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EX-32.2 - EXHIBIT 32.2 - Sila Realty Trust, Inc.a2018q310qexhibit322reitii.htm
EX-32.1 - EXHIBIT 32.1 - Sila Realty Trust, Inc.a2018q310qexhibit321reitii.htm
EX-31.2 - EXHIBIT 31.2 - Sila Realty Trust, Inc.a2018q310qexhibit312reitii.htm
EX-31.1 - EXHIBIT 31.1 - Sila Realty Trust, Inc.a2018q310qexhibit311reitii.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 September 30, 2018
OR 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 000-55435
cvmcriilogob30.jpg
CARTER VALIDUS MISSION CRITICAL REIT II, INC.
(Exact name of registrant as specified in its charter)
Maryland
 
46-1854011
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
4890 West Kennedy Blvd., Suite 650
Tampa, FL 33609
 
(813) 287-0101
(Address of Principal Executive Offices; Zip Code)
 
(Registrant’s Telephone Number)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
None
 
None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $0.01 per share
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
  
Accelerated filer
 
Non-accelerated filer
 
  
Smaller reporting company
 
 
 
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒
As of November 8, 2018, there were approximately 82,112,000 shares of Class A common stock, 11,770,000 shares of Class I common stock, 37,930,000 shares of Class T common stock and 3,062,000 shares of Class T2 common stock of Carter Validus Mission Critical REIT II, Inc. outstanding.
 



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




PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements.
CARTER VALIDUS MISSION CRITICAL REIT II, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
(Unaudited)
September 30, 2018
 
December 31, 2017
ASSETS
Real estate:
 
 
 
Land
$
243,663

 
$
223,277

Buildings and improvements, less accumulated depreciation of $74,239 and $45,789, respectively
1,368,406

 
1,250,794

Construction in progress

 
31,334

Total real estate, net
1,612,069

 
1,505,405

Cash and cash equivalents
84,789

 
74,803

Acquired intangible assets, less accumulated amortization of $36,905 and $22,162, respectively
150,305

 
150,554

Other assets, net
71,533

 
47,182

Total assets
$
1,918,696

 
$
1,777,944

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
 
 
 
Notes payable, net of deferred financing costs of $3,679 and $4,393, respectively
$
464,196

 
$
463,742

Credit facility, net of deferred financing costs of $2,633 and $601, respectively
307,367

 
219,399

Accounts payable due to affiliates
13,293

 
15,249

Accounts payable and other liabilities
29,019

 
27,709

Intangible lease liabilities, less accumulated amortization of $6,422 and $2,760, respectively
57,632

 
61,294

Total liabilities
871,507

 
787,393

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

 

Common stock, $0.01 par value per share, 500,000,000 shares authorized; 140,060,816 and 126,559,834 shares issued, respectively; 134,248,141 and 124,327,777 shares outstanding, respectively
1,342

 
1,243

Additional paid-in capital
1,172,134

 
1,084,905

Accumulated distributions in excess of earnings
(137,364
)
 
(99,309
)
Accumulated other comprehensive income
11,075

 
3,710

Total stockholders’ equity
1,047,187

 
990,549

Noncontrolling interests
2

 
2

Total equity
1,047,189

 
990,551

Total liabilities and stockholders’ equity
$
1,918,696

 
$
1,777,944

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

3


CARTER VALIDUS MISSION CRITICAL REIT II, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands, except share data and per share amounts)
(Unaudited)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Revenue:
 
 
 
 
 
 
 
Rental and parking revenue
$
39,134

 
$
30,249

 
$
112,637

 
$
73,675

Tenant reimbursement revenue
6,384

 
5,956

 
18,123

 
14,154

Total revenue
45,518

 
36,205

 
130,760

 
87,829

Expenses:
 
 
 
 
 
 
 
Rental and parking expenses
9,447

 
8,368

 
27,439

 
18,594

General and administrative expenses
1,244

 
1,062

 
3,526

 
3,199

Asset management fees
3,323

 
2,698

 
9,655

 
7,055

Depreciation and amortization
14,849

 
11,852

 
42,848

 
28,487

Total expenses
28,863

 
23,980

 
83,468

 
57,335

Income from operations
16,655

 
12,225

 
47,292

 
30,494

Interest expense, net
8,938

 
6,786

 
24,885

 
15,623

Net income attributable to common stockholders
$
7,717

 
$
5,439

 
$
22,407

 
$
14,871

Other comprehensive income:
 
 
 
 
 
 
 
Unrealized income on interest rate swaps, net
$
972

 
$
219

 
$
7,365

 
$
281

Comprehensive income attributable to common stockholders
$
8,689

 
$
5,658

 
$
29,772

 
$
15,152

Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
132,467,127

 
105,388,118

 
129,614,816

 
95,668,433

Diluted
132,491,755

 
105,405,297

 
129,637,967

 
95,687,382

Net income per common share attributable to common stockholders:
 
 
 
 
 
 
 
Basic
$
0.06

 
$
0.05

 
$
0.17

 
$
0.16

Diluted
$
0.06

 
$
0.05

 
$
0.17

 
$
0.16

Distributions declared per common share
$
0.16

 
$
0.16

 
$
0.47

 
$
0.47

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

4


CARTER VALIDUS MISSION CRITICAL REIT II, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
(Unaudited)
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
No. of
Shares
 
Par
Value
 
Additional
Paid-in
Capital
 
Accumulated Distributions in Excess of Earnings
 
Accumulated Other Comprehensive Income
 
Total
Stockholders’
Equity
 
Noncontrolling
Interests
 
Total
Equity
Balance, December 31, 2017
124,327,777

 
$
1,243

 
$
1,084,905

 
$
(99,309
)
 
$
3,710

 
$
990,549

 
$
2

 
$
990,551

Issuance of common stock
10,154,072

 
102

 
97,184

 

 

 
97,286

 

 
97,286

Issuance of common stock under the distribution reinvestment plan
3,324,410

 
33

 
30,486

 

 

 
30,519

 

 
30,519

Vesting of restricted common stock
9,000

 

 
67

 

 

 
67

 

 
67

Commissions on sale of common stock and related dealer manager fees

 

 
(4,073
)
 

 

 
(4,073
)
 

 
(4,073
)
Distribution and servicing fees

 

 
(402
)
 

 

 
(402
)
 

 
(402
)
Other offering costs

 

 
(3,323
)
 

 

 
(3,323
)
 

 
(3,323
)
Repurchase of common stock
(3,567,118
)
 
(36
)
 
(32,710
)
 

 

 
(32,746
)
 

 
(32,746
)
Distributions declared to common stockholders

 

 

 
(60,462
)
 

 
(60,462
)
 

 
(60,462
)
Other comprehensive income

 

 

 

 
7,365

 
7,365

 

 
7,365

Net income

 

 

 
22,407

 

 
22,407

 

 
22,407

Balance, September 30, 2018
134,248,141

 
$
1,342

 
$
1,172,134

 
$
(137,364
)
 
$
11,075

 
$
1,047,187

 
$
2

 
$
1,047,189

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

5


CARTER VALIDUS MISSION CRITICAL REIT II, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
 
Nine Months Ended
September 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income
$
22,407

 
$
14,871

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
42,848

 
28,487

Amortization of deferred financing costs
2,205

 
1,870

Amortization of above-market leases
404

 
174

Amortization of intangible lease liabilities
(3,662
)
 
(1,137
)
Straight-line rent
(10,009
)
 
(7,686
)
Stock-based compensation
67

 
54

Ineffectiveness of interest rate swaps
28

 
(16
)
Changes in operating assets and liabilities:
 
 
 
Accounts payable and other liabilities
6,349

 
8,209

Accounts payable due to affiliates
133

 
1,391

Other assets
(3,450
)
 
(5,920
)
Net cash provided by operating activities
57,320

 
40,297

Cash flows from investing activities:
 
 
 
Investment in real estate
(141,380
)
 
(458,023
)
Acquisition costs capitalized subsequent to acquisition

 
(44
)
Capital expenditures
(13,351
)
 
(25,002
)
Real estate deposits, net
(600
)
 
(37
)
Net cash used in investing activities
(155,331
)
 
(483,106
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of common stock
97,286

 
269,133

Proceeds from notes payable

 
260,845

Payments on notes payable
(260
)
 

Proceeds from credit facility
90,000

 
175,000

Payments on credit facility

 
(175,000
)
Payments of deferred financing costs
(4,800
)
 
(2,963
)
Repurchases of common stock
(32,746
)
 
(8,767
)
Offering costs on issuance of common stock
(10,054
)
 
(23,196
)
Distributions to stockholders
(29,673
)
 
(20,415
)
Net cash provided by financing activities
109,753

 
474,637

Net change in cash, cash equivalents and restricted cash
11,742

 
31,828

Cash, cash equivalents and restricted cash - Beginning of period
85,747

 
56,909

Cash, cash equivalents and restricted cash - End of period
$
97,489

 
$
88,737

Supplemental cash flow disclosure:
 
 
 
Interest paid, net of interest capitalized of $1,171 and $1,450, respectively
$
23,583

 
$
14,106

Supplemental disclosure of non-cash transactions:
 
 
 
Common stock issued through distribution reinvestment plan
$
30,519

 
$
23,001

Distribution and servicing fees accrued during the period
$

 
$
5,756

Liabilities assumed at acquisition
$

 
$
815

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

6


CARTER VALIDUS MISSION CRITICAL REIT II, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2018
Note 1—Organization and Business Operations
Carter Validus Mission Critical REIT II, Inc., or the Company, is a Maryland corporation that was formed on January 11, 2013. The Company elected to be taxed as a real estate investment trust, or a REIT, under the Internal Revenue Code of 1986, as amended, for federal income tax purposes. Substantially all of the Company’s business is conducted through Carter Validus Operating Partnership II, LP, a Delaware limited partnership, or the Operating Partnership, formed on January 10, 2013. The Company is the sole general partner of the Operating Partnership and Carter Validus Advisors II, LLC, or the Advisor, is the special limited partner of the Operating Partnership.
The Company commenced the initial public offering of $2,350,000,000 in shares of common stock, or the Initial Offering, consisting of up to $2,250,000,000 in shares in its primary offering and up to $100,000,000 in shares of common stock to be made available pursuant to the Company’s distribution reinvestment plan, or the DRIP, on May 29, 2014. The Company ceased offering shares of common stock pursuant to the Initial Offering on November 24, 2017. At the completion of the Initial Offering, the Company had accepted investors' subscriptions for and issued approximately 125,095,000 shares of Class A, Class I and Class T common stock, including shares of common stock issued pursuant to the DRIP, resulting in gross proceeds of $1,223,803,000. On October 13, 2017, the Company filed a Registration Statement on Form S-3 to register 10,893,246 shares of common stock under the DRIP for a proposed maximum offering price of $100,000,000 in shares of common stock, or the DRIP Offering. The Company will continue to issue shares of common stock under the DRIP Offering until such time as the Company sells all of the shares registered for sale under the DRIP Offering, unless the Company files a new registration statement with the U.S. Securities and Exchange Commission, or the SEC, or the DRIP Offering is terminated by the Company's board of directors.
On November 27, 2017, the Company commenced its follow-on offering of up to $1,000,000,000 in shares of common stock, or the Offering, and collectively with the Initial Offering and the DRIP Offering, the Offerings. As of March 14, 2018, the Company ceased offering shares of Class T common stock in the Offering and began offering shares of Class T2 common stock in the Offering on March 15, 2018. The Company continues to offer shares of Class T common stock in the DRIP Offering. The Company is currently offering, in any combination with a dollar value up to the maximum offering amount, Class A shares of common stock at a price of $10.200 per share, Class I shares of common stock at a price of $9.273 per share, and Class T2 shares of common stock at a price of $9.714 per share in the Offerings. The offering prices are based on the most recent estimated per share net asset value of each of the Class A common stock, Class I common stock and Class T common stock, and any applicable per share upfront selling commissions and dealer manager fees.
As of September 30, 2018, the Company had issued approximately 140,038,000 shares of Class A, Class I, Class T and Class T2 common stock in the Offerings, resulting in receipt of gross proceeds of approximately $1,365,443,000, before share repurchases of $53,330,000, selling commissions and dealer manager fees of approximately $95,971,000 and other offering costs of approximately $26,680,000.
Substantially all of the Company’s business is managed by the Advisor. Carter Validus Real Estate Management Services II, LLC, or the Property Manager, an affiliate of the Advisor, serves as the Company’s property manager. The Advisor and the Property Manager have received, and will continue to receive, fees for services related to the Company's acquisition and operational stages. The Advisor will also be eligible to receive fees during the Company's liquidation stage. SC Distributors, LLC, an affiliate of the Advisor, or the Dealer Manager, serves as the dealer manager of the Offering. The Dealer Manager has received fees for services related to the Initial Offering, and has received, and will continue to receive, fees for services related to the Offering.
The Company was formed to invest primarily in quality income-producing commercial real estate, with a focus on data centers and healthcare properties, preferably with long-term net leases to creditworthy tenants, as well as to make other real estate-related investments that relate to such property types, which may include equity or debt interests, including securities, in other real estate entities. The Company also may originate or invest in real estate-related notes receivable. As of September 30, 2018, the Company owned 58 real estate investments, consisting of 77 properties.
Except as the context otherwise requires, “we,” “our,” “us,” and the “Company” refer to Carter Validus Mission Critical REIT II, Inc., the Operating Partnership and all wholly-owned subsidiaries.

7


Note 2—Summary of Significant Accounting Policies
The summary of significant accounting policies presented below is designed to assist in understanding the Company’s condensed consolidated financial statements. Such condensed consolidated financial statements and the accompanying notes thereto are the representation of management. These accounting policies conform to accounting principles generally accepted in the United States of America, or GAAP, for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of a normal and recurring nature considered for a fair presentation, have been included. Operating results for the three and nine months ended September 30, 2018, are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.
The condensed consolidated balance sheet at December 31, 2017, has been derived from the audited consolidated financial statements at that date but does not include all the information and notes required by GAAP for complete financial statements. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company's audited consolidated financial statements as of and for the year ended December 31, 2017, and related notes thereto set forth in the Company's Annual Report on Form 10-K, filed with the SEC on March 21, 2018.
Principles of Consolidation and Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of the Company, the Operating Partnership, and all wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the condensed consolidated financial statements and accompanying notes in conformity with GAAP requires the Company to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These estimates are made and evaluated on an ongoing basis using information that is currently available as well as various other assumptions believed to be reasonable under the circumstances. Actual results could differ from those estimates.
Restricted Cash
Restricted cash consists of restricted cash held in escrow and restricted bank deposits. Restricted cash held in escrow includes cash held in escrow accounts for capital improvements for certain properties as well as cash held by lenders in escrow accounts for tenant and capital improvements, repairs and maintenance and other lender reserves for certain properties, in accordance with the respective lender’s loan agreement. Restricted cash held in escrow is reported in other assets, net in the accompanying condensed consolidated balance sheets. 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. See Note 6—"Other Assets, Net".
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 (amounts in thousands):
 
 
Nine Months Ended
September 30,
Beginning of period:
 
2018
 
2017
Cash and cash equivalents
 
74,803

 
50,446

Restricted cash
 
10,944

 
6,463

Cash, cash equivalents and restricted cash
 
$
85,747

 
$
56,909

 
 
 
 
 
End of period:
 
 
 
 
Cash and cash equivalents
 
84,789

 
74,488

Restricted cash
 
12,700

 
14,249

Cash, cash equivalents and restricted cash
 
$
97,489

 
$
88,737

Concentration of Credit Risk and Significant Leases
As of September 30, 2018, the Company had cash on deposit, including restricted cash, in certain financial institutions that had deposits in excess of current federally insured levels. The Company limits its cash investments to financial institutions

8


with high credit standing; therefore, the Company believes it is not exposed to any significant credit risk on its cash deposits. To date, the Company has experienced no loss or lack of access to cash in its accounts.
As of September 30, 2018, the Company owned real estate investments in 39 MSAs, two of which accounted for 10.0% or more of revenue. Real estate investments located in the Atlanta-Sandy Springs-Roswell, Georgia MSA and the Houston-The Woodlands-Sugar Land, Texas MSA accounted for 17.3% and 10.0%, respectively, of revenue for the nine months ended September 30, 2018.
As of September 30, 2018, the Company had no exposure to tenant concentration that accounted for 10.0% or more of revenue for the nine months ended September 30, 2018.
Share Repurchase Program
The Company’s share repurchase program allows for repurchases of shares of the Company’s common stock when certain criteria are met. The share repurchase program provides that all repurchases during any calendar year, including those redeemable upon death or a Qualifying Disability of a stockholder, are limited to those that can be funded with equivalent proceeds raised from the DRIP Offering during the prior calendar year and other operating funds, if any, as the board of directors, in its sole discretion, may reserve for this purpose.
Repurchases of shares of the Company’s common stock are at the sole discretion of the Company’s board of directors, provided, however, 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. In addition, the Company’s board of directors, in its sole discretion, may suspend (in whole or in part) the share repurchase program at any time, and may amend, 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 board of directors of the Company approved and adopted the Fourth Amended and Restated Share Repurchase Program, or the Amended & Restated SRP, which was effective on August 29, 2018. The Amended & Restated SRP provides, among other things, that the Company will repurchase shares on a quarterly, instead of monthly basis. Subsequent to September 30, 2018, the board of directors of the Company approved and adopted the Fifth Amended and Restated Share Repurchase Program clarifying the definition of the Company's repurchase date. See Part II, Item 2. "Unregistered Sales of Equity Securities" for more information on the Amended & Restated SRP.
During the nine months ended September 30, 2018, the Company received valid repurchase requests, in accordance with the Amended & Restated SRP, related to 3,567,118 Class A shares, Class I shares and Class T shares of common stock (3,202,255 Class A shares, 49,528 Class I shares and 315,335 Class T shares), all of which were redeemed in full for an aggregate purchase price of approximately $32,746,000 (an average of $9.18 per share). During the nine months ended September 30, 2017, the Company received valid repurchase requests related to 966,610 Class A and Class T shares of common stock (915,269 Class A shares and 51,341 Class T shares), all of which were redeemed in full for an aggregate purchase price of approximately $8,767,000 (an average of $9.07 per share).
Earnings Per Share
The Company calculates basic earnings per share by dividing net income attributable to common stockholders for the period by the weighted average shares of its common stock outstanding for that period. Diluted earnings per share are computed based on the weighted average number of shares outstanding and all potentially dilutive securities. Shares of non-vested restricted common stock give rise to potentially dilutive shares of common stock. For the three months ended September 30, 2018 and 2017, diluted earnings per share reflected the effect of approximately 25,000 and 17,000 shares, respectively, of non-vested shares of restricted common stock that were outstanding as of such period. For the nine months ended September 30, 2018 and 2017, diluted earnings per share reflected the effect of approximately 23,000 and 19,000 and shares, respectively, of non-vested shares of restricted common stock that were outstanding as of such period.
Types of Leases
Tenant leases may be net leases in which the total operating expenses are recoverable, modified gross leases in which some of the operating expenses are recoverable or gross leases in which no expenses are recoverable (gross leases represent only a small portion of the Company's total leases). The contractual amounts due under gross lease arrangements are not allocated between the rental and expense reimbursement components. The aggregate revenue earned under gross leases is presented in rental and parking revenue on the condensed consolidated statements of comprehensive income.
Recently Issued Accounting Pronouncements
On May 28, 2014, the FASB issued Accounting Standards Update, or ASU, 2014-09, Revenue from Contracts with Customers, or ASU 2014-09. The pronouncement was issued to clarify the principles for recognizing revenue and to develop a common revenue standard and disclosure requirements. The pronouncement is effective for reporting periods beginning after

9


December 15, 2017. On February 25, 2016, the FASB released ASU 2016-02, Leases (Topic 842). Upon adoption of ASU 2016-02 in 2019, as discussed below, the Company will be required to separate lease contracts into lease and nonlease components, whereby the nonlease components would be subject to ASU 2014-09. The Company adopted the provisions of ASU 2014-09 effective January 1, 2018, using the modified retrospective approach. Property rental revenue is accounted for in accordance with ASC 840, Leases. The Company's rental revenue consists of (i) contractual revenues from leases recognized on a straight-line basis over the term of the respective lease; (ii) parking revenue; and (iii) the reimbursements of the tenants' share of real estate taxes, insurance and other operating expenses. The Company evaluated the revenue recognition for its contracts within this scope under existing accounting standards and under ASU 2014-09 and concluded that there were no changes to the condensed consolidated financial statements as a result of adoption.
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 non-financial assets 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 provides guidance on how entities should recognize sales, including partial sales, of nonfinancial assets (and in-substance non-financial assets) to non-customers. ASU 2017-05 requires the seller to recognize a full gain or loss in a partial sale of non-financial assets, to the extent control is not retained. Any noncontrolling interest retained by the seller would, accordingly, be measured at fair value. ASU 2017-05 was effective for fiscal years beginning after December 15, 2017, including interim reporting periods within those fiscal years. The Company adopted the ASU 2017-05 effective January 1, 2018. The Company has not disposed of any real estate properties, therefore, the adoption of ASU 2017-05 has no impact on the Company's condensed consolidated financial statements.
On February 25, 2016, the FASB established Topic 842, Leases, by issuing 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—Gains and Losses from the Derecognition of Non-financial Assets. 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 several ground leases, which will result in the recognition of a right of use asset and lease liability upon the adoption of ASU 2016-02. As of September 30, 2018, the total future undiscounted rent obligation amount under non-cancelable ground leases is approximately $3,703,000, which represents approximately 0.2% of the Company total assets. The Company is in the process of determining the appropriate discount rate to measure the right of use asset and lease liability.
In addition, with 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 as general and administrative expenses in the consolidated statements of comprehensive income (loss) rather than capitalized. As a result of the narrower definition of initial direct costs, the Company does not expect that the adoption of ASU 2016-02 related to the leasing commission costs will have a material impact on the Company's condensed consolidated financial statements. In addition, ASU 2016-02 requires lessors to identify and separate the lease and non-lease components, such as the reimbursement of 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. In July 2018, the FASB issued ASU 2018-11, Targeted Improvements, to simplify the guidance by allowing lessors to elect a practical expedient to not separate non-lease components from a lease, which would provide the Company with the option of not bifurcating certain common area maintenance recoveries as a non-lease component. The Company does not believe that the adoption of the practical expedient will have a material impact on the Company's condensed consolidated financial statements.
On June 16, 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses, or ASU 2016-13. ASU 2016-13 requires more timely recording of credit losses on loans and other financial instruments that are not accounted for at fair value through net income, including loans held for investment, held-to-maturity debt securities, trade and other receivables, net investment in leases and other such commitments. ASU 2016-13 requires that financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The amendments in ASU 2016-13 require the Company to measure all expected credit losses based upon historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of the financial assets and eliminates the “incurred loss” methodology in current GAAP. ASU 2016-13 is effective for fiscal years, and interim periods within, beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within, beginning after December 15, 2018. The Company is in the process of evaluating the impact ASU 2016-13 will have on the Company’s condensed consolidated financial statements. The Company believes that certain financial statements' accounts may be

10


impacted by the adoption of ASU 2016-13, including allowances for doubtful accounts with respect to accounts receivable and straight-line rent receivable. As of September 30, 2018, there were no allowances for doubtful accounts recorded in the Company's condensed consolidated financial statements.
On August 17, 2018, the SEC issued a final rule, SEC Final Rule Release No. 33-10532, Disclosure Update and Simplification, that amends certain of its disclosure requirements that have become redundant, duplicative, overlapping, outdated or superseded, in light of other SEC disclosure requirements or GAAP. For filings on Form 10-Q, the final rule, among other items, extends to interim periods the annual requirement to disclose changes in stockholders’ equity. As amended by the final rule, entities must analyze changes in stockholders’ equity, in the form of a reconciliation, for the then current and comparative year-to-date interim periods, with subtotals for each interim period. The final rule becomes effective on November 5, 2018. The SEC staff said it would not object to a registrant waiting to comply with the new interim disclosure requirement until the filing of its Form 10-Q for the first quarter beginning after the effective date of the rule. As a result, the Company will apply these changes in the presentation of stockholders’ equity beginning with its Quarterly Report on Form 10-Q for the three months ended March 31, 2019. The Company has determined this final rule will not have a material impact on the Company's financial condition, results of operations or financial statement disclosures.
On August 28, 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities, or ASU 2017-12. The objectives of ASU 2017-12 are to (i) improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting for hedging relationships with those risk management activities and (ii) reduce the complexity of and simplify the application of hedge accounting by preparers. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018, and interim periods therein. Early adoption is permitted. Upon adoption of ASU 2017-12, the cumulative ineffectiveness previously recognized on existing cash flow hedges will be adjusted and removed from beginning retained earnings and placed in accumulated other comprehensive income (loss). The Company does not expect to have material ineffectiveness related to its outstanding designated cash flow hedges, therefore, the adoption of this standard will not have a material impact on the Company’s condensed consolidated financial statements.
On August 28, 2018, the FASB issued ASU 2018-13, Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, or ASU 2018-13. ASU 2018-13 removes certain disclosure requirements, including the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between the levels and the valuation processes for Level 3 fair value measurements. ASU 2018-13 also adds certain disclosure requirements, including the requirement to disclose the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, and interim periods therein. Early adoption is permitted. The Company is in the process of evaluating the impact that ASU 2018-13 will have on the Company's condensed consolidated financial statements.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current financial statement presentation, with no effect on the Company’s condensed consolidated financial position or results of operations.

11


Note 3—Real Estate Investments
During the nine months ended September 30, 2018, the Company purchased five real estate investments, consisting of seven properties, all of which were determined to be asset acquisitions. Upon the acquisition of the real estate properties determined to be asset acquisitions, the Company allocated the purchase price of the real estate properties to acquired tangible assets, consisting of land and buildings and improvements, and acquired intangible assets, based on a relative fair value method allocating all accumulated costs.
The following table summarizes the consideration transferred for the properties acquired during the nine months ended September 30, 2018:
Property Description
 
Date Acquired
 
Ownership Percentage
 
Purchase Price (amounts in thousands)
Rancho Cordova Data Center Portfolio (1)
 
03/14/2018
 
100%
 
$
52,087

Carrollton Healthcare Facility
 
04/27/2018
 
100%
 
8,699

Oceans Katy Behavioral Health Hospital
 
06/08/2018
 
100%
 
15,715

San Jose Data Center
 
06/13/2018
 
100%
 
50,408

Indianola Healthcare Facilities Portfolio (2)
 
09/26/2018
 
100%
 
14,471

Total
 
 
 
 
 
$
141,380

 
(1)
The Rancho Cordova Data Center Portfolio consists of two properties.
(2)
The Indianola Healthcare Facilities Portfolio consists of two properties.
The following table summarizes the Company's allocation of the real estate acquisitions during the nine months ended September 30, 2018, (amounts in thousands):
 
 
Total
Land
 
$
20,386

Buildings and improvements
 
106,282

In-place leases
 
14,494

Tenant improvements
 
218

Total assets acquired
 
$
141,380

Acquisition fees and costs associated with transactions determined to be asset acquisitions are capitalized. The Company capitalized acquisition fees and costs of approximately $624,000 and $3,633,000 related to properties acquired during the three and nine months ended September 30, 2018, respectively, which are included in the Company's allocation of the real estate acquisitions presented above. The total amount of all acquisition fees and costs is limited to 6.0% of the contract purchase price of a property. The contract purchase price is the amount actually paid or allocated in respect of the purchase, development, construction or improvement of a property exclusive of acquisition fees and costs. For the three and nine months ended September 30, 2018, acquisition fees and costs did not exceed 6.0% of the contract purchase price of the Company's acquisitions during such periods.

12


Note 4—Acquired Intangible Assets, Net
Acquired intangible assets, net, consisted of the following as of September 30, 2018 and December 31, 2017 (amounts in thousands, except weighted average life amounts):
 
September 30, 2018
 
December 31, 2017
In-place leases, net of accumulated amortization of $36,115 and $21,776, respectively (with a weighted average remaining life of 10.2 years and 11.0 years, respectively)
$
148,749

 
$
148,594

Above-market leases, net of accumulated amortization of $755 and $358, respectively (with a weighted average remaining life of 2.1 years and 2.8 years, respectively)
947

 
1,344

Ground lease interests, net of accumulated amortization of $35 and $28, respectively (with a weighted average remaining life of 65.1 years and 65.8 years, respectively)
609

 
616

 
$
150,305

 
$
150,554

The aggregate weighted average remaining life of the acquired intangible assets was 10.4 years and 11.2 years as of September 30, 2018 and December 31, 2017, respectively.
Amortization of the acquired intangible assets for the three months ended September 30, 2018 and 2017 was $5,102,000 and $4,422,000, respectively, and for the nine months ended September 30, 2018 and 2017 was $14,743,000 and $9,625,000, respectively. Amortization of the above-market leases is recorded as an adjustment to rental and parking revenue, amortization of the in-place leases is included in depreciation and amortization, and amortization of the ground lease interests is included in rental and parking expenses in the accompanying condensed consolidated statements of comprehensive income.
Note 5—Intangible Lease Liabilities, Net
Intangible lease liabilities, net, consisted of the following as of September 30, 2018 and December 31, 2017 (amounts in thousands, except weighted average life amounts):
 
September 30, 2018
 
December 31, 2017
Below-market leases, net of accumulated amortization of $6,422 and $2,760, respectively (with a weighted average remaining life of 18.0 years and 18.7 years, respectively)
$
57,632

 
$
61,294


$
57,632

 
$
61,294

Amortization of below-market leases for the three months ended September 30, 2018 and 2017 was $1,220,000 and $751,000, respectively, and for the nine months ended September 30, 2018 and 2017 was $3,662,000 and $1,137,000, respectively. Amortization of below-market leases is recorded as an adjustment to rental and parking revenue in the accompanying condensed consolidated statements of comprehensive income.
Note 6—Other Assets, Net
Other assets, net, consisted of the following as of September 30, 2018 and December 31, 2017 (amounts in thousands):
 
September 30, 2018
 
December 31, 2017
Deferred financing costs, related to the revolver portion of the secured credit facility, net of accumulated amortization of $4,463 and $3,426, respectively
$
3,131

 
$
1,850

Real estate escrow deposits
700

 
100

Restricted cash
12,700

 
10,944

Tenant receivables
6,150

 
4,916

Straight-line rent receivable
29,330

 
19,321

Prepaid and other assets
8,273

 
6,117

Derivative assets
11,249

 
3,934

 
$
71,533

 
$
47,182


13


Note 7—Accounts Payable and Other Liabilities
Accounts payable and other liabilities, as of September 30, 2018 and December 31, 2017, consisted of the following (amounts in thousands):
 
September 30, 2018
 
December 31, 2017
Accounts payable and accrued expenses
$
7,097

 
$
13,220

Accrued interest expense
2,880

 
2,410

Accrued property taxes
4,773

 
1,532

Distributions payable to stockholders
6,836

 
6,566

Tenant deposits
865

 
682

Deferred rental income
6,568

 
3,277

Derivative liabilities

 
22

 
$
29,019

 
$
27,709

Note 8—Notes Payable and Secured Credit Facility
The Company's debt outstanding as of September 30, 2018 and December 31, 2017, consisted of the following (amounts in thousands):
 
 
 
 
 
September 30, 2018
 
December 31, 2017
Notes payable:
 
 
 
Fixed rate notes payable
$
220,372

 
$
220,436

Variable rate notes payable fixed through interest rate swaps
247,503

 
247,699

Total notes payable, principal amount outstanding
467,875

 
468,135

Unamortized deferred financing costs related to notes payable
(3,679
)
 
(4,393
)
Total notes payable, net of deferred financing costs
464,196

 
463,742

Secured credit facility:
 
 
 
Variable rate revolving line of credit
60,000

 
120,000

Variable rate term loan fixed through interest rate swaps
100,000

 
100,000

Variable rate term loan
150,000

 

Total secured credit facility, principal amount outstanding
310,000

 
220,000

Unamortized deferred financing costs related to the term loan secured credit facility
(2,633
)
 
(601
)
Total secured credit facility, net of deferred financing costs
307,367

 
219,399

Total debt outstanding
$
771,563

 
$
683,141

Significant debt activity for the nine months ended September 30, 2018, excluding scheduled principal payments, includes:
On April 27, 2018, the Operating Partnership and certain of the Company’s subsidiaries entered into the Third Amended and Restated Credit Agreement (the "A&R Credit Agreement") to add seven new lenders and to increase the maximum commitments available under the secured credit facility from $425,000,000 to an aggregate of up to $700,000,000, consisting of a $450,000,000 revolving line of credit, with a maturity date of April 27, 2022, subject to the Operating Partnership's right for one, 12-month extension period, and a $250,000,000 term loan, with a maturity date of April 27, 2023. In connection with the A&R Credit Agreement, during the three months ended June 30, 2018, the Company converted $150,000,000 of the outstanding balance on its revolving line of credit into $150,000,000 outstanding on its term loan. The annual interest rate payable under the secured credit facility was decreased to, at the Operating Partnership's option, either (a) the London Interbank Offered Rate, plus an applicable margin ranging from 1.75% to 2.25%, which is determined based on the overall leverage of the Operating Partnership; or (b) a base rate, which means, for any day, a fluctuating rate per annum equal to the prime rate for such day, plus an applicable margin ranging from 0.75% to 1.25%, which is determined based on the overall leverage of the Operating Partnership.

14


During the nine months ended September 30, 2018, the Company drew $90,000,000 on its secured credit facility to fund the acquisition of three real estate investments.
During the nine months ended September 30, 2018, the Company increased the borrowing base availability under the secured credit facility by $94,160,000 by adding six properties to the aggregate pool availability.
As of September 30, 2018, the Company had an aggregate pool availability under the secured credit facility of $501,447,000. As of September 30, 2018, the aggregate outstanding principal balance was $310,000,000, and a total of $191,447,000 remained to be drawn on the secured credit facility.
The principal payments due on the notes payable and secured credit facility for the three months ending December 31, 2018, and for each of the next four years ending December 31 and thereafter, are as follows (amounts in thousands):
Year
 
Total Amount
Three months ending December 31, 2018
 
$
140

2019
 
1,939

2020
 
4,533

2021
 
155,151

2022
 
224,971

Thereafter
 
391,141

 
 
$
777,875

Note 9—Related-Party Transactions and Arrangements
The Company reimburses the Advisor and its affiliates for organization and offering expenses it incurs on the Company’s behalf, but only to the extent the reimbursement would not cause the selling commissions, dealer manager fees, distribution and servicing fees and other organization and offering expenses to exceed 15.0% of the gross proceeds of the Company's Initial Offering or Offering, respectively. Other offering costs, which are offering expenses other than selling commissions, dealer manager fees and distribution and servicing fees, associated with the Company's Initial Offering, which terminated on November 24, 2017, were approximately 2.0% of the gross proceeds. The Company expects that other offering costs associated with the Company's Offering, which commenced on November 27, 2017, will be approximately 2.0% of the gross proceeds at the termination of the Offering. As of September 30, 2018, since inception, the Advisor and its affiliates incurred approximately $19,747,000 on the Company’s behalf in other offering costs, the majority of which were incurred by the Dealer Manager. Of this amount, approximately $353,000 of other offering costs remained accrued as of September 30, 2018. As of September 30, 2018, the Company reimbursed the Advisor or its affiliates approximately $18,860,000 in other offering costs. As of September 30, 2018, since inception, the Company paid approximately $534,000 to an affiliate of the Dealer Manager in other offering costs. Other organization expenses are expensed as incurred and offering costs are charged to stockholders’ equity as incurred.
The Company pays to the Advisor 2.0% of the contract purchase price of each property or asset acquired. For the three months ended September 30, 2018 and 2017, the Company incurred approximately $277,000 and $1,019,000, respectively, and for the nine months ended September 30, 2018 and 2017, the Company incurred $2,755,000 and $8,975,000, respectively, in acquisition fees to the Advisor or its affiliates. In addition, the Company reimburses the Advisor for acquisition expenses incurred in connection with the selection and acquisition of properties or real estate-related investments (including expenses relating to potential investments that the Company does not close), such as legal fees and expenses, costs of real estate due diligence, appraisals, non-refundable option payments on properties not acquired, travel and communications expenses, accounting fees and expenses and title insurance premiums, whether or not the property was acquired. The Company expects these expenses will be approximately 0.75% of the purchase price of each property or real estate-related investment.
The Company pays to the Advisor an asset management fee calculated on a monthly basis in an amount equal to 1/12th of 0.75% of aggregate asset value, which is payable monthly in arrears. For the three months ended September 30, 2018 and 2017, the Company incurred approximately $3,323,000 and $2,698,000, respectively, and for the nine months ended September 30, 2018 and 2017, the Company incurred approximately $9,655,000 and $7,055,000, respectively, in asset management fees.
In connection with the rental, leasing, operation and management of the Company’s properties, the Company pays the Property Manager and its affiliates aggregate fees equal to 3.0% of gross revenues from the properties managed, or property management fees. The Company will reimburse the Property Manager and its affiliates for property-level expenses that any of them pay or incur on the Company’s behalf, including certain salaries, bonuses and benefits of persons employed by the Property Manager and its affiliates except for the salaries, bonuses and benefits of persons who also serve as one of its executive officers. The Property Manager and its affiliates may subcontract the performance of their duties to third parties and

15


pay all or a portion of the property management fee to the third parties with whom they contract for these services. If the Company contracts directly with third parties for such services, it will pay them customary market fees and may pay the Property Manager an oversight fee equal to 1.0% of the gross revenues of the properties managed. In no event will the Company pay the Property Manager or any affiliate both a property management fee and an oversight fee with respect to any particular property. The Company also will pay the Property Manager a separate fee for the one-time initial lease-up, leasing-up of newly constructed properties or re-leasing to existing tenants. For the three months ended September 30, 2018 and 2017, the Company incurred approximately $1,123,000 and $913,000, respectively, and for the nine months ended September 30, 2018 and 2017, the Company incurred $3,282,000 and $2,322,000, 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 September 30, 2018 and 2017, the Company incurred approximately $42,000 and $884,000, respectively, and for the nine months ended September 30, 2018 and 2017, the Company incurred $473,000 and $907,000, respectively, in leasing commissions to the Property Manager. Leasing commission fees are capitalized in other assets, net in the accompanying condensed consolidated balance sheets.
For acting as general contractor and/or construction manager to supervise or coordinate projects or to provide major repairs or rehabilitation on our properties, the Company may pay the Property Manager up to 5.0% of the cost of the projects, repairs and/or rehabilitation, as applicable, or construction management fees. For the three months ended September 30, 2018 and 2017, the Company incurred approximately $30,000 and $172,000, respectively, and for the nine months ended September 30, 2018 and 2017, the Company incurred approximately $203,000 and $575,000, respectively, in construction management fees to the Property Manager. Construction management fees are capitalized in real estate, net in the accompanying condensed consolidated balance sheets.
The Company reimburses the Advisor for all operating expenses it paid or incurred in connection with the services provided to the Company, subject to certain limitations. Expenses in excess of the operating expenses in the four immediately preceding quarters that exceed the greater of (a) 2.0% of average invested assets or (b) 25% of net income, subject to certain adjustments, will not be reimbursed unless the independent directors determine such excess expenses are justified. The Company will not reimburse the Advisor for personnel costs in connection with services for which the Advisor receives an acquisition fee or a disposition fee. For the three months ended September 30, 2018 and 2017, the Advisor allocated approximately $433,000 and $381,000, respectively, and for the nine months ended September 30, 2018 and 2017, the Advisor allocated approximately $1,130,000 and $1,228,000, respectively, in operating expenses to the Company, which are recorded in general and administrative expenses in the accompanying condensed consolidated statements of comprehensive income.
On May 15, 2017, the Advisor employed Gael Ragone, who is the daughter of John E. Carter, the chairman of the Company's board of directors, as Vice President of Product Management of Carter Validus Advisors II, LLC. Effective June, 18, 2018, Ms. Ragone is no longer employed by the Advisor. The Company directly reimbursed the Advisor any amounts of Ms. Ragone's salary that were allocated to the Company. For the three and nine months ended September 30, 2018, the Advisor allocated approximately $0 and $69,000, respectively, which is included in other offering costs in the accompanying condensed consolidated balance sheets.
The Company will pay its Advisor, or its affiliates, if it provides a substantial amount of services (as determined by a majority of the Company’s independent directors) in connection with the sale of properties, a disposition fee, equal to the lesser of 1.0% of the contract sales price and one-half of the total brokerage commission paid if a third party broker is also involved, without exceeding the lesser of 6.0% of the contract sales price or a reasonable, customary and competitive real estate commission. As of September 30, 2018, the Company has not incurred any disposition fees to the Advisor or its affiliates.
Upon the sale of the Company, the Advisor will receive 15% of the remaining net sale proceeds after return of capital contributions plus payment to investors of a 6.0% annual cumulative, non-compounded return on the capital contributed by investors, or the subordinated participation in net sale proceeds. As of September 30, 2018, the Company has not incurred any subordinated participation in net sale proceeds to the Advisor or its affiliates.
Upon the listing of the Company’s shares on a national securities exchange, the Advisor will receive 15% of the amount by which the sum of the Company’s adjusted market value plus distributions exceeds the sum of the aggregate capital contributed by investors plus an amount equal to a 6.0% annual cumulative, non-compounded return to investors, or the subordinated incentive listing fee. As of September 30, 2018, the Company has not incurred any subordinated incentive listing fees to the Advisor or its affiliates.
Upon termination or non-renewal of the advisory agreement, with or without cause, the Advisor will be entitled to receive subordinated termination fees from the Operating Partnership equal to 15% of the amount by which the sum of the Company’s adjusted market value plus distributions exceeds the sum of the aggregate capital contributed by investors plus an amount equal to an annual 6.0% cumulative, non-compounded return to investors. In addition, the Advisor may elect to defer its right to receive a subordinated termination fee upon termination until either shares of the Company’s common stock are listed and

16


traded on a national securities exchange or another liquidity event occurs. As of September 30, 2018, the Company has not incurred any subordinated termination fees to the Advisor or its affiliates.
The Company pays the Dealer Manager selling commissions, dealer manager fees and distribution and servicing fees in connection with the purchase of shares of certain classes of common stock. All selling commissions are expected to be re-allowed to participating broker-dealers. The dealer manager fee may be partially re-allowed to participating broker-dealers. No selling commissions, dealer manager fees and distribution and servicing fees will be paid in connection with purchases of shares of any class made pursuant to the DRIP.
Class A Shares
The Company pays the Dealer Manager selling commissions of up to 7.0% of the gross offering proceeds per Class A share. In addition, the Company pays the Dealer Manager a dealer manager fee of up to 3.0% of gross offering proceeds from the sale of Class A shares.
Class I Shares
The Company does not pay selling commissions with respect to Class I shares. The Dealer Manager may receive up to 2.0% of the gross offering proceeds from the sale of Class I shares as a dealer manager fee, of which 1.0% will be funded by the Advisor without reimbursement from the Company. The 1.0% of the dealer manager fee paid from offering proceeds will be waived in the event an investor purchases Class I shares through a registered investment advisor that is not affiliated with a broker dealer.
Class T Shares
The Company paid the Dealer Manager selling commissions of up to 3.0% of the gross offering proceeds per Class T share. In addition, the Company paid the Dealer Manager a dealer manager fee up to 3.0% of gross offering proceeds from the sale of Class T shares. The Company ceased offering Class T shares in the Offering on March 14, 2018. Beginning on March 15, 2018, the Company offers Class T2 shares, as described below.
Class T2 Shares
The Company pays the Dealer Manager selling commissions of up to 3.0% of gross offering proceeds per Class T2 share. In addition, the Company pays the Dealer Manager a dealer manager fee of up to 2.5% of gross offering proceeds from the sale of Class T2 shares.
For the three months ended September 30, 2018 and 2017, the Company incurred approximately $844,000 and $6,065,000, respectively, and for the nine months ended September 30, 2018 and 2017, the Company incurred approximately $4,073,000 and $16,323,000, respectively, for selling commissions and dealer manager fees in connection with the Offerings to the Dealer Manager.
The Company pays the Dealer Manager a distribution and servicing fee with respect to its Class T and T2 shares that are sold in the Company's Offerings.
The distribution and servicing fee is paid monthly in arrears. For the nine months ended September 30, 2018 and 2017, the Company incurred $402,000 and $7,031,000, respectively, in distribution and servicing fees to the Dealer Manager.
Accounts Payable Due to Affiliates
The following amounts were due to affiliates as of September 30, 2018 and December 31, 2017 (amounts in thousands):
Entity
 
Fee
 
September 30, 2018
 
December 31, 2017
Carter Validus Advisors II, LLC and its affiliates
 
Asset management fees
 
$
1,114

 
$
1,017

Carter Validus Real Estate Management Services II, LLC
 
Property management fees
 
462

 
463

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

 
39

Carter Validus Advisors II, LLC and its affiliates
 
General and administrative costs
 
182

 
182

Carter Validus Advisors II, LLC and its affiliates
 
Offering costs
 
353

 
167

SC Distributors, LLC
 
Distribution and servicing fees
 
11,140

 
13,376

Carter Validus Advisors II, LLC and its affiliates
 
Acquisition expenses
 

 
5

Carter Validus Real Estate Management Services II, LLC
 
Leasing commissions
 
42

 


 
 
 
$
13,293

 
$
15,249


17


Note 10—Segment Reporting
Management reviews the performance of individual properties and aggregates individual properties based on operating criteria into two reportable segments—commercial real estate investments in data centers and healthcare, and makes operating decisions based on these two reportable segments. The Company’s commercial real estate investments in data centers and healthcare are based on certain underwriting assumptions and operating criteria, which are different for data centers and healthcare.
The Company evaluates performance based on net operating income of the individual properties in each segment. Net operating income, a non-GAAP financial measure, is defined as total revenues, less rental and parking expenses, which excludes depreciation and amortization, general and administrative expenses, acquisition related expenses, asset management fees and interest expense, net. The Company believes that segment net operating income serves as a useful supplement to net income because it allows investors and management to measure unlevered property-level operating results and to compare operating results to the operating results of other real estate companies between periods on a consistent basis. Segment net operating income should not be considered as an alternative to net income determined in accordance with GAAP as an indicator of financial performance, and accordingly, the Company believes that in order to facilitate a clear understanding of the consolidated historical operating results, segment net operating income should be examined in conjunction with net income as presented in the accompanying condensed consolidated financial statements and data included elsewhere in this Quarterly Report on Form 10-Q.
Non-segment assets primarily consist of corporate assets, including cash and cash equivalents, real estate and escrow deposits, deferred financing costs attributable to the revolving line of credit portion of the Company's secured credit facility and other assets not attributable to individual properties.

18


Summary information for the reportable segments during the three and nine months ended September 30, 2018 and 2017, is as follows (amounts in thousands):
 
Data Center
 
Healthcare
 
Three Months Ended
September 30, 2018
Revenue:
 
 
 
 
 
Rental, parking and tenant reimbursement revenue
$
26,843

 
$
18,675

 
$
45,518

Expenses:
 
 
 
 
 
Rental and parking expenses
(6,893
)
 
(2,554
)
 
(9,447
)
Segment net operating income
$
19,950

 
$
16,121

 
36,071

 
 
 
 
 
 
Expenses:
 
 
 
 
 
General and administrative expenses
 
 
 
 
(1,244
)
Asset management fees
 
 
 
 
(3,323
)
Depreciation and amortization
 
 
 
 
(14,849
)
Income from operations
 
 
 
 
16,655

Interest expense, net
 
 
 
 
(8,938
)
Net income attributable to common stockholders
 
 
 
 
$
7,717

 
Data Center
 
Healthcare
 
Three Months Ended
September 30, 2017
Revenue:
 
 
 
 
 
Rental, parking and tenant reimbursement revenue
$
19,882

 
$
16,323

 
$
36,205

Expenses:
 
 
 
 
 
Rental and parking expenses
(6,092
)
 
(2,276
)
 
(8,368
)
Segment net operating income
$
13,790

 
$
14,047

 
27,837

 
 
 
 
 
 
Expenses:
 
 
 
 
 
General and administrative expenses
 
 
 
 
(1,062
)
Asset management fees
 
 
 
 
(2,698
)
Depreciation and amortization
 
 
 
 
(11,852
)
Income from operations
 
 
 
 
12,225

Interest expense, net
 
 
 
 
(6,786
)
Net income attributable to common stockholders
 
 
 
 
$
5,439


19


 
Data Centers
 
Healthcare
 
Nine Months Ended
September 30, 2018
Revenue:
 
 
 
 
 
Rental, parking and tenant reimbursement revenue
$
76,443

 
$
54,317

 
$
130,760

Expenses:
 
 
 
 
 
Rental and parking expenses
(20,030
)
 
(7,409
)
 
(27,439
)
Segment net operating income
$
56,413

 
$
46,908

 
103,321

 
 
 
 
 
 
Expenses:
 
 
 
 
 
General and administrative expenses
 
 
 
 
(3,526
)
Asset management fees
 
 
 
 
(9,655
)
Depreciation and amortization
 
 
 
 
(42,848
)
Income from operations
 
 
 
 
47,292

Interest expense, net
 
 
 
 
(24,885
)
Net income attributable to common stockholders
 
 
 
 
$
22,407

 
Data Centers
 
Healthcare
 
Nine Months Ended
September 30, 2017
Revenue:
 
 
 
 
 
Rental, parking and tenant reimbursement revenue
$
41,347

 
$
46,482

 
$
87,829

Expenses:
 
 
 
 
 
Rental and parking expenses
(11,779
)
 
(6,815
)
 
(18,594
)
Segment net operating income
$
29,568

 
$
39,667

 
69,235


 
 
 
 
 
Expenses:
 
 
 
 
 
General and administrative expenses
 
 
 
 
(3,199
)
Asset management fees
 
 
 
 
(7,055
)
Depreciation and amortization
 
 
 
 
(28,487
)
Income from operations
 
 
 
 
30,494

Interest expense, net
 
 
 
 
(15,623
)
Net income attributable to common stockholders
 
 
 
 
$
14,871

There were no intersegment sales or transfers during the three and nine months ended September 30, 2018 and 2017.
Assets by each reportable segment as of September 30, 2018 and December 31, 2017 are as follows (amounts in thousands):
 
September 30, 2018
 
December 31, 2017
Assets by segment:
 
 
 
Data centers
$
1,002,068

 
$
909,477

Healthcare
840,887

 
813,742

All other
75,741

 
54,725

Total assets
$
1,918,696

 
$
1,777,944


20


Capital additions and acquisitions by reportable segments for the nine months ended September 30, 2018 and 2017 are as follows (amounts in thousands):
 
Nine Months Ended
September 30,
 
2018
 
2017
Capital additions and acquisitions by segment:
 
 
 
Data centers
$
104,532

 
$
344,458

Healthcare
50,199

 
138,611

Total capital additions and acquisitions
$
154,731

 
$
483,069

Note 11—Future Minimum Rent
Rental Income
The Company’s real estate assets are leased to tenants under operating leases with varying terms. Typically, the leases have provisions to extend the terms of the lease agreements. The Company retains substantially all of the risks and benefits of ownership of the real estate assets leased to tenants.
The future minimum rent to be received from the Company’s investment in real estate assets under non-cancelable operating leases, including optional renewal periods for which exercise is reasonably assured, for the three months ending December 31, 2018 and for each of the next four years ending December 31 and thereafter, are as follows (amounts in thousands):
Year
 
Amount
Three months ending December 31, 2018
 
$
34,469

2019
 
139,371

2020
 
139,066

2021
 
141,268

2022
 
136,739

Thereafter
 
1,078,123

 
 
$
1,669,036

Rental Expense
The Company has three 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 three months ending December 31, 2018 and for each of the next four years ending December 31 and thereafter, are as follows (amounts in thousands):
Year
 
Amount
Three months ending December 31, 2018
 
$
33

2019
 
132

2020
 
132

2021
 
132

2022
 
132

Thereafter
 
3,142

 
 
$
3,703

Note 12—Fair Value
Notes payable—Fixed Rate—The estimated fair value of notes payablefixed rate measured using observable inputs from similar liabilities (Level 2) was approximately $208,894,000 and $211,011,000 as of September 30, 2018 and December 31, 2017, respectively, as compared to the outstanding principal of $220,372,000 and $220,436,000 as of September 30, 2018 and December 31, 2017, respectively. The estimated fair value of notes payablevariable rate fixed through interest rate swap agreements (Level 2) was approximately $238,122,000 and $243,812,000 as of September 30, 2018

21


and December 31, 2017, respectively, as compared to the outstanding principal of $247,503,000 and $247,699,000 as of September 30, 2018 and December 31, 2017, respectively.
Secured credit facility—The outstanding principal of the secured credit facility—variable was $210,000,000 and $120,000,000, which approximated its fair value as of September 30, 2018 and December 31, 2017, respectively. The fair value of the Company's variable rate secured credit facility is estimated based on the interest rates currently offered to the Company by financial institutions. The estimated fair value of the secured credit facility—variable rate fixed through interest rate swap agreements (Level 2) was approximately $93,286,000 and $98,593,000 as of September 30, 2018 and December 31, 2017, respectively, as compared to the outstanding principal of $100,000,000 as of September 30, 2018 and December 31, 2017.
Derivative instruments—Considerable judgment is necessary to develop estimated fair values of financial instruments. Accordingly, the estimates presented herein are not necessarily indicative of the amount the Company could realize, or be liable for, on disposition of the financial instruments. The Company has determined that the majority of the inputs used to value its interest rate swaps fall within Level 2 of the fair value hierarchy. The credit valuation adjustments associated with these instruments utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by the Company and the respective counterparty. However, as of September 30, 2018, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions, and has determined that the credit valuation adjustments are not significant to the overall valuation of its interest rate swaps. As a result, the Company determined that its interest rate swaps valuation is classified in Level 2 of the fair value hierarchy.
The following tables show 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 September 30, 2018 and December 31, 2017 (amounts in thousands):
 
September 30, 2018
 
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
$

 
$
11,249

 
$

 
$
11,249

Total assets at fair value
$

 
$
11,249

 
$

 
$
11,249

 
December 31, 2017
 
Fair Value Hierarchy
 
 
 
Quoted Prices in Active
Markets for Identical
Assets (Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs (Level 3)
 
Total Fair
Value
Assets:
 
 
 
 
 
 
 
Derivative assets
$

 
$
3,934

 
$

 
$
3,934

Total assets at fair value
$

 
$
3,934

 
$

 
$
3,934

Liabilities:
 
 
 
 
 
 
 
Derivative liabilities
$

 
$
22

 
$

 
$
22

Total liabilities at fair value
$

 
$
22

 
$

 
$
22

Note 13—Derivative Instruments and Hedging Activities
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish these objectives, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable rate amounts from a counterparty in exchange for the Company making fixed rate payments over the life of the agreements without exchange of the underlying notional amount.
The effective portion of changes in the fair value of derivatives designated, and that qualify, as cash flow hedges is recorded in accumulated other comprehensive income in the accompanying condensed consolidated statement of stockholders' equity and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.
During the three and nine months ended September 30, 2018 and 2017, the Company's derivative instruments were used to hedge the variable cash flows associated with variable rate debt. The ineffective portion of changes in fair value of the

22


derivatives are recognized directly in earnings. During the three months ended September 30, 2018 and 2017, the Company recognized a gain of $49,000 and $14,000, respectively, and during the nine months ended September 30, 2018 and 2017, the Company recognized a loss of $28,000 and a gain of $16,000, respectively, due to ineffectiveness of its hedges of interest rate risk, which was recorded in interest expense, net in the accompanying condensed consolidated statements of comprehensive income.
Amounts reported in accumulated other comprehensive income related to the derivative will be reclassified to interest expense, net as interest payments are made on the Company’s variable rate debt. During the next twelve months, the Company estimates that an additional $3,000,000 will be reclassified from accumulated other comprehensive income as a decrease to interest expense, net.
See Note 12—"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
 
September 30, 2018
 
December 31, 2017
Outstanding
Notional
Amount
 
Fair Value of
 
Outstanding
Notional
Amount
 
Fair Value of
Asset
 
(Liability)
 
Asset
 
(Liability)
 
Interest rate swaps
 
Other assets, net/Accounts
payable and other
liabilities
 
07/01/2016 to
11/16/2017
 
12/22/2020 to
11/16/2022
 
$
347,503

 
$
11,249

 
$

 
$
347,699

 
$
3,934

 
$
(22
)
The notional amount under the agreements is an indication of the extent of the Company’s involvement in the instruments at the time, but does not represent exposure to credit, interest rate or market risks.
Accounting for changes in the fair value of a derivative instrument depends on the intended use and designation of the derivative instrument. The Company designated the interest rate swaps as cash flow hedges to hedge the variability of the anticipated cash flows on its variable rate secured credit facility and notes payable. The change in fair value of the effective portion of the derivative instruments that are designated as hedges is recorded in other comprehensive income (loss) in the accompanying condensed consolidated statements of comprehensive income.
The table below summarizes the amount of income (loss) recognized on the interest rate derivatives designated as cash flow hedges for the three and nine months ended September 30, 2018 and 2017 (amounts in thousands):
Derivatives in Cash Flow Hedging Relationships
 
Amount of Income (Loss) Recognized
in OCI on Derivative
(Effective Portion)
 
Location of Income (Loss)
Reclassified From
Accumulated Other
Comprehensive Income to
Net Income
(Effective Portion)
 
Amount of Income (Loss)
Reclassified From
Accumulated Other
Comprehensive Income to
Net Income
(Effective Portion)
Three Months Ended September 30, 2018
 
 
 
 
 
 
Interest rate swaps
 
$
1,276

 
Interest expense, net
 
$
304

Total
 
$
1,276

 
 
 
$
304

Three Months Ended September 30, 2017
 
 
 
 
 
 
Interest rate swaps
 
$
(108
)
 
Interest expense, net
 
$
(327
)
Total
 
$
(108
)
 
 
 
$
(327
)
Nine Months Ended September 30, 2018
 
 
 
 
 
 
Interest rate swaps
 
$
7,693

 
Interest expense, net
 
$
328

Total
 
$
7,693

 
 
 
$
328

Nine Months Ended September 30, 2017
 
 
 
 
 
 
Interest rate swaps
 
$
(743
)
 
Interest expense, net
 
$
(1,024
)
Total
 
$
(743
)
 
 
 
$
(1,024
)

23


Credit Risk-Related Contingent Features
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 September 30, 2018, there were no derivatives in a net liability position. As of September 30, 2018, there were no termination events or events of default related to the interest rate swaps.
Tabular Disclosure Offsetting Derivatives
The Company has elected not to offset derivative positions in its condensed consolidated financial statements. The following tables present the effect on the Company’s financial position had the Company made the election to offset its derivative positions as of September 30, 2018 and December 31, 2017 (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
September 30, 2018
 
$
11,249

 
$

 
$
11,249

 
$

 
$

 
$
11,249

December 31, 2017
 
$
3,934

 
$

 
$
3,934

 
$

 
$

 
$
3,934

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
December 31, 2017
 
$
22

 
$

 
$
22

 
$

 
$

 
$
22

The Company reports derivatives in the accompanying condensed consolidated balance sheets as other assets, net and accounts payable and other liabilities.
Note 14—Accumulated Other Comprehensive Income
The following table presents a rollforward of amounts recognized in accumulated other comprehensive income by component for the nine months ended September 30, 2018 and 2017 (amounts in thousands):
 
 
Unrealized Income on Derivative
Instruments
Balance as of December 31, 2017
 
$
3,710

Other comprehensive income before reclassification
 
7,693

Amount of gain reclassified from accumulated other comprehensive income to net income (effective portion)
 
(328
)
Other comprehensive income
 
7,365

Balance as of September 30, 2018
 
$
11,075

 
 
Unrealized Income on Derivative
Instruments
Balance as of December 31, 2016
 
$
840

Other comprehensive loss before reclassification
 
(743
)
Amount of loss reclassified from accumulated other comprehensive income to net income (effective portion)
 
1,024

Other comprehensive income
 
281

Balance as of September 30, 2017
 
$
1,121


24


The following table presents reclassifications out of accumulated other comprehensive income for the nine months ended September 30, 2018 and 2017 (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
 
 
Nine Months Ended
September 30,
 
 
 
 
2018
 
2017
 
 
Interest rate swap contracts
 
$
(328
)
 
$
1,024

 
Interest expense, net
Note 15—Commitments and Contingencies
Litigation
In the ordinary course of business, the Company may become subject to litigation or claims. As of September 30, 2018, there were, and currently there are, no material pending legal proceedings to which the Company is a party.

25


Note 16—Economic Dependency
The Company is dependent on the Advisor and its affiliates for certain services that are essential to the Company, including the sale of the Company’s shares of common and preferred stock available for issuance; the identification, evaluation, negotiation, purchase and disposition of real estate investments and other investments; the management of the daily operations of the Company’s real estate portfolio; and other general and administrative responsibilities. In the event that the Advisor and its affiliates are unable to provide the respective services, the Company will be required to obtain such services from other sources.
Note 17—Subsequent Events
Distributions Paid to Stockholders
On October 1, 2018, the Company paid aggregate distributions of approximately $4,416,000 to Class A stockholders ($2,315,000 in cash and $2,101,000 in shares of the Company’s Class A common stock pursuant to the DRIP), which related to distributions declared for each day in the period from September 1, 2018 through September 30, 2018. On November 1, 2018, the Company paid aggregate distributions of approximately $4,584,000 to Class A stockholders ($2,407,000 in cash and $2,177,000 in shares of the Company’s Class A common stock pursuant to the DRIP), which related to distributions declared for each day in the period from October 1, 2018 through October 31, 2018.
On October 1, 2018, the Company paid aggregate distributions of approximately $585,000 to Class I stockholders ($338,000 in cash and $247,000 in shares of the Company’s Class I common stock pursuant to the DRIP), which related to distributions declared for each day in the period from September 1, 2018 through September 30, 2018. On November 1, 2018, the Company paid aggregate distributions of approximately $636,000 to Class I stockholders ($367,000 in cash and $269,000 in shares of the Company’s Class I common stock pursuant to the DRIP), which related to distributions declared for each day in the period from October 1, 2018 through October 31, 2018.
On October 1, 2018, the Company paid aggregate distributions of approximately $1,728,000 to Class T stockholders ($750,000 in cash and $978,000 in shares of the Company's Class T common stock pursuant to the DRIP), which related to distributions declared for each day in the period from September 1, 2018 through September 30, 2018. On November 1, 2018, the Company paid aggregate distributions of approximately $1,834,000 to Class T stockholders ($802,000 in cash and $1,032,000 in shares of the Company's Class T common stock pursuant to the DRIP), which related to distributions declared for each day in the period from October 1, 2018 through October 31, 2018.
On October 1, 2018, the Company paid aggregate distributions of approximately $107,000 to Class T2 stockholders ($39,000 in cash and $68,000 in shares of the Company's Class T2 common stock pursuant to the DRIP), which related to distributions declared for each day in the period from September 1, 2018 through September 30, 2018. On November 1, 2018, the Company paid aggregate distributions of approximately $139,000 to Class T2 stockholders ($57,000 in cash and $82,000 in shares of the Company's Class T2 common stock pursuant to the DRIP), which related to distributions declared for each day in the period from October 1, 2018 through October 31, 2018.
Distributions Authorized
Class A Shares
The board of directors approved and authorized an additional daily distribution to the Company’s Class A stockholders of record as of the close of business on each day of the period commencing on October 1, 2018 and ending November 30, 2018 in the amount of $0.000013677 per share. This additional distribution amount and the daily distribution of $0.001788493 previously authorized and declared by the board of directors will equal an annualized rate of 6.40%, based on the revised follow-on offering purchase price of $10.278 per Class A share. The distributions for each record date in October 2018 and November 2018 will be paid in November 2018 and December 2018, respectively. The distributions will be payable to stockholders from legally available funds therefor.
On November 8, 2018, the board of directors of the Company approved and authorized a daily distribution to the Company’s Class A stockholders of record as of the close of business on each day of the period commencing on December 1, 2018 and ending on February 28, 2019. The distribution will be calculated based on 365 days in the calendar year and will be equal to $0.001802170 per share of Class A common stock, which will be equal to an annualized distribution rate of 6.40%, assuming a purchase price of $10.278 per share of Class A common stock. The distributions declared for each record date in December 2018, January 2019 and February 2019 will be paid in January 2019, February 2019 and March 2019, respectively. The distributions will be payable to stockholders from legally available funds therefor.

26


Class I Shares
The board of directors approved and authorized an additional daily distribution to the Company’s Class I stockholders of record as of the close of business on each day of the period commencing on October 1, 2018 and ending November 30, 2018 in the amount of $0.000013677 per share. This additional distribution amount and the daily distribution of $0.001788493 previously authorized and declared by the board of directors will equal an annualized rate of 7.04%, based on the revised follow-on offering purchase price of $9.343 per Class I share. The distributions for each record date in October 2018 and November 2018 will be paid in November 2018 and December 2018, respectively. The distributions will be payable to stockholders from legally available funds therefor.
On November 8, 2018, the board of directors of the Company approved and authorized a daily distribution to the Company’s Class I stockholders of record as of the close of business on each day of the period commencing on December 1, 2018 and ending on February 28, 2019. The distribution will be calculated based on 365 days in the calendar year and will be equal to $0.001802170 per share of Class I common stock, which will be equal to an annualized distribution rate of 7.04%, assuming a purchase price of $9.343 per share. The distributions declared for each record date in December 2018, January 2019 and February 2019 will be paid in January 2019, February 2019 and March 2019, respectively. The distributions will be payable to stockholders from legally available funds therefor.
Class T Shares
The board of directors approved and authorized an additional daily distribution to the Company’s Class T stockholders of record as of the close of business on each day of the period commencing on October 1, 2018 and ending November 30, 2018 in the amount of $0.000041894 per share. This additional distribution amount and the daily distribution of $0.001519750 previously authorized and declared by the board of directors will equal an annualized rate of 5.79%, based on $9.840 per Class T share, which reflects the updated NAV per share of the Company's Class T common stock, a 3.0% selling commission and a 3.0% dealer manager fee that were in place at the time the shares were purchased. The distributions for each record date in October 2018 and November 2018 will be paid in November 2018 and December 2018, respectively. The distributions will be payable to stockholders from legally available funds therefor.
On November 8, 2018, the board of directors of the Company approved and authorized a daily distribution to the Company’s Class T stockholders of record as of the close of business on each day of the period commencing on December 1, 2018 and ending on February 28, 2019. The distribution will be calculated based on 365 days in the calendar year and will be equal to $0.001561644 per share of Class T common stock, which will be equal to an annualized distribution rate of 5.79%, based on $9.840 per Class T share, which reflects the updated NAV per share of the Company's Class T common stock, a 3.0% selling commission and a 3.0% dealer manager fee that were in place at the time the shares were purchased. The distributions declared for each record date in December 2018, January 2019 and February 2019 will be paid in January 2019, February 2019 and March 2019, respectively. The distributions will be payable to stockholders from legally available funds therefor.
Class T2 Shares
The board of directors approved and authorized an additional daily distribution to the Company’s Class T2 stockholders of record as of the close of business on each day of the period commencing on October 1, 2018 and ending November 30, 2018 in the amount of $0.000039288 per share. This additional distribution amount and the daily distribution of $0.001522356 previously authorized and declared by the board of directors will equal an annualized rate of 5.82%, based on the revised follow-on offering purchase price of $9.788 per Class T2 share. The distributions for each record date in October 2018 and November 2018 will be paid in November 2018 and December 2018, respectively. The distributions will be payable to stockholders from legally available funds therefor.
On November 8, 2018, the board of directors of the Company approved and authorized a daily distribution to the Company’s Class T2 stockholders of record as of the close of business on each day of the period commencing on December 1, 2018 and ending on February 28, 2019. The distribution will be calculated based on 365 days in the calendar year and will be equal to $0.001561644 per share of Class T2 common stock, which will be equal to an annualized distribution rate of 5.82%, assuming a purchase price of $9.788 per share. The distributions declared for each record date in December 2018, January 2019 and February 2019 will be paid in January 2019, February 2019 and March 2019, respectively. The distributions will be payable to stockholders from legally available funds therefor.
Fifth Amended and Restated Share Repurchase Program
The board of directors approved and adopted the Fifth Amended and Restated Share Repurchase Program clarifying the definition of the Company's repurchase date for the first quarter 2019, which is applied for repurchase requests received by the Company between September 25, 2018 and December 23, 2018.
See Part II, Item 2. "Unregistered Sales of Equity Securities" for more information on the share repurchase program.

27


Status of the Offerings
As of November 8, 2018, the Company had accepted investors’ subscriptions for and issued approximately 88,365,000 shares of Class A common stock, 11,847,000 shares of Class I common stock, 38,524,000 shares of Class T common stock and 3,062,000 shares of Class T2 common stock in the Offerings, resulting in receipt of gross proceeds of approximately $874,050,000, $108,534,000, $369,940,000 and $29,548,000, respectively, for a total of $1,382,072,000. As of November 8, 2018, the Company had approximately $882,340,000 in Class A shares, Class I shares and Class T2 shares of common stock remaining in the Offering and approximately $59,320,000 in Class A shares, Class I shares, Class T shares and Class T2 shares of common stock remaining in the DRIP Offering.
Acquisitions
The following table summarizes the properties acquired subsequent to September 30, 2018 and through November 13, 2018:
Property
 
Date Acquired
 
Contract Purchase Price (1)
 
Ownership
Canton Data Center
 
10/03/2018
 
$9,425,000
 
100%
Benton Hot Springs Healthcare Facilities Portfolio (2)
 
10/17/2018
 
$30,448,369
 
100%
(1)
The property acquisitions were funded using the Company's Offerings.
(2)
The Benton Hot Springs Healthcare Facilities Portfolio consists of four properties.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the notes thereto and the other unaudited financial information appearing elsewhere in this Quarterly Report on Form 10-Q. The following discussion should also be read in conjunction with our audited consolidated financial statements, and the notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the Securities and Exchange Commission, or the SEC, on March 21, 2018, or the 2017 Annual Report on Form 10-K.
The terms “we,” “our,” "us," and the “Company” refer to Carter Validus Mission Critical REIT II, Inc., Carter Validus Operating Partnership II, LP, or our Operating Partnership, and all wholly-owned subsidiaries.
Forward-Looking Statements
Certain statements contained in this Quarterly Report on Form 10-Q, other than historical facts, include forward-looking statements that reflect our expectations and projections about our future results, performance, prospects and opportunities. Such statements include, in particular, statements about our plans, strategies, and prospects and are subject to certain risks and uncertainties, as well as known and unknown risks, which could cause actual results to differ materially from those projected or anticipated. Therefore, such statements are not intended to be a guarantee of our performance in future periods. Such forward-looking statements can generally be identified by our use of forward-looking terminology such as “may,” “will,” “would,” “could,” “should,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “continue,” or other similar words. Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect our management’s view only as of the date this Quarterly Report on Form 10-Q is filed with the SEC. We make no representation or warranty (express or implied) about the accuracy of any such forward-looking statements contained in this Quarterly Report on Form 10-Q, and we do not undertake to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. See Item 1A. “Risk Factors” of our 2017 Annual Report on Form 10-K for a discussion of some, although not all, of the risks and uncertainties that could cause actual results to differ materially from those presented in our forward-looking statements.
Management’s discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate these estimates. These estimates are based on management’s historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
Overview
We were formed on January 11, 2013, under the laws of Maryland to acquire and operate a diversified portfolio of income-producing commercial real estate with a focus on data centers and healthcare properties, preferably with long-term net leases to creditworthy tenants, as well as to make real estate-related investments that relate to such property types.
We commenced our initial public offering of $2,350,000,000 of shares of our common stock, or our Initial Offering, consisting of $2,250,000,000 of shares in our primary offering and up to $100,000,000 of shares pursuant to our distribution reinvestment plan, or DRIP, on May 29, 2014. We ceased offering shares of common stock pursuant to our Initial Offering on November 24, 2017. At the completion of our Initial Offering, we had accepted investors subscriptions for and issued approximately 125,095,000 shares of Class A, Class I and Class T common stock, including shares of common stock issued pursuant to our DRIP resulting in gross proceeds of $1,223,803,000, before selling commissions and dealer manager fees of approximately $91,503,000.
On November 27, 2017, our follow-on offering, or our Offering, of up to $1,000,000,000 in shares of Class A common stock, Class I common stock, and Class T common stock pursuant to a registration statement on Form S-11, or the Follow-On Registration Statement, was declared effective by the SEC.
On September 28, 2017, our board of directors, at the recommendation of the audit committee, which is comprised solely of independent directors, unanimously approved and established an estimated per share net asset value, or Estimated Per Share NAV, of $9.18 as of June 30, 2017, of each of our Class A common stock, Class I common stock and Class T common stock for purposes of assisting broker-dealers participating in the Initial Offering and the Offering in meeting their customer account statement reporting obligations under the National Association of Securities Dealers Conduct Rule 2340. As a result of our board of directors' determination of the Estimated Per Share NAV, our board of directors approved the revised primary offering prices of $10.200 per Class A share, $9.273 per Class I share, and $9.766 per Class T share, effective October 1, 2017. Further,

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our board of directors approved $9.18 as the per share purchase price of Class A shares, Class I shares and Class T shares pursuant to the DRIP, effective October 1, 2017. On September 27, 2018, our board of directors established an updated Estimated Per Share NAV of $9.25 as of June 30, 2018. Therefore, effective October 1, 2018, shares of common stock are offered for a price per share of $10.278 per Class A share, $9.343 per Class I share and $9.788 per Class T2 share. The Estimated Per Share NAV is not subject to audit by our independent registered public accounting firm. We intend to publish an updated estimated NAV per share on at least an annual basis.
On October 13, 2017, we registered 10,893,246 shares of common stock under the DRIP pursuant to a registration statement on Form S-3, or the DRIP Registration Statement, for a price per share of $9.18 per Class A share, Class I share and Class T share for a proposed maximum offering price of $100,000,000 in shares of common stock, or the DRIP Offering. The DRIP Registration Statement was automatically effective with the SEC upon filing and we commenced offering shares of common stock pursuant to the DRIP Registration Statement on December 1, 2017. On December 6, 2017, we filed a post-effective amendment to our DRIP Registration Statement to register shares of Class T2 common stock at $9.18 per share. On September 27, 2018, our board of directors established an updated Estimated Per Share NAV of $9.25. Therefore, effective October 1, 2018, shares of common stock are offered pursuant to the DRIP Offering for a price per share of $9.25.
On June 2, 2017, we filed Articles Supplementary to the Second Articles of Amendment and Restatement with the State Department of Assessments and Taxation of Maryland reclassifying a portion of our Class A common stock, Class I common stock and Class T common stock as Class T2 common stock. On December 6, 2017, we filed Post-Effective Amendment No. 1 to our Registration Statement on Form S-11 to register Class T2 shares of common stock, which was declared effective by the SEC on February 20, 2018.
We ceased offering shares of Class T common stock in our Offering on March 14, 2018, and began offering shares of Class T2 common stock in our Offering on March 15, 2018. We refer to the "Offering", "Initial Offering" and "DRIP Offering" collectively, as the "Offerings."
As of September 30, 2018, we had issued approximately 140,038,000 shares of Class A, Class I, Class T and Class T2 common stock in our Offerings, resulting in receipt of gross proceeds of approximately $1,365,443,000, before share repurchases of $53,330,000, selling commissions and dealer manager fees of approximately $95,971,000 and other offering costs of approximately $26,680,000.
Our board of directors approved and adopted the Fourth Amended and Restated Share Repurchase Program (the "Amended & Restated SRP"), which was effective on August 29, 2018. The Amended & Restated SRP provides that the Company will repurchase shares on a quarterly, instead of monthly basis. Our board of directors approved and adopted the Fifth Amended and Restated Share Repurchase Program clarifying the definition of Repurchase Date. See Part II, Item 2. "Unregistered Sales of Equity Securities" for further discussion.
Substantially all of our operations are conducted through our Operating Partnership. We are externally advised by our Advisor, which is our affiliate, pursuant to an advisory agreement between us and our Advisor. Our Advisor supervises and manages our day-to-day operations and selects the properties and real estate-related investments we acquire, subject to the oversight and approval of our board of directors. Our Advisor also provides marketing, sales and client services related to real estate on our behalf. Our Advisor engages affiliated entities to provide various services to us. Our Advisor is managed by, and is a subsidiary of, our sponsor, Carter Validus REIT Management Company II, LLC, or our Sponsor. We have no paid employees and we rely on our Advisor to provide substantially all of our services.
Carter Validus Real Estate Management Services II, LLC, or our Property Manager, a wholly-owned subsidiary of our Sponsor, serves as our property manager. Our Advisor and our Property Manager received, and will continue to receive, fees during the acquisition and operational stages and our Advisor may be eligible to receive fees during the liquidation stage of the Company. SC Distributors, LLC, an affiliate of the Advisor, or the Dealer Manager, served as the dealer manager of the Initial Offering and serves as the dealer manager of the Offering. The Dealer Manager has received fees for services related to the Initial Offering, and has received and will continue to receive, fees for services related to the Offering.
Effective April 10, 2018, John E. Carter resigned as Chief Executive Officer of the Company. Mr. Carter remains with the Company as the Chairman of the board of directors, or the Board. In connection with the resignation of Mr. Carter as Chief Executive Officer, the Board appointed Michael A. Seton to serve as Chief Executive Officer of the Company, effective April 10, 2018. Mr. Seton continues to serve as President of the Company.
On July 24, 2018, our board of directors increased its size from five to seven directors and elected Michael A. Seton and Roger S. Pratt as directors to fill the newly created vacancies on the board, effective immediately. The board of directors determined that Mr. Pratt is an independent director. With the election of Messrs. Seton and Pratt, our board of directors now consists of seven members, four of whom are independent directors. In addition, the board of directors appointed Mr. Pratt to serve on the audit committee of the board of directors.

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On September 13, 2018, Lisa A. Drummond retired as Chief Operating Officer and Secretary of the Company, effective immediately. Our board of directors elected Todd M. Sakow as Chief Operating Officer and Secretary of the Company, effective September 13, 2018. Mr. Sakow resigned as Chief Financial Officer and Treasurer of the Company. Our board of directors named Kay C. Neely as Chief Financial Officer and Treasurer of the Company, effective September 13, 2018.
We currently operate through two reportable segments – commercial real estate investments in data centers and healthcare. As of September 30, 2018, we had purchased 58 real estate investments, consisting of 77 properties, comprising approximately 5,541,000 of rental square feet for an aggregate purchase price of approximately $1,752,435,000.
Critical Accounting Policies
Our critical accounting policies were disclosed in our 2017 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 2017 Annual Report on Form 10-K.
Qualification as a REIT
We elected, and qualify, to be taxed as a REIT for federal income tax purposes and we intend to continue to be taxed as a REIT. To maintain our qualification as a REIT, we must continue to meet certain organizational and operational requirements, including a requirement to currently distribute at least 90.0% of our REIT taxable income to our stockholders. As a REIT, we generally will not be subject to federal income tax on taxable income that we distribute to our stockholders. If we fail to maintain our qualification as a REIT in any taxable year, we would then be subject to federal income taxes on our taxable income at regular corporate rates and would not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year during which qualification is lost unless the Internal Revenue Service grants us relief under certain statutory provisions. Such an event could have a material adverse effect on our net income and net cash available for distribution to our stockholders.
Recently Issued Accounting Pronouncements
For a discussion of recently issued accounting pronouncements, see Note 2—“Summary of Significant Accounting Policies—Recently Issued Accounting Pronouncements” to our condensed consolidated financial statements that are a part of this Quarterly Report on Form 10-Q.
Segment Reporting
We report our financial performance based on two reporting segments—commercial real estate investments in data centers and healthcare. See Note 10—"Segment Reporting" to our condensed consolidated financial statements that are part of this Quarterly Report on Form 10-Q for additional information on our two reporting segments.
Factors that May Influence Results of Operations
We are not aware of any material trends or uncertainties, other than national economic conditions affecting real estate generally, that may reasonably be expected to have a material impact, favorable or unfavorable, on revenues or income from the acquisition, management and operation of our properties other than those set forth in our Annual Report on Form 10-K for the year ended December 31, 2017 and in Part II, Item 1A. "Risk Factors" of this Quarterly Report on Form 10-Q.

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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 September 30, 2018 and 2017:
 
September 30,
 
2018
 
2017
Number of commercial operating real estate properties (1)
77

 
64

Leased rentable square feet
5,401,000

 
4,655,000

Weighted average percentage of rentable square feet leased
97.5
%
 
97.3
%
(1)
As of September 30, 2017, we owned 66 real estate properties, two of which were under construction.
The following table summarizes our real estate activity for the three and nine months ended September 30, 2018 and 2017:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Operating real estate properties acquired
2

 
4

 
7

 
15

Commercial real estate property placed into service
1

 

 
1

 

Approximate aggregate purchase price of acquired real estate properties
$
14,471,000

 
$
52,454,000

 
$
141,380,000

 
$
458,838,000

Approximate aggregate cost of properties placed into service
$
10,349,000

 
$

 
$
10,349,000

 
$

Leased rentable square feet
87,000

 
154,000

 
328,000

 
1,683,000

This section describes and compares our results of operations for the three and nine months ended September 30, 2018 and 2017. We generate almost all of our income from property operations. In order to evaluate our overall portfolio, management analyzes the net operating income of same store properties. We define "same store properties" as operating properties that were owned and operated for the entirety of both calendar periods being compared and exclude properties under development.
By evaluating the revenue and expenses 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 September 30, 2018 Compared to Three Months Ended September 30, 2017
Changes in our revenues are summarized in the following table (amounts in thousands):
 
Three Months Ended September 30,
 
 
 
2018
 
2017
 
Change
 
 
 
 
 
 
Same store rental and parking revenue
$
30,188

 
$
30,130

 
$
58

Non-same store rental and parking revenue
8,977

 
116

 
8,861

Same store tenant reimbursement revenue
5,459

 
5,942

 
(483
)
Non-same store tenant reimbursement revenue
925

 
14

 
911

Other operating income
(31
)
 
3

 
(34
)
Total revenue
$
45,518

 
$
36,205

 
$
9,313

There was an increase in contractual rental revenue as a result of average annual escalations of 1.23% at our same store properties, which was offset by straight-line rental revenue.
Non-same store rental and parking revenue and tenant reimbursement revenue increased due to the acquisition of 15 operating properties and placing in service two development properties since July 1, 2017.
Same store tenant reimbursement revenue decreased primarily due to an decrease in real estate taxes, offset by an increase in utility reimbursements.

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Changes in our expenses are summarized in the following table (amounts in thousands):
 
Three Months Ended September 30,
 
 
 
2018
 
2017
 
Change
 
 
 
 
 
 
Same store rental and parking expenses
$
7,761

 
$
8,348

 
$
(587
)
Non-same store rental and parking expenses
1,686

 
20

 
1,666

General and administrative expenses
1,244

 
1,062

 
182

Asset management fees
3,323

 
2,698

 
625

Depreciation and amortization
14,849

 
11,852

 
2,997

Total expenses
$
28,863

 
$
23,980

 
$
4,883

Same store rental and parking expenses, certain of which are subject to reimbursement by our tenants, decreased primarily due to a decrease in real estate taxes, offset by an increase in utilities at certain same store properties.