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EX-32.2 - EXHIBIT 32.2 - Carter Validus Mission Critical REIT, Inc.a2017q210qexhibit322reiti0.htm
EX-32.1 - EXHIBIT 32.1 - Carter Validus Mission Critical REIT, Inc.a2017q210qexhibit321reiti0.htm
EX-31.2 - EXHIBIT 31.2 - Carter Validus Mission Critical REIT, Inc.a2017q210qexhibit312reiti0.htm
EX-31.1 - EXHIBIT 31.1 - Carter Validus Mission Critical REIT, Inc.a2017q210qexhibit311reiti0.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: 000-54675
___________________________________________
cvmcrlogonewcva28.jpg
CARTER VALIDUS MISSION CRITICAL REIT, INC. 
(Exact name of registrant as specified in its charter) 
___________________________________________
Maryland
 
27-1550167
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
4890 West Kennedy Blvd., Suite 650
Tampa, FL 33609
 
(813) 287-0101
(Address of Principal Executive Offices; Zip Code)
 
(Registrant’s Telephone Number)
Not Applicable
(Former name, former address, and former fiscal year, if changed since last report)
___________________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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. (Check one):
Large accelerated filer
 
  
Accelerated filer
 
Non-accelerated filer
 
☒ (Do not check if a smaller reporting company)
  
Smaller reporting company
 
 
 
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for comply with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of Securities Act.    ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒
As of August 7, 2017, there were approximately 186,643,000 shares of common stock of Carter Validus Mission Critical REIT, Inc. outstanding.
 



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



PART 1. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements.
CARTER VALIDUS MISSION CRITICAL REIT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
(Unaudited)
June 30, 2017
 
December 31, 2016
ASSETS
Real estate:
 
 
 
Land ($4,280 and $4,280, respectively, related to VIE)
$
181,960

 
$
181,960

Buildings and improvements, less accumulated depreciation of $180,030 and $152,486, respectively ($83,347 and $84,760, respectively, related to VIE)
1,812,123

 
1,812,769

Construction in process

 
16,143

Total real estate, net ($87,627 and $89,040, respectively, related to VIE)
1,994,083

 
2,010,872

Cash and cash equivalents ($2,068 and $2,308, respectively, related to VIE)
45,394

 
42,613

Acquired intangible assets, less accumulated amortization of $61,852 and $53,372, respectively ($6,099 and $6,465, respectively, related to VIE)
169,950

 
178,430

Other assets, net ($9,878 and $8,525, respectively, related to VIE)
110,525

 
105,739

Total assets
$
2,319,952

 
$
2,337,654

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
 
 
 
Notes payable, net of deferred financing costs of $1,777 and $2,542, respectively ($50,876 and $51,283, respectively, related to VIE)
$
468,491

 
$
484,270

Credit facility, net of deferred financing costs of $1,303 and $1,789, respectively
386,697

 
356,211

Accounts payable due to affiliates ($55 and $54, respectively, related to VIE)
2,695

 
2,635

Accounts payable and other liabilities ($3,509 and $3,825, respectively, related to VIE)
41,212

 
40,196

Intangible lease liabilities, less accumulated amortization of $18,071 and $16,332, respectively ($7,518 and $8,030, respectively, related to VIE)
47,659

 
49,398

Total liabilities
946,754

 
932,710

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

 

Common stock, $0.01 par value per share, 300,000,000 shares authorized; 193,374,412 and 189,848,165 shares issued, respectively; 186,048,460 and 184,909,673 shares outstanding, respectively
1,860

 
1,849

Additional paid-in capital
1,635,907

 
1,625,862

Accumulated distributions in excess of earnings
(302,251
)
 
(258,878
)
Accumulated other comprehensive income
2,942

 
1,823

Total stockholders’ equity
1,338,458

 
1,370,656

Noncontrolling interests
34,740

 
34,288

Total equity
1,373,198

 
1,404,944

Total liabilities and stockholders’ equity
$
2,319,952

 
$
2,337,654

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

3


CARTER VALIDUS MISSION CRITICAL REIT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands, except share data and per share amounts)
(Unaudited)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Revenue:
 
 
 
 
 
 
 
Rental and parking revenue
$
50,752

 
$
54,113

 
$
98,562

 
$
106,302

Tenant reimbursement revenue
5,237

 
4,774

 
8,817

 
9,095

Total revenue
55,989

 
58,887

 
107,379

 
115,397

Expenses:
 
 
 
 
 
 
 
Rental and parking expenses
7,713

 
7,373

 
15,104

 
14,012

General and administrative expenses
1,997

 
1,587

 
3,680

 
3,168

Change in fair value of contingent consideration
100

 
125

 
(1,040
)
 
245

Acquisition related expenses

 
1,640

 

 
1,640

Asset management fees
4,827

 
4,877

 
9,646

 
9,664

Depreciation and amortization
18,088

 
17,349

 
36,155

 
34,348

Total expenses
32,725

 
32,951

 
63,545

 
63,077

Income from operations
23,264

 
25,936

 
43,834

 
52,320

Other income (expense):
 
 
 
 
 
 
 
Other interest and dividend income
491

 
2,857

 
1,054

 
5,679

Interest expense, net
(8,859
)
 
(9,213
)
 
(17,524
)
 
(19,827
)
Provision for loan losses
(1,688
)
 
(1,666
)
 
(4,172
)
 
(1,666
)
Total other expense
(10,056
)
 
(8,022
)
 
(20,642
)
 
(15,814
)
Net income
13,208

 
17,914

 
23,192

 
36,506

Net income attributable to noncontrolling interests in consolidated partnerships
(1,039
)
 
(1,061
)
 
(2,120
)
 
(1,989
)
Net income attributable to common stockholders
$
12,169

 
$
16,853

 
$
21,072

 
$
34,517

Other comprehensive (loss) income:
 
 
 
 
 
 
 
Unrealized (loss) income on interest rate swaps, net
$
(384
)
 
$
(2,606
)
 
$
1,119

 
$
(6,469
)
Other comprehensive (loss) income
(384
)
 
(2,606
)
 
1,119

 
(6,469
)
Comprehensive income
12,824

 
15,308

 
24,311

 
30,037

Comprehensive income attributable to noncontrolling interests in consolidated partnerships
(1,039
)
 
(1,061
)
 
(2,120
)
 
(1,989
)
Comprehensive income attributable to common stockholders
$
11,785

 
$
14,247

 
$
22,191

 
$
28,048

Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
185,897,525

 
182,743,182

 
185,600,604

 
182,372,560

Diluted
185,911,968

 
182,762,094

 
185,616,171

 
182,392,594

Net income per common share attributable to common stockholders:
 
 
 
 
 
 
 
Basic
$
0.07

 
$
0.09

 
$
0.11

 
$
0.19

Diluted
$
0.07

 
$
0.09

 
$
0.11

 
$
0.19

Distributions declared per common share
$
0.17

 
$
0.17

 
$
0.35

 
$
0.35

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

4


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

 
$
1,849

 
$
1,625,862

 
$
(258,878
)
 
$
1,823

 
$
1,370,656

 
$
34,288

 
$
1,404,944

Vesting of restricted stock
4,500

 

 
45

 

 

 
45

 

 
45

Issuance of common stock under the distribution reinvestment plan
3,521,747

 
35

 
33,506

 

 

 
33,541

 

 
33,541

Distributions to noncontrolling interests

 

 

 

 

 

 
(1,668
)
 
(1,668
)
Distributions declared to common stockholders

 

 

 
(64,445
)
 

 
(64,445
)
 

 
(64,445
)
Other offering costs

 

 
(32
)
 

 

 
(32
)
 

 
(32
)
Repurchase of common stock
(2,387,460
)
 
(24
)
 
(23,474
)
 

 

 
(23,498
)
 

 
(23,498
)
Other comprehensive income

 

 

 

 
1,119

 
1,119

 

 
1,119

Net income

 

 

 
21,072

 

 
21,072

 
2,120

 
23,192

Balance, June 30, 2017
186,048,460

 
$
1,860

 
$
1,635,907

 
$
(302,251
)
 
$
2,942

 
$
1,338,458

 
$
34,740

 
$
1,373,198

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

5


CARTER VALIDUS MISSION CRITICAL REIT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) 
(Unaudited)
 
Six Months Ended
June 30,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income
$
23,192

 
$
36,506

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
36,155

 
34,348

Amortization of deferred financing costs
1,959

 
2,279

Amortization of above-market leases
186

 
232

Amortization of intangible lease liabilities
(1,739
)
 
(1,950
)
Provision for doubtful accounts
9,259

 
809

Provision for loan losses
4,172

 
1,666

Loss on debt extinguishment

 
1,133

Straight-line rent
(7,787
)
 
(12,689
)
Stock-based compensation
45

 
45

Change in fair value of contingent consideration
(1,040
)
 
245

Changes in operating assets and liabilities:
 
 
 
Accounts payable and other liabilities
441

 
1,686

Accounts payable due to affiliates
14

 
142

Other assets
(6,248
)
 
(5,707
)
Net cash provided by operating activities
58,609

 
58,745

Cash flows from investing activities:
 
 
 
Investment in real estate

 
(71,000
)
Capital expenditures
(9,472
)
 
(30,830
)
Real estate deposits, net

 
450

Notes receivable advances
(500
)
 
(3,519
)
Net cash used in investing activities
(9,972
)
 
(104,899
)
Cash flows from financing activities:
 
 
 
Payments on notes payable
(16,544
)
 
(37,353
)
Proceeds from credit facility
30,000

 
135,000

Payments of deferred financing costs
(1,409
)
 
(401
)
Repurchase of common stock
(23,498
)
 
(16,996
)
Offering costs
(32
)
 
(9
)
Distributions to stockholders
(31,160
)
 
(29,629
)
Distributions to noncontrolling interests in consolidated partnerships
(1,668
)
 
(1,113
)
Net cash (used in) provided by financing activities
(44,311
)
 
49,499

Net change in cash, cash equivalents and restricted cash
4,326

 
3,345

Cash, cash equivalents and restricted cash - Beginning of period
57,605

 
43,070

Cash, cash equivalents and restricted cash - End of period
$
61,931

 
$
46,415

Supplemental cash flow disclosure:
 
 
 
Interest paid, net of interest capitalized of $1,736 and $801, respectively
$
17,334

 
$
17,191

Supplemental disclosure of non-cash transactions:
 
 
 
Common stock issued through distribution reinvestment plan
$
33,541

 
$
34,138

Net unrealized gain (loss) on interest rate swap
$
1,119

 
$
(6,469
)
Accrued capital expenditures
$
1,641

 
$
7,459

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

6


CARTER VALIDUS MISSION CRITICAL REIT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2017
Note 1Organization and Business Operations
Carter Validus Mission Critical REIT, Inc., or the Company, a Maryland corporation, was incorporated on December 16, 2009 and elected to be taxed and currently qualifies as a real estate investment trust, or a REIT, under the Internal Revenue Code of 1986, as amended, or the Code, for federal income tax purposes. The Company was organized to acquire and operate a diversified portfolio of income-producing commercial real estate, with a focus on the data center and healthcare property sectors, net leased to creditworthy tenants, as well as to make other real estate-related investments that relate to such property types. The Company operates through two reportable segments—commercial real estate investments in data centers and healthcare. Substantially all of the Company’s business is conducted through Carter/Validus Operating Partnership, LP, a Delaware limited partnership, or the Operating Partnership. The Company is the sole general partner of the Operating Partnership. Carter/Validus Advisors, LLC, or the Advisor, the Company’s affiliated advisor, is the sole limited partner of the Operating Partnership.
As of June 30, 2017, the Company owned 49 real estate investments (including one real estate investment owned through a consolidated partnership), consisting of 84 properties located in 46 metropolitan statistical areas, or MSAs.
The Company ceased offering shares of common stock in its initial public offering, or the Offering, on June 6, 2014. At the completion of the Offering, the Company raised gross proceeds of approximately $1,716,046,000 (including shares of common stock issued pursuant to a distribution reinvestment plan, or the DRIP). The Company will continue to issue shares of common stock under the DRIP Offering (as defined below) until such time as the Company sells all of the shares registered for sale under the DRIP Offering, unless the Company files a new registration statement with the Securities and Exchange Commission, or the SEC, or the DRIP Offering is terminated by the Company’s board of directors. We refer to our DRIP Offering and Offering together as the "Offerings."
On May 22, 2017, the Company registered 11,387,512 shares of common stock with a price per share of $9.519, based on the price per share formula set forth in the registration statement on Form S-3 (which price may change upon the Company's calculation of an updated net asset value per share), for a proposed maximum offering price of $108,397,727 in shares of common stock under the DRIP pursuant to a registration statement on Form S-3, or the DRIP Offering.
As of June 30, 2017, the Company had issued approximately 193,312,000 shares of common stock in the Offerings for gross proceeds of $1,913,309,000, before share repurchases of $71,360,000 and offering costs, selling commissions and dealer manager fees of $174,825,000.
Except as the context otherwise requires, “we,” “our,” “us,” and the “Company” refer to Carter Validus Mission Critical REIT, Inc., the Operating Partnership, all majority-owned subsidiaries and controlled subsidiaries.

7


Note 2Summary of Significant Accounting Policies
The summary of significant accounting policies presented below is designed to assist in understanding the Company’s condensed consolidated financial statements. Such condensed consolidated financial statements and the accompanying notes thereto are the representation of management. The accompanying condensed consolidated unaudited financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP, for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal and recurring nature considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ended December 31, 2017.
The condensed consolidated balance sheet at December 31, 2016 has been derived from the audited consolidated financial statements at that date but does not include all of the information and notes required by GAAP for complete financial statements. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s audited consolidated financial statements as of and for the year ended December 31, 2016 and related notes thereto set forth in the Company’s Annual Report on Form 10-K, filed with the SEC on March 30, 2017.
Principles of Consolidation and Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of the Company, the Operating Partnership, all majority-owned subsidiaries and controlled subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with GAAP necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. These estimates are made and evaluated on an ongoing basis using information that is currently available as well as various other assumptions believed to be reasonable under the circumstances. Actual results could differ from those estimates.
Allowance for Uncollectible Accounts
Tenant receivables and unbilled deferred rent receivables are carried net of the allowances for uncollectible amounts. An allowance will be maintained for estimated losses resulting from the inability of certain tenants to meet the contractual obligations under their lease agreements. The Company also maintains an allowance for deferred rent receivables arising from the straight-lining of rents. The Company’s determination of the adequacy of these allowances is based primarily upon evaluations of historical loss experience, the tenant’s financial condition, security deposits, letters of credit, lease guarantees and current economic conditions and other relevant factors. For the three months ended June 30, 2017 and 2016, the Company recorded $1,595,000 and $809,000, respectively, and for the six months ended June 30, 2017 and 2016, the Company recorded $9,259,000 and $809,000, respectively, in provision for doubtful accounts related to reserves for rental and parking revenue and tenant reimbursement revenue, which are recognized in the accompanying condensed consolidated statements of comprehensive income as a deduction from rental and parking revenue and tenant reimbursement revenue.
Notes Receivable
Notes receivable are reported at their outstanding principal balance, net of any unearned income, unamortized deferred fees and costs and allowances for loan losses. The unamortized deferred fees and costs are amortized over the life of the notes receivable, as applicable, and recorded in other interest and dividend income in the accompanying condensed consolidated statements of comprehensive income.
The Company evaluates the collectability of both interest and principal on each note receivable to determine whether it is collectible primarily through the evaluation of credit quality indicators, such as the tenant's financial condition, evaluations of historical loss experience, current economic conditions and other relevant factors. Evaluating a note receivable for potential impairment requires management to exercise significant judgment. As of June 30, 2017 and December 31, 2016, the aggregate balance on the Company's notes receivable before allowances for loan losses was $15,019,000 and $19,422,000, respectively. For the three months ended June 30, 2017 and 2016, the Company recorded $1,688,000 and $1,666,000, respectively, and for the six months ended June 30, 2017 and 2016, the Company recorded $4,172,000 and $1,666,000, respectively, as an allowance to reduce the carrying value of notes receivable and accrued interest related to two tenants in provision for loan losses in the accompanying condensed consolidated financial statements.

8


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 standings; therefore, the Company believes it is not exposed to any significant credit risk on its cash deposits. To date, the Company has experienced no loss of, or lack of access to, cash in its accounts.
As of June 30, 2017, the Company owned real estate investments in 46 MSAs, (including one real estate investment owned through a consolidated partnership), two of which accounted for 10.0% or more of contractual rental revenue. Real estate investments located in the Dallas-Ft. Worth-Arlington, Texas MSA and the Chicago-Naperville-Elgin, Illinois-Indiana-Wisconsin MSA accounted for an aggregate of 10.4% and 12.1%, respectively, of contractual rental revenue for the six months ended June 30, 2017.
As of June 30, 2017, the Company had one exposure to tenant concentration that accounted for 10.0% or more of rental revenue. The leases with AT&T Services, Inc. accounted for 11.9% of rental revenue for the six months ended June 30, 2017.
Restricted Cash
Restricted cash consists of restricted cash held in escrow and restricted bank deposits. Restricted cash held in escrow includes 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 is reported in other assets, net in the accompanying condensed consolidated balance sheets. See Note 5—"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 ASU 2016-18, Restricted Cash, or ASU 2016-18. ASU 2016-18 requires that a statement of cash flows explain the change during a reporting period in the total of cash, cash equivalents, and amounts generally described as restricted cash. 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 an increase of $1,604,000 in net cash provided by financing activities and an increase of $169,000 in net cash provided by operating activities on the condensed consolidated statements of cash flows for the six months ended June 30, 2016.
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
 
$
42,613

 
$
28,527

Restricted cash
 
14,992

 
14,543

Cash, cash equivalents and restricted cash
 
$
57,605

 
$
43,070

 
 
 
 
 
End of period:
 
 
 
 
Cash and cash equivalents
 
$
45,394

 
$
30,099

Restricted cash
 
16,537

 
16,316

Cash, cash equivalents and restricted cash
 
$
61,931

 
$
46,415

Share Repurchase Program
The Company’s share repurchase program allows for repurchases of shares of the Company’s common stock when certain criteria are met. The share repurchase program provides that all repurchases during any calendar year, including those redeemable upon death or a qualifying disability of a stockholder, are limited to those that can be funded with equivalent reinvestments pursuant to the DRIP Offerings during the prior calendar year and other operating funds, if any, as the board of directors, in its sole discretion, may reserve for this purpose.

9


Repurchases of shares of the Company’s common stock are at the sole discretion of the Company’s board of directors. In addition, the Company’s board of directors, in its sole discretion, may amend, suspend, reduce, terminate or otherwise change the share repurchase program upon 30 days' prior notice to the Company’s stockholders for any reason it deems appropriate. The share repurchase program provides that the Company will limit the number of shares repurchased during any calendar year to 5.0% of the number of shares of common stock outstanding as of December 31st of the previous calendar year.
During the six months ended June 30, 2017, the Company received valid repurchase requests related to approximately 2,387,000 shares of common stock, all of which were repurchased in full for an aggregate purchase price of approximately $23,498,000 (an average of $9.84 per share). During the six months ended June 30, 2016, the Company received valid repurchase requests related to approximately 1,758,000 shares of common stock, all of which were repurchased in full for an aggregate purchase price of approximately $16,996,000 (an average of $9.67 per share).
Earnings Per Share
Basic earnings per share for all periods presented are computed by dividing net income attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Shares of non-vested restricted common stock give rise to potentially dilutive shares of common stock. Diluted earnings per share are computed based on the weighted average number of shares outstanding and all potentially dilutive securities. For the three months ended June 30, 2017 and 2016, diluted earnings per share reflected the effect of approximately 14,000 and 19,000, respectively, of non-vested shares of restricted common 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 20,000, respectively, of non-vested shares of restricted common stock that were outstanding as of such period.
Recently Issued Accounting Pronouncements
On May 28, 2014, the Financial Accounting Standards Board, or the FASB, issued Accounting Standards Update, or ASU, 2014-09, Revenue from Contracts with Customers, or ASU 2014-09. The objective of ASU 2014-09 is to clarify the principles for recognizing revenue and to develop a common revenue standard for GAAP. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle, which may require more judgment and estimates within the revenue recognition process than are required under existing GAAP. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606) Deferral of the Effective Date, or ASU 2015-14. ASU 2015-14 defers the effective date of ASU 2014-09 by one year to fiscal years and interim periods beginning after December 15, 2017. Early adoption is permitted as of the original effective date, which was annual reporting periods beginning after December 15, 2016, and the interim periods within that year. On March 17, 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers Principal versus Agent Considerations (Reporting Revenue Gross versus Net), or ASU 2016-08, which clarifies the implementation guidance on principal versus agent considerations in the new revenue recognition standard. ASU 2016-08 clarifies that an entity is a principal when it controls the specified good or service before that good or service is transferred to the customer, and is an agent when it does not control the specified good or service before it is transferred to the customer. The effective date and transition of this update is the same as 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. 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.

10


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, straight-line rents receivable and notes 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.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current financial statement presentation, with no effect on the Company’s condensed consolidated financial position or results of operations.

11


Note 3Acquired 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 $60,131 and $51,837, respectively (with a weighted average remaining life of 12.5 years and 12.9 years, respectively)
$
164,497

 
$
172,791

Above-market leases, net of accumulated amortization of $1,463 and $1,303, respectively (with a weighted average remaining life of 9.8 years and 10.3 years, respectively)
2,897

 
3,057

Ground lease interest, net of accumulated amortization of $258 and $232, respectively (with a weighted average remaining life of 59.1 years and 59.5 years, respectively)
2,556

 
2,582

 
$
169,950

 
$
178,430

The aggregate weighted average remaining life of the acquired intangible assets was 13.2 years and 13.5 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 $4,240,000 and $4,409,000, respectively, and for the six months ended June 30, 2017 and 2016 was $8,480,000 and $8,755,000, respectively. Amortization of the above-market leases is recorded as an adjustment to rental and parking revenue, amortization expense for the in-place leases is included in depreciation and amortization and amortization expense for the ground lease interest is included in rental and parking expenses in the accompanying condensed consolidated statements of comprehensive income.
Note 4Intangible Lease Liabilities, Net
Intangible lease liabilities, net, consisted of the following as of 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 $17,708 and $16,031, respectively (with a weighted average remaining life of 16.7 years and 17.1 years, respectively)
$
42,697

 
$
44,374

Ground leasehold liabilities, net of accumulated amortization of $363 and $301, respectively (with a weighted average remaining life of 41.7 years and 42.2 years, respectively)
4,962

 
5,024

 
$
47,659

 
$
49,398

The aggregate weighted average remaining life of intangible lease liabilities was 19.3 years and 19.6 years as of June 30, 2017 and December 31, 2016, respectively.
Amortization of the intangible lease liabilities for the three months ended June 30, 2017 and 2016 was $870,000 and $975,000, respectively, and for the six months ended June 30, 2017 and 2016 was $1,739,000 and $1,950,000, respectively. Amortization of below-market leases is recorded as an adjustment to rental and parking revenue and amortization expense of ground leasehold liabilities is included in rental and parking expenses in the accompanying condensed consolidated statements of comprehensive income.

12


Note 5Other 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 unsecured credit facility, net of accumulated amortization of $6,544 and $5,833, respectively
$
1,578

 
$
877

Lease commissions, net of accumulated amortization of $838 and $557, respectively
4,878

 
4,869

Investments in unconsolidated partnerships
123

 
113

Tenant receivables, net of allowances for doubtful accounts of $3,239 and $6,007, respectively
6,134

 
10,475

Notes receivable, net of allowances for loan losses of $2,858 and $4,294, respectively
12,161

 
15,128

Real estate-related notes receivable
514

 
514

Straight-line rent receivable
62,333

 
53,545

Restricted cash
16,537

 
14,992

Derivative assets
3,418

 
3,070

Prepaid and other assets
2,849

 
2,156

 
$
110,525

 
$
105,739

Note 6Accounts 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
$
7,724

 
$
7,200

Accrued interest expense
2,807

 
2,855

Accrued property taxes
3,594

 
4,277

Contingent consideration obligations
4,600

 
5,640

Distributions payable to stockholders
10,713

 
10,968

Tenant deposits
1,039

 
1,039

Deferred rental income
10,259

 
6,970

Derivative liabilities
476

 
1,247

 
$
41,212

 
$
40,196


13


Note 7Notes Payable and Unsecured 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
$
102,516

 
$
114,783

Variable rate notes payable fixed through interest rate swaps
326,868

 
330,425

Variable rate notes payable
40,884

 
41,604

Total notes payable, principal amount outstanding
470,268

 
486,812

Unamortized deferred financing costs related to notes payable
(1,777
)
 
(2,542
)
Total notes payable, net of deferred financing costs
468,491

 
484,270

Unsecured credit facility:
 
 
 
Revolving line of credit
178,000

 
148,000

Term loan
210,000

 
210,000

Total unsecured credit facility, principal amount outstanding
388,000

 
358,000

Unamortized deferred financing costs related to the term loan of the unsecured credit facility
(1,303
)
 
(1,789
)
Total unsecured credit facility, net of deferred financing costs
386,697

 
356,211

Total debt outstanding
$
855,188

 
$
840,481

Significant debt activity since December 31, 2016, excluding scheduled principal payments, includes:
On January 31, 2017, the Operating Partnership and certain of the Company’s subsidiaries entered into an amendment related to the unsecured credit facility to extend the maturity date and modify the extension options of the revolving line of credit portion of the unsecured credit facility. In connection with the amendment to the unsecured credit facility, the maturity date of the revolving line of credit was changed from May 28, 2017 to May 28, 2018, subject to the Operating Partnership's right to two 12-month extension periods (the Operating Partnership previously had a right to one 12-month extension period).
On February 10, 2017, the Company paid off its debt in connection with one of the Company's notes payable with an outstanding principal balance of $5,645,000 at the time of repayment.
On June 28, 2017, the Company paid off its debt in connection with one of the Company's notes payable with an outstanding principal balance of $5,337,000 at the time of repayment.
During the six months ended June 30, 2017, the Company removed a portfolio of certain healthcare properties from the unencumbered pool of the unsecured credit facility due to a tenant undergoing a restructuring of its liabilities, which decreased the Company's total unencumbered pool availability under the unsecured credit facility by approximately $58,608,000.
During the six months ended June 30, 2017, the Company made a draw of $30,000,000 on its unsecured credit facility related to repayments of matured notes payable and general corporate purposes.
As of June 30, 2017, the Company had a total unencumbered pool availability under the unsecured credit facility of $453,921,000 and an aggregate outstanding principal balance of $388,000,000. As of June 30, 2017, $65,921,000 remained available to be drawn on the unsecured credit facility.

14


The principal payments due on the notes payable and unsecured 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
 
Amount
 
Six months ending December 31, 2017
 
$
174,422

(1) 
2018
 
326,965

 
2019
 
170,719

 
2020
 
136,160

 
2021
 
1,239

 
Thereafter
 
48,763

 
 
 
$
858,268

 
(1)
Of this amount, $105,850,000 relates to one loan agreement with a maturity date of August 21, 2017, subject to the Company's right to a two-year extension and $18,575,000 relates to one loan agreement with a maturity date of October 11, 2017, subject to the Company's right to two one-year extensions. The Company may refinance these loan agreements or exercise the extension options depending upon refinancing terms available at the time. In addition, $45,476,000 relates to two loan agreements that the Company may elect to add to the unencumbered pool of the unsecured credit facility.
Note 8Related-Party Transactions and Arrangements
The Company pays to the Advisor 2.0% of the contract purchase price of each property or asset acquired, 2.0% of the cost of development/redevelopment projects, other than the initial acquisition of the property, and 2.0% of the amount advanced with respect to a mortgage loan. For the three months ended June 30, 2017 and 2016, the Company incurred $0 and $1,420,000, respectively, and for the six months ended June 30, 2017 and 2016, the Company incurred $0 and $1,420,000, respectively, in acquisition fees to the Advisor or its affiliates related to investments in real estate.
The Company pays the Advisor an annual asset management fee of 0.85% of the aggregate asset value plus costs and expenses incurred by the Advisor in providing asset management services. The fee is payable monthly in an amount equal to 0.07083% of the aggregate asset value as of the last day of the immediately preceding month. For the three months ended June 30, 2017 and 2016, the Company incurred $4,827,000 and $4,877,000, respectively, and for the six months ended June 30, 2017 and 2016, the Company incurred $9,646,000 and $9,664,000, respectively, in asset management fees to the Advisor.
The Company reimburses the Advisor for all expenses it paid or incurred in connection with the services provided to the Company, subject to certain limitations. The Company will not reimburse the Advisor for personnel costs in connection with services for which the Advisor receives an acquisition and advisory fee or a disposition fee. For the three months ended June 30, 2017 and 2016, the Advisor allocated $498,000 and $429,000, respectively, and for the six months ended June 30, 2017 and 2016, the Advisor allocated $953,000 and $857,000, respectively, in operating expenses incurred on the Company’s behalf, which are recorded in general and administrative expenses in the accompanying condensed consolidated statements of comprehensive income.
The Company has no direct employees. The employees of the Advisor and other affiliates provide services to the Company related to acquisitions, property management, asset management, accounting, investor relations, and all other administrative services. If the Advisor or its affiliates provides a substantial amount of services, as determined by a majority of the Company’s independent directors, in connection with the sale of one or more properties, the Company will pay the Advisor a disposition fee up to the lesser of 1.0% of the contract sales price and one-half of the brokerage commission paid if a third party broker is involved. In no event will the combined real estate commission paid to the Advisor, its affiliates and unaffiliated third parties exceed 6.0% of the contract sales price. Notwithstanding the terms of the advisory agreement, the Advisor agreed to receive a reduced disposition fee payable to the Advisor or its affiliates in the event of a disposition of all or substantially all of the assets of the Company, a sale of the Company, or a merger with a change of control of the Company, of up to the lesser of 50% of the fees paid in the aggregate to third party investment bankers for such transaction, not to exceed 0.5% of the transaction price. The disposition fee is otherwise payable in accordance with the advisory agreement. This reduction in the disposition fee would not impact a disposition fee paid in the event of a sale of an individual property or portfolio of properties. The reduced disposition fee in such situations was approved by the Company's board of directors on May 5, 2016. In addition, after investors have received a return on their net capital contributions and an 8.0% cumulative non-compounded annual return, then the Advisor is entitled to receive 15.0% of the remaining net sale proceeds, or a subordinated participation in net sale proceeds. As of June 30, 2017, the Company has not incurred a disposition fee or a subordinated participation in net sale proceeds to the Advisor or its affiliates.

15


Upon the listing of the Company’s common stock on a national securities exchange, the Company will pay the Advisor a subordinated incentive listing fee equal to 15.0% of the amount by which the market value of the Company’s outstanding stock plus all distributions paid by the Company prior to listing exceeds the sum of the total amount of capital raised from investors and the amount of cash flow necessary to generate an 8.0% cumulative, non-compounded annual return to investors, or a subordinated incentive listing fee. As of June 30, 2017, the Company has not incurred a subordinated incentive listing fee.
Upon termination or non-renewal of the Advisory Agreement, with or without cause, the Advisor will be entitled to receive distributions from the Operating Partnership equal to 15.0% of the amount by which the sum of the Company’s adjusted market value plus distributions exceeds the sum of the aggregate capital contributed by investors plus an amount equal to an annual 8.0% cumulative, non-compounded return to investors. In addition, the Advisor may elect to defer its right to receive a subordinated distribution upon termination until either shares of the Company’s common stock are listed and traded on a national securities exchange or another liquidity event occurs. As of June 30, 2017, the Company has not incurred any subordinated distribution upon termination fees to the Advisor or its affiliates.
The Company pays Carter Validus Real Estate Management Services, LLC, or the Property Manager, leasing and property management fees for the Company’s properties. Such fees equal 3.0% of monthly gross revenues from single-tenant properties and 4.0% of monthly gross revenues from multi-tenant properties. The Company will reimburse the Property Manager and its affiliates for property-level expenses that any of them pay or incur on the Company’s behalf, including salaries, bonuses and benefits of persons employed by the Property Manager and its affiliates, except for the salaries, bonuses and benefits of persons who also serve as one of the Company’s executive officers. The Property Manager and its affiliates may subcontract the performance of their duties to third parties and pay all or a portion of the property management fee to the third parties with whom they contract for these services. If the Company contracts directly with third parties for such services at customary market fees, the Company may pay the Property Manager an oversight fee equal to 1.0% of the gross revenues of the property managed. In no event will the Company pay the Property Manager, the Advisor or its affiliates both a property management fee and an oversight fee with respect to any particular property. The Company will pay the Property Manager a separate fee for the one-time initial rent-up, lease renewals or leasing-up of newly constructed properties. For the three months ended June 30, 2017 and 2016, the Company incurred $1,012,000 and $1,324,000, respectively, and for the six months ended June 30, 2017 and 2016, the Company incurred $2,444,000 and $2,611,000, 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 months ended June 30, 2017 and 2016, the Company incurred $0 and $277,000, respectively, and for the six months ended June 30, 2017 and 2016, the Company incurred $277,000 and $277,000, respectively, in leasing commissions to the Property Manager. Leasing commissions 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 $138,000 and $229,000, respectively, in construction management fees to the Property Manager. Construction management fees are capitalized in buildings and improvements in the accompanying condensed consolidated balance sheets.
Accounts Payable Due to Affiliates
The following amounts were due to affiliates as of June 30, 2017 and December 31, 2016 (amounts in thousands):
Entity
 
Fee
 
June 30, 2017
 
December 31, 2016
Carter/Validus Advisors, LLC and its affiliates
 
Asset management fees
 
$
1,610

 
$
1,604

Carter Validus Real Estate Management Services, LLC
 
Property management fees
 
566

 
791

Carter/Validus Advisors, LLC and its affiliates
 
General, administrative and other costs
 
407

 
174

Carter Validus Real Estate Management Services, LLC
 
Construction management fees
 
112

 
66

 
 
 
 
$
2,695

 
$
2,635


16


Note 9Segment Reporting
Management reviews the performance of individual properties and aggregates individual properties based on operating criteria into two reportable segments—commercial real estate investments in data centers and healthcare—and makes operating decisions based on these two reportable segments. The Company’s commercial real estate investments in data centers and healthcare are based on certain underwriting assumptions and operating criteria, which are different for data centers and healthcare. There were no intersegment sales or transfers during the three and 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, asset management fees, acquisition related expenses, change in fair value of contingent consideration, interest expense, net, provision for loan losses and other interest and dividend income. The Company believes that segment net operating income serves as a useful supplement to net income because it allows investors and management to measure unlevered property-level operating results and to compare operating results to the operating results of other real estate companies between periods on a consistent basis. Segment net operating income should not be considered as an alternative to net income determined in accordance with GAAP as an indicator of financial performance, and accordingly, the Company believes that in order to facilitate a clear understanding of the consolidated historical operating results, segment net operating income should be examined in conjunction with net income as presented in the accompanying condensed consolidated financial statements and data included elsewhere in this Quarterly Report on Form 10-Q.
Non-segment assets primarily consist of corporate assets, including cash and cash equivalents, real estate and escrow deposits, deferred financing costs attributable to the revolving line of credit portion of the Company's unsecured credit facility, real estate-related notes receivable and other assets not attributable to individual properties.

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
Centers
 
Healthcare
 
Three Months Ended
June 30, 2017
Revenue:
 
 
 
 
 
Rental, parking and tenant reimbursement revenue
$
30,112

 
$
25,877

 
$
55,989

Expenses:
 
 
 
 
 
Rental and parking expenses
(5,229
)
 
(2,484
)
 
(7,713
)
Segment net operating income
$
24,883

 
$
23,393

 
48,276

Expenses:
 
 
 
 
 
General and administrative expenses
 
 
 
 
(1,997
)
Change in fair value of contingent consideration
 
 
 
 
(100
)
Asset management fees
 
 
 
 
(4,827
)
Depreciation and amortization
 
 
 
 
(18,088
)
Income from operations
 
 
 
 
23,264

Other income (expense):
 
 
 
 
 
Other interest and dividend income
 
 
 
 
491

Interest expense, net
 
 
 
 
(8,859
)
Provision for loan losses
 
 
 
 
(1,688
)
Net income
 
 
 
 
$
13,208

 
Data
Centers
 
Healthcare
 
Three Months Ended
June 30, 2016
Revenue:
 
 
 
 
 
Rental, parking and tenant reimbursement revenue
$
28,971

 
$
29,916

 
$
58,887

Expenses:
 
 
 
 
 
Rental and parking expenses
(4,936
)
 
(2,437
)
 
(7,373
)
Segment net operating income
$
24,035

 
$
27,479

 
51,514

Expenses:
 
 
 
 
 
General and administrative expenses
 
 
 
 
(1,587
)
Change in fair value of contingent consideration
 
 
 
 
(125
)
Acquisition related expenses
 
 
 
 
(1,640
)
Asset management fees
 
 
 
 
(4,877
)
Depreciation and amortization
 
 
 
 
(17,349
)
Income from operations
 
 
 
 
25,936

Other income (expense):
 
 
 
 
 
Other interest and dividend income
 
 
 
 
2,857

Interest expense, net
 
 
 
 
(9,213
)
Provision for loan losses
 
 
 
 
(1,666
)
Net income
 
 
 
 
$
17,914


18


 
Data
Centers
 
Healthcare
 
Six Months Ended
June 30, 2017
Revenue:
 
 
 
 
 
Rental, parking and tenant reimbursement revenue
$
59,806

 
$
47,573

 
$
107,379

Expenses:
 
 
 
 
 
Rental and parking expenses
(10,013
)
 
(5,091
)
 
(15,104
)
Segment net operating income
$
49,793

 
$
42,482

 
92,275

Expenses:
 
 
 
 
 
General and administrative expenses
 
 
 
 
(3,680
)
Change in fair value of contingent consideration
 
 
 
 
1,040

Asset management fees
 
 
 
 
(9,646
)
Depreciation and amortization
 
 
 
 
(36,155
)
Income from operations
 
 
 
 
43,834

Other income (expense):
 
 
 
 
 
Other interest and dividend income
 
 
 
 
1,054

Interest expense, net
 
 
 
 
(17,524
)
Provision for loan losses
 
 
 
 
(4,172
)
Net income
 
 
 
 
$
23,192

 
Data
Centers
 
Healthcare
 
Six Months Ended
June 30, 2016
Revenue:
 
 
 
 
 
Rental, parking and tenant reimbursement revenue
$
57,633

 
$
57,764

 
$
115,397

Expenses:
 
 
 
 
 
Rental and parking expenses
(9,759
)
 
(4,253
)
 
(14,012
)
Segment net operating income
$
47,874

 
$
53,511

 
101,385

Expenses:
 
 
 
 
 
General and administrative expenses
 
 
 
 
(3,168
)
Change in fair value of contingent consideration
 
 
 
 
(245
)
Acquisition related expenses
 
 
 
 
(1,640
)
Asset management fees
 
 
 
 
(9,664
)
Depreciation and amortization
 
 
 
 
(34,348
)
Income from operations
 
 
 
 
52,320

Other income (expense):
 
 
 
 
 
Other interest and dividend income
 
 
 
 
5,679

Interest expense, net
 
 
 
 
(19,827
)
Provision for loan losses
 
 
 
 
(1,666
)
Net income
 
 
 
 
$
36,506

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
$
1,087,283

 
$
1,102,550

Healthcare
1,191,007

 
1,190,087

All other
41,662

 
45,017

Total assets
$
2,319,952

 
$
2,337,654


19


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
$
579

 
$
7,139

Healthcare
8,893

 
94,691

Total capital additions and acquisitions
$
9,472

 
$
101,830

Note 10Future Minimum Rent
Rental Income
The Company’s real estate assets are leased to tenants under operating leases with varying terms. The leases frequently have provisions to extend the lease agreements. The Company retains substantially all of the risks and benefits of ownership of the real estate assets leased to tenants.
The future minimum rent to be received from the Company’s investments in real estate assets under non-cancelable operating leases, including optional renewal periods for which exercise is reasonably assured, for the 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
 
$
95,122

2018
 
193,897

2019
 
197,303

2020
 
198,317

2021
 
193,566

Thereafter
 
1,452,795

 
 
$
2,331,000

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 ended December 31 and thereafter, are as follows (amounts in thousands):
Year
 
Amount
Six months ending December 31, 2017
 
$
350

2018
 
702

2019
 
746

2020
 
746

2021
 
753

Thereafter
 
37,083

 
 
$
40,380


20


Note 11Fair Value
Notes payable – Fixed Rate—The estimated fair value of notes payable – fixed rate measured using quoted prices and observable inputs from similar liabilities (Level 2) was approximately $104,566,000 and $116,402,000 as of June 30, 2017 and December 31, 2016, respectively, as compared to the outstanding principal of $102,516,000 and $114,783,000 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 $326,448,000 and $328,512,000 as of June 30, 2017 and December 31, 2016, respectively, as compared to the outstanding principal of $326,868,000 and $330,425,000 as of June 30, 2017 and December 31, 2016, respectively.
Notes payable – Variable—The outstanding principal of the notes payable – variable was $40,884,000 and $41,604,000 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.
Unsecured credit facility—The outstanding principal balance of the unsecured credit facility – variable was $178,000,000 and $148,000,000, which approximated its fair value, as of June 30, 2017 and December 31, 2016, respectively. The estimated fair value of the unsecured credit facility – variable rate fixed through interest rate swap agreements (Level 2) was approximately $206,717,000 and $203,055,000 as of June 30, 2017 and December 31, 2016, respectively, as compared to the outstanding principal of $210,000,000 and $210,000,000 as of June 30, 2017 and December 31, 2016, respectively.
Notes receivable—The outstanding principal balance of the notes receivable approximated the fair value as of June 30, 2017. The fair value of the Company’s notes receivable is estimated using significant unobservable inputs not based on market activity, but rather through particular valuation techniques (Level 3). The fair value was measured based on the income approach valuation methodology, which requires certain judgments to be made by management.
Contingent consideration—The Company has a contingent consideration obligation to pay a former owner in conjunction with a certain acquisition if specified future operational objectives are met over future reporting periods. Liabilities for contingent consideration will be measured at fair value each reporting period, with the acquisition-date fair value included as part of the consideration transferred, and subsequent changes in fair value recorded in earnings as change in fair value of contingent consideration.
The estimated fair value of the contingent consideration was $4,600,000 and $5,640,000 as of June 30, 2017 and December 31, 2016, respectively, which is reported in the accompanying condensed consolidated balance sheets in accounts payable and other liabilities. The Company uses an income approach to value the contingent consideration liability, which is determined based on the present value of probability-weighted future cash flows. The significant inputs to the discounted cash flow model were the discount rate and weighted probability scenarios. The Company has classified the contingent consideration liability as Level 3 of the fair value hierarchy due to the lack of relevant observable market data over fair value inputs such as probability-weighting for payment outcomes.
Increases in the assessed likelihood of a high payout under a contingent consideration arrangement contributes to increases in the fair value of the related liability. Conversely, decreases in the assessed likelihood of a higher payout under a contingent consideration arrangement contributes to decreases in the fair value of the related liability. Changes in assumptions could have an impact on the payout of the contingent consideration arrangement with a maximum payout of $8,450,000 and a minimum payout of $0 as of June 30, 2017.
Derivative instruments— Considerable judgment is necessary to develop estimated fair values of financial instruments. Accordingly, the estimates presented herein are not necessarily indicative of the amount the Company could realize, or be liable for, on disposition of the financial instruments. The Company has determined that the majority of the inputs used to value its interest rate swaps fall within Level 2 of the fair value hierarchy. The credit valuation adjustments associated with these instruments utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by the Company and the respective counterparty. However, as of 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 in its entirety is classified in Level 2 of the fair value hierarchy. See Note 12—"Derivative Instruments and Hedging Activities" for a further discussion of the Company’s derivative instruments.

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
$

 
$
3,418

 
$

 
$
3,418

Total assets at fair value
$

 
$
3,418

 
$

 
$
3,418

Liabilities:
 
 
 
 
 
 
 
Derivative liabilities
$

 
$
(476
)
 
$

 
$
(476
)
Contingent consideration obligation

 

 
(4,600
)
 
(4,600
)
Total liabilities at fair value
$

 
$
(476
)
 
$
(4,600
)
 
$
(5,076
)
 
 
 
 
 
 
 
 
 
December 31, 2016
 
Fair Value Hierarchy
 
 
 
Quoted Prices in Active
Markets for Identical
Assets (Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs (Level 3)
 
Total Fair
Value
Assets:
 
 
 
 
 
 
 
Derivative assets
$

 
$
3,070

 
$

 
$
3,070

Total assets at fair value
$

 
$
3,070

 
$

 
$
3,070

Liabilities:
 
 
 
 
 
 
 
Derivative liabilities
$

 
$
(1,247
)
 
$

 
$
(1,247
)
Contingent consideration obligation

 

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

 
$
(1,247
)
 
$
(5,640
)
 
$
(6,887
)
The following table provides a rollforward of the fair value of recurring Level 3 fair value measurements for the three and six months ended June 30, 2017 and 2016 (amounts in thousands):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Liabilities:
 
 
 
 
 
 
 
Contingent consideration obligation:
 
 
 
 
 
 
 
Beginning balance
$
4,500

 
$
5,460

 
$
5,640

 
$
5,340

Additions to contingent consideration obligation

 

 

 

Total changes in fair value included in earnings
100

 
125

 
(1,040
)
 
245

Ending balance
$
4,600

 
$
5,585

 
$
4,600

 
$
5,585

Unrealized losses (gains) still held (1)
$
100

 
$
125

 
$
(1,040
)
 
$
245


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

22


Note 12Derivative Instruments and Hedging Activities
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish these objectives, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable rate amounts from a counterparty in exchange for the Company making fixed rate payments over the life of the agreements without exchange of the underlying notional amount.
The effective portion of changes in the fair value of derivatives designated, and that qualify, as cash flow hedges is recorded in accumulated other comprehensive income in the accompanying condensed consolidated statement of stockholders' equity and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the six months ended June 30, 2017, such derivatives were used to hedge the variable cash flows associated with variable rate debt. The ineffective portion of changes in fair value of the derivatives is recognized directly in earnings. During the three and six months ended June 30, 2017, no gains or losses were recognized due to ineffectiveness of hedges of interest rate risk. During the three months ended June 30, 2016, no gains or losses were recognized due to ineffectiveness of hedges of interest rate risk. During the six months ended June 30, 2016, the Company accelerated the reclassification of amounts in other comprehensive income to earnings as a result of a hedged forecasted transaction becoming probable not to occur due to a related debt extinguishment. The accelerated amount was a loss of $728,000, which was recorded in interest expense, net in the accompanying condensed consolidated statement of comprehensive income.
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable rate debt. During the next twelve months, the Company estimates that an additional $260,000 will be reclassified from accumulated other comprehensive income as a decrease to interest expense.
See Note 11—"Fair Value" for a further discussion of the fair value of the Company’s derivative instruments.
The following table summarizes the notional amount and fair value of the Company’s derivative instruments (amounts in thousands):
Derivatives
Designated as
Hedging
Instruments
 
Balance
Sheet
Location
 
Effective
Dates
 
Maturity
Dates
 
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
 
10/12/2012 to
05/03/2016
 
10/11/2017 to
08/21/2020
 
$
536,868

 
$
3,418

 
$
(476
)
 
$
540,425

 
$
3,070

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

23


The table below summarizes the amount of income and loss recognized on interest rate derivatives designated as cash flow hedges for the three and six months ended June 30, 2017 and 2016 (amounts in thousands):
Derivatives in Cash Flow Hedging Relationships
 
Amount of (Loss) Income Recognized
in OCI on Derivatives
(Effective Portion)
 
Location Of Loss
Reclassified From
Accumulated Other
Comprehensive Income to
Net Income
(Effective Portion)
 
Amount of Loss
Reclassified From
Accumulated Other
Comprehensive Income to
Net Income
(Effective Portion and Accelerated Amounts)
Three Months Ended June 30, 2017
 
 
 
 
 
 
Interest rate swaps
 
$
(744
)
 
Interest expense, net
 
$
(360
)
Total
 
$
(744
)
 
 
 
$
(360
)
Three Months Ended June 30, 2016
 
 
 
 
 
 
Interest rate swaps
 
$
(3,680
)
 
Interest expense, net
 
$
(1,074
)
Total
 
$
(3,680
)
 
 
 
$
(1,074
)
Six Months Ended June 30, 2017
 
 
 
 
 
 
Interest rate swaps
 
$
90

 
Interest expense, net
 
$
(1,029
)
Total
 
$
90

 
 
 
$
(1,029
)
Six Months Ended June 30, 2016
 
 
 
 
 
 
Interest rate swaps
 
$
(9,320
)
 
Interest expense, net
 
$
(2,851
)
Total
 
$
(9,320
)
 
 
 
$
(2,851
)
Credit Risk-Related Contingent Features
The Company has agreements with each of its derivative counterparties that contain cross-default provisions, whereby if the Company defaults on certain of its unsecured indebtedness, then the Company could also be declared in default on its derivative obligations, resulting in an acceleration of payment thereunder.
In addition, the Company has agreements with each of its derivative counterparties that contain a provision where if the Company either defaults or is capable of being declared in default on any of its indebtedness, then the Company could also be declared in default on its derivative obligations. The Company 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 derivatives in a net liability position, including accrued interest but excluding any adjustment for nonperformance risk related to these agreements, was $533,000.

24


Tabular Disclosure Offsetting Derivatives
The Company has elected not to offset derivative positions in its condensed consolidated financial statements. The following table presents the effect on the Company’s financial position had the Company made the election to offset its derivative positions as of 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
$
3,418

 
$

 
$
3,418

 
$
(35
)
 
$

 
$
3,383

December 31, 2016
$
3,070

 
$

 
$
3,070

 
$
(10
)
 
$

 
$
3,060

Offsetting of Derivative Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Balance Sheet
 
 
 
Gross
Amounts of
Recognized
Liabilities
 
Gross Amounts
Offset in the
Balance Sheet
 
Net Amounts of
Liabilities
Presented in the
Balance Sheet
 
Financial Instruments
Collateral
 
Cash Collateral
 
Net
Amount
June 30, 2017
$
476

 
$

 
$
476

 
$
(35
)
 
$

 
$
441

December 31, 2016
$
1,247

 
$

 
$
1,247

 
$
(10
)
 
$

 
$
1,237

The Company reports derivatives in the accompanying condensed consolidated balance sheets as other assets, net and accounts payable and other liabilities.
Note 13Accumulated Other Comprehensive Income
The following table presents a rollforward of amounts recognized in accumulated other comprehensive income (loss), net of noncontrolling interests, by component for the 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
$
2,303

 
$
1,823

Other comprehensive income before reclassification
90

 
90

Amount of loss reclassified from accumulated other comprehensive income to net income (effective portion)
1,029

 
1,029

Other comprehensive income
1,119

 
1,119

Balance as of June 30, 2017
$
3,422

 
$
2,942

 
 
 
 
 
Unrealized Loss on Derivative
Instruments
 
Accumulated Other
Comprehensive Loss
Balance as of December 31, 2015
$
(2,100
)
 
$
(2,580
)
Other comprehensive loss before reclassification
(9,320
)
 
(9,320
)
Amount of loss reclassified from accumulated other comprehensive loss to net income (effective portion and missed forecast)
2,851

 
2,851

Other comprehensive loss
(6,469
)
 
(6,469
)
Balance as of June 30, 2016
$
(8,569
)
 
$
(9,049
)

25


The following table presents reclassifications out of accumulated other comprehensive income (loss) 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 Condensed Consolidated Statements of Comprehensive
Income
 
 
Six Months Ended
June 30,
 
 
 
 
2017
 
2016
 
 
Interest rate swap contracts
 
$
1,029

 
$
2,851

 
Interest expense, net
Note 14Commitments and Contingencies
Litigation
In the ordinary course of business, the Company may become subject to litigation or claims. As of June 30, 2017, there were, and currently there are, no material pending legal proceedings to which the Company is a party.
Note 15Subsequent Events
Distributions Paid
On July 3, 2017, the Company paid aggregate distributions of $10,713,000 ($5,196,000 in cash and $5,517,000 in shares of the Company’s common stock issued pursuant to the DRIP Offering), which related to distributions declared for each day in the period from June 1, 2017 through June 30, 2017.
On August 1, 2017, the Company paid aggregate distributions of $11,071,000 ($5,374,000 in cash and $5,697,000 in shares of the Company’s common stock issued pursuant to the DRIP Offering), which related to distributions declared for each day in the period from July 1, 2017 through July 31, 2017.
Distributions Declared
On August 3, 2017, the board of directors of the Company approved and declared a distribution to the Company’s stockholders of record as of the close of business on each day of the period commencing on 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 $0.001917808 per share of 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.

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 financial information appearing elsewhere in this Quarterly Report on Form 10-Q. The following discussion should also be read in conjunction with our audited consolidated financial statements, and the notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the U.S. Securities and Exchange Commission, or the SEC, on March 30, 2017, or the 2016 Annual Report on Form 10-K.
The terms “we,” “our,” "us" and the “Company” refer to Carter Validus Mission Critical REIT, Inc., Carter/Validus Operating Partnership, LP, all majority-owned subsidiaries and controlled subsidiaries.
Forward-Looking Statements
Certain statements contained in this Quarterly Report on Form 10-Q, other than historical facts, include forward-looking statements that reflect our expectations and projections about our future results, performance, prospects and opportunities. Such statements include, in particular, statements about our plans, strategies, and prospects and are subject to certain risks and uncertainties, as well as known and unknown risks, which could cause actual results to differ materially from those projected or anticipated. Therefore, such statements are not intended to be a guarantee of our performance in future periods. Such forward-looking statements can generally be identified by our use of forward-looking terminology such as “may,” “will,” “would,” “could,” “should,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “continue,” or other similar words. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect our management’s view only as of the date this Quarterly Report on Form 10-Q is filed with the SEC. We make no representation or warranty (express or implied) about the accuracy of any such forward-looking statements contained in this Quarterly Report on Form 10-Q, and we do not undertake to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. See Item 1A. “Risk Factors” of our 2016 Annual Report on Form 10-K for a discussion of some, although not all, of the risks and uncertainties that could cause actual results to differ materially from those presented in our forward-looking statements.
Management’s discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate these estimates. These estimates are based on management’s historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
Overview
We were formed on December 16, 2009 under the laws of Maryland to acquire and operate a diversified portfolio of income-producing commercial real estate in the data center and healthcare sectors. We may also invest in real estate-related investments that relate to such property types. We qualified and elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, or the Code, for federal income tax purposes.
We ceased offering shares of common stock in our initial public offering of up to $1,746,875,000 in shares of common stock, or our Offering, on June 6, 2014. Upon completion of our Offering, we raised gross proceeds of approximately $1,716,046,000 (including shares of common stock issued pursuant to our distribution reinvestment plan, or the DRIP).
On April 14, 2014, we registered 10,526,315 shares of common stock in the First DRIP Offering for a price per share of $9.50 for a proposed maximum offering price of $100,000,000 in shares of common stock under the DRIP pursuant to a registration statement on Form S-3. On November 25, 2015, we ceased offering shares of common stock pursuant to our First DRIP Offering and registered an additional 10,473,946 shares of common stock in the Second DRIP Offering for a price per share of $9.5475, which was the greater of (i) 95% of the fair market value per share as determined by our board of directors as of September 30, 2015 and (ii) $9.50 per share, for a proposed maximum offering price of $100,000,000 in shares of common stock under the DRIP pursuant to a new registration statement on Form S-3. On May 22, 2017, we ceased offering shares of common stock pursuant to our Second DRIP Offering and registered an additional 11,387,512 shares of common stock in the Third DRIP Offering for a price per share of $9.519, which was the greater of (i) 95% of the fair market value per share as determined by our board of directors as of September 30, 2016 and (ii) $9.50 per share, for a proposed maximum offering price of $108,397,727 in shares of common stock under the DRIP pursuant to a new registration statement on Form S-3.

27


We will continue to issue shares of common stock under the Third DRIP Offering until such time as we sell all of the shares registered for sale under the Third DRIP Offering, unless we file a new registration statement with the SEC or the Third DRIP Offering is terminated by our board of directors.
We refer to the First DRIP Offering, Second DRIP Offering and Third DRIP Offering together as the "DRIP Offerings," and collectively with our Offering, our "Offerings." As of June 30, 2017, we had issued approximately 193,312,000 shares of common stock in our Offerings for gross proceeds of $1,913,309,000, before share repurchases of $71,360,000 and offering costs, selling commissions and dealer manager fees of $174,825,000.
On November 16, 2015, our board of directors, at the recommendation of the audit committee of the board, or the Audit Committee, which is comprised solely of independent directors, established an estimated net asset value, "NAV", per share of our common stock, or the "Estimated Per Share NAV", calculated as of September 30, 2015, of $10.05 for purposes of assisting broker-dealers that participated in our Offering in meeting their customer account statement reporting obligations under the National Association of Securities Dealers Conduct, or NASD, Rule 2340. On November 28, 2016, our board of directors, at the recommendation of the Audit Committee, established an updated Estimated Per Share NAV, calculated as of September 30, 2016, of $10.02 for purposes of assisting broker-dealers that participated in our Offering in meeting their customer account statement reporting obligations under NASD Rule 2340. We intend to publish an updated Estimated Per Share NAV on at least an annual basis. Each Estimated Per Share NAV was determined by our board of directors after consultation with Carter/Validus Advisors, LLC, or our Advisor, and an independent third-party valuation firm.
Substantially all of our operations are conducted through Carter/Validus Operating Partnership, LP, or our Operating Partnership. We are externally advised by our Advisor pursuant to an advisory agreement between us and our Advisor, which is our affiliate. Our Advisor supervises and manages our day-to-day operations and selects the properties and real estate-related investments we acquire, subject to the oversight and approval of our board of directors. Our Advisor also provides marketing, sales and client services related to real estate on our behalf. Our Advisor engages affiliated entities to provide various services to us. Our Advisor is managed by, and is a subsidiary of our sponsor, Carter/Validus REIT Investment Management Company, LLC, or our Sponsor. We have no paid employees and rely upon our Advisor to provide substantially all of our services.
Carter Validus Real Estate Management Services, LLC, or our Property Manager, a wholly-owned subsidiary of our Sponsor, serves as our property manager. Our Advisor and our Property Manager received, and will continue to receive, fees during our acquisition and operational stages and our Advisor may be eligible to receive fees during the liquidation stage of the Company.
We currently operate through two reportable segments – commercial real estate investments in data centers and healthcare. As of June 30, 2017, we had completed acquisitions of 49 real estate investments (including one real estate investment owned through a consolidated partnership) consisting of 84 properties, comprised of 95 buildings and parking facilities and approximately 6,218,000 square feet of gross rentable area (excluding parking facilities), for an aggregate purchase price of $2,189,062,000
Critical Accounting Policies
Our critical accounting policies were disclosed in our 2016 Annual Report on Form 10-K. There have been no material changes to our critical accounting policies as disclosed therein.
Interim Unaudited Financial Data
Our accompanying condensed consolidated financial statements have been prepared by us in accordance with GAAP in conjunction with the rules and regulations of the SEC. Certain information and footnote disclosures required for annual financial statements have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, our accompanying condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. Our accompanying condensed consolidated financial statements reflect all adjustments, which are, in our view, of a normal recurring nature and necessary for a fair presentation of our financial position, results of operations and cash flows for the interim period. Interim results of operations are not necessarily indicative of the results to be expected for the full year; such full year results may be less favorable. Our accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our 2016 Annual Report on Form 10-K.

28


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, or the IRS, grants us relief under certain statutory provisions. Such an event could have a material adverse effect on our net income and net cash available for distribution to our stockholders.
Recently Issued Accounting Pronouncements
For a discussion of recently issued accounting pronouncements, see Note 2—“Summary of Significant Accounting Policies—Recently Issued Accounting Pronouncements” to our condensed consolidated financial statements that are a part of this Quarterly Report on Form 10-Q.
Segment Reporting
We report our financial performance based on two reporting segments—commercial real estate investments in data centers and healthcare. See Note 9—"Segment Reporting" to the condensed consolidated financial statements for additional information on our two reporting segments.
Factors That May Influence Results of Operations
We are not aware of any material trends and uncertainties, other than national economic conditions affecting real estate generally, that may be reasonably expected to have a material impact, favorable or unfavorable, on revenues or incomes from the acquisition, management and operation of properties other than those set forth in our Annual Report on Form 10-K for the year ended December 31, 2016 and in Part II, Item 1A. "Risk Factors" of this Quarterly Report on Form 10-Q.
Results of Operations
Our results of operations are influenced by the timing of acquisitions and the operating performance of our real estate properties. The following table shows the property statistics of our real estate properties as of June 30, 2017 and 2016:
 
June 30,
 
2017
 
2016
Number of commercial operating properties (1)
84

 
83

Leased rentable square feet
5,910,000

 
6,048,000

Weighted average percentage of rentable square feet leased
95
%
 
98
%
 
(1)
As of June 30, 2017, we owned 84 real estate properties, one of which was vacated by the tenant on June 2, 2017 and remains unoccupied. Currently, we are seeking to re-lease the space. As of June 30, 2016, we owned 84 real estate properties, one of which was under construction.

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The following table summarizes our real estate properties' 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 properties acquired

 
5

 

 
5

Commercial operating properties placed in service

 

 
1

 

Approximate aggregate purchase price of operating properties acquired
$

 
$
71,000,000

 
$

 
$
71,000,000

Approximate aggregate cost of property placed in service
$

 
$

 
$
19,466,000

 
$

Leased rentable square feet of operating properties acquired

 
158,000

 

 
158,000

Leased rentable square feet of property placed in service

 

 
34,000

 

The following discussion is based on our condensed consolidated financial statements for the three and six months ended June 30, 2017 and 2016.
These sections describe and compare 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, we analyze the net operating income of same store properties. We define "same store properties" as operating properties that were owned and operated for the entirety of both calendar periods being compared and excludes properties under development.
By evaluating the property net operating income of our same store properties, management is able to monitor the operations of our existing properties for comparable periods to measure the performance of our current portfolio and determine the effects of our new acquisitions on net income.
Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016
Changes in our revenues are summarized in the following table (amounts in thousands):
 
Three Months Ended
June 30,
 
 
 
2017
 
2016
 
Change
Same store rental and parking revenue
48,254

 
53,183

 
(4,929
)
Non-same store rental and parking revenue
2,293

 
838

 
1,455

Same store tenant reimbursement revenue
5,118

 
4,773

 
345

Non-same store tenant reimbursement revenue
119

 
1

 
118

Other operating income
205

 
92

 
113

Total revenue
$
55,989

 
$
58,887

 
$
(2,898
)
Same store rental and parking revenue decreased primarily due to an increase in bad debt expense related to delinquent accounts receivable recorded in the amount of $1.4 million during the three months ended June 30, 2017, as compared to $0.6 million during the three months ended June 30, 2016. During the three months ended June 30, 2016, we recovered $1.2 million of the 2015 delinquent account. Furthermore, during the three months ended June 30, 2017, we terminated the lease of a tenant that generated approximately $3.5 million in rental revenue during the three months ended June 30, 2016 because the tenant was in default of the lease. In addition, there was an increase in contractual rental revenue resulting from average annual rent escalations of 2.13% at our same store properties, which was offset entirely by straight-line rental revenue.
Non-same store rental and parking revenue increased primarily as a result of the acquisition of five properties and one property placed in service since April 1, 2016.

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Changes in our expenses are summarized in the following table (amounts in thousands):
 
Three Months Ended
June 30,
 
 
 
2017
 
2016
 
Change