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EX-32.1 - EXHIBIT 32.1 - Sila Realty Trust, Inc.a201710-qexhibit321reitii0.htm
EX-32.2 - EXHIBIT 32.2 - Sila Realty Trust, Inc.a201710-qexhibit322reitii0.htm
EX-31.2 - EXHIBIT 31.2 - Sila Realty Trust, Inc.a201710-qexhibit312reitii0.htm
EX-31.1 - EXHIBIT 31.1 - Sila Realty Trust, Inc.a201710-qexhibit311reitii0.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 June 30, 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: 000-55435
cvmcriilogoa37.jpg
CARTER VALIDUS MISSION CRITICAL REIT II, INC.
(Exact name of registrant as specified in its charter)
Maryland
 
46-1854011
(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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
None
 
None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $0.01 per share
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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
 
Accelerated filer
 
Non-accelerated filer
 
☒ (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 complying with any new or revised financial accounting standards pursuant to Section 7(a)(2)(B) of the 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 August 7, 2017, there were approximately 77,373,000 shares of Class A common stock, 2,306,000 shares of Class I common stock, 24,443,000 shares of Class T common stock and 0 shares of Class T2 common stock of Carter Validus Mission Critical REIT II, Inc. outstanding.
 



CARTER VALIDUS MISSION CRITICAL REIT II, 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 I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements.
CARTER VALIDUS MISSION CRITICAL REIT II, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
(Unaudited)
June 30, 2017
 
December 31, 2016
ASSETS
Real estate:
 
 
 
Land
$
204,641

 
$
154,385

Buildings and improvements, less accumulated depreciation of $29,989 and $18,521, respectively
1,028,553

 
722,492

Construction in progress
36,808

 
20,123

Total real estate, net
1,270,002

 
897,000

Cash and cash equivalents
74,350

 
50,446

Acquired intangible assets, less accumulated amortization of $13,198 and $7,995, respectively
147,244

 
98,053

Other assets, net
37,522

 
24,539

Total assets
$
1,529,118

 
$
1,070,038

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
 
 
 
Notes payable, net of deferred financing costs of $3,981 and $1,945, respectively
$
397,308

 
$
151,045

Credit facility, net of deferred financing costs of $751 and $876, respectively
274,249

 
219,124

Accounts payable due to affiliates
11,938

 
7,384

Accounts payable and other liabilities
26,755

 
17,184

Intangible lease liabilities, less accumulated amortization of $1,020 and $634, respectively
22,201

 
6,873

Total liabilities
732,451

 
401,610

Stockholders’ equity:
 
 
 
Preferred stock, $0.01 par value per share, 100,000,000 shares authorized; none issued and outstanding

 

Common stock, $0.01 par value per share, 500,000,000 shares authorized; 100,760,807 and 83,109,025 shares issued, respectively; 99,863,473 and 82,744,288 shares outstanding, respectively
999

 
827

Additional paid-in capital
870,592

 
723,859

Accumulated distributions in excess of earnings
(75,828
)
 
(57,100
)
Accumulated other comprehensive income
902

 
840

Total stockholders’ equity
796,665

 
668,426

Noncontrolling interests
2

 
2

Total equity
796,667

 
668,428

Total liabilities and stockholders’ equity
$
1,529,118

 
$
1,070,038

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

3


CARTER VALIDUS MISSION CRITICAL REIT II, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands, except share data and per share amounts)
(Unaudited)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Revenue:
 
 
 
 
 
 
 
Rental and parking revenue
$
23,684

 
$
10,888

 
$
43,366

 
$
20,909

Tenant reimbursement revenue
3,918

 
1,315

 
8,258

 
2,718

Total revenue
27,602

 
12,203

 
51,624

 
23,627

Expenses:
 
 
 
 
 
 
 
Rental and parking expenses
5,300

 
1,577

 
10,226

 
3,261

General and administrative expenses
1,212

 
757

 
2,137

 
1,522

Acquisition related expenses

 
1,946

 

 
3,611

Asset management fees
2,351

 
1,058

 
4,357

 
2,013

Depreciation and amortization
9,025

 
4,300

 
16,635

 
8,166

Total expenses
17,888

 
9,638

 
33,355

 
18,573

Income from operations
9,714

 
2,565

 
18,269

 
5,054

Interest expense, net
5,073

 
732

 
8,837

 
1,611

Net income attributable to common stockholders
$
4,641

 
$
1,833

 
$
9,432

 
$
3,443

Other comprehensive income:
 
 
 
 
 
 
 
Unrealized (loss) income on interest rate swaps, net
$
(706
)
 
$
(101
)
 
$
62

 
$
(101
)
Other comprehensive (loss) income attributable to common stockholders
(706
)
 
(101
)
 
62

 
(101
)
Comprehensive income attributable to common stockholders
$
3,935

 
$
1,732

 
$
9,494

 
$
3,342

Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
94,910,818

 
63,514,780

 
90,721,343

 
58,591,709

Diluted
94,925,665

 
63,530,999

 
90,737,075

 
58,608,490

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

 
$
0.03

 
$
0.10

 
$
0.06

Diluted
$
0.05

 
$
0.03

 
$
0.10

 
$
0.06

Distributions declared per common share
$
0.16

 
$
0.16

 
$
0.31

 
$
0.32

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

4


CARTER VALIDUS MISSION CRITICAL REIT II, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(in thousands, except for share data)
(Unaudited)
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
No. of
Shares
 
Par
Value
 
Additional
Paid-in
Capital
 
Accumulated Distributions in Excess of Earnings
 
Accumulated Other Comprehensive Income
 
Total
Stockholders’
Equity
 
Noncontrolling
Interests
 
Total
Equity
Balance, December 31, 2016
82,744,288

 
$
827

 
$
723,859

 
$
(57,100
)
 
$
840

 
$
668,426

 
$
2

 
$
668,428

Issuance of common stock
16,046,414

 
161

 
155,639

 

 

 
155,800

 

 
155,800

Issuance of common stock under the distribution reinvestment plan
1,603,120

 
16

 
14,633

 

 

 
14,649

 

 
14,649

Vesting of restricted common stock
2,250

 

 
34

 

 

 
34

 

 
34

Commissions on sale of common stock and related dealer manager fees

 

 
(10,258
)
 

 

 
(10,258
)
 

 
(10,258
)
Distribution and servicing fees

 

 
(4,459
)
 

 

 
(4,459
)
 

 
(4,459
)
Other offering costs

 

 
(4,031
)
 

 

 
(4,031
)
 

 
(4,031
)
Repurchase of common stock
(532,599
)
 
(5
)
 
(4,825
)
 

 

 
(4,830
)
 

 
(4,830
)
Distributions declared to common stockholders

 

 

 
(28,160
)
 

 
(28,160
)
 

 
(28,160
)
Other comprehensive income

 

 

 

 
62

 
62

 

 
62

Net income

 

 

 
9,432

 

 
9,432

 

 
9,432

Balance, June 30, 2017
99,863,473

 
$
999

 
$
870,592

 
$
(75,828
)
 
$
902

 
$
796,665

 
$
2

 
$
796,667

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

5


CARTER VALIDUS MISSION CRITICAL REIT II, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
 
Six Months Ended
June 30,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income
$
9,432

 
$
3,443

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
16,635

 
8,166

Amortization of deferred financing costs
1,185

 
447

Amortization of above-market leases
39

 
19

Amortization of intangible lease liabilities
(386
)
 
(268
)
Straight-line rent
(4,842
)
 
(2,699
)
Stock-based compensation
34

 
24

Ineffectiveness of interest rate swaps
(2
)
 
22

Changes in operating assets and liabilities:
 
 
 
Accounts payable and other liabilities
4,853

 
1,162

Accounts payable due to affiliates
632

 
111

Other assets
(1,386
)
 
(1,366
)
Net cash provided by operating activities
26,194

 
9,061

Cash flows from investing activities:
 
 
 
Investment in real estate
(405,569
)
 
(161,462
)
Acquisition costs capitalized subsequent
(44
)
 

Capital expenditures
(13,692
)
 
(2,087
)
Real estate deposits, net
290

 
443

Net cash used in investing activities
(419,015
)
 
(163,106
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of common stock
155,800

 
182,504

Proceeds from notes payable
248,299

 

Proceeds from credit facility
175,000

 
45,000

Payments on credit facility
(120,000
)
 
(40,000
)
Payments of deferred financing costs
(2,551
)
 
(281
)
Repurchases of common stock
(4,830
)
 
(1,135
)
Offering costs on issuance of common stock
(14,621
)
 
(17,649
)
Distributions to stockholders
(12,812
)
 
(7,493
)
Net cash provided by financing activities
424,285

 
160,946

Net change in cash, cash equivalents and restricted cash
31,464

 
6,901

Cash, cash equivalents and restricted cash - Beginning of period
56,904

 
33,189

Cash, cash equivalents and restricted cash - End of period
$
88,368

 
$
40,090

Supplemental cash flow disclosure:
 
 
 
Interest paid, net of interest capitalized of $835 and $101, respectively
$
7,882

 
$
1,242

Supplemental disclosure of non-cash transactions:
 
 
 
Common stock issued through distribution reinvestment plan
$
14,649

 
$
10,096

Distribution and servicing fees accrued during the period
$
3,725

 
$
2,963

Net unrealized gain (loss) on interest rate swap
$
62

 
$
(101
)
Liability assumed at acquisition
$
815

 
$

Accrued capital expenditures
$
3,172

 
$

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

6


CARTER VALIDUS MISSION CRITICAL REIT II, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2017
Note 1—Organization and Business Operations
Carter Validus Mission Critical REIT II, Inc., or the Company, is a Maryland corporation that was formed on January 11, 2013. The Company elected to be taxed as a real estate investment trust, or a REIT, under the Internal Revenue Code of 1986, as amended, for federal income tax purposes, on September 11, 2015. Substantially all of the Company’s business is conducted through Carter Validus Operating Partnership II, LP, a Delaware limited partnership, or the Operating Partnership, formed on January 10, 2013. The Company is the sole general partner of the Operating Partnership and Carter Validus Advisors II, LLC, or the Advisor, is the initial limited partner of the Operating Partnership.
The Company is offering for sale a maximum of $2,350,000,000 in shares of common stock, consisting of up to $2,250,000,000 in shares in its primary offering and up to $100,000,000 in shares of common stock to be made available pursuant to the Company’s distribution reinvestment plan, or the DRIP, on a “best efforts” basis, or the Offering, pursuant to a registration statement on Form S-11, or the Registration Statement, filed with the Securities and Exchange Commission, or the SEC, under the Securities Act of 1933, as amended, or the Securities Act, which was declared effective on May 29, 2014. As of June 30, 2017, the Company was offering Class A shares, Class I shares and Class T shares of common stock, in any combination with a dollar value up to the maximum offering amount.
On May 1, 2017, the Company filed a registration statement on Form S-11 under the Securities Act to register a maximum of $332,500,000 of shares of common stock in the primary offering pursuant to a proposed follow-on offering, and a maximum of $17,500,000 of additional shares pursuant to the DRIP. Accordingly, as provided pursuant to Rule 415 promulgated under the Securities Act, the Company extended the Offering until the earlier of (i) the effective date of the registration statement for the proposed follow-on public offering, (ii) November 25, 2017, that date that is 180 days after the third anniversary of the effective date of the Offering, or (iii) the date the maximum offering amount under the Offering is sold. The Company's board of directors determined to terminate the Offering on November 24, 2017. The Company's board of directors may revise the offering termination date as necessary in its discretion. The Company has not issued any shares in connection with the proposed follow-on offering as the registration statement on Form S-11 has not been declared effective by the SEC.
As of June 30, 2017, the Company had issued approximately 100,752,000 shares of Class A, Class I and Class T common stock (including shares of common stock issued pursuant to the DRIP) in the Offering, resulting in receipt of gross proceeds of approximately $989,732,000, before selling commissions and dealer manager fees of approximately $79,443,000 and other offering costs of approximately $19,908,000. As of June 30, 2017, the Company had approximately $1,360,268,000 in Class A shares, Class I shares and Class T shares of common stock remaining in the Offering.
Substantially all of the Company’s business is managed by the Advisor. Carter Validus Real Estate Management Services II, LLC, or the Property Manager, an affiliate of the Advisor, serves as the Company’s property manager. The Advisor and the Property Manager have received, and will continue to receive, fees for services related to the acquisition and operational stages. The Advisor will also be eligible to receive fees during the liquidation stage. SC Distributors, LLC, an affiliate of the Advisor, or the Dealer Manager, serves as the dealer manager of the Offering. The Dealer Manager has received, and will continue to receive, fees for services related to the Offering.
The Company was formed to invest primarily in quality income-producing commercial real estate, with a focus on data centers and healthcare properties, preferably with long-term net leases to creditworthy tenants, as well as to make other real estate-related investments that relate to such property types, which may include equity or debt interests, including securities, in other real estate entities. The Company also may originate or invest in real estate-related notes receivable. The Company expects real estate-related notes receivable originations and investments to be focused on first mortgage loans, but also may include real estate-related bridge loans, mezzanine loans and securitized notes receivable. As of June 30, 2017, the Company owned 45 real estate investments, consisting of 62 properties, located in 35 metropolitan statistical areas, or MSAs, and one micropolitan statistical area, or µSA.
Except as the context otherwise requires, “we,” “our,” “us,” and the “Company” refer to Carter Validus Mission Critical REIT II, Inc., the Operating Partnership and all wholly-owned subsidiaries.
Note 2—Summary 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

7


accompanying notes thereto are the representation of management. These accounting policies conform to accounting principles generally accepted in the United States of America, 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 for a fair presentation, have been included. Operating results for the three and six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending 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 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 16, 2017.
Principles of Consolidation and Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of the Company, the Operating Partnership, and all wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the condensed consolidated financial statements and accompanying notes in conformity with GAAP requires the Company to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. 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.
Concentration of Credit Risk and Significant Leases
As of June 30, 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 standing; 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 or lack of access to cash in its accounts.
As of June 30, 2017, the Company owned real estate investments in 35 MSAs, one of which accounted for 10.0% or more of contractual rental revenue. Real estate investments located in the Oklahoma City, Oklahoma MSA accounted for 11.7% of contractual rental revenue for the six months ended June 30, 2017.
As of June 30, 2017, the Company had no exposure to tenant concentration that accounted for 10.0% or more of rental revenue.
Restricted Cash
Restricted cash consists of restricted cash held in escrow and restricted bank deposits. Restricted cash held in escrow includes cash held in escrow accounts for capital improvements for certain properties as well as cash held by lenders in escrow accounts for tenant and capital improvements, repairs and maintenance and other lender reserves for certain properties, in accordance with the respective lender’s loan agreement. Restricted cash held in escrow is reported in other assets, net in the accompanying condensed consolidated balance sheets. See Note 6—"Other Assets, Net". Restricted bank deposits consist of tenant receipts for certain properties which are required to be deposited into lender-controlled accounts in accordance with the respective lender's loan agreement. Restricted bank deposits are reported in other assets, net in the accompanying condensed consolidated balance sheets.
On April 1, 2017, the Company adopted Accounting Standards Update, or 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 restricted cash. This ASU states that transfers between cash, cash equivalents and restricted cash are not part of the Company’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. As required, the Company retrospectively applied the guidance in ASU 2016-18 to the prior period presented, which resulted in a decrease of $2,515,000 in net cash used in investing activities on the condensed consolidated statements of cash flows for the six months ended June 30, 2016.

8


The following table presents a reconciliation of the beginning of period and end of period cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets to the totals shown in the condensed consolidated statements of cash flows:
 
 
Six Months Ended
June 30,
Beginning of period:
 
2017
 
2016
Cash and cash equivalents
 
50,446

 
31,262

Restricted cash
 
6,458

 
1,927

Cash, cash equivalents and restricted cash
 
$
56,904

 
$
33,189

 
 
 
 
 
End of period:
 
 
 
 
Cash and cash equivalents
 
74,350

 
35,648

Restricted cash
 
14,018

 
4,442

Cash, cash equivalents and restricted cash
 
$
88,368

 
$
40,090

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 proceeds raised from the DRIP Offering 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. The Company will limit the number of shares repurchased pursuant to the share repurchase program as follows: during any calendar year, the Company will not repurchase in excess of 5.0% of the number of shares of common stock outstanding on December 31st of the previous calendar year. 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.
During the six months ended June 30, 2017, the Company received valid repurchase requests related to 532,599 Class A shares and Class T shares of common stock (519,091 of Class A shares and 13,508 of Class T shares), all of which were repurchased in full for an aggregate purchase price of approximately $4,830,000 (an average of $9.07 per share). During the six months ended June 30, 2016, the Company received valid repurchase requests related to 118,641 Class A shares of common stock, all of which were repurchased in full for an aggregate purchase price of approximately $1,135,000 (an average of $9.57 per share). No shares of Class T common stock were requested to be, or were, repurchased during the six months ended June 30, 2016. No shares of Class I common stock were requested to be, or were, repurchased during the six months ended June 30, 2017 and 2016.
Earnings Per Share
The Company calculates basic earnings per share by dividing net income attributable to common stockholders for the period by the weighted average shares of its common stock outstanding for that period. Diluted earnings per share are computed based on the weighted average number of shares outstanding and all potentially dilutive securities. Shares of non-vested restricted common stock give rise to potentially dilutive shares of common stock. For the three months ended June 30, 2017 and 2016, diluted earnings per share reflected the effect of approximately 15,000 and 16,000, respectively, of non-vested shares of restricted stock that were outstanding as of such period. For the six months ended June 30, 2017 and 2016, diluted earnings per share reflected the effect of approximately 16,000 and 17,000, respectively, of non-vested shares of restricted 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

9


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 the effective date and transition of ASU 2015-14. As the majority of the Company's revenue is derived from real estate lease contracts, as discussed in relation to ASU 2016-02, Leases, the Company does not expect that the adoption of ASU 2014-09 or related amendments and modifications will have a material impact on the condensed consolidated financial statements.
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. Under ASU 2016-02, a lessee is required to record a right of use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. The Company is a lessee on a limited number of ground leases, which will result in the recognition of a right of use asset and lease liability upon the adoption of ASU 2016-02. Lessor accounting remains largely unchanged, apart from the narrower scope of initial direct costs that can be capitalized. The new standard will result in certain costs, such as legal costs related to lease negotiations, being expensed rather than capitalized. In addition, ASU 2016-02 requires lessors to identify the lease and non-lease components, such as common area maintenance, contained within each lease. The non-lease components would have to be evaluated under the revenue recognition guidance of ASU 2014-09. 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 condensed 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 condensed consolidated financial statements. The Company believes that certain financial statements' accounts will be impacted by the adoption of ASU 2016-13, including allowances for doubtful accounts with respect to accounts receivable and straight-line rents receivable. 
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. The Company does not expect that the adoption of ASU 2017-05 will have a material impact on the condensed consolidated financial statements.

10


Note 3—Real Estate Investments
During the six months ended June 30, 2017, the Company purchased eleven real estate properties, all of which were determined to be asset acquisitions. Upon the acquisition of the real estate properties determined to be asset acquisitions, the Company allocates the purchase price of such properties to acquired tangible assets, consisting of land and buildings and improvements, and acquired intangible assets, based on a relative fair value method allocating all accumulated costs.
The following table summarizes the acquisitions paid in cash during the six months ended June 30, 2017:
Property Description
Date
Acquired
 
Ownership
Percentage
 
Purchase Price
(amounts in thousands)
Tempe Data Center
01/26/2017
 
100%
 
$
16,224

Norwalk Data Center
03/30/2017
 
100%
 
58,835

Aurora Healthcare Facility
03/30/2017
 
100%
 
11,531

Texas Rehab - Austin
03/31/2017
 
100%
 
36,945

Texas Rehab - Allen
03/31/2017
 
100%
 
23,691

Texas Rehab - Beaumont
03/31/2017
 
100%
 
9,649

Charlotte Data Center II
05/15/2017
 
100%
 
16,646

250 Williams Atlanta Data Center
06/15/2017
 
100%
 
168,588

Sunnyvale Data Center
06/28/2017
 
100%
 
38,105

Texas Rehab - San Antonio
06/29/2017
 
100%
 
14,853

Cincinnati Data Center
06/30/2017
 
100%
 
10,502

Total
 
 
 
 
$
405,569

The following table summarizes management's allocation of the acquisitions during the six months ended June 30, 2017, based on a relative fair value method allocating all accumulated costs (amounts in thousands):
 
Total
Land
$
50,180

Buildings and improvements
318,266

In-place leases
52,204

Above market leases
1,448

Total assets acquired
422,098

Below market leases and liabilities assumed at acquisitions
(16,529
)
Total liabilities acquired
(16,529
)
Net assets acquired
$
405,569

Acquisition fees and expenses associated with transactions determined to be asset acquisitions are capitalized. The Company capitalized acquisition fees and costs of approximately $6,023,000 related to properties acquired during the three months ended June 30, 2017 and $10,116,000 during the six months ended June 30, 2017. The Company expensed acquisition fees and expenses of approximately of approximately $1,839,000 and $3,368,000, respectively, for the three and six months ended June 30, 2016 in connection with the acquisition of properties determined to be business combinations. The total amount of all acquisition fees and costs is limited to 6.0% of the contract purchase price of a property. The contract purchase price is the amount actually paid or allocated in respect of the purchase, development, construction or improvement of a property exclusive of acquisition fees and costs. For the three and six months ended June 30, 2017 and 2016, acquisition fees and costs did not exceed 6.0% of the contract purchase price of the Company's acquisitions during such periods.

11


Note 4—Acquired Intangible Assets, Net
Acquired intangible assets, net consisted of the following as of June 30, 2017 and December 31, 2016 (amounts in thousands, except weighted average life amounts):
 
June 30, 2017
 
December 31, 2016
In-place leases, net of accumulated amortization of $13,082 and $7,918, respectively (with a weighted average remaining life of 11.1 years and 12.8 years, respectively)
$
145,014

 
$
97,232

Above-market leases, net of accumulated amortization of $93 and $58, respectively (with a weighted average remaining life of 3.3 years and 7.4 years, respectively)
1,609

 
196

Ground lease interest, net of accumulated amortization of $23 and $19, respectively (with a weighted average remaining life of 66.3 years and 66.8 years, respectively)
621

 
625

 
$
147,244

 
$
98,053

The aggregate weighted average remaining life of the acquired intangible assets was 11.2 years and 13.1 years as of June 30, 2017 and December 31, 2016, respectively.
Amortization of the acquired intangible assets for the three months ended June 30, 2017 and 2016 was $2,845,000 and $1,318,000, respectively, and for the six months ended June 30, 2017 and 2016 was $5,203,000 and $2,499,000, 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 5—Intangible Lease Liabilities, Net
Intangible lease liabilities, net consisted of the following as of June 30, 2017 and December 31, 2016 (amounts in thousands, except weighted average life amounts):
 
June 30, 2017
 
December 31, 2016
Below-market leases, net of accumulated amortization of $1,020 and $634, respectively (with a weighted average remaining life of 9.4 years and 13.6 years, respectively)
$
22,201

 
$
6,873


$
22,201

 
$
6,873

Amortization of below-market leases for the three months ended June 30, 2017 and 2016 was $252,000 and $134,000, respectively, and for the six months ended June 30, 2017 and 2016 was $386,000 and $268,000, respectively. Amortization of below-market leases is recorded as an adjustment to rental and parking revenue in the accompanying condensed consolidated statements of comprehensive income.
Note 6—Other Assets, Net
Other assets, net consisted of the following as of June 30, 2017 and December 31, 2016 (amounts in thousands):
 
June 30, 2017
 
December 31, 2016
Deferred financing costs, related to the revolver portion of the secured credit facility, net of accumulated amortization of $2,569 and $1,789, respectively
$
2,525

 
$
3,071

Real estate escrow deposits

 
290

Restricted cash
14,018

 
6,458

Tenant receivable
3,526

 
3,126

Straight-line rent receivable
13,567

 
8,725

Prepaid and other assets
2,073

 
1,087

Derivative assets
1,813

 
1,782

 
$
37,522

 
$
24,539


12


Note 7—Accounts Payable and Other Liabilities
Accounts payable and other liabilities as of June 30, 2017 and December 31, 2016, were comprised of the following (amounts in thousands):
 
June 30, 2017
 
December 31, 2016
Accounts payable and accrued expenses
$
11,884

 
$
7,657

Accrued interest expense
1,643

 
945

Accrued property taxes
3,468

 
1,164

Distributions payable to stockholders
5,035

 
4,336

Tenant deposits
1,218

 
1,551

Deferred rental income
2,742

 
733

Derivative liabilities
765

 
798

 
$
26,755

 
$
17,184

Note 8—Notes Payable and Secured Credit Facility
The Company's debt outstanding as of June 30, 2017 and December 31, 2016 consisted of the following (amounts in thousands):
 
June 30, 2017
 
December 31, 2016
Notes payable:
 
 
 
Fixed rate notes payable
$
214,699

 
$
51,000

Variable rate notes payable fixed through interest rate swaps
136,190

 
71,540

Variable rate notes payable
50,400

 
30,450

Total notes payable, principal amount outstanding
401,289

 
152,990

Unamortized deferred financing costs related to notes payable
(3,981
)
 
(1,945
)
Total notes payable, net of deferred financing costs
397,308

 
151,045

Secured credit facility:
 
 
 
Revolving line of credit
175,000

 
120,000

Term loan
100,000

 
100,000

Total secured credit facility, principal amount outstanding
275,000

 
220,000

Unamortized deferred financing costs related to the term loan of the secured credit facility
(751
)
 
(876
)
Total secured credit facility, net of deferred financing costs
274,249

 
219,124

Total debt outstanding
$
671,557

 
$
370,169

Significant debt activity since December 31, 2016, excluding scheduled principal payments, includes:
During the six months ended June 30, 2017, the Company drew $175,000,000 and repaid $120,000,000 on its secured credit facility.
During the six months ended June 30, 2017, the Company increased the borrowing base availability under the secured credit facility by $83,348,000 by adding seven properties to the aggregate pool availability and removed a property from the collateralized pool, which decreased the aggregate pool availability by $18,645,000.
As of June 30, 2017, the Company had an aggregate pool availability under the secured credit facility of $361,236,000 and an aggregate outstanding principal balance of $275,000,000. As of June 30, 2017, $86,236,000 remained to be drawn on the secured credit facility.
During the six months ended June 30, 2017, the Company entered into five notes payable collateralized by real estate assets in the principal amount of $248,299,000.
During the six months ended June 30, 2017, the Company entered into four interest rate swap agreements to effectively fix the London Interbank Offered Rate, or LIBOR, on $75,000,000 of the term loan of the secured credit facility and two interest rate swap agreements of variable rate notes payable in the aggregate amount of $84,600,000.

13


The principal payments due on the notes payable and secured credit facility for the six 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
 
Total Amount
Six months ending December 31, 2017
 
$

2018
 
175,050

2019
 
101,749

2020
 
4,456

2021
 
154,251

Thereafter
 
240,783

 
 
$
676,289


14


Note 9—Related-Party Transactions and Arrangements
The Company reimburses the Advisor and its affiliates for organization and offering expenses it incurs on the Company’s behalf, but only to the extent the reimbursement would not cause the selling commissions, dealer manager fees, distribution and servicing fees and other organization and offering expenses to exceed 15% of the gross proceeds of the Offering. The Company expects that organization and offering expenses associated with the Offering (other than selling commissions, dealer manager fees and distribution and servicing fees) will be approximately 1.50% of the gross proceeds. As of June 30, 2017, since inception, the Advisor and its affiliates incurred approximately $15,510,000 on the Company’s behalf in offering costs, of which approximately $627,000 of other organization and offering costs remained accrued as of June 30, 2017. Other organization expenses are expensed as incurred and offering costs are charged to stockholders’ equity as incurred.
The Company pays to the Advisor 2.0% of the contract purchase price of each property or asset acquired. For the three months ended June 30, 2017 and 2016, the Company incurred approximately $4,873,000 and $1,937,000, respectively, and for the six months ended June 30, 2017 and 2016, the Company incurred $7,956,000 and $4,170,000, respectively, in acquisition fees to the Advisor or its affiliates. In addition, the Company reimburses the Advisor for acquisition expenses incurred in connection with the selection and acquisition of properties or other real estate-related investments (including expenses relating to potential investments that the Company does not close), such as legal fees and expenses, costs of real estate due diligence, appraisals, non-refundable option payments on properties not acquired, travel and communications expenses, accounting fees and expenses and title insurance premiums, whether or not the property was acquired. The Company expects these expenses will be approximately 0.75% of the purchase price of each property or real estate-related investment.
The Company pays to the Advisor an asset management fee calculated on a monthly basis in an amount equal to 1/12th of 0.75% of gross assets (including amounts borrowed), which is payable monthly in arrears. For the three months ended June 30, 2017 and 2016, the Company incurred approximately $2,351,000 and $1,058,000, respectively, and for the six months ended June 30, 2017 and 2016, the Company incurred approximately $4,357,000 and $2,013,000, respectively, in asset management fees.
In connection with the rental, leasing, operation and management of the Company’s properties, the Company pays the Property Manager and its affiliates aggregate fees equal to 3.0% of gross revenues from the properties managed, or property management fees. 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 its 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, it will pay them customary market fees and may pay the Property Manager an oversight fee equal to 1.0% of the gross revenues of the properties managed. In no event will the Company pay the Property Manager or any affiliate both a property management fee and an oversight fee with respect to any particular property. The Company also will pay the Property Manager a separate fee for the one-time initial rent-up, leasing-up of newly constructed properties or re-leasing to existing tenants. For the three months ended June 30, 2017 and 2016, the Company incurred approximately $738,000 and $312,000, respectively, and for the six months ended June 30, 2017 and 2016, the Company incurred approximately $1,409,000 and $611,000, 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 and six months ended June 30, 2017, the Company incurred $0 and $23,000, respectively, in leasing commissions to the Property Manager. As of June 30, 2016, the Company had not incurred any 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 and six months ended June 30, 2017, the Company incurred approximately $244,000 and $403,000, respectively, in construction management fees to the Property Manager. As of June 30, 2016, the Company had not incurred any construction management fees to the Property Manager. Construction management fees are capitalized in real estate, net in the accompanying condensed consolidated balance sheets.
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. Expenses in excess of the operating expenses in the four immediately preceding quarters that exceeds the greater of (a) 2.0% of average invested assets or (b) 25% of net income, subject to certain adjustments, will not be reimbursed unless the independent directors determine such excess expenses are justified. The Company will not reimburse the Advisor for personnel costs in connection with services for which the Advisor receives an acquisition fee or a disposition fee. For the three months ended June 30, 2017 and 2016, the Advisor allocated approximately $482,000 and $321,000, respectively, and for the six months ended June 30, 2017 and 2016, the Advisor allocated $847,000

15


and $598,000 respectively, in operating expenses to the Company, which are recorded in general and administrative expenses in the accompanying condensed consolidated statements of comprehensive income.
The Company will pay its Advisor or its affiliates, if it provides a substantial amount of services (as determined by a majority of the Company’s independent directors) in connection with the sale of properties, a disposition fee equal to up to the lesser of 1.0% of the contract sales price and one-half of the total brokerage commission paid if a third party broker is also involved, without exceeding the lesser of 6.0% of the contract sales price or a reasonable, customary and competitive real estate commission. As of June 30, 2017, the Company has not incurred any disposition fees to the Advisor or its affiliates.
Upon the sale of the Company, the Advisor will receive 15% of the remaining net sale proceeds after return of capital contributions plus payment to investors of a 6.0% annual cumulative, non-compounded return on the capital contributed by investors, or the subordinated participation in net sale proceeds. As of June 30, 2017, the Company has not incurred any subordinated participation in net sale proceeds to the Advisor or its affiliates.
Upon the listing of the Company’s shares on a national securities exchange, the Advisor will receive 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 a 6.0% annual cumulative, non-compounded return to investors, or the subordinated incentive listing fee. As of June 30, 2017, the Company has not incurred any subordinated incentive listing fees to the Advisor or its affiliates.
Upon termination or non-renewal of the advisory agreement, with or without cause, the Advisor will be entitled to receive subordinated termination fees from the Operating Partnership equal to 15% 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 6.0% cumulative, non-compounded return to investors. In addition, the Advisor may elect to defer its right to receive a subordinated termination fee 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 June 30, 2017, the Company has not incurred any subordinated termination fees to the Advisor or its affiliates.
The Company pays the Dealer Manager selling commissions of up to 7.0% of the gross offering proceeds per Class A share and up to 3.0% of gross offering proceeds per Class T share. All selling commissions are expected to be re-allowed to participating broker-dealers. The Company does not pay selling commissions with respect to Class I shares and shares of any class sold pursuant to the DRIP. In addition, the Company pays the Dealer Manager a dealer manager fee of up to 3.0% of gross offering proceeds from the sale of Class A and Class T shares. The Dealer Manager may receive up to 2.0% of the gross offering proceeds from the sale of Class I shares as a dealer manager fee, of which 1.0% will be funded by our Advisor without reimbursement from us. The 1.0% of the dealer manager fee paid from offering proceeds will be waived in the event an investor purchases Class I shares through a registered investment advisor that is not affiliated with a broker dealer. The dealer manager fee may be partially re-allowed to participating broker-dealers. No dealer manager fees will be paid in connection with purchases of shares of any class made pursuant to the DRIP. For the three months ended June 30, 2017 and 2016, the Company incurred approximately $5,313,000 and $6,940,000, respectively, and for the six months ended June 30, 2017 and 2016, the Company incurred approximately $10,258,000 and $14,944,000, respectively, for selling commissions and dealer manager fees in connection with the Offering to the Dealer Manager.
The Company pays the Dealer Manager a distribution and servicing fee with respect to its Class T shares that are sold in the primary offering that accrues daily in an amount equal to 1/365th of 1.0% of the most recent offering price per Class T share sold in the primary offering on a continuous basis from year to year; provided, however, that upon the termination of the primary offering, the distribution and servicing fee will accrue daily in an amount equal to 1/365th of 1.0% of the most recent estimated NAV per Class T share on a continuous basis from year to year. The Dealer Manager will reallow all of the distribution and servicing fees with respect to Class T shares sold in the primary offering to participating broker-dealers; provided, however, effective June 1, 2017, a participating broker-dealer may give written notice to the Dealer Manager that it waives all or a portion of the reallowance of the distribution and servicing fee, which waiver shall be irrevocable and will not retroactively apply to Class T shares that were previously sold through such participating broker-dealer. Termination of such payment will commence on the earliest to occur of the following: (i) a listing of the Class T shares on a national securities exchange; (ii) following the completion of the Offering, the date on which total underwriting compensation in the Offering equals (a) 10% of the gross proceeds from our primary offering less (b) the total amount of distribution and servicing fees waived by participating broker-dealers; (iii) the date on which there are no longer any Class T shares outstanding; (iv) the fourth anniversary of the last day of the fiscal quarter in which the Company's primary offering terminates; (v) with respect to a Class T share sold in the primary offering, the date on which a participating broker-dealer receives (a) total underwriting compensation equal to 10% of the gross offering proceeds of such Class T share less (b) the amount of any waived distribution and servicing fees by such participating broker-dealer; or (vi) the date on which the holder of such Class T share or its agent notifies the Company or its agent that he or she is represented by a new participating broker-dealer; provided that the Company will continue paying the distribution and servicing fee, which shall be re-allowed to the new participating broker-dealer, if the

16


new participating broker-dealer enters into a participating broker-dealer agreement with the Dealer Manager or otherwise agrees to provide the services set forth in the dealer manager agreement. 
The distribution and servicing fee is paid monthly in arrears. The distribution and servicing fee will not be payable with respect to Class T shares issued under the DRIP or in connection with Class A shares and Class I shares. For the three months ended June 30, 2017 and 2016, the Company incurred approximately $2,810,000 and $3,020,000, respectively, and for the six months ended June 30, 2017 and 2016, the Company incurred approximately $4,459,000 and $3,042,000, respectively, in distribution and servicing fees to the Dealer Manager.
Accounts Payable Due to Affiliates
The following amounts were due to affiliates as of June 30, 2017 and December 31, 2016 (amounts in thousands):
Entity
 
Fee
 
June 30, 2017
 
December 31, 2016
Carter Validus Advisors II, LLC and its affiliates
 
Asset management fees
 
$
883

 
$
627

Carter Validus Real Estate Management Services II, LLC
 
Property management fees
 
352

 
252

Carter Validus Real Estate Management Services II, LLC
 
Construction management fees
 
182

 
323

Carter Validus Advisors II, LLC and its affiliates
 
General and administrative costs
 
397

 
138

Carter Validus Advisors II, LLC and its affiliates
 
Offering costs
 
627

 
289

SC Distributors, LLC
 
Distribution and servicing fees
 
9,475

 
5,750

Carter Validus Advisors II, LLC and its affiliates
 
Acquisition expenses and fees
 
22

 
5


 
 
 
$
11,938

 
$
7,384

Note 10—Segment 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 six months ended June 30, 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, acquisition related expenses, asset management fees and interest expense, net. 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.
General and administrative expenses, acquisition related expenses, asset management fees, depreciation and amortization and interest expense, net are not allocated to individual segments for purposes of assessing segment performance.
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 secured credit facility and other assets not attributable to individual properties.

17


Summary information for the reportable segments during the three and six months ended June 30, 2017 and 2016, is as follows (amounts in thousands):
 
Data Center
 
Healthcare
 
Three Months Ended
June 30, 2017
Revenue:
 
 
 
 
 
Rental, parking and tenant reimbursement revenue
$
11,761

 
$
15,841

 
$
27,602

Expenses:
 
 
 
 
 
Rental and parking expenses
(3,027
)
 
(2,273
)
 
(5,300
)
Segment net operating income
$
8,734

 
$
13,568

 
22,302

 
 
 
 
 
 
Expenses:
 
 
 
 
 
General and administrative expenses
 
 
 
 
(1,212
)
Asset management fees
 
 
 
 
(2,351
)
Depreciation and amortization
 
 
 
 
(9,025
)
Income from operations
 
 
 
 
9,714

Interest expense, net
 
 
 
 
(5,073
)
Net income attributable to common stockholders
 
 
 
 
$
4,641

 
Data Center
 
Healthcare
 
Three Months Ended
June 30, 2016
Revenue:
 
 
 
 
 
Rental, parking and tenant reimbursement revenue
$
2,177

 
$
10,026

 
$
12,203

Expenses:
 
 
 
 
 
Rental and parking expenses
(317
)
 
(1,260
)
 
(1,577
)
Segment net operating income
$
1,860

 
$
8,766

 
10,626

 
 
 
 
 
 
Expenses:
 
 
 
 
 
General and administrative expenses
 
 
 
 
(757
)
Acquisition related expenses
 
 
 
 
(1,946
)
Asset management fees
 
 
 
 
(1,058
)
Depreciation and amortization
 
 
 
 
(4,300
)
Income from operations
 
 
 
 
2,565

Interest expense, net
 
 
 
 
(732
)
Net income attributable to common stockholders
 
 
 
 
$
1,833


18


 
Data Centers
 
Healthcare
 
Six Months Ended
June 30, 2017
Revenue:
 
 
 
 
 
Rental, parking and tenant reimbursement revenue
$
21,465

 
$
30,159

 
$
51,624

Expenses:
 
 
 
 
 
Rental and parking expenses
(5,687
)
 
(4,539
)
 
(10,226
)
Segment net operating income
$
15,778

 
$
25,620

 
41,398

 
 
 
 
 
 
Expenses:
 
 
 
 
 
General and administrative expenses
 
 
 
 
(2,137
)
Asset management fees
 
 
 
 
(4,357
)
Depreciation and amortization
 
 
 
 
(16,635
)
Income from operations
 
 
 
 
18,269

Interest expense, net
 
 
 
 
(8,837
)
Net income attributable to common stockholders
 
 
 
 
$
9,432

 
Data Centers
 
Healthcare
 
Six Months Ended
June 30, 2016
Revenue:
 
 
 
 
 
Rental, parking and tenant reimbursement revenue
$
3,714

 
$
19,913

 
$
23,627

Expenses:
 
 
 
 
 
Rental and parking expenses
(571
)
 
(2,690
)
 
(3,261
)
Segment net operating income
$
3,143

 
$
17,223

 
20,366


 
 
 
 
 
Expenses:
 
 
 
 
 
General and administrative expenses
 
 
 
 
(1,522
)
Acquisition related expenses
 
 
 
 
(3,611
)
Asset management fees
 
 
 
 
(2,013
)
Depreciation and amortization
 
 
 
 
(8,166
)
Income from operations
 
 
 
 
5,054

Interest expense, net
 
 
 
 
(1,611
)
Net income attributable to common stockholders
 
 
 
 
$
3,443


19


Assets by each reportable segment as of June 30, 2017 and December 31, 2016 are as follows (amounts in thousands):
 
June 30, 2017
 
December 31, 2016
Assets by segment:
 
 
 
Data centers
$
697,585

 
$
362,969

Healthcare
763,576

 
653,416

All other
67,957

 
53,653

Total assets
$
1,529,118

 
$
1,070,038

Capital additions and acquisitions by reportable segments for the six months ended June 30, 2017 and 2016 are as follows (amounts in thousands):
 
Six Months Ended
June 30,
 
2017
 
2016
Capital additions and acquisitions by segment:
 
 
 
Data centers
$
308,931

 
$
56,544

Healthcare
110,374

 
107,005

Total capital additions and acquisitions
$
419,305

 
$
163,549

Note 11—Future 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 terms of 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 investment in real estate assets under non-cancelable operating leases for the six 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
Six months ending December 31, 2017
 
$
51,882

2018
 
105,015

2019
 
105,934

2020
 
102,979

2021
 
103,493

Thereafter
 
815,468

 
 
$
1,284,771


20


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 six 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
Six months ending December 31, 2017
 
$
18

2018
 
38

2019
 
38

2020
 
38

2021
 
38

Thereafter
 
2,481

 
 
$
2,651

Note 12—Fair 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 $213,413,000 and $49,930,000 as of June 30, 2017 and December 31, 2016, respectively, as compared to the outstanding principal of $214,699,000 and $51,000,000 as of June 30, 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 $133,774,000 and $69,247,000 as of June 30, 2017 and December 31, 2016, respectively, as compared to the outstanding principal of $136,190,000 and $71,540,000 as of June 30, 2017 and December 31, 2016, respectively.
Notes payable – Variable—The outstanding principal of the notes payable – variable was $50,400,000 and $30,450,000 as of June 30, 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.
Secured credit facility—The outstanding principal of the secured credit facility – variable was $175,000,000 and $195,000,000, which approximated its fair value as of June 30, 2017 and December 31, 2016, respectively. The fair value of the Company's variable rate secured credit facility is estimated based on the interest rates currently offered to the Company by financial institutions. The estimated fair value of the secured credit facility – variable rate fixed through an interest rate swap agreement (Level 2) was approximately $99,149,000 and $24,195,000 as of June 30, 2017 and December 31, 2016, respectively, as compared to the outstanding principal of $100,000,000 and $25,000,000 as of June 30, 2017 and December 31, 2016, respectively.
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 June 30, 2017, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions, and has determined that the credit valuation adjustments are not significant to the overall valuation of its interest rate swaps. As a result, the Company determined that its interest rate swaps valuation is classified in Level 2 of the fair value hierarchy.

21


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 June 30, 2017 and December 31, 2016 (amounts in thousands):
 
June 30, 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
$

 
$
1,813

 
$

 
$
1,813

Total assets at fair value
$

 
$
1,813

 
$

 
$
1,813

Liabilities:
 
 
 
 
 
 
 
Derivative liabilities
$

 
$
765

 
$

 
$
765

Total liabilities at fair value
$

 
$
765

 
$

 
$
765

 
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
$

 
$
1,782

 
$

 
$
1,782

Total assets at fair value
$

 
$
1,782

 
$

 
$
1,782

Liabilities:
 
 
 
 
 
 
 
Derivative liabilities
$

 
$
798

 
$

 
$
798

Total liabilities at fair value
$

 
$
798

 
$

 
$
798

Note 13—Derivative 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 six months ended June 30, 2017, the Company's derivative instruments were used to hedge the variable cash flows associated with variable rate debt. The ineffective portion of changes in fair value of the derivatives are recognized directly in earnings. During the three months ended June 30, 2017 and 2016, the Company recognized a gain of $10,000 and a loss of $22,000, respectively, and during the six months ended June 30, 2017 and 2016, the Company recognized a gain of $2,000 and a loss of $22,000, respectively, due to ineffectiveness of its hedges of interest rate risk, which were recorded in interest expense, net in the accompanying condensed consolidated statements of comprehensive income.
Amounts reported in accumulated other comprehensive income related to the derivative will be reclassified to interest expense, net as interest payments are made on the Company’s variable rate debt. During the next twelve months, the Company estimates that an additional $885,000 will be reclassified from accumulated other comprehensive income as an increase to interest expense, net.
See Note 12—"Fair Value" for a further discussion of the fair value of the Company’s derivative instruments.

22


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
 
June 30, 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
 
07/01/2016 to
05/10/2017
 
12/22/2020 to
04/19/2022
 
$
236,190

 
$
1,813

 
$
(765
)
 
$
96,540

 
$
1,782

 
$
(798
)
The notional amount under the agreements is an indication of the extent of the Company’s involvement in the instruments 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 secured credit facility and notes payable. The change in fair value of the effective portion of the derivative instruments that are designated as hedges is recorded in other comprehensive income, or OCI, in the accompanying condensed consolidated statements of comprehensive income.
The table below summarizes the amount of income recognized on the interest rate derivatives designated as cash flow hedging relationships for the three and six months ended June 30, 2017 and 2016 (amounts in thousands):
Derivatives in Cash Flow Hedging Relationships
 
Amount of Loss Recognized
in OCI on Derivative
(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)
Three Months Ended June 30, 2017
 
 
 
 
 
 
Interest rate swap
 
$
(1,048
)
 
Interest expense, net
 
$
(342
)
Total
 
$
(1,048
)
 
 
 
$
(342
)
Three Months Ended June 30, 2016
 
 
 
 
 
 
Interest rate swap
 
$
(101
)
 
Interest expense, net
 
$

Total
 
$
(101
)
 
 
 
$

Six Months Ended June 30, 2017
 
 
 
 
 
 
Interest rate swaps
 
$
(635
)
 
Interest expense, net
 
$
(697
)
Total
 
$
(635
)
 
 
 
$
(697
)
Six Months Ended June 30, 2016
 
 
 
 
 
 
Interest rate swaps
 
$
(101
)
 
Interest expense, net
 
$

Total
 
$
(101
)
 
 
 
$

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 indebtedness, then the Company could also be declared in default on its derivative obligation, 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 records credit risk valuation adjustments on its interest rate swaps based on the respective credit quality of the Company and the counterparty. The Company believes it mitigates its credit risk by entering into agreements with creditworthy counterparties. As of June 30, 2017, the fair value of the derivative in a net liability position, including accrued interest but excluding any adjustment for nonperformance risk related to the agreement, was $898,000. As of June 30, 2017, there were no termination events or events of default related to the interest rate swaps.

23


Tabular Disclosure Offsetting Derivatives
The Company has elected not to offset derivative positions in its condensed consolidated financial statements. The following tables present the effect on the Company’s financial position had the Company made the election to offset its derivative positions as of June 30, 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
June 30, 2017
 
$
1,813

 
$

 
$
1,813

 
$

 
$

 
$
1,813

December 31, 2016
 
$
1,782

 
$

 
$
1,782

 
$

 
$

 
$
1,782

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
June 30, 2017
 
$
765

 
$

 
$
765

 
$

 
$

 
$
765

December 31, 2016
 
$
798

 
$

 
$
798

 
$

 
$

 
$
798

The Company reports derivatives in the accompanying condensed consolidated balance sheets as other assets, net and accounts payable and other liabilities.
Note 14—Accumulated Other Comprehensive Income
The following table presents a rollforward of amounts recognized in accumulated other comprehensive income by component for the six months ended June 30, 2017 and 2016 (amounts in thousands):
 
 
Unrealized Income on Derivative
Instruments
 
Accumulated Other
Comprehensive Income
Balance as of December 31, 2016
 
$
840

 
$
840

Other comprehensive loss before reclassification
 
(635
)
 
(635
)
Amount of loss reclassified from accumulated other comprehensive income to net income (effective portion)
 
697

 
697

Other comprehensive income
 
62

 
62

Balance as of June 30, 2017
 
$
902

 
$
902


24


 
 
Unrealized Loss on Derivative
Instruments
 
Accumulated Other
Comprehensive Loss
Balance as of December 31, 2015
 
$

 
$

Other comprehensive loss before reclassification
 
(101
)
 
(101
)
Amount of loss reclassified from accumulated other comprehensive loss to net income (effective portion)
 

 

Other comprehensive loss
 
(101
)
 
(101
)
Balance as of June 30, 2016
 
$
(101
)
 
$
(101
)
The following table presents reclassifications out of accumulated other comprehensive income for the six months ended June 30, 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 Consolidated Statements of Comprehensive Income
 
 
Six Months Ended
June 30,
 
 
 
 
2017
 
2016
 
 
Interest rate swap contracts
 
$
697

 
$

 
Interest expense, net
Note 15—Commitments and Contingencies
Litigation
In the ordinary course of business, the Company may become subject to litigation or claims. As of June 30, 2017, there were, and currently there are, no material pending legal proceedings to which the Company is a party.
Note 16—Economic Dependency
The Company is dependent on the Advisor and its affiliates for certain services that are essential to the Company, including the sale of the Company’s shares of common and preferred stock available for issuance; the identification, evaluation, negotiation, purchase and disposition of real estate investments and other investments; the management of the daily operations of the Company’s real estate portfolio; and other general and administrative responsibilities. In the event that the Advisor and its affiliates are unable to provide the respective services, the Company will be required to obtain such services from other sources.
Note 17—Subsequent Events
Distributions to Stockholders Paid
On July 3, 2017, the Company paid aggregate distributions of approximately $4,029,000 to Class A stockholders ($1,977,000 in cash and $2,052,000 in shares of the Company’s Class A common stock pursuant to the DRIP), which related to distributions declared for each day in the period from June 1, 2017 through June 30, 2017. On August 1, 2017, the Company paid aggregate distributions of approximately $4,203,000 to Class A stockholders ($2,073,000 in cash and $2,130,000 in shares of the Company’s Class A common stock pursuant to the DRIP), which related to distributions declared for each day in the period from July 1, 2017 through July 31, 2017.
On July 3, 2017, the Company paid aggregate distributions of approximately $72,000 to Class I stockholders ($34,000 in cash and $38,000 in shares of the Company's Class I common stock pursuant to the DRIP), which related to distributions declared for each day in the period from June 1, 2017 through June 30, 2017. On August 1, 2017, the Company paid aggregate distributions of approximately $106,000 to Class I stockholders ($52,000 in cash and $54,000 in shares of the Company's Class I common stock pursuant to the DRIP), which related to distributions declared for each day in the period from July 1, 2017 through July 31, 2017.
On July 3, 2017, the Company paid aggregate distributions of approximately $934,000 to Class T stockholders ($375,000 in cash and $559,000 in shares of the Company's Class T common stock pursuant to the DRIP), which related to distributions declared for each day in the period from June 1, 2017 through June 30, 2017. On August 1, 2017, the Company paid aggregate distributions of approximately $1,061,000 to Class T stockholders ($432,000 in cash and $629,000 in shares of the Company's

25


Class T common stock pursuant to the DRIP), which related to distributions declared for each day in the period from July 1, 2017 through July 31, 2017.
Distributions Declared
Class A Shares
On August 3, 2017, the board of directors of the Company approved and declared a distribution to the Company’s Class A stockholders of record as of the close of business on each day of the period commencing on September 1, 2017 and ending on November 30, 2017. The distributions will be calculated based on 365 days in the calendar year and will be equal to $0.001767101 per share of Class A common stock, which will be equal to an annualized distribution rate of 6.40%, assuming a purchase price of $10.078 per share of Class A common stock. The distributions declared for each record date in September 2017, October 2017 and November 2017 will be paid in October 2017, November 2017 and December 2017, respectively. The distributions will be payable to stockholders from legally available funds therefor.
Class I Shares
On August 3, 2017, the board of directors of the Company approved and declared a daily distribution to the Company’s Class I stockholders of record as of the close of business on each day of the period commencing on September 1, 2017 and ending on November 30, 2017. The distribution will be calculated based on 365 days in the calendar year and will be equal to $0.001767101 per share of Class I common stock, which will be equal to an annualized distribution rate of 7.04%, assuming a purchase price of $9.162 per share. The distributions declared for each record date in September 2017, October 2017 and November 2017 will be paid in October 2017, November 2017 and December 2017, respectively. The distributions will be payable to stockholders from legally available funds therefor.
Class T Shares
On August 3, 2017, the board of directors of the Company approved and declared a daily distribution to the Company’s Class T stockholders of record as of the close of business on each day of the period commencing on September 1, 2017 and ending on November 30, 2017. The distribution will be calculated based on 365 days in the calendar year and will be equal to $0.001501543 per share of Class T common stock, which will be equal to an annualized distribution rate of 5.68%, assuming a purchase price of $9.649 per share. The distributions declared for each record date in September 2017, October 2017 and November 2017 will be paid in October 2017, November 2017 and December 2017, respectively. The distributions will be payable to stockholders from legally available funds therefor.
Status of the Offering
As of August 7, 2017, the Company had accepted investors’ subscriptions for and issued approximately 78,430,000 shares of Class A common stock, 2,306,000 shares of Class I common stock and 24,465,000 shares of Class T common stock in the Offering, resulting in receipt of gross proceeds of approximately $776,787,000, $20,988,000 and $234,478,000, respectively, including shares of its common stock issued pursuant to its DRIP, for total gross proceeds raised of $1,032,253,000. As of August 7, 2017, the Company had approximately $1,317,747,000 in Class A shares, Class I shares and Class T shares of common stock remaining in the Offering.

26


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 unaudited 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 Securities and Exchange Commission, or the SEC, on March 16, 2017, or the 2016 Annual Report on Form 10-K.
The terms “we,” “our,” and the “Company” refer to Carter Validus Mission Critical REIT II, Inc., Carter Validus Operating Partnership II, LP, or our Operating Partnership, and all wholly-owned 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. Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. 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 generally accepted accounting principles 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 January 11, 2013 under the laws of Maryland to acquire and operate a diversified portfolio of income-producing commercial real estate with a focus on data centers and healthcare properties, preferably with long-term net leases to creditworthy tenants, as well as to make other real estate-related investments that relate to such property types. We are offering for sale a maximum of $2,350,000,000 in shares of common stock, or the maximum offering amount, consisting of up to $2,250,000,000 in shares of common stock in our primary offering and up to $100,000,000 in shares of common stock pursuant to our distribution reinvestment plan, or the DRIP, on a “best efforts” basis pursuant to a registration statement on Form S-11, or the Registration Statement, filed with the SEC under the Securities Act, or our Offering. As of June 30, 2017, we were offering Class A shares, Class I shares and Class T shares of common stock, in any combination with a dollar value up to the maximum offering amount. The offering price for the common shares in the primary offering is $10.078 per Class A share, $9.162 per Class I share, and $9.649 per Class T share and the offering price for shares in the DRIP is $9.07 per Class A share, $9.07 per Class I share and $9.07 per Class T share, which is equal to the most recent estimated per share net asset value, or NAV, of each of our Class A common stock and Class T common stock, as determined by our board of directors on September 29, 2016.
On May 1, 2017, we filed a registration statement on Form S-11 under the Securities Act to register a maximum of $332,500,000 of shares of Class A, Class I and Class T common stock in the primary offering pursuant to a proposed follow-on offering, and a maximum of $17,500,000 of additional shares pursuant to the DRIP. Accordingly, as provided pursuant to Rule 415 promulgated under the Securities Act, we extended the Offering until the earlier of (i) the effective date of the registration statement for the proposed follow-on public offering, (ii) November 25, 2017, that date that is 180 days after the third anniversary of the effective date of the Offering, or (iii) the date the maximum offering amount under the Offering is sold. Our board of directors determined to terminate the Offering on November 24, 2017. Our board of directors may revise the offering

27


termination date as necessary in its discretion. We have not issued any shares in connection with the proposed follow-on offering as the registration statement on Form S-11 has not been declared effective by the SEC.
On June 2, 2017, we filed Articles Supplementary to the Second Articles of Amendment and Restatement with the State Department of Assessments and Taxation of Maryland reclassifying a portion of our Class A shares, Class I shares and Class T shares as Class T2 shares. We currently are not offering Class T2 shares in the Offering.
As of June 30, 2017, we had accepted investors’ subscriptions for and issued approximately 100,752,000 shares of Class A, Class I and Class T common stock (including shares of common stock issued pursuant to the DRIP) in our Offering, resulting in receipt of gross proceeds of approximately $989,732,000, before selling commissions and dealer manager fees of approximately $79,443,000 and other offering costs of approximately $19,908,000. As of June 30, 2017, we had approximately $1,360,268,000 in Class A shares, Class I shares and Class T shares of common stock remaining in our Offering.
Substantially all of our operations are conducted through Carter Validus Operating Partnership II, LP, or our Operating Partnership. We are externally advised by Carter Validus Advisors II, LLC, or our Advisor, which is our affiliate, pursuant to an advisory agreement between us and our Advisor. 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 Management Company II, LLC, or our Sponsor. We have no paid employees and we rely on our Advisor to provide substantially all of our services.
Carter Validus Real Estate Management Services II, 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 the acquisition and operational stages and our Advisor may be eligible to receive fees during the liquidation stage of the Company. SC Distributors, LLC, an affiliate of the Advisor, or the Dealer Manager, serves as the dealer manager of the Offering. The Dealer Manager has received, and will continue to receive, fees for services related to our Offering.
We currently operate through two reportable segments – commercial real estate investments in data centers and healthcare. As of June 30, 2017, we had purchased 45 real estate investments, consisting of 62 properties and comprising approximately 4,630,000 of gross rental square feet, for an aggregate purchase price of approximately $1,406,516,000.
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. 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 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.

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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 10—"Segment Reporting" to our condensed consolidated financial statements that are part of this Quarterly Report on Form 10-Q 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 June 30, 2017 and 2016:
 
June 30,
 
2017
 
2016
Number of commercial operating real estate properties (1)
60


40

Leased rentable square feet
4,496,000

 
2,003,000

Weighted average percentage of rentable square feet leased
97.1
%
 
99.9
%
(1)
As of June 30, 2017, we owned 62 real estate properties, two of which were under construction. As of June 30, 2016, we owned 42 real estate properties, two of which were under construction.
The following table summarizes our real estate acquisition activity for the three and six months ended June 30, 2017 and 2016:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
 
Commercial operating real estate properties acquired
5

 
3

(1) 
11

 
12

(1) 
Approximate aggregate purchase price of acquired real estate properties
$
248,694,000

 
$
76,046,000

 
$
406,384,000

 
$
161,462,000

 
Leased rentable square feet
1,119,000

 
202,000

 
1,525,000

 
481,000

 
(1)
During the three months ended June 30, 2016, we acquired four real estate properties, one of which was under construction. During the six months ended June 30, 2016, we acquired 14 real estate properties, two of which were under construction.
The following discussion is based on our condensed consolidated financial statements for the three and six months June 30, 2017 and 2016.
This section describes and compares our results of operations for the three and six months ended June 30, 2017 and 2016. We generate almost all of our net operating income from property operations. In order to evaluate our overall portfolio, management analyzes 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 exclude 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.
Three Months Ended June 30, 2017 Compared to the Three Months Ended June 30, 2016
Changes in our revenues are summarized in the following table (amounts in thousands):

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Three Months Ended June 30,
 
 
 
2017
 
2016
 
Change
Same store rental and parking revenue
$
10,827

 
$
10,814

 
$
13

Non-same store rental and parking revenue
12,856

 
73

 
12,783

Same store tenant reimbursement revenue
1,562

 
1,314

 
248

Non-same store tenant reimbursement revenue
2,356

 
1

 
2,355

Other operating income
1

 
1

 

Total revenue
$
27,602

 
$
12,203

 
$
15,399

There was an increase in contractual rental revenue resulting from average annual rent escalations of 2.15% at our same store properties, which was offset entirely by straight-line rental revenue.
Non-same store rental and parking revenue increased due to the acquisition of 23 operating properties since April 1, 2016.
Same store tenant reimbursement revenue increased primarily due to an increase in real estate tax and common area maintenance reimbursements at certain same store properties.
Non-same store tenant reimbursement revenue increased due to the acquisition of 23 operating properties since April 1, 2016.
Changes in our expenses are summarized in the following table (amounts in thousands):
 
Three Months Ended June 30,
 
 
 
2017
 
2016
 
Change
Same store rental and parking expenses
$
1,933

 
$
1,576

 
$
357

Non-same store rental and parking expenses
3,367

 
1

 
3,366

General and administrative expenses
1,212

 
757

 
455

Acquisition related expenses

 
1,946

 
(1,946
)
Asset management fees
2,351

 
1,058

 
1,293

Depreciation and amortization
9,025

 
4,300

 
4,725

Total expenses
$
17,888

 
$
9,638

 
$
8,250

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 and repairs and maintenance at certain same store properties.
Non-same store rental and parking expenses, certain of which are subject to reimbursement by our tenants, increased primarily due to the acquisition of 23 operating properties since April 1, 2016.
General and administrative expenses increased due to an increase in professional and legal fees, personnel costs and other administrative costs, in connection with our Company's growth.
Acquisition related expenses decreased due to a decrease in real estate properties determined to be business combinations due to the early adoption of ASU 2017-01, Business Combinations. Acquisition fees and expenses associated with transactions determined to be business combinations are expensed as incurred. During the three months ended June 30, 2017, we did not acquire any real estate properties determined to be business combinations as compared to three real estate properties determined to be business combinations during the three months ended June 30, 2016.
Asset management fees increased due to an increase in the weighted average operating assets held to $1,115.9 million as of June 30, 2017, as compared to $521.2 million as of June 30, 2016.
Depreciation and amortization increased due to an increase in the weighted average depreciable basis of operating real estate investments.
Changes in interest expense, net are summarized in the following table (amounts in thousands):


30


 
Three Months Ended June 30,
 
 
 
2017
 
2016
 
Change
Interest expense, net: