14 defers the effective date of ASU 2014-09 by one year to fiscal years and interim periods beginning after December 15, 2017. Early adoption is permitted as of the original effective date, which was annual reporting periods beginning after December 15, 2016, and the interim periods within that year. On March 17, 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers Principal versus Agent Considerations (Reporting Revenue Gross versus Net), or ASU 2016-08, which clarifies the implementation guidance on principal versus agent considerations in the new revenue recognition standard. ASU 2016-08 clarifies that an entity is a principal when it controls the specified good or service before that good or service is transferred to the customer, and is an agent when it does not control the specified good or service before it is transferred to the customer. The effective date and transition of this update is the same as

9


the effective date and transition of ASU 2015-14. The Company believes the adoption of ASUs 2014-09 and 2016-08 will not have a material impact on the Company’s consolidated financial statements, but may result in additional disclosures.
On February 25, 2016, the FASB issued ASU 2016-02, Leases, or ASU 2016-02. ASU 2016-02 establishes the principles to increase the transparency about the assets and liabilities arising from leases. ASU 2016-02 results in a more faithful representation of the rights and obligations arising from leases by requiring lessees to recognize the lease assets and lease liabilities that arise from leases in the statement of financial position and to disclose qualitative and quantitative information about lease transactions and aligns lessor accounting and sale leaseback transactions guidance more closely to comparable guidance in Topic 606, Revenue from Contracts with Customers, and Topic 610, Other Income. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is in process of evaluating the impact ASU 2016-02 will have on the Company’s consolidated financial statements.
On June 16, 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses, or ASU 2016-13. ASU 2016-13 requires more timely recording of credit losses on loans and other financial instruments that are not accounted for at fair value through net income, including loans held for investment, held-to-maturity debt securities, trade and other receivables, net investment in leases and other such commitments. ASU 2016-13 requires that financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The amendments in ASU 2016-13 require the Company to measure all expected credit losses based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the financial assets and eliminates the “incurred loss” methodology in current GAAP. ASU 2016-13 is effective for fiscal years, and interim periods within, beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within, beginning after December 15, 2018. The Company is in the process of evaluating the impact ASU 2016-13 will have on the Company’s consolidated financial statements.
On November 17, 2016, the FASB issued ASU 2016-18, Restricted Cash, or ASU 2016-18. ASU 2016-18 requires that a statement of cash flows explain the change during a reporting period in the total of cash, cash equivalents, and amounts generally described as restricted cash and restricted cash equivalents. This ASU states that transfers between cash, cash equivalents, and restricted cash are not part of the entity’s operating, investing, and financing activities. Therefore, restricted cash should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. This ASU should be applied using a retrospective transition method to each period presented. The Company is in the process of evaluating the impact ASU 2016-18 will have on the Company’s consolidated statements of cash flows.
On January 5, 2017, the Financial Accounting Standards Board, or the FASB, issued Accounting Standards Update, or ASU, 2017-01, Business Combinations, or ASU 2017-01. ASU 2017-01 clarifies the definition of a business. The objective of ASU 2017-01 is to add further guidance that assists entities in evaluating whether a transaction will be accounted for as an acquisition of an asset or a business. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If so, the set of transferred asset and activities is not a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs. The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those years. Early adoption is permitted using a prospective transition method. The Company adopted ASU 2017-01 effective October 1, 2016.
On February 23, 2017, the FASB issued ASU 2017-05, Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets, or ASU 2017-05. ASU 2017-05 clarifies the scope of asset derecognition guidance and accounting for partial sales of nonfinancial assets. Partial sales of nonfinancial assets are common in the real estate industry and include transactions in which the seller retains an equity interest in the entity that owns the assets or has an equity interest in the buyer. ASU 2017-05 is effective for fiscal years beginning after December 15, 2017, including interim reporting periods within those fiscal years. Early adoption is permitted. The Company is in process of evaluating the impact ASU 2017-05 will have on the Company’s condensed consolidated financial statements.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current financial statement presentation, with no effect on the Company’s condensed consolidated financial position or results of operations.

10


Note 3Acquired Intangible Assets, Net
Acquired intangible assets, net, consisted of the following as of March 31, 2017 and December 31, 2016 (amounts in thousands, except weighted average life amounts):
 
March 31, 2017
 
December 31, 2016
In-place leases, net of accumulated amortization of $55,984 and $51,837, respectively (with a weighted average remaining life of 12.7 years and 12.9 years, respectively)
$
168,644

 
$
172,791

Above-market leases, net of accumulated amortization of $1,383 and $1,303, respectively (with a weighted average remaining life of 10.0 years and 10.3 years, respectively)
2,977

 
3,057

Ground lease interest, net of accumulated amortization of $245 and $232, respectively (with a weighted average remaining life of 59.3 years and 59.5 years, respectively)
2,569

 
2,582

 
$
174,190

 
$
178,430

The aggregate weighted average remaining life of the acquired intangible assets was 13.3 years and 13.5 years as of March 31, 2017 and December 31, 2016, respectively.
Amortization of the acquired intangible assets for the three months ended March 31, 2017 and 2016 was $4,240,000 and $4,346,000, respectively. Amortization of the above-market leases is recorded as an adjustment to rental and parking revenue, amortization expense for the in-place leases is included in depreciation and amortization and amortization expense for the ground lease interest is included in rental and parking expenses in the accompanying condensed consolidated statements of comprehensive income.
Note 4Intangible Lease Liabilities, Net
Intangible lease liabilities, net, consisted of the following as of March 31, 2017 and December 31, 2016 (amounts in thousands, except weighted average life amounts):
 
March 31, 2017
 
December 31, 2016
Below-market leases, net of accumulated amortization of $16,869 and $16,031, respectively (with a weighted average remaining life of 16.9 years and 17.1 years, respectively)
$
43,536

 
$
44,374

Ground leasehold liabilities, net of accumulated amortization of $332 and $301, respectively (with a weighted average remaining life of 42.0 years and 42.2 years, respectively)
4,993

 
5,024

 
$
48,529

 
$
49,398

The aggregate weighted average remaining life of intangible lease liabilities was 19.5 years and 19.6 years as of March 31, 2017 and December 31, 2016, respectively.
Amortization of the intangible lease liabilities for the three months ended March 31, 2017 and 2016 was $869,000 and $975,000, respectively. Amortization of below-market leases is recorded as an adjustment to rental and parking revenue and amortization expense of ground leasehold liabilities is included in rental and parking expenses in the accompanying condensed consolidated statements of comprehensive income.

11


Note 5Other Assets, Net
Other assets, net consisted of the following as of March 31, 2017 and December 31, 2016 (amounts in thousands):
 
March 31, 2017
 
December 31, 2016
Deferred financing costs related to the revolver portion of the unsecured credit facility, net of accumulated amortization of $6,113 and $5,833, respectively
$
2,017

 
$
877

Lease commissions, net of accumulated amortization of $698 and $557, respectively
5,019

 
4,869

Investments in unconsolidated partnerships
119

 
113

Tenant receivables, net of allowances for doubtful accounts of $13,671 and $6,007, respectively
5,808

 
10,475

Notes receivable, net of allowances for loan losses of $6,778 and $4,294, respectively
13,497

 
15,128

Real estate-related notes receivable
514

 
514

Straight-line rent receivable
57,843

 
53,545

Restricted cash held in escrow
14,521

 
13,882

Restricted cash
1,285

 
1,110

Derivative assets
3,900

 
3,070

Prepaid and other assets
1,798

 
2,156

 
$
106,321

 
$
105,739

Note 6Accounts Payable and Other Liabilities
Accounts payable and other liabilities, as of March 31, 2017 and December 31, 2016, were comprised of the following (amounts in thousands):
 
March 31, 2017
 
December 31, 2016
Accounts payable and accrued expenses
$
7,286

 
$
7,200

Accrued interest expense
2,901

 
2,855

Accrued property taxes
2,870

 
4,277

Contingent consideration obligations
4,500

 
5,640

Distributions payable to stockholders
11,032

 
10,968

Tenant deposits
1,039

 
1,039

Deferred rental income
8,172

 
6,970

Derivative liabilities
574

 
1,247

 
$
38,374

 
$
40,196


12


Note 7Notes Payable and Unsecured Credit Facility
The Company's debt outstanding as of March 31, 2017 and December 31, 2016 consisted of the following (amounts in thousands):
 
March 31, 2017
 
December 31, 2016
Notes payable:
 
 
 
Fixed rate notes payable
$
108,472

 
$
114,783

Variable rate notes payable fixed through interest rate swaps
328,643

 
330,425

Variable rate notes payable
41,237

 
41,604

Total notes payable, principal amount outstanding
478,352

 
486,812

Unamortized deferred financing costs related to notes payable
(2,160
)
 
(2,542
)
Total notes payable, net of deferred financing costs
476,192

 
484,270

Unsecured credit facility:
 
 
 
Revolving line of credit
168,000

 
148,000

Term loan
210,000

 
210,000

Total unsecured credit facility, principal amount outstanding
378,000

 
358,000

Unamortized deferred financing costs related to the term loan of the unsecured credit facility
(1,506
)
 
(1,789
)
Total unsecured credit facility, net of deferred financing costs
376,494

 
356,211

Total debt outstanding
$
852,686

 
$
840,481

Significant debt activity since December 31, 2016, excluding scheduled principal payments, includes:
On January 31, 2017, the Operating Partnership and certain of the Company’s subsidiaries entered into an amendment related to the unsecured credit facility to extend the maturity date and modify the extension options of the revolving line of credit portion of the unsecured credit facility. In connection with the amendment to the unsecured credit facility, the maturity date of the revolving line of credit was changed from May 28, 2017 to May 28, 2018, subject to the Operating Partnership's right to two 12-month extension periods (the Operating Partnership previously had a right to one 12-month extension period).
On February 10, 2017 the Company paid off its debt in connection with one of the Company's notes payable, the maturity date of which was February 10, 2017, with an outstanding principal balance of $5,645,000 at the time of repayment.
During the three months ended March 31, 2017 the Company made a draw of $20,000,000 on its unsecured credit facility.
As of March 31, 2017, the Company had a total unencumbered pool availability under the unsecured credit facility of $514,575,000 and an aggregate outstanding principal balance of $378,000,000. As of March 31, 2017, $136,575,000 remained available to be drawn on the unsecured credit facility.

13


The principal payments due on the notes payable and unsecured credit facility for the nine months ending December 31, 2017 and for each of the next four years ending December 31 and thereafter, are as follows (amounts in thousands):
Year
 
Amount
 
Nine months ending December 31, 2017
 
$
182,535

(1) 
2018
 
317,008

 
2019
 
170,647

 
2020
 
136,160

 
2021
 
1,239

 
Thereafter
 
48,763

 
 
 
$
856,352

 
(1)
Of this amount, $105,850,000 relates to one loan agreement with a maturity date of August 21, 2017, subject to the Company's right to a two-year extension and $18,707,000 relates to one loan agreement, the maturity date of which is October 11, 2017, subject to the Company's right to two one-year extensions. The Company may refinance these loan agreements or exercise the extension options depending upon refinancing terms available at the time. In addition, $51,161,000 relates to three loan agreements of which the Company may elect to add to the unencumbered pool of the unsecured credit facility.
Note 8Related-Party Transactions and Arrangements
The Company pays to the Advisor 2.0% of the contract purchase price of each property or asset acquired, 2.0% of the cost of development/redevelopment projects, other than the initial acquisition of the property and 2.0% of the amount advanced with respect to a mortgage loan. For the three months ended March 31, 2017 and 2016, the Company did not incur acquisition fees to the Advisor or its affiliates related to investments in real estate.
The Company pays the Advisor an annual asset management fee of 0.85% of the aggregate asset value plus costs and expenses incurred by the Advisor in providing asset management services. The fee is payable monthly in an amount equal to 0.07083% of the aggregate asset value as of the last day of the immediately preceding month. For the three months ended March 31, 2017 and 2016, the Company incurred $4,819,000 and $4,787,000, respectively, in asset management fees to the Advisor.
The Company reimburses the Advisor for all expenses it paid or incurred in connection with the services provided to the Company, subject to certain limitations. The Company will not reimburse the Advisor for personnel costs in connection with services for which the Advisor receives an acquisition and advisory fee or a disposition fee. For the three months ended March 31, 2017 and 2016, the Advisor allocated $455,000 and $428,000, respectively, in operating expenses incurred on the Company’s behalf.
The Company has no direct employees. The employees of the Advisor and other affiliates provide services to the Company related to acquisitions, property management, asset management, accounting, investor relations, and all other administrative services. If the Advisor or its affiliates provides a substantial amount of services, as determined by a majority of the Company’s independent directors, in connection with the sale of one or more properties, the Company will pay the Advisor a disposition fee up to the lesser of 1.0% of the contract sales price and one-half of the brokerage commission paid if a third party broker is involved. In no event will the combined real estate commission paid to the Advisor, its affiliates and unaffiliated third parties exceed 6.0% of the contract sales price. Notwithstanding the terms of the advisory agreement, the Advisor agreed to receive a reduced disposition fee payable to the Advisor or its affiliates in the event of a disposition of all or substantially all of the assets of the Company, a sale of the Company, or a merger with a change of control of the Company, of up to the lesser of 50% of the fees paid in the aggregate to third party investment bankers for such transaction, not to exceed 0.5% of the transaction price. The disposition fee is otherwise payable in accordance with the advisory agreement. This reduction in the disposition fee would not impact a disposition fee paid in the event of a sale of an individual property or portfolio of properties. The reduced disposition fee in such situations was approved by the Company's board of directors on May 5, 2016. In addition, after investors have received a return on their net capital contributions and an 8.0% cumulative non-compounded annual return, then the Advisor is entitled to receive 15.0% of the remaining net sale proceeds. As of March 31, 2017, the Company has not incurred a disposition fee or a subordinated participation in net sale proceeds to the Advisor or its affiliates.

14


Upon listing of the Company’s common stock on a national securities exchange, the Company will pay the Advisor a subordinated incentive listing fee equal to 15.0% of the amount by which the market value of the Company’s outstanding stock plus all distributions paid by the Company prior to listing exceeds the sum of the total amount of capital raised from investors and the amount of cash flow necessary to generate an 8.0% cumulative, non-compounded annual return to investors. As of March 31, 2017, the Company has not incurred a subordinated incentive listing fee.
Upon termination or non-renewal of the Advisory Agreement, with or without cause, the Advisor will be entitled to receive distributions from the Operating Partnership equal to 15.0% of the amount by which the sum of the Company’s adjusted market value plus distributions exceeds the sum of the aggregate capital contributed by investors plus an amount equal to an annual 8.0% cumulative, non-compounded return to investors. In addition, the Advisor may elect to defer its right to receive a subordinated distribution upon termination until either shares of the Company’s common stock are listed and traded on a national securities exchange or another liquidity event occurs. As of March 31, 2017, the Company has not incurred any subordinated termination fees to the Advisor or its affiliates.
The Company pays Carter Validus Real Estate Management Services, LLC, or the Property Manager, leasing and property management fees for the Company’s properties. Such fees equal 3.0% of monthly gross revenues from single-tenant properties and 4.0% of monthly gross revenues from multi-tenant properties. The Company will reimburse the Property Manager and its affiliates for property-level expenses that any of them pay or incur on the Company’s behalf, including salaries, bonuses and benefits of persons employed by the Property Manager and its affiliates, except for the salaries, bonuses and benefits of persons who also serve as one of the Company’s executive officers. The Property Manager and its affiliates may subcontract the performance of their duties to third parties and pay all or a portion of the property management fee to the third parties with whom they contract for these services. If the Company contracts directly with third parties for such services at customary market fees, the Company may pay the Property Manager an oversight fee equal to 1.0% of the gross revenues of the property managed. In no event will the Company pay the Property Manager, the Advisor or its affiliates both a property management fee and an oversight fee with respect to any particular property. The Company will pay the Property Manager a separate fee for the one-time initial rent-up, lease renewals or leasing-up of newly constructed properties. For the three months ended March 31, 2017 and 2016, the Company incurred $1,432,000 and $1,287,000, respectively, in property management fees to the Property Manager, which are recorded in rental and parking expenses in the accompanying condensed consolidated statements of comprehensive income. For the three months ended March 31, 2017 the Company incurred $277,000 in leasing commissions to the Property Manager. Leasing commission fees are capitalized in other assets, net in the accompanying condensed consolidated balance sheets.
For acting as general contractor and/or construction manager to supervise or coordinate projects or to provide major repairs or rehabilitation on our properties, the Company may pay the Property Manager up to 5.0% of the cost of the projects, repairs and/or rehabilitation, as applicable, or construction management fees. For the three months ended March 31, 2017 the Company incurred $91,000 in construction management fees to the Property Manager. Construction management fees are capitalized in buildings and improvements in the accompanying condensed consolidated balance sheets.
Accounts Payable Due to Affiliates
The following amounts were due to affiliates as of March 31, 2017 and December 31, 2016 (amounts in thousands):
Entity
 
Fee
 
March 31, 2017
 
December 31, 2016
Carter/Validus Advisors, LLC and its affiliates
 
Asset management fees
 
$
1,608

 
$
1,604

Carter Validus Real Estate Management Services, LLC
 
Property management fees
 
908

 
791

Carter/Validus Advisors, LLC and its affiliates
 
General, administrative and other costs
 
199

 
174

Carter Validus Real Estate Management Services, LLC
 
Construction management fees
 
58

 
66

 
 
 
 
$
2,773

 
$
2,635


15


Note 9Segment Reporting
Management reviews the performance of individual properties and aggregates individual properties based on operating criteria into two reportable segments—commercial real estate investments in data centers and healthcare—and makes operating decisions based on these two reportable segments. The Company’s commercial real estate investments in data centers and healthcare are based on certain underwriting assumptions and operating criteria, which are different for data centers and healthcare. There were no intersegment sales or transfers during the three months ended March 31, 2017 and 2016.
The Company evaluates performance based on net operating income of the individual properties in each segment. Net operating income, a non-GAAP financial measure, is defined as total revenues, less rental and parking expenses, which excludes depreciation and amortization, general and administrative expenses, asset management fees, change in fair value of contingent consideration, interest expense, net, provision for loan losses and other interest and dividend income. The Company believes that segment net operating income serves as a useful supplement to net income because it allows investors and management to measure unlevered property-level operating results and to compare operating results to the operating results of other real estate companies between periods on a consistent basis. Segment net operating income should not be considered as an alternative to net income determined in accordance with GAAP as an indicator of financial performance, and accordingly, the Company believes that in order to facilitate a clear understanding of the consolidated historical operating results, segment net operating income should be examined in conjunction with net income as presented in the accompanying condensed consolidated financial statements and data included elsewhere in this Quarterly Report on Form 10-Q.
Non-segment assets primarily consist of corporate assets, including cash and cash equivalents, real estate and escrow deposits, deferred financing costs attributable to the revolving line of credit portion of the Company's unsecured credit facility, real estate-related notes receivable and other assets not attributable to individual properties.
Summary information for the reportable segments during the three months ended March 31, 2017 and 2016, is as follows (amounts in thousands):
 
Data
Centers
 
Healthcare
 
Three Months Ended
March 31, 2017
Revenue:
 
 
 
 
 
Rental, parking and tenant reimbursement revenue
$
29,694

 
$
21,696

 
$
51,390

Expenses:
 
 
 
 
 
Rental and parking expenses
(4,784
)
 
(2,607
)
 
(7,391
)
Segment net operating income
$
24,910

 
$
19,089

 
43,999

Expenses:
 
 
 
 
 
General and administrative expenses
 
 
 
 
(1,683
)
Change in fair value of contingent consideration
 
 
 
 
1,140

Asset management fees
 
 
 
 
(4,819
)
Depreciation and amortization
 
 
 
 
(18,067
)
Income from operations
 
 
 
 
20,570

Other income (expense):
 
 
 
 
 
Other interest and dividend income
 
 
 
 
563

Interest expense, net
 
 
 
 
(8,665
)
Provision for loan losses
 
 
 
 
(2,484
)
Net income
 
 
 
 
$
9,984


16


 
Data
Centers
 
Healthcare
 
Three Months Ended
March 31, 2016
Revenue:
 
 
 
 
 
Rental, parking and tenant reimbursement revenue
$
28,662

 
$
27,848

 
$
56,510

Expenses:
 
 
 
 
 
Rental and parking expenses
(4,823
)
 
(1,816
)
 
(6,639
)
Segment net operating income
$
23,839

 
$
26,032

 
49,871

Expenses:
 
 
 
 
 
General and administrative expenses
 
 
 
 
(1,581
)
Change in fair value of contingent consideration
 
 
 
 
(120
)
Asset management fees
 
 
 
 
(4,787
)
Depreciation and amortization
 
 
 
 
(16,999
)
Income from operations
 
 
 
 
26,384

Other income (expense):
 
 
 
 
 
Other interest and dividend income
 
 
 
 
2,822

Interest expense, net
 
 
 
 
(10,614
)
Net income
 
 
 
 
$
18,592

Assets by each reportable segment as of March 31, 2017 and December 31, 2016 are as follows (amounts in thousands):
 
March 31, 2017
 
December 31, 2016
Assets by segment:
 
 
 
Data centers
$
1,094,095

 
$
1,102,550

Healthcare
1,185,575

 
1,190,087

All other
50,834

 
45,017

Total assets
$
2,330,504

 
$
2,337,654

Capital additions by reportable segments for the three months ended March 31, 2017 and 2016 are as follows (amounts in thousands):
 
Three Months Ended
March 31,
 
2017
 
2016
Capital additions by segment:
 
 
 
Data centers
$
58

 
$
182

Healthcare
4,443

 
10,250

Total capital additions
$
4,501

 
$
10,432


17


Note 10Future Minimum Rent
Rental Income
The Company’s real estate assets are leased to tenants under operating leases with varying terms. The leases frequently have provisions to extend the lease agreements. The Company retains substantially all of the risks and benefits of ownership of the real estate assets leased to tenants.
The future minimum rent to be received from the Company’s investments in real estate assets under non-cancelable operating leases, including optional renewal periods for which exercise is reasonably assured, for the nine months ending December 31, 2017 and for each of the next four years ending December 31 and thereafter, are as follows (amounts in thousands):
Year
 
Amount
Nine months ending December 31, 2017
 
$
138,908

2018
 
188,689

2019
 
191,957

2020
 
192,829

2021
 
187,931

Thereafter
 
1,378,068

 
 
$
2,278,382

Rental Expense
The Company has ground lease obligations that generally require fixed annual rental payments and may also include escalation clauses and renewal options.
The future minimum rent obligations under non-cancelable ground leases for the nine months ending December 31, 2017 and for each of the next four years ended December 31 and thereafter, are as follows (amounts in thousands):
Year
 
Amount
Nine months ending December 31, 2017
 
$
525

2018
 
702

2019
 
746

2020
 
746

2021
 
753

Thereafter
 
37,083

 
 
$
40,555

Note 11Fair Value
Notes payable – Fixed Rate—The estimated fair value of notes payable – fixed rate measured using quoted prices and observable inputs from similar liabilities (Level 2) was approximately $109,586,000 and $116,402,000 as of March 31, 2017 and December 31, 2016, respectively, as compared to the outstanding principal of $108,472,000 and $114,783,000 as of March 31, 2017 and December 31, 2016, respectively. The estimated fair value of notes payable – variable rate fixed through interest rate swap agreements (Level 2) was approximately $326,393,000 and $328,512,000 as of March 31, 2017 and December 31, 2016, respectively, as compared to the outstanding principal of $328,643,000 and $330,425,000 as of March 31, 2017 and December 31, 2016, respectively.
Notes payable – Variable—The outstanding principal of the notes payable – variable was $41,237,000 and $41,604,000 as of March 31, 2017 and December 31, 2016, respectively, which approximated its fair value. The fair value of the Company's variable rate notes payable is estimated based on the interest rates currently offered to the Company by financial institutions.
Unsecured credit facility—The outstanding principal balance of the unsecured credit facility – variable was $168,000,000 and $148,000,000, which approximated its fair value, as of March 31, 2017 and December 31, 2016, respectively. The estimated fair value of the unsecured credit facility – variable rate fixed through interest rate swap agreements (Level 2) was approximately $204,591,000 and $203,055,000 as of March 31, 2017 and December 31, 2016, respectively, as compared to the outstanding principal of $210,000,000 and $210,000,000 as of March 31, 2017 and December 31, 2016, respectively.

18


Notes receivable—The outstanding principal balance of the notes receivable approximated the fair value as of March 31, 2017. The fair value of the Company’s notes receivable is estimated using significant unobservable inputs not based on market activity, but rather through particular valuation techniques (Level 3). The fair value was measured based on the income approach valuation methodology, which requires certain judgments to be made by management.
Contingent consideration—The Company has a contingent consideration obligation to pay a former owner in conjunction with a certain acquisition if specified future operational objectives are met over future reporting periods. Liabilities for contingent consideration will be measured at fair value each reporting period, with the acquisition-date fair value included as part of the consideration transferred, and subsequent changes in fair value recorded in earnings as change in fair value of contingent consideration.
The estimated fair value of the contingent consideration was $4,500,000 and $5,640,000 as of March 31, 2017 and December 31, 2016, respectively, which is reported in the accompanying condensed consolidated balance sheets in accounts payable and other liabilities. The Company uses an income approach to value the contingent consideration liability, which is determined based on the present value of probability-weighted future cash flows. The significant inputs to the discounted cash flow model were the discount rate and weighted probability scenarios. The Company has classified the contingent consideration liability as Level 3 of the fair value hierarchy due to the lack of relevant observable market data over fair value inputs such as probability-weighting for payment outcomes.
Increases in the assessed likelihood of a high payout under a contingent consideration arrangement contributes to increases in the fair value of the related liability. Conversely, decreases in the assessed likelihood of a higher payout under a contingent consideration arrangement contributes to decreases in the fair value of the related liability. Changes in assumptions could have an impact on the payout of the contingent consideration arrangement with a maximum payout of $8,450,000 and a minimum payout of $0 as of March 31, 2017.
Derivative instruments— Considerable judgment is necessary to develop estimated fair values of financial instruments. Accordingly, the estimates presented herein are not necessarily indicative of the amount the Company could realize, or be liable for, on disposition of the financial instruments. The Company has determined that the majority of the inputs used to value its interest rate swaps fall within Level 2 of the fair value hierarchy. The credit valuation adjustments associated with these instruments utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by the Company and the respective counterparty. However, as of March 31, 2017, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions, and has determined that the credit valuation adjustments are not significant to the overall valuation of its interest rate swaps. As a result, the Company determined that its interest rate swaps valuation in its entirety is classified in Level 2 of the fair value hierarchy. See Note 12—"Derivative Instruments and Hedging Activities" for a further discussion of the Company’s derivative instruments.

19


The following table shows the fair value of the Company’s financial assets and liabilities that are required to be measured at fair value on a recurring basis as of March 31, 2017 and December 31, 2016 (amounts in thousands):
 
March 31, 2017
 
Fair Value Hierarchy
 
 
 
Quoted Prices in Active
Markets for Identical
Assets (Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs (Level 3)
 
Total Fair
Value
Assets:
 
 
 
 
 
 
 
Derivative assets
$

 
$
3,900

 
$

 
$
3,900

Total assets at fair value
$

 
$
3,900

 
$

 
$
3,900

Liabilities:
 
 
 
 
 
 
 
Derivative liabilities
$

 
$
(574
)
 
$

 
$
(574
)
Contingent consideration obligation

 

 
(4,500
)
 
(4,500
)
Total liabilities at fair value
$

 
$
(574
)
 
$
(4,500
)
 
$
(5,074
)
 
 
 
 
 
 
 
 
 
December 31, 2016
 
Fair Value Hierarchy
 
 
 
Quoted Prices in Active
Markets for Identical
Assets (Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs (Level 3)
 
Total Fair
Value
Assets:
 
 
 
 
 
 
 
Derivative assets
$

 
$
3,070

 
$

 
$
3,070

Total assets at fair value
$

 
$
3,070

 
$

 
$
3,070

Liabilities:
 
 
 
 
 
 
 
Derivative liabilities
$

 
$
(1,247
)
 
$

 
$
(1,247
)
Contingent consideration obligation

 

 
(5,640
)
 
(5,640
)
Total liabilities at fair value
$

 
$
(1,247
)
 
$
(5,640
)
 
$
(6,887
)
The following table provides a rollforward of the fair value of recurring Level 3 fair value measurements for the three months ended March 31, 2017 and 2016 (amounts in thousands):
 
Three Months Ended
March 31,
 
2017
 
2016
Liabilities:
 
 
 
Contingent consideration obligation:
 
 
 
Beginning balance
$
5,640

 
$
5,340

Additions to contingent consideration obligation

 

Total changes in fair value included in earnings
(1,140
)
 
120

Ending balance
$
4,500

 
$
5,460

Unrealized (gains) losses still held (1)
$
(1,140
)
 
$
120


(1)
Represents the unrealized (gains) losses recorded in earnings or other comprehensive income (loss) during the period for liabilities classified as Level 3 that are still held at the end of the period.

20


Note 12Derivative Instruments and Hedging Activities
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish these objectives, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable rate amounts from a counterparty in exchange for the Company making fixed rate payments over the life of the agreements without exchange of the underlying notional amount.
The effective portion of changes in the fair value of derivatives designated, and that qualify, as cash flow hedges is recorded in accumulated other comprehensive income in the accompanying condensed consolidated statement of stockholders' equity and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the three months ended March 31, 2017, such derivatives were used to hedge the variable cash flows associated with variable rate debt. The ineffective portion of changes in fair value of the derivatives is recognized directly in earnings. During the three months ended March 31, 2017, no gains or losses were recognized due to ineffectiveness of hedges of interest rate risk. During the three months ended March 31, 2016, the Company accelerated the reclassification of amounts in other comprehensive income to earnings as a result of a hedged forecasted transaction becoming probable not to occur due to a related debt extinguishment. The accelerated amount was a loss of $728,000, which was recorded in interest expense, net in the accompanying condensed consolidated statement of comprehensive income.
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable rate debt. During the next twelve months, the Company estimates that an additional $327,000 will be reclassified from accumulated other comprehensive income as an increase to interest expense.
See Note 11—"Fair Value" for a further discussion of the fair value of the Company’s derivative instruments.
The following table summarizes the notional amount and fair value of the Company’s derivative instruments (amounts in thousands):
Derivatives
Designated as
Hedging
Instruments
 
Balance
Sheet
Location
 
Effective
Dates
 
Maturity
Dates
 
March 31, 2017
 
December 31, 2016
Outstanding
Notional
Amount
 
Fair Value of
 
Outstanding
Notional
Amount
 
Fair Value of
Asset
 
(Liability) 
 
Asset
 
(Liability)
 
Interest rate swaps
 
Other assets, net/Accounts
payable and other
liabilities
 
10/12/2012 to
05/03/2016
 
10/11/2017 to
08/21/2020
 
$
538,643

 
$
3,900

 
$
(574
)
 
$
540,425

 
$
3,070

 
$
(1,247
)
The notional amount under the agreements is an indication of the extent of the Company’s involvement in each instrument at the time, but does not represent exposure to credit, interest rate or market risks.
Accounting for changes in the fair value of a derivative instrument depends on the intended use and designation of the derivative instrument. The Company designated the interest rate swaps as cash flow hedges to hedge the variability of the anticipated cash flows on its variable rate notes payable. The change in fair value of the effective portion of the derivative instrument that is designated as a hedge is recorded in other comprehensive income (loss), or OCI, in the accompanying condensed consolidated statements of comprehensive income.

21


The table below summarizes the amount of income and loss recognized on interest rate derivatives designated as cash flow hedges for the three months ended March 31, 2017 and 2016 (amounts in thousands):
Derivatives in Cash Flow Hedging Relationships
 
Amount of Income (Loss) Recognized
in OCI on Derivatives
(Effective Portion)
 
Location Of Loss
Reclassified From
Accumulated Other
Comprehensive Income to
Net Income
(Effective Portion)
 
Amount of Loss
Reclassified From
Accumulated Other
Comprehensive Income to
Net Income
(Effective Portion and Accelerated Amounts)
Three Months Ended March 31, 2017
 
 
 
 
 
 
Interest rate swaps
 
$
834

 
Interest Expense, Net
 
$
(669
)
Total
 
$
834

 
 
 
$
(669
)
Three Months Ended March 31, 2016
 
 
 
 
 
 
Interest rate swaps
 
$
(5,640
)
 
Interest Expense, Net
 
$
(1,777
)
Total
 
$
(5,640
)
 
 
 
$
(1,777
)
Credit Risk-Related Contingent Features
The Company has agreements with each of its derivative counterparties that contain cross-default provisions, whereby if the Company defaults on certain of its unsecured indebtedness, then the Company could also be declared in default on its derivative obligations, resulting in an acceleration of payment thereunder.
In addition, the Company has agreements with each of its derivative counterparties that contain a provision where if the Company either defaults or is capable of being declared in default on any of its indebtedness, then the Company could also be declared in default on its derivative obligations. The Company believes it mitigates its credit risk by entering into agreements with creditworthy counterparties. The Company records credit risk valuation adjustments on its interest rate swaps based on the respective credit quality of the Company and the counterparty. As of March 31, 2017, the fair value of derivatives in a net liability position, including accrued interest but excluding any adjustment for nonperformance risk related to these agreements, was $689,000.
Tabular Disclosure Offsetting Derivatives
The Company has elected not to offset derivative positions in its condensed consolidated financial statements. The following table presents the effect on the Company’s financial position had the Company made the election to offset its derivative positions as of March 31, 2017 and December 31, 2016 (amounts in thousands):
Offsetting of Derivative Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Balance Sheet
 
 
 
Gross
Amounts of
Recognized
Assets
 
Gross Amounts
Offset in the
Balance Sheet
 
Net Amounts of
Assets Presented in
the Balance Sheet
 
Financial Instruments
Collateral
 
Cash Collateral
 
Net
Amount
March 31, 2017
$
3,900

 
$

 
$
3,900

 
$
(29
)
 
$

 
$
3,871

December 31, 2016
$
3,070

 
$

 
$
3,070

 
$
(10
)
 
$

 
$
3,060

Offsetting of Derivative Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Balance Sheet
 
 
 
Gross
Amounts of
Recognized
Liabilities
 
Gross Amounts
Offset in the
Balance Sheet
 
Net Amounts of
Liabilities
Presented in the
Balance Sheet
 
Financial Instruments
Collateral
 
Cash Collateral
 
Net
Amount
March 31, 2017
$
574

 
$

 
$
574

 
$
(29
)
 
$

 
$
545

December 31, 2016
$
1,247

 
$

 
$
1,247

 
$
(10
)
 
$

 
$
1,237

The Company reports derivatives in the accompanying condensed consolidated balance sheets as other assets, net and accounts payable and other liabilities.

22


Note 13Accumulated Other Comprehensive Income
The following table presents a rollforward of amounts recognized in accumulated other comprehensive income (loss), net of noncontrolling interests, by component for the three months ended March 31, 2017 and 2016 (amounts in thousands):
 
Unrealized (Loss) Income on Derivative
Instruments
 
Accumulated Other
Comprehensive Income
Balance as of December 31, 2016
$
2,303

 
$
1,823

Other comprehensive income before reclassification
834

 
834

Amount of loss reclassified from accumulated other comprehensive income to net income (effective portion)
669

 
669

Other comprehensive income
1,503

 
1,503

Balance as of March 31, 2017
$
3,806

 
$
3,326

 
 
 
 
 
Unrealized (Loss) Income on Derivative
Instruments
 
Accumulated Other
Comprehensive Loss
Balance as of December 31, 2015
$
(2,100
)
 
$
(2,580
)
Other comprehensive loss before reclassification
(5,640
)
 
(5,640
)
Amount of loss reclassified from accumulated other comprehensive loss to net income (effective portion and missed forecast)
1,777

 
1,777

Other comprehensive loss
(3,863
)
 
(3,863
)
Balance as of March 31, 2016
$
(5,963
)
 
$
(6,443
)
The following table presents reclassifications out of accumulated other comprehensive income (loss) for the three months ended March 31, 2017 and 2016 (amounts in thousands):
Details about Accumulated Other
Comprehensive Income Components
 
Amounts Reclassified from
Accumulated Other Comprehensive Income to Net
Income
 
Affected Line Items in the Condensed Consolidated Statements of Comprehensive
Income
 
 
Three Months Ended
March 31,
 
 
 
 
2017
 
2016
 
 
Interest rate swap contracts
 
$
669

 
$
1,777

 
Interest expense, net
Note 14Commitments and Contingencies
Litigation
In the ordinary course of business, the Company may become subject to litigation or claims. As of March 31, 2017, there were, and currently there are, no material pending legal proceedings to which the Company is a party.

23


Note 15Subsequent Events
Distributions Paid
On April 3, 2017, the Company paid aggregate distributions of $11,032,000 ($5,359,000 in cash and $5,673,000 in shares of the Company’s common stock issued pursuant to the DRIP Offering), which related to distributions declared for each day in the period from March 1, 2017 through March 31, 2017.
On May 1, 2017, the Company paid aggregate distributions of $10,685,000 ($5,174,000 in cash and $5,511,000 in shares of the Company’s common stock issued pursuant to the DRIP Offering), which related to distributions declared for each day in the period from April 1, 2017 through April 30, 2017.
Distributions Declared
On May 4, 2017, the board of directors of the Company approved and declared a distribution to the Company’s stockholders of record as of the close of business on each day of the period commencing on June 1, 2017 and ending on August 31, 2017. The distributions will be calculated based on 365 days in the calendar year and will be equal to $0.001917808 per share of common stock. The distributions declared for each record date in June 2017, July 2017 and August 2017 will be paid in July 2017, August 2017 and September 2017, respectively. The distributions will be payable to stockholders from legally available funds therefor.
Lease Termination
On April 25, 2017, the Company terminated a lease agreement with one of its tenants due to several events of default under the lease agreement by the tenant, which included the tenant's failure to pay certain rental amounts and failure to comply with certain financial covenants set forth in the lease agreement. After the lease termination, the tenant will continue to operate the property for a reasonable amount of time in a manner compliant with the state law requirements.
Tenant Experiencing Financial Difficulty
A tenant comprising approximately 5.0% of the Company’s rental revenue at March 31, 2017, has been experiencing financial difficulty and may undergo a restructuring of its liabilities.  As of May 12, 2017, the tenant is and has been current with rental payments.


24


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the notes thereto and the other financial information appearing elsewhere in this Quarterly Report on Form 10-Q. The following discussion should also be read in conjunction with our audited consolidated financial statements, and the notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the U.S. Securities and Exchange Commission, or the SEC, on March 30, 2017, or the 2016 Annual Report on Form 10-K.
The terms “we,” “our,” "us" and the “Company” refer to Carter Validus Mission Critical REIT, Inc., Carter/Validus Operating Partnership, LP, all majority-owned subsidiaries and controlled subsidiaries.
Forward-Looking Statements
Certain statements contained in this Quarterly Report on Form 10-Q, other than historical facts, include forward-looking statements that reflect our expectations and projections about our future results, performance, prospects and opportunities. Such statements include, in particular, statements about our plans, strategies, and prospects and are subject to certain risks and uncertainties, as well as known and unknown risks, which could cause actual results to differ materially from those projected or anticipated. Therefore, such statements are not intended to be a guarantee of our performance in future periods. Such forward-looking statements can generally be identified by our use of forward-looking terminology such as “may,” “will,” “would,” “could,” “should,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “continue,” or other similar words. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect our management’s view only as of the date this Quarterly Report on Form 10-Q is filed with the SEC. We make no representation or warranty (express or implied) about the accuracy of any such forward-looking statements contained in this Quarterly Report on Form 10-Q, and we do not undertake to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. See Item 1A. “Risk Factors” of our 2016 Annual Report on Form 10-K for a discussion of some, although not all, of the risks and uncertainties that could cause actual results to differ materially from those presented in our forward-looking statements.
Management’s discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with the accounting principles generally accepted in the United States, or GAAP. The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate these estimates. These estimates are based on management’s historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
Overview
We were formed on December 16, 2009 under the laws of Maryland to acquire and operate a diversified portfolio of income-producing commercial real estate in the data center and healthcare sectors. We may also invest in real estate-related investments that relate to such property types. We qualified and elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, or the Code, for federal income tax purposes.
We ceased offering shares of common stock in our initial public offering of up to $1,746,875,000 in shares of common stock, or our Offering, on June 6, 2014. Upon completion of our Offering, we raised gross proceeds of approximately $1,716,046,000 (including shares of common stock issued pursuant to our distribution reinvestment plan, or the DRIP).
On April 14, 2014, we registered 10,526,315 shares of common stock in the First DRIP Offering for a price per share of $9.50 for a proposed maximum offering price of $100,000,000 in shares of common stock under the DRIP pursuant to a registration statement on Form S-3. On November 25, 2015, we registered an additional 10,473,946 shares of common stock in the Second DRIP Offering for a price per share of $9.5475, which was the greater of (i) 95% of the fair market value per share as determined by our board of directors as of September 30, 2015 and (ii) $9.50 per share, for a proposed maximum offering price of $100,000,000 in shares of common stock under the DRIP pursuant to a new registration statement on Form S-3. Effective January 1, 2017, shares are offered pursuant to the Second DRIP Offering for a price per share of $9.519, which is the greater of (i) 95% of the fair market value per share as determined by our board of directors as of September 30, 2016 and (ii) $9.50 per share, until such time as our board of directors determines a new estimated share value. We will continue to issue shares of common stock under the Second DRIP Offering until such time as we sell all of the shares registered for sale under the Second DRIP Offering, unless we file a new registration statement with the SEC or the Second DRIP Offering is terminated by our board of directors.

25


We refer to the First DRIP Offering and the Second DRIP Offering together as the "DRIP Offerings," and collectively with our Offering, our "Offerings." As of March 31, 2017, we had issued approximately 191,535,000 shares of common stock in our Offerings for gross proceeds of $1,896,389,000, before share repurchases of $59,963,000 and offering costs, selling commissions and dealer manager fees of $174,798,000.
On November 16, 2015, our board of directors, at the recommendation of the audit committee of the board, or the Audit Committee, which is comprised solely of independent directors, established an estimated net asset value, "NAV", per share of our common stock, or the "Estimated Per Share NAV", calculated as of September 30, 2015, of $10.05 for purposes of assisting broker-dealers that participated in our Offering in meeting their customer account statement reporting obligations under the National Association of Securities Dealers Conduct, or NASD, Rule 2340. On November 28, 2016, our board of directors, at the recommendation of the Audit Committee, established an updated Estimated Per Share NAV, calculated as of September 30, 2016, of $10.02 for purposes of assisting broker-dealers that participated in our Offering in meeting their customer account statement reporting obligations under NASD Rule 2340. We intend to publish an updated Estimated Per Share NAV on at least an annual basis. Each Estimated Per Share NAV was determined by our board of directors after consultation with Carter/Validus Advisors, LLC, or our Advisor, and an independent third-party valuation firm.
Substantially all of our operations are conducted through Carter/Validus Operating Partnership, LP, or our Operating Partnership. We are externally advised by our Advisor pursuant to an advisory agreement between us and our Advisor, which is our affiliate. Our Advisor supervises and manages our day-to-day operations and selects the properties and real estate-related investments we acquire, subject to the oversight and approval of our board of directors. Our Advisor also provides marketing, sales and client services related to real estate on our behalf. Our Advisor engages affiliated entities to provide various services to us. Our Advisor is managed by, and is a subsidiary of our sponsor, Carter/Validus REIT Investment Management Company, LLC, or our Sponsor. We have no paid employees and rely upon our Advisor to provide substantially all of our services.
Carter Validus Real Estate Management Services, LLC, or our Property Manager, a wholly-owned subsidiary of our Sponsor, serves as our property manager. Our Advisor and our Property Manager received, and will continue to receive, fees during our acquisition and operational stages and our Advisor may be eligible to receive fees during the liquidation stage of the Company.
We currently operate through two reportable segments – commercial real estate investments in data centers and healthcare. As of March 31, 2017, we had completed acquisitions of 49 real estate investments (including one real estate investment owned through a consolidated partnership) consisting of 84 properties, comprised of 95 buildings and parking facilities and approximately 6,218,000 square feet of gross rentable area (excluding parking facilities), for an aggregate purchase price of $2,189,062,000
Critical Accounting Policies
Our critical accounting policies were disclosed in our 2016 Annual Report on Form 10-K. There have been no material changes to our critical accounting policies as disclosed therein.
Interim Unaudited Financial Data
Our accompanying condensed consolidated financial statements have been prepared by us in accordance with GAAP in conjunction with the rules and regulations of the SEC. Certain information and footnote disclosures required for annual financial statements have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, our accompanying condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. Our accompanying condensed consolidated financial statements reflect all adjustments, which are, in our view, of a normal recurring nature and necessary for a fair presentation of our financial position, results of operations and cash flows for the interim period. Interim results of operations are not necessarily indicative of the results to be expected for the full year; such full year results may be less favorable. Our accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our 2016 Annual Report on Form 10-K.
Qualification as a REIT
We qualified and elected to be taxed as a REIT for federal income tax purposes and we intend to continue to be taxed as a REIT. To maintain our qualification as a REIT, we must continue to meet certain organizational and operational requirements, including a requirement to currently distribute at least 90.0% of our REIT taxable income to our stockholders. As a REIT, we generally will not be subject to federal income tax on taxable income that we distribute to our stockholders.

26


If we fail to maintain our qualification as a REIT in any taxable year, we would then be subject to federal income taxes on our taxable income at regular corporate rates and would not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year during which qualification is lost unless the Internal Revenue Service, or the IRS, grants us relief under certain statutory provisions. Such an event could have a material adverse effect on our net income and net cash available for distribution to our stockholders.
Recently Issued Accounting Pronouncements
For a discussion of recently issued accounting pronouncements, see Note 2—“Summary of Significant Accounting Policies—Recently Issued Accounting Pronouncements” to our condensed consolidated financial statements that are a part of this Quarterly Report on Form 10-Q.
Segment Reporting
We report our financial performance based on two reporting segments—commercial real estate investments in data centers and healthcare. See Note 9—"Segment Reporting" to the condensed consolidated financial statements for additional information on our two reporting segments.
Factors That May Influence Results of Operations
We are not aware of any material trends and uncertainties, other than national economic conditions affecting real estate generally, that may be reasonably expected to have a material impact, favorable or unfavorable, on revenues or incomes from the acquisition, management and operation of properties other than those set forth in our Annual Report on Form 10-K for the year ended December 31, 2016 and in Part II, Item 1A. "Risk Factors" of this Quarterly Report on Form 10-Q.
Results of Operations
Our results of operations are influenced by the timing of acquisitions and the operating performance of our real estate properties. The following table shows the property statistics of our real estate properties as of March 31, 2017 and 2016:
 
March 31,
 
 
2017
 
2016
 
Number of commercial operating properties
84

 
78

(1) 
Leased rentable square feet
6,109,000

 
5,890,000

 
Weighted average percentage of rentable square feet leased
98
%
 
98
%
 
 
(1)
As of March 31, 2016, we owned 79 real estate properties, one of which was under construction.
The following table summarizes our real estate properties' activity for the three months ended March 31, 2017 and 2016:
 
Three Months Ended March 31,
 
2017
 
2016
Commercial operating properties placed in service
1

 

Approximate aggregate cost of property placed in service
$
19,466,000

 
$

Leased rentable square feet of property placed in service
34,000

 

The following discussion is based on our condensed consolidated financial statements for the three months ended March 31, 2017 and 2016.
These sections describe and compare our results of operations for the three months ended March 31, 2017 and 2016. We generate almost all of our net operating income from property operations. In order to evaluate our overall portfolio, we analyze the net operating income of same store properties. We define "same store properties" as operating properties that were owned and operated for the entirety of both calendar periods being compared and excludes properties under development.
By evaluating the property net operating income of our same store properties, management is able to monitor the operations of our existing properties for comparable periods to measure the performance of our current portfolio and determine the effects of our new acquisitions on net income.

27


Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016
Changes in our revenues are summarized in the following table (amounts in thousands):
 
Three Months Ended
March 31,
 
 
 
2017
 
2016
 
Change
Same store rental and parking revenue
$
45,513

 
$
52,103

 
$
(6,590
)
Non-same store rental and parking revenue
2,212

 

 
2,212

Same store tenant reimbursement revenue
3,509

 
4,321

 
(812
)
Non-same store tenant reimbursement revenue
71

 

 
71

Other operating income
85

 
86

 
(1
)
Total revenue
$
51,390

 
$
56,510

 
$
(5,120
)
Same store rental and parking revenue decreased primarily due to provision for doubtful accounts totaling $6.5 million during the three months ended March 31, 2017, which were a result of two tenants experiencing financial difficulties that we believe will result in material new lease terms. In addition, there was an increase in contractual rental revenue resulting from average annual rent escalations of 2.23% at our same store properties, which was offset by straight-line rental revenue.
Non-same store rental and parking revenue increased primarily as a result of the acquisition of 5 properties and one property placed in service since January 1, 2016.
Same store tenant reimbursement revenue decreased primarily due to provision for doubtful accounts recorded for tenant reimbursement revenue in the amount of $1.2 million during the three months ended March 31, 2017, which was a result of two tenants experiencing financial difficulties that we believe will result in material new lease terms, offset by an increase in real estate taxes.
Non-same store tenant reimbursement revenue increased primarily as a result of the acquisition of 5 properties since January 1, 2016.
Changes in our expenses are summarized in the following table (amounts in thousands):
 
Three Months Ended
March 31,
 
 
 
2017
 
2016
 
Change
Same store rental and parking expenses
$
7,203

 
$
6,545

 
$
658

Non-same store rental and parking expenses
188

 
94

 
94

General and administrative expenses
1,683

 
1,581

 
102

Change in fair value of contingent consideration
(1,140
)
 
120

 
(1,260
)
Asset management fees
4,819

 
4,787

 
32

Depreciation and amortization
18,067

 
16,999

 
1,068

Total expenses
$
30,820

 
$
30,126

 
$
694

Same store rental and parking expenses, certain of which are subject to reimbursement by our tenants, increased primarily due to an increase in real estate taxes paid directly by two tenants during the three months ended March 31, 2016, which we now pay and is subject to reimbursement by our tenants.
Non-same store rental and parking expenses increased primarily due to the placing one property in service since January 1, 2016.
General and administrative expenses increased primarily due to an increase in professional fees.
The decrease in fair value of contingent consideration is due to a change in management's assessment of incurring a lower payout under the contingent consideration arrangement.
Depreciation and amortization increased primarily due to the increase in the weighted average depreciable basis of real estate investments.

28


Changes in other income (expense) are summarized in the following table (amounts in thousands):
 
Three Months Ended
March 31,
 
 
 
2017
 
2016
 
Change
Other interest and dividend income:
 
 
 
 
 
Cash deposits interest
$
13

 
$
13

 
$

Dividends on preferred equity investment

 
2,461

 
(2,461
)
Notes receivable interest and other income
534

 
332

 
202

Real estate-related notes receivable interest income
16

 
16

 

Total other interest and dividend income
563

 
2,822

 
(2,259
)
 
 
 
 
 
 
Interest expense, net:
 
 
 
 
 
Interest on notes payable
(5,599
)
 
(6,458
)
 
859

Interest on unsecured credit facility
(2,986
)
 
(2,123
)
 
(863
)
Amortization of deferred financing costs
(941
)
 
(1,151
)
 
210

Capitalized interest
861

 
251

 
610

Loss on debt extinguishment

 
(1,133
)
 
1,133

Total interest expense, net
(8,665
)
 
(10,614
)
 
1,949

Provision for loan losses
(2,484
)
 

 
(2,484
)
Total other expense
(10,586
)
 
(7,792
)
 
(2,794
)
Net income
$
9,984

 
$
18,592

 
$
(8,608
)
Dividends on preferred equity investment decreased due to the redemption of the preferred equity investment on October 4, 2016.
Notes receivable interest and other income increased primarily due to an increase in the weighted average outstanding principal balance on notes receivable, which resulted in an increase in notes receivable interest income.
Interest on notes payable decreased due to the payoff of one note payable during the three months ended March 31, 2017 in the amount of $5.6 million and the payoff of two notes payable during the year ended December 31, 2016 in the aggregate amount of $44.7 million. The outstanding principal balance on notes payable was $478.4 million as of March 31, 2017, as compared to $508.9 million as of March 31, 2016.
Interest on unsecured credit facility increased due to an increase in the weighted average outstanding principal balance on our unsecured credit facility. The weighted average outstanding principal balance of our unsecured credit facility was $371.3 million as of March 31, 2017, and $300.1 million as of March 31, 2016.
Capitalized interest increased due to an increase in the average accumulated expenditures on development properties to $53.3 million for the three months ended March 31, 2017, as compared to $15.1 million for the three months ended March 31, 2016.
Provision for loan losses increased due to a $2.5 million reserve of two notes receivable and accrued interest as of March 31, 2017.
Organization and Offering Costs
Prior to the termination of our Offering on June 6, 2014, we reimbursed our Advisor or its affiliates for organization and offering costs it incurred on our behalf, but only to the extent the reimbursement did not cause the selling commissions, dealer manager fees and the other organization and offering costs incurred by us to exceed 15% of gross offering proceeds as of the date of the reimbursement. Since inception and through the termination of our Offering on June 6, 2014, we paid approximately $156,519,000 in selling commissions and dealer manager fees to SC Distributors, LLC, or our Dealer Manager, which is an affiliate of our Advisor, and we reimbursed our Advisor or its affiliates approximately $14,207,000 in offering expenses, and incurred approximately $3,900,000 of other organization and offering costs, which totaled approximately $174,626,000, or 10.2% of total gross offering proceeds, which were approximately $1,716,046,000.
Subsequent to the termination of our Offering and as of March 31, 2017, we had incurred approximately $172,000 in other offering costs related to the DRIP Offerings.

29


Other organization costs were expensed as incurred and selling commissions and dealer manager fees were charged to stockholders’ equity as the amounts related to raising capital. For a further discussion of other organization and offering costs, see Note 8—"Related-Party Transactions and Arrangements" to the condensed consolidated financial statements that are a part of this Quarterly Report on Form 10-Q.
Inflation
We are exposed to inflation risk as income from long-term leases is the primary source of our cash flows from operations. There are provisions in certain of our leases with tenants that are intended to protect us from, and mitigate the risk of, the impact of inflation. These provisions include scheduled increases in contractual base rent receipts, reimbursement billings for operating expenses, pass-through charges and real estate tax and insurance reimbursements. However, due to the long-term nature of our leases, among other factors, the leases may not reset frequently enough to adequately offset the effects of inflation.
Liquidity and Capital Resources
Our principal demands for funds are for real estate and real estate-related investments, for the payment of acquisition related costs, capital expenditures, operating expenses, distributions and repurchases to stockholders and principal and interest on any current and any future indebtedness. Generally, cash needs for items other than acquisitions and acquisition related costs will be generated from operations of our current and future investments. We expect to utilize funds equal to amounts reinvested in the DRIP Offerings and future proceeds from secured and unsecured financings to complete future real estate-related investments. We expect to meet future cash needs for real estate-related investments from cash flows from operations, funds equal to amounts reinvested in the DRIP Offerings and debt financings. The sources of our operating cash flows will be primarily provided by the rental income received from current and future tenants of our leased properties.
We are required by the terms of applicable loan documents to meet certain financial covenants, such as coverage ratios and reporting requirements. In addition, certain loan agreements include cross-default provisions to financial covenants in lease agreements with our tenants so that a default in the financial covenant in the lease agreement is a default in our loan. We were in compliance with all financial covenant requirements as of March 31, 2017.
In the event we are not in compliance with these covenants in future periods and are unable to obtain a consent or waiver, the lender may choose to pursue remedies under the respective loan agreements, which could include, at the lender's discretion, declaring the loans to be immediately due and payable and payment of termination fees and costs incurred by the lender, among other potential remedies.
Short-term Liquidity and Capital Resources
On a short-term basis, our principal demands for funds will be for the acquisition of real estate and real estate-related notes and investments and payments of tenant improvements, acquisition related costs, operating expenses, distributions, and interest and principal payments on current and future debt financings. We expect to meet our short-term liquidity requirements through net cash flows provided by operations, borrowings on our unsecured credit facility, and secured and unsecured borrowings from banks and other lenders to finance our expected future acquisitions.
Long-term Liquidity and Capital Resources
On a long-term basis, our principal demands for funds will be for the acquisition of real estate and real estate-related notes and investments and payments of tenant improvements, acquisition related costs, operating expenses, distributions and repurchases to stockholders, and interest and principal payments on current and future indebtedness. We expect to meet our long-term liquidity requirements through proceeds from cash flow from operations, borrowings on our unsecured credit facility and proceeds from secured or unsecured borrowings from banks or other lenders.
We expect that substantially all cash flows from operations will be used to pay distributions to our stockholders after certain capital expenditures; however, we have used, and may continue to use, other sources to fund distributions, as necessary, such as, funds equal to amounts reinvested in the DRIP Offerings, borrowing on our unsecured credit facility and/or future borrowings on unencumbered assets. To the extent cash flows from operations are lower due to fewer properties being acquired or lower-than-expected returns on the properties held, distributions paid to stockholders may be lower. We expect that substantially all net cash flows from our Offerings or debt financings will be used to fund acquisitions, certain capital expenditures identified at acquisition, repayments of outstanding debt or distributions to our stockholders in excess of cash flows from operations.
Capital Expenditures
We will require approximately $19.6 million in expenditures for capital improvements over the next 12 months. We cannot provide assurances, however, that actual expenditures will not exceed these estimated expenditure levels. As of

30


March 31, 2017, we had $2.3 million of restricted cash in lender-controlled escrow reserve accounts for such capital expenditures. In addition, as of March 31, 2017, we had approximately $48.5 million in cash and cash equivalents. For the three months ended March 31, 2017, we had capital expenditures of $4.5 million that primarily related to two healthcare real estate investments.
Unsecured Credit Facility
The proceeds of loans made under the unsecured credit facility may be used to finance the acquisition of real estate investments, for tenant improvements and leasing commissions with respect to real estate, for repayment of indebtedness, for capital expenditures with respect to real estate and for general corporate and working capital purposes. As of March 31, 2017, we had a total unencumbered pool availability under the unsecured credit facility of $514,575,000 and an aggregate outstanding principal balance of $378,000,000. As of March 31, 2017, $136,575,000 remained available to be drawn under the unsecured credit facility.
Cash Flows
Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016
 
Three Months Ended
March 31,
 
 
(in thousands)
2017
 
2016
 
Change
Net cash provided by operating activities
$
29,619

 
$
29,168

 
$
451

Net cash used in investing activities
$
5,001

 
$
12,035

 
$
(7,034
)
Net cash used in financing activities
$
18,764

 
$
9,225

 
$
9,539

Operating Activities
Net cash provided by operating activities increased due to annual rental increases at our same store properties and the acquisition of five operating properties and placing one property in service subsequent to March 31, 2016, partially offset by increased operating expenses.
Investing Activities
Net cash used in investing activities decreased due to a decrease in capital expenditures of $5.9 million and a decrease in notes receivable advances of $1.1 million.
Financing Activities
Net cash used in financing activities increased due to an increase in payments of deferred financing costs of $1.4 million related to the extension of the maturity date of the revolving line of credit portion of the credit facility, an increase in repurchases of our common stock of $3.7 million, an increase in distributions to common stockholders of $0.7 million, an increase in distributions to noncontrolling interests of $0.3 million and a decrease in proceeds from our unsecured credit facility of $30.0 million, offset by a decrease in payments on notes payable of $26.0 million and a decrease in payments to escrow funds of $0.6 million.
Distributions
The amount of distributions payable to our stockholders is determined by our board of directors and is dependent on a number of factors, including funds available for distribution, financial condition, capital expenditure requirements and annual distribution requirements needed to maintain our qualification as a REIT under the Code. To the extent that funds are available, we intend to continue to pay monthly distributions to stockholders. Our board of directors must authorize each distribution and may, in the future, authorize lower amounts of distributions or not authorize additional distributions and therefore distribution payments are not assured. Our Advisor may also defer, suspend and/or waive fees and expense reimbursements if we have not generated sufficient cash flow from our operations and other sources to fund distributions. Additionally, our organizational documents permit us to pay distributions from unlimited amounts of any source, and we may use sources other than operating cash flows to fund distributions, including funds equal to amounts reinvested in the DRIP Offerings, which may reduce the amount of capital we ultimately invest in properties or other permitted investments.

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We have funded distributions with operating cash flows from our properties, funds equal to amounts reinvested in the DRIP Offerings and offering proceeds raised in our Offering. To the extent that we do not have taxable income, distributions paid will be considered a return of capital to stockholders. The following table shows the sources of distributions paid during the three months ended March 31, 2017 and 2016:
 
Three Months Ended March 31,
 
2017
 
2016
Distributions paid in cash - common stockholders
$
15,309,000

 
 
 
$
14,559,000

 
 
Distributions reinvested (shares issued)
16,621,000

 
 
 
17,084,000

 
 
Total distributions
$
31,930,000

 
 
 
$
31,643,000

 
 
Source of distributions:
 
 
 
 
 
 
 
Cash flows provided by operations (1)
$
15,309,000

 
48
%
 
$
14,559,000

 
46
%
Offering proceeds from issuance of common stock pursuant to the DRIP (1)
16,621,000

 
52
%
 
17,084,000

 
54
%
Total sources
$
31,930,000

 
100
%
 
$
31,643,000

 
100
%

(1)
Percentages were calculated by dividing the respective source amount by the total sources of distributions.
Total distributions declared but not paid as of March 31, 2017 were $11.0 million for common stockholders. These distributions were paid on April 3, 2017.
For the three months ended March 31, 2017, we paid and declared distributions of approximately $31.9 million to common stockholders including shares issued pursuant to the DRIP Offerings, as compared to FFO (as defined below) for the three months ended March 31, 2017 of $26.2 million. The payment of distributions from sources other than FFO may reduce the amount of proceeds available for investment and operations or cause us to incur additional interest expense as a result of borrowed funds.
For a discussion of distributions paid subsequent to March 31, 2017, see Note 15—"Subsequent Events" to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
Contractual Obligations
As of March 31, 2017, we had approximately $856,352,000 of principal debt outstanding, of which $478,352,000 related to notes payable and $378,000,000 related to the unsecured credit facility. See Note 7—"Notes Payable and Unsecured Credit Facility" to the condensed consolidated financial statements that are a part of this Quarterly Report on Form 10-Q for certain terms of the debt outstanding.
Our contractual obligations as of March 31, 2017 were as follows (amounts in thousands):
 
Payments due by period
 
 
 
Less than
1 Year
 
1-3 Years
 
3-5 Years
 
More than
5 Years
 
Total
Principal payments — fixed rate debt
$
49,635

 
$
7,962

 
$
48,790

 
$
2,085

 
$
108,472

Interest payments — fixed rate debt
5,071

 
6,388

 
5,495

 
18

 
16,972

Principal payments — variable rate debt fixed through interest rate swap agreements (1)
146,064

(5) 
257,579

 
135,000

 

 
538,643

Interest payments — variable rate debt fixed through interest rate swap agreements (2)
18,195

 
18,395

 
1,794

 

 
38,384

Principal payments — variable rate debt
1,456


207,781

 

 

 
209,237

Interest payments — variable rate debt (3)
6,883

 
3,018

 

 

 
9,901

Contingent consideration (4)

 
4,500

 

 

 
4,500

Capital expenditures
19,575

 
2,047

 

 

 
21,622

Ground lease payments
665

 
1,574

 
1,558

 
37,098

 
40,895

Total
$
247,544

 
$
509,244

 
$
192,637

 
$
39,201

 
$
988,626



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(1)
As of March 31, 2017, we had $538.6 million outstanding principal on notes payable and borrowings under the unsecured credit facility that were fixed through the use of interest rate swap agreements.
(2)
We used the fixed rates under our interest rate swap agreements as of March 31, 2017 to calculate the debt payment obligations in future periods.
(3)
We used the London Interbank Offered Rate, or LIBOR, plus the applicable margin under our variable rate debt agreements as of March 31, 2017 to calculate the debt payment obligations in future periods.
(4)
Contingent consideration represents our best estimate of the cash payments we will be obligated to make under contingent consideration arrangements with a former owner of a property we acquired if specified objectives are achieved by the acquired entity. Changes in assumptions could have an impact on the payout of contingent consideration arrangements with a maximum payout of $8.5 million in cash and a minimum payout of $0 as of March 31, 2017.
(5)
Of this amount, $105.9 million relates to one loan agreement, the maturity date of which is August 21, 2017, subject to our right to a two-year extension and $18.7 million relates to one loan agreement, the maturity date of which is October 11, 2017, subject to our right to two one-year extensions. In addition, $51.2 million relates to three loan agreements of which the Company may exercise its right to add to the unencumbered pool of the unsecured credit facility.
Off-Balance Sheet Arrangements
As of March 31, 2017, we had no off-balance sheet arrangements.
Related-Party Transactions and Arrangements
We have entered into agreements with our Advisor and its affiliates, whereby we agree to pay certain fees to, or reimburse certain expenses of, our Advisor or its affiliates for acquisition fees and expenses, organization and offering expenses, asset and property management fees and reimbursement of operating costs. Refer to Note 8—"Related-Party Transactions and Arrangements" to our condensed consolidated financial statements that are a part of this Quarterly Report on Form 10-Q for a detailed discussion of the various related-party transactions and agreements.
Funds from Operations and Modified Funds from Operations
One of our objectives is to provide cash distributions to our stockholders from cash generated by our operations. The purchase of real estate assets and real estate-related investments, and the corresponding expenses associated with that process, is a key operational feature of our business plan in order to generate cash from operations. Due to certain unique operating characteristics of real estate companies, the National Association of Real Estate Investment Trusts, or NAREIT, an industry trade group, has promulgated a measure known as funds from operations, or FFO, which we believe is an appropriate supplemental measure to reflect the operating performance of a REIT. The use of FFO is recommended by the REIT industry as a supplemental performance measure. FFO is not equivalent to our net income as determined under GAAP.
We define FFO, consistent with NAREIT’s definition, as net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property and asset impairment write-downs, plus depreciation and amortization of real estate assets, and after adjustments for unconsolidated partnership and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect FFO on the same basis.
We, along with others in the real estate industry, consider FFO to be an appropriate supplemental measure of a REIT’s operating performance because it is based on a net income analysis of property portfolio performance that excludes non-cash items such as depreciation and amortization and asset impairment write-downs, which we believe provides a more complete understanding of our performance to investors and to our management, and when compared year over year, reflects the impact on our operations from trends in occupancy.
Historical accounting convention (in accordance with GAAP) for real estate assets requires companies to report their investment in real estate at its carrying value, which consists of capitalizing the cost of acquisitions, development, construction, improvements and significant replacements, less depreciation and amortization and asset impairment write-downs, if any, which is not necessarily equivalent to the fair market value of its investment in real estate assets.
The historical accounting convention requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time, which could be the case if such assets are not adequately maintained or repaired and renovated as required by relevant circumstances and/or as requested or required by lessees for operational purposes in order to maintain the value disclosed. We believe that, since the fair value of real estate assets historically rises and falls with market conditions including, but not limited to, inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation could be less informative.

33


In addition, we believe it is appropriate to disregard asset impairment write-downs as they are a non-cash adjustment to recognize losses on prospective sales of real estate assets. Since losses from sales of real estate assets are excluded from FFO, we believe it is appropriate that asset impairment write-downs in advancement of realization of losses should be excluded. Impairment write-downs are based on negative market fluctuations and underlying assessments of general market conditions, which are independent of our operating performance, including, but not limited to, a significant adverse change in the financial condition of our tenants, changes in supply and demand for similar or competing properties, changes in tax, real estate, environmental and zoning law, which can change over time. When indicators of potential impairment suggest that the carrying value of real estate and related assets may not be recoverable, we assess the recoverability by estimating whether we will recover the carrying value of the asset through undiscounted future cash flows and eventual disposition (including, but not limited to, net rental and lease revenues, net proceeds on the sale of property and any other ancillary cash flows at a property or group level under GAAP). If based on this analysis, we do not believe that we will be able to recover the carrying value of the real estate asset, we will record an impairment write-down to the extent that the carrying value exceeds the estimated fair value of the real estate asset. Testing for indicators of impairment is a continuous process and is analyzed on a quarterly basis. Investors should note, however, that determinations of whether impairment charges have been incurred are based partly on anticipated operating performance, because estimated undiscounted future cash flows from a property, including estimated future net rental and lease revenues, net proceeds on the sale of the property, and certain other ancillary cash flows, are taken into account in determining whether an impairment charge has been incurred. While impairment charges are excluded from the calculation of FFO as described above, investors are cautioned that due to the fact that impairments are based on estimated future undiscounted cash flows and that we intend to have a relatively limited term of our operations, it could be difficult to recover any impairment charges through the eventual sale of the property. No impairment losses have been recorded to date.
In developing estimates of expected future cash flow, we make certain assumptions regarding future market rental income amounts subsequent to the expiration of current lease arrangements, property operating expenses, terminal capitalization and discount rates, the expected number of months it takes to re-lease the property, required tenant improvements and the number of years the property will be held for investment. The use of alternative assumptions in the future cash flow analysis could result in a different determination of the property’s future cash flows and a different conclusion regarding the existence of an asset impairment, the extent of such loss, if any, as well as the carrying value of the real estate asset.
Publicly registered, non-listed REITs, such as us, typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operations. While other start-up entities may also experience significant acquisition activity during their initial years, we believe that publicly registered, non-listed REITs are unique in that they have a limited life with targeted exit strategies within a relatively limited time frame after the acquisition activity ceases. We will use cash flows from operations and debt financings to acquire real estate assets and real estate-related investments, and we intend to begin the process of achieving a liquidity event (i.e., listing of our shares of common stock on a national securities exchange, a merger or sale, the sale of all or substantially all of our assets, or another similar transaction) within five years after the completion of our offering stage, which is generally comparable to other publicly registered, non-listed REITs. Thus, we do not intend to continuously purchase real estate assets and intend to have a limited life. Due to these factors and other unique features of publicly registered, non-listed REITs, the Investment Program Association, or the IPA, an industry trade group, has standardized a measure known as modified funds from operations, or MFFO, which we believe to be another appropriate supplemental measure to reflect the operating performance of a publicly registered, non-listed REIT. MFFO is a metric used by management to evaluate sustainable performance and dividend policy. MFFO is not equivalent to our net income as determined under GAAP.
We define MFFO, a non-GAAP measure, consistent with the IPA’s definition: FFO further adjusted for the following items included in the determination of GAAP net income; acquisition fees and expenses; amounts related to straight-line rental income and amortization of above and below intangible lease assets and liabilities; accretion of discounts and amortization of premiums on debt investments; mark-to-market adjustments included in net income; nonrecurring gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, adjustments related to contingent purchase price obligations where such adjustments have been included in the derivation of GAAP net income, and after adjustments for a consolidated and unconsolidated partnership and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. Our MFFO calculation complies with the IPA’s Practice Guideline, described above. In calculating MFFO, we exclude paid and accrued acquisition fees and expenses that are reported in our condensed consolidated statements of comprehensive income, amortization of above and below-market leases, adjustments related to contingent purchase price obligations, gains or losses from the extinguishment of debt and hedges, amounts related to straight-line rents (which are adjusted in order to reflect such payments from a GAAP accrual basis to closer to an expected to be received cash basis of disclosing the rent and lease payments); and the adjustments of such items related to noncontrolling interests in our Operating Partnership. The other adjustments included in the IPA’s guidelines are not applicabl