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EX-32.2 - EXHIBIT 32.2 - Sila Realty Trust, Inc.a2020q110-qexhibit322reiti.htm
EX-32.1 - EXHIBIT 32.1 - Sila Realty Trust, Inc.a2020q110-qexhibit321reiti.htm
EX-31.2 - EXHIBIT 31.2 - Sila Realty Trust, Inc.a2020q110-qexhibit312reiti.htm
EX-31.1 - EXHIBIT 31.1 - Sila Realty Trust, Inc.a2020q110-qexhibit311reiti.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________
FORM 10-Q
(Mark One)
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
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
cvmcriilogob59.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, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Title of each class
 
Trading Symbol
 
Name of each exchange on which registered
N/A
 
N/A
 
N/A
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  þ    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
¨
  
Accelerated filer
 
¨
Non-accelerated filer
 
þ
  
Smaller reporting company
 
¨
 
 
 
 
Emerging growth company
 
þ
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ
As of May 8, 2020, there were approximately 165,675,000 shares of Class A common stock, 12,468,000 shares of Class I common stock, 38,985,000 shares of Class T common stock and 3,455,000 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)
March 31, 2020
 
December 31, 2019
ASSETS
Real estate:
 
 
 
Land
$
344,275

 
$
343,444

Buildings and improvements, less accumulated depreciation of $145,709 and $128,304, respectively
2,410,566

 
2,422,102

Construction in progress
6,430

 
2,916

Total real estate, net
2,761,271

 
2,768,462

Cash and cash equivalents
150,476

 
69,342

Acquired intangible assets, less accumulated amortization of $72,844 and $64,164, respectively
275,421

 
285,459

Right-of-use assets - operating leases
29,345

 
29,537

Other assets, net
89,165

 
86,734

Total assets
$
3,305,678

 
$
3,239,534

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
 
 
 
Notes payable, net of deferred financing costs of $2,270 and $2,500, respectively
$
454,305

 
$
454,845

Credit facility, net of deferred financing costs of $6,957 and $7,385, respectively
996,043

 
900,615

Accounts payable due to affiliates
9,047

 
9,759

Accounts payable and other liabilities
64,417

 
45,354

Acquired intangible liabilities, less accumulated amortization of $13,718 and $12,332, respectively
58,152

 
59,538

Operating lease liabilities
31,048

 
31,004

Total liabilities
1,613,012

 
1,501,115

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, 510,000,000 shares authorized; 232,309,866 and 231,416,123 shares issued, respectively; 221,387,100 and 221,912,714 shares outstanding, respectively
2,214

 
2,219

Additional paid-in capital
1,977,360

 
1,981,848

Accumulated distributions in excess of earnings
(261,872
)
 
(240,946
)
Accumulated other comprehensive loss
(25,038
)
 
(4,704
)
Total stockholders’ equity
1,692,664

 
1,738,417

Noncontrolling interests
2

 
2

Total equity
1,692,666

 
1,738,419

Total liabilities and stockholders’ equity
$
3,305,678

 
$
3,239,534

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 (LOSS) INCOME
(in thousands, except share data and per share amounts)
(Unaudited)
 
Three Months Ended
March 31,
 
2020
 
2019
Revenue:
 
 
 
Rental revenue
$
69,185

 
$
46,467

Expenses:
 
 
 
Rental expenses
11,488

 
9,128

General and administrative expenses
3,688

 
1,403

Asset management fees
5,956

 
3,494

Depreciation and amortization
27,065

 
18,246

Total expenses
48,197

 
32,271

Income from operations
20,988

 
14,196

Interest and other expense, net
15,319

 
9,835

Net income attributable to common stockholders
$
5,669

 
$
4,361

Other comprehensive loss:
 
 
 
Unrealized loss on interest rate swaps, net
$
(20,334
)
 
$
(3,611
)
Other comprehensive loss
(20,334
)
 
(3,611
)
Comprehensive (loss) income attributable to common stockholders
$
(14,665
)
 
$
750

Weighted average number of common shares outstanding:
 
 
 
Basic
221,540,890

 
136,179,343

Diluted
221,570,975

 
136,204,843

Net income per common share attributable to common stockholders:
 
 
 
Basic
$
0.03

 
$
0.03

Diluted
$
0.03

 
$
0.03

Distributions declared per common share
$
0.12

 
$
0.16

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

4


CARTER VALIDUS MISSION CRITICAL REIT II, INC.
CONDENSED CONSOLIDATED STATEMENTS 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 Loss
 
Total
Stockholders’
Equity
 
Noncontrolling
Interests
 
Total
Equity
Balance, December 31, 2019
221,912,714

 
$
2,219

 
$
1,981,848

 
$
(240,946
)
 
$
(4,704
)
 
$
1,738,417

 
$
2

 
$
1,738,419

Issuance of common stock under the distribution reinvestment plan
893,743

 
9

 
7,722

 

 

 
7,731

 

 
7,731

Vesting of restricted stock

 

 
27

 

 

 
27

 

 
27

Distribution and servicing fees

 

 
33

 

 

 
33

 

 
33

Other offering costs

 

 
(7
)
 

 

 
(7
)
 

 
(7
)
Repurchase of common stock
(1,419,357
)
 
(14
)
 
(12,263
)
 

 

 
(12,277
)
 

 
(12,277
)
Distributions to common stockholders

 

 

 
(26,595
)
 

 
(26,595
)
 

 
(26,595
)
Other comprehensive loss

 

 

 

 
(20,334
)
 
(20,334
)
 

 
(20,334
)
Net income

 

 

 
5,669

 

 
5,669

 

 
5,669

Balance, March 31, 2020
221,387,100

 
$
2,214

 
$
1,977,360

 
$
(261,872
)
 
$
(25,038
)
 
$
1,692,664

 
$
2

 
$
1,692,666

 
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, 2018
136,466,242

 
$
1,364

 
$
1,192,340

 
$
(152,421
)
 
$
6,100

 
$
1,047,383

 
$
2

 
$
1,047,385

Cumulative effect of accounting change

 

 

 
(103
)
 
103

 

 

 

Issuance of common stock under the distribution reinvestment plan
1,122,412

 
12

 
10,373

 

 

 
10,385

 

 
10,385

Vesting of restricted stock

 

 
23

 

 

 
23

 

 
23

Distribution and servicing fees

 

 
52

 

 

 
52

 

 
52

Other offering costs

 

 
(5
)
 

 

 
(5
)
 

 
(5
)
Repurchase of common stock
(1,160,279
)
 
(12
)
 
(10,721
)
 

 

 
(10,733
)
 

 
(10,733
)
Distributions to common stockholders

 

 

 
(21,196
)
 

 
(21,196
)
 

 
(21,196
)
Other comprehensive loss

 

 

 

 
(3,611
)
 
(3,611
)
 

 
(3,611
)
Net income

 

 

 
4,361

 

 
4,361

 

 
4,361

Balance, March 31, 2019
136,428,375

 
$
1,364

 
$
1,192,062

 
$
(169,359
)
 
$
2,592

 
$
1,026,659

 
$
2

 
$
1,026,661

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)
 
Three Months Ended
March 31,
 
2020
 
2019
Cash flows from operating activities:
 
 
 
Net income attributable to common stockholders
$
5,669

 
$
4,361

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
27,065

 
18,246

Amortization of deferred financing costs
946

 
606

Amortization of above-market leases
969

 
156

Amortization of below-market leases
(1,386
)
 
(1,232
)
Reduction in the carrying amount of right-of-use assets - operating leases, net
234

 
113

Straight-line rent
(5,500
)
 
(2,674
)
Stock-based compensation
27

 
23

Changes in operating assets and liabilities:
 
 
 
Accounts payable and other liabilities
(290
)
 
(1,160
)
Accounts payable due to affiliates
(58
)
 
(205
)
Other assets
2,258

 
1,713

Net cash provided by operating activities
29,934

 
19,947

Cash flows from investing activities:
 
 
 
Investment in real estate
(5,024
)
 

Capital expenditures
(5,441
)
 
(1,073
)
Payments of deal costs
(126
)
 
(106
)
Real estate deposit
100

 

Net cash used in investing activities
(10,491
)
 
(1,179
)
Cash flows from financing activities:
 
 
 
Payments on notes payable
(770
)
 
(305
)
Proceeds from credit facility
95,000

 
10,000

Payments of deferred financing costs
(1
)
 
(67
)
Repurchase of common stock
(12,277
)
 
(10,733
)
Offering costs on issuance of common stock
(845
)
 
(1,036
)
Distributions to common stockholders
(18,890
)
 
(10,813
)
Net cash provided by (used in) financing activities
62,217

 
(12,954
)
Net change in cash, cash equivalents and restricted cash
81,660

 
5,814

Cash, cash equivalents and restricted cash - Beginning of period
80,230

 
79,527

Cash, cash equivalents and restricted cash - End of period
$
161,890

 
$
85,341

Supplemental cash flow disclosure:
 
 
 
Interest paid, net of interest capitalized of $145 and $23, respectively
$
14,720

 
$
9,462

Supplemental disclosure of non-cash transactions:
 
 
 
Common stock issued through distribution reinvestment plan
$
7,731

 
$
10,385

Accrued capital expenditures
$
268

 
$
1,161

Accrued deal costs
$
6

 
$
802

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

6


CARTER VALIDUS MISSION CRITICAL REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2020
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, and currently qualifies, to be taxed as a real estate investment trust, or a REIT, under the Internal Revenue Code of 1986, as amended, or the Code, for federal income tax purposes. 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 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 leases to creditworthy tenants, as well as to make other real estate-related investments in such property types, which may include equity or debt interests in other real estate entities. As of March 31, 2020, the Company owned 153 real estate properties.
The Company raised the equity capital for its real estate investments through two public offerings, or the Offerings, from May 2014 through November 2018, and the Company has offered shares pursuant to its distribution reinvestment plan, or the DRIP, pursuant to two Registration Statements on Form S-3 (each, a “DRIP Offering” and together the "DRIP Offerings") since November 2017.
On April 11, 2019, the Company, along with Carter Validus Mission Critical REIT, Inc., or REIT I, the Operating Partnership, Carter/Validus Operating Partnership, LP, the operating partnership of REIT I, or CVOP, and Lightning Merger Sub, LLC, a wholly-owned subsidiary of the Company, or Merger Sub, entered into an Agreement and Plan of Merger, or the Merger Agreement. Pursuant to the terms and conditions of the Merger Agreement, on October 4, 2019, REIT I merged with and into Merger Sub, or the REIT Merger, with Merger Sub surviving the REIT Merger, or the Surviving Entity, such that following the REIT Merger, the Surviving Entity continues as a wholly-owned subsidiary of the Company. In accordance with the applicable provisions of the Maryland General Corporation Law, the separate existence of REIT I ceased. The combined company after the REIT Merger, or the Combined Company, retained the name “Carter Validus Mission Critical REIT II, Inc.”
Except as the context otherwise requires, the “Company” refers to Carter Validus Mission Critical REIT II, Inc., the Operating Partnership and all wholly-owned subsidiaries.
Note 2—Summary of Significant Accounting Policies
The summary of significant accounting policies presented below is designed to assist in understanding the Company’s condensed consolidated financial statements. Such condensed consolidated financial statements and the accompanying notes thereto are the representation of management. These accounting policies conform to United States generally accepted accounting principles, 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 months ended March 31, 2020, are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.
The condensed consolidated balance sheet at December 31, 2019, has been derived from the audited consolidated financial statements at that date but does not include all of the information and notes required by GAAP for complete financial statements. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s audited consolidated financial statements as of and for the year ended December 31, 2019, and related notes thereto set forth in the Company’s Annual Report on Form 10-K, filed with the SEC on March 27, 2020.
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 condensed consolidated

7


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 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 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 cash held in escrow and restricted bank deposits are reported in other assets, net in the accompanying condensed consolidated balance sheets. See Note 7—"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):
 
 
Three Months Ended
March 31,
 
 
2020
 
2019
Beginning of period:
 
 
 
 
Cash and cash equivalents
 
69,342

 
68,360

Restricted cash
 
10,888

 
11,167

Cash, cash equivalents and restricted cash
 
$
80,230

 
$
79,527

 
 
 
 
 
End of period:
 
 
 
 
Cash and cash equivalents
 
150,476

 
73,727

Restricted cash
 
11,414

 
11,614

Cash, cash equivalents and restricted cash
 
$
161,890

 
$
85,341

Impairment of Long-Lived Assets
The Company continually monitors events and changes in circumstances that could indicate that the carrying amounts of its real estate and related intangible assets may not be recoverable. When indicators of potential impairment suggest that the carrying value of real estate and related intangible assets may not be recoverable, the Company assesses the recoverability of the assets by estimating whether the Company will recover the carrying value of the assets through its undiscounted future cash flows and their eventual disposition. If, based on this analysis, the Company does not believe that it will be able to recover the carrying value of the assets, the Company will record an impairment loss to the extent that the carrying value exceeds the estimated fair value of the assets.
When developing estimates of expected future cash flows, the Company makes certain assumptions regarding future market rental income amounts subsequent to the expiration of current lease arrangements, property operating expenses, terminal capitalization and discount rates, the expected number of months it takes to re-lease the property, required tenant improvements and the number of years the property will be held for investment. The use of alternative assumptions in the future cash flow analysis could result in a different determination of the property’s future cash flows and a different conclusion regarding the existence of an impairment, the extent of such loss, if any, as well as the carrying value of the real estate and related assets.
In addition, the Company estimates the fair value of the assets by applying a market approach using comparable sales for certain properties. The use of alternative assumptions in the market approach analysis could result in a different determination of the property’s estimated fair value and a different conclusion regarding the existence of an impairment, the extent of such loss, if any, as well as the carrying value of the real estate and related assets.
Impairment of Real Estate
During the three months ended March 31, 2020 and 2019, no impairment losses were recorded on real estate assets.
Impairment of Acquired Intangible Assets and Acquired Intangible Liabilities
During the three months ended March 31, 2020, the Company recognized impairments of an in-place lease intangible asset in the amount of approximately $1,484,000 and an above-market lease intangible asset in the amount of approximately $344,000, related to a healthcare tenant of the Company experiencing financial difficulties, by accelerating the amortization of

8


the acquired intangible assets. During the three months ended March 31, 2019, the Company recognized an impairment of an in-place lease intangible asset in the amount of approximately $2,658,000, by accelerating the amortization of an acquired intangible asset related to a healthcare tenant of the Company that was experiencing financial difficulties and whose lease terminated on June 25, 2019.
Concentration of Credit Risk and Significant Leases
As of March 31, 2020, 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 with high credit standings; therefore, the Company believes it is not exposed to any significant credit risk on its cash deposits. To date, the Company has not experienced a loss or lack of access to cash in its accounts.
As of March 31, 2020, the Company owned real estate investments in two micropolitan statistical areas and 67 metropolitan statistical areas, or MSA, two MSA of which accounted for 10.0% or more of rental revenue. Real estate investments located in the Atlanta-Sandy Springs-Roswell, Georgia MSA and the Houston-The Woodlands-Sugar Land, Texas MSA accounted for 12.0% and 10.3%, respectively, of rental revenue for the three months ended March 31, 2020.
As of March 31, 2020, the Company had one exposure to tenant concentration that accounted for 10.0% or more of rental revenue for the three months ended March 31, 2020. The leases with tenants under common control of the guarantor Post Acute Medical, LLC accounted for 10.1% of rental revenue for the three months ended March 31, 2020.
Share Repurchase Program
The Company’s share repurchase program, or SRP, allows for repurchases of shares of the Company’s common stock when certain criteria are met. The SRP 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 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 SRP at any time, and may amend, reduce, terminate or otherwise change the SRP upon 30 days' prior notice to the Company’s stockholders for any reason it deems appropriate.
The Company's SRP applied to all eligible stockholders on the first quarter repurchase date of 2020, which was January 30, 2020. Subject to the terms and limitations of the SRP, including, but not limited to, quarterly share limitations, an annual 5.0% share limitation, and DRIP funding limitations, the SRP is available to any stockholder as a potential means of interim liquidity. The Company honors valid repurchase requests approximately 30 days following the end of the applicable quarter.
On April 30, 2020, due to the uncertainty surrounding the coronavirus pandemic and any impact it may have on the Company, the Company's board of directors decided to temporarily suspend share repurchases under the SRP, effective with repurchase requests that would otherwise be processed on the third quarter repurchase date, which is expected to be July 30, 2020. See Note 16—"Subsequent Events" for further discussion.
On May 1, 2020, the Company announced it had reached the DRIP funding limitation, and that it would not be able to fully accommodate all repurchase requests for the second quarter repurchase date of 2020. For repurchase requests received by the Company by March 31, 2020, repurchase shares were repurchased on a pro rata basis in accordance with the terms of the SRP. See Note 16—"Subsequent Events" for further discussion and Part II, Item 2. "Unregistered Sales of Equity Securities" for more information on the Company's SRP.
During the three months ended March 31, 2020, the Company repurchased 1,419,357 Class A shares, Class I shares, Class T shares and Class T2 shares of common stock (1,078,423 Class A shares, 214,843 Class I shares, 122,865 Class T shares and 3,226 Class T2 shares) for an aggregate purchase price of approximately $12,277,000 (an average of $8.65 per share). During the three months ended March 31, 2019, the Company repurchased 1,160,279 Class A shares, Class I shares and Class T shares of common stock (858,080 Class A shares, 108,765 Class I shares and 193,434 Class T shares) for an aggregate purchase price of approximately $10,733,000 (an average of $9.25 per share).
Distribution Policy and Distributions Payable
In order to maintain its status as a REIT, the Company is required to make distributions each taxable year equal to at least 90% of its REIT taxable income, computed without regard to the dividends paid deduction and excluding capital gains. To the extent funds are available, the Company intends to continue to pay regular distributions to stockholders. Distributions are paid

9


to stockholders of record as of the applicable record dates. Distributions are payable to stockholders from legally available funds therefor.
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. During the three months ended March 31, 2020 and 2019, diluted earnings per share reflected the effect of approximately 30,000 and 26,000 of non-vested shares of restricted common stock that were outstanding as of such period, respectively.
Reportable Segments
Accounting Standards Codification, or ASC, 280, Segment Reporting, establishes standards for reporting financial and descriptive information about an enterprise’s reportable segments. As of March 31, 2020 and December 31, 2019, the Company operated through two reportable business segments­— real estate investments in data centers and healthcare. With the continued expansion of the Company’s portfolio, segregation of the Company’s operations into two reporting segments is useful in assessing the performance of the Company’s business in the same way that management reviews performance and makes operating decisions. See Note 11—"Segment Reporting" for further discussion on the reportable segments of the Company.
Derivative Instruments and Hedging Activities
As required by ASC 815, Derivatives and Hedging, or ASC 815, the Company records all derivative instruments at fair value as assets and liabilities on its condensed consolidated balance sheets. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation. For derivative instruments not designated as hedging instruments, the income or loss is recognized in the condensed consolidated statements of comprehensive (loss) income during such period.
In accordance with the fair value measurement guidance Accounting Standards Update, or ASU, 2011-04, Fair Value Measurement, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.
The Company is exposed to variability in expected future cash flows that are attributable to interest rate changes in the normal course of business. The Company’s primary strategy in entering into derivative contracts is to add stability to future cash flows by managing its exposure to interest rate movements. The Company utilizes derivative instruments, including interest rate swaps, to effectively convert some of its variable rate debt to fixed rate debt. The Company does not enter into derivative instruments for speculative purposes.
In accordance with ASC 815, the Company designates interest rate swap contracts as cash flow hedges of floating-rate borrowings. For derivative instruments that are designated and qualify as cash flow hedges, the gains or losses on the derivative instruments are reported as a component of other comprehensive loss in the condensed consolidated statements of comprehensive (loss) income and are reclassified into earnings in the same line item associated with the forecasted transaction in the same period during which the hedged transactions affect earnings. See additional discussion in Note 13—"Derivative Instruments and Hedging Activities."
Recently Adopted Accounting Pronouncements
Leases—Rent Concessions
The global outbreak of a new strain of coronavirus and the disease it causes, or COVID-19, has forced the temporary closure or changes to the operating hours of certain healthcare properties of the Company. In response, some tenants are seeking rent concessions, including decreased rent and rent deferrals for COVID-19 affected periods. To provide operational clarity, on April 8, 2020, the Financial Accounting Standards Board, or FASB, issued practical expedients to the lease modification guidance in ASC 842, Leases, in the context of the COVID-19 crisis for leases where the total lease cash flows will remain substantially the same or less than those after the COVID-19 related effects. Entities may choose to forgo the evaluation of the enforceable rights and obligations of the original lease agreements in accordance with ASC 842, Leases. The entity may elect to account for rent concessions either:
as if they are part of the enforceable rights and obligations of the parties under the existing lease contracts; or
as a lease modification.

10


As a lessor, for leases impacted by COVID-19, the Company elected the approach to treat any rent concessions as if they were part of the enforceable rights and obligations under the existing lease. Subsequent to March 31, 2020, the Company granted rent deferrals to a certain number of tenants impacted by COVID-19 with immaterial impact to the Company's condensed consolidated financial statements and no impact on the collectability of tenant receivables over their respective term of the lease.
As a lessee, the Company did not elect the practical expedient and will apply the lease modification guidance in accordance with ASC 842 if changes to ground lease agreements occur. The Company does not have any modifications to its ground lease agreements as of March 31, 2020.
Reference Rate Reform
In March 2020, the FASB issued ASU, 2020-04, Reference Rate Reform (ASC 848), or ASU 2020-04. ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time through, December 31, 2022, as reference rate reform activities occur. During the three months ended March 31, 2020, the Company has elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company continues to evaluate the impact the guidance may have on its condensed consolidated financial statements and may apply other elections, as applicable, as additional changes in the market occur.
Note 3—Acquisitions
2020 Acquisition
During the three months ended March 31, 2020, the Company purchased one real estate property, or the 2020 Acquisition, which was determined to be an asset acquisition. Upon the completion of the 2020 Acquisition, the Company allocated the purchase price of the real estate property to acquired tangible assets, consisting of land and buildings and improvements and acquired intangible assets, consisting of an in-place lease, based on the relative fair value method of allocating all accumulated costs.
The following table summarizes the consideration transferred for the 2020 Acquisition during the three months ended March 31, 2020:
Property Description
 
Date Acquired
 
Ownership Percentage
 
Purchase Price
(amounts in thousands)
Grimes Healthcare Facility
 
2/19/2020
 
100%
 
$
5,030

The following table summarizes the Company's purchase price allocation of the 2020 Acquisition during the three months ended March 31, 2020 (amounts in thousands):
 
 
Total
Land
 
$
831

Buildings and improvements
 
3,690

In-place lease
 
509

Total assets acquired
 
$
5,030

Acquisition fees and costs associated with transactions determined to be asset acquisitions are capitalized. The Company capitalized acquisition fees and costs of approximately $205,000 related to the 2020 Acquisition during the three months ended March 31, 2020, which are included in the Company's allocation of the real estate acquisition presented above. The total amount of all acquisition fees and costs is limited to 6.0% of the contract purchase price of a property, unless the Company’s board of directors determines a higher transaction fee to be commercially competitive, fair and reasonable to the Company. 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. During the three months ended March 31, 2020, acquisition fees and costs did not exceed 6.0% of the contract purchase price of the 2020 Acquisition during such period.

11


Note 4—Acquired Intangible Assets, Net
Acquired intangible assets, net, consisted of the following as of March 31, 2020 and December 31, 2019 (amounts in thousands, except weighted average remaining life amounts):
 
March 31, 2020
 
December 31, 2019
In-place leases, net of accumulated amortization of $70,314 and $62,252, respectively (with a weighted average remaining life of 10.1 years and 10.4 years, respectively)
$
257,787

 
$
266,856

Above-market leases, net of accumulated amortization of $2,530 and $1,912, respectively (with a weighted average remaining life of 10.1 years and 10.5 years, respectively)
17,634

 
18,603

 
$
275,421

 
$
285,459

The aggregate weighted average remaining life of the acquired intangible assets was 10.1 years and 10.4 years as of March 31, 2020 and December 31, 2019, respectively.
Amortization of the acquired intangible assets was $10,547,000 and $7,795,000 for the three months ended March 31, 2020 and 2019, respectively. Of the $10,547,000 recorded for the three months ended March 31, 2020, $1,828,000 was attributable to accelerated amortization due to the impairment of one in-place lease intangible asset and one above-market lease intangible asset. Of the $7,795,000 recorded for the three months ended March 31, 2019, $2,658,000 was attributable to accelerated amortization due to the impairment of an in-place lease intangible asset. Amortization of the in-place leases is included in depreciation and amortization and the above-market leases are recorded as an adjustment to rental revenue in the accompanying condensed consolidated statements of comprehensive (loss) income.
Note 5—Acquired Intangible Liabilities, Net
Acquired intangible liabilities, net, consisted of the following as of March 31, 2020 and December 31, 2019 (amounts in thousands, except weighted average remaining life amounts):
 
March 31, 2020
 
December 31, 2019
Below-market leases, net of accumulated amortization of $13,718 and $12,332, respectively (with a weighted average remaining life of 15.8 years and 16.1 years, respectively)
$
58,152

 
$
59,538

Amortization of the below-market leases was $1,386,000 and $1,232,000 for the three months ended March 31, 2020 and 2019, respectively. Amortization of below-market leases is recorded as an adjustment to rental revenue in the accompanying condensed consolidated statements of comprehensive (loss) income.

12


Note 6—Leases
Lessor
Rental Revenue
The Company’s real estate properties 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 properties leased to tenants.
Future rent to be received from the Company's investments in real estate assets under the terms of non-cancelable operating leases in effect as of March 31, 2020, including optional renewal periods, for the nine months ending December 31, 2020, and for each of the next four years ending December 31 and thereafter, are as follows (amounts in thousands):
Year
 
Amount
Nine months ending December 31, 2020
 
$
168,078

2021
 
231,490

2022
 
236,229

2023
 
235,850

2024
 
231,056

Thereafter
 
1,616,361

Total (1)
 
$
2,719,064

 
(1)
The total future rent amount of $2,719,064,000 includes approximately $47,642,000 in rent to be received in connection with two leases executed, as of December 31, 2019, at two development properties with estimated lease start dates of March 1, 2021
Lessee
Rental Expense
The Company has 17 ground leases, for which four do not have corresponding operating lease liabilities because the Company did not have future payment obligations at the acquisition of these leases. The ground lease obligations generally require fixed annual rental payments and may also include escalation clauses. The weighted average remaining lease term for the Company's operating leases was 50.4 years and 50.7 years as of March 31, 2020 and December 31, 2019, respectively.
The Company's ground leases do not provide an implicit interest rate. In order to calculate the present value of the remaining ground lease payments, the Company used incremental borrowing rates, or IBRs, adjusted for a number of factors. The determination of an appropriate IBR involves multiple inputs and judgments. The Company determined their IBRs considering the general economic environment, the Company's credit rating and various financing and asset specific adjustments to ensure the IBRs are appropriate for the intended use of the underlying ground lease. As a result, the IBRs ranged between 5.0% and 6.6%.
The future rent payments, discounted by the Company's adjusted incremental borrowing rates, under non-cancelable ground leases, as of March 31, 2020, for the nine months ending December 31, 2020, and for each of the next four years ending December 31 and thereafter, are as follows (amounts in thousands):
Year
 
Amount
Nine months ending December 31, 2020
 
$
1,224

2021
 
1,634

2022
 
1,634

2023
 
1,638

2024
 
1,687

Thereafter
 
136,719

Total undiscounted rental payments
 
144,536

Less imputed interest
 
(113,488
)
Total operating lease liabilities
 
$
31,048


13


Note 7—Other Assets, Net
Other assets, net, consisted of the following as of March 31, 2020 and December 31, 2019 (amounts in thousands):
 
March 31, 2020
 
December 31, 2019
Deferred financing costs, related to the revolver portion of the credit facility, net of accumulated amortization of $5,984 and $5,696, respectively
$
2,337

 
$
2,623

Leasing commissions, net of accumulated amortization of $308 and $240, respectively
10,537

 
10,288

Restricted cash
11,414

 
10,888

Tenant receivables
5,217

 
6,116

Note receivable
2,700

 
2,700

Straight-line rent receivable, net
54,026

 
48,526

Prepaid and other assets
2,934

 
4,709

Derivative assets

 
884

 
$
89,165

 
$
86,734

Note 8—Accounts Payable and Other Liabilities
Accounts payable and other liabilities consisted of the following as of March 31, 2020 and December 31, 2019 (amounts in thousands):
 
March 31, 2020
 
December 31, 2019
Accounts payable and accrued expenses
$
11,869

 
$
11,448

Accrued interest expense
5,074

 
5,185

Accrued property taxes
3,789

 
3,537

Distributions payable to stockholders
9,067

 
9,093

Tenant deposits
1,019

 
1,500

Deferred rental income
8,561

 
9,003

Derivative liabilities
25,038

 
5,588

 
$
64,417

 
$
45,354

Note 9—Notes Payable and Credit Facility
The Company's debt outstanding as of March 31, 2020 and December 31, 2019, consisted of the following (amounts in thousands):
 
March 31, 2020
 
December 31, 2019
Notes payable:
 
 
 
Fixed rate notes payable
$
219,281

 
$
219,567

Variable rate notes payable fixed through interest rate swaps
237,294

 
237,778

Total notes payable, principal amount outstanding
456,575

 
457,345

Unamortized deferred financing costs related to notes payable
(2,270
)
 
(2,500
)
Total notes payable, net of deferred financing costs
454,305

 
454,845

Credit facility:
 
 
 
Variable rate revolving line of credit
203,000

 
108,000

Variable rate term loan fixed through interest rate swaps
400,000

 
250,000

Variable rate term loans
400,000

 
550,000

Total credit facility, principal amount outstanding
1,003,000

 
908,000

Unamortized deferred financing costs related to the term loan credit facility
(6,957
)
 
(7,385
)
Total credit facility, net of deferred financing costs
996,043

 
900,615

Total debt outstanding
$
1,450,348

 
$
1,355,460


14


Significant debt activity during the three months ended March 31, 2020, excluding scheduled principal payments, includes:
During the three months ended March 31, 2020, the Company drew $95,000,000 on its credit facility, $20,000,000 of which was related to a property acquisition (discussed in Note 3—"Acquisitions") and to fund share repurchases, and $75,000,000 was drawn to provide additional liquidity due to the uncertainty in overall economic conditions created by the COVID-19 outbreak.
During the three months ended March 31, 2020, three interest rate swap agreements, which the Company entered into in December 2019, with an effective date of January 1, 2020, effectively fixed LIBOR related to $150,000,000 of the term loans of the credit facility.
The principal payments due on the notes payable and credit facility as of March 31, 2020, for the nine months ending December 31, 2020, and for each of the next four years ending December 31 and thereafter, are as follows (amounts in thousands):
Year
 
Amount
Nine months ending December 31, 2020
 
$
3,155

2021
 
146,025

2022
 
369,209

2023
 
282,710

2024
 
547,360

Thereafter
 
111,116

 
 
$
1,459,575

Note 10—Related-Party Transactions and Arrangements
The Company has no direct employees. Substantially all of the Company's business is managed by the Advisor. The employees of the Advisor and other affiliates provide services to the Company related to acquisitions, property management, asset management, accounting, investor relations, and all other administrative services.
Distribution and Servicing Fees
Through the termination of the Offering on November 27, 2018, the Company paid the Dealer Manager selling commissions and dealer manager fees in connection with the sale of shares of certain classes of common stock. The Company continues to pay the Dealer Manager a distribution and servicing fee with respect to its Class T and Class T2 shares of common stock that were sold in the Initial Offering (primary Offering only) and the Offering. Distribution and servicing fees are recorded in the accompanying condensed consolidated statements of stockholders' equity as a reduction to equity as incurred.
Acquisition Fees and Expenses
The Company pays to the Advisor 2.0% of the contract purchase price of each property or asset acquired. 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. Since the Company's formation through March 31, 2020, the Company reimbursed the Advisor expenses of approximately 0.01% of the aggregate purchase price all of properties acquired. Acquisition fees and expenses associated with the acquisition of properties determined to be business combinations are expensed as incurred, including investment transactions that are no longer under consideration. Acquisition fees and expenses associated with transactions determined to be asset acquisitions are capitalized in total real estate, net, in the accompanying condensed consolidated balance sheets.
Asset Management Fees
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.
Operating Expense Reimbursement
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% of average invested assets or (b) 25% of net income, subject to certain

15


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. Operating expenses incurred on the Company’s behalf are recorded in general and administrative expenses in the accompanying condensed consolidated statements of comprehensive (loss) income.
Property 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 reimburses 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 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. Property management fees are recorded in rental expenses in the accompanying condensed consolidated statements of comprehensive (loss) income.
Leasing Commission Fees
The Company pays the Property Manager a separate fee for the initial lease-up, leasing-up of newly constructed properties or re-leasing to existing tenants. Leasing commission fees are capitalized in other assets, net, in the accompanying condensed consolidated balance sheets and amortized over the terms of the related leases.
Construction Management Fees
For acting as general contractor and/or construction manager to supervise or coordinate projects or to provide major repairs or rehabilitation on the Company's 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. Construction management fees are capitalized in real estate, net, in the accompanying condensed consolidated balance sheets.
Disposition Fees
The Company pays 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 or 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 March 31, 2020, the Company had not incurred any disposition fees to the Advisor or its affiliates.
Special Limited Partner Interest of Advisor
The Advisor, as the special limited partner in the Operating Partnership, may be entitled to: (i) certain cash distributions upon the disposition of certain of the Operating Partnership’s assets; or (ii) a one-time payment in the form of cash, shares or promissory note or a combination of the forms of payment in connection with the redemption of the special limited partnership interests upon the occurrence of a listing of the Company’s shares of common stock on a national stock exchange or certain events that result in the termination or non-renewal of the advisory agreement. The special limited partnership interest holder will only become entitled to the compensation after the Company’s stockholders have received, in the aggregate, cumulative distributions equal to their invested capital plus an 8.0% cumulative, non-compounded annual return on such invested capital. No such compensation has been paid to the Advisor to date.

16


The following table details amounts incurred in connection with the Company's related parties transactions as described above for the three months ended March 31, 2020 and 2019 (amounts in thousands):
 
 
 
 
Incurred
 
 
 
 
Three Months Ended
March 31,
Fee
 
Entity
 
2020
 
2019
Distribution and servicing fees(1)
 
SC Distributors, LLC
 
$
(33
)
 
$
(52
)
Acquisition fees and costs
 
Carter Validus Advisors II, LLC and its affiliates
 
97

 

Asset management fees
 
Carter Validus Advisors II, LLC and its affiliates
 
5,956

 
3,494

Property management fees
 
Carter Validus Real Estate Management Services II, LLC
 
1,796

 
1,209

Operating expense reimbursement
 
Carter Validus Advisors II, LLC and its affiliates
 
1,278

 
730

Leasing commission fees
 
Carter Validus Real Estate Management Services II, LLC
 
239

 
3

Construction management fees
 
Carter Validus Real Estate Management Services II, LLC
 
176

 
129

Total
 
 
 
$
9,509

 
$
5,513

 
(1)
Reduction of distribution and servicing fees is a result of repurchases of Class T and Class T2 shares of common stock for the three months ended March 31, 2020 and the result of repurchases of Class T shares of common stock for the three months ended March 31, 2019.
The following table details amounts payable to affiliates in connection with the Company's related parties transactions as described above as of March 31, 2020 and December 31, 2019 (amounts in thousands):
 
 
 
 
Payable
 
 
 
 
March 31, 2020
 
December 31, 2019
Fee
 
Entity
 
Distribution and servicing fees
 
SC Distributors, LLC
 
$
5,380

 
$
6,210

Asset management fees
 
Carter Validus Advisors II, LLC and its affiliates
 
1,981

 
2,100

Property management fees
 
Carter Validus Real Estate Management Services II, LLC
 
486

 
433

Operating expense reimbursement
 
Carter Validus Advisors II, LLC and its affiliates
 
471

 
518

Leasing commission fees
 
Carter Validus Real Estate Management Services II, LLC
 
354

 
299

Construction management fees
 
Carter Validus Real Estate Management Services II, LLC
 
375

 
199

Total
 
 
 
$
9,047

 
$
9,759

Note 11—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 rental revenue, less rental expenses, which excludes depreciation and amortization, general and administrative expenses, asset management fees and interest and other 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, note receivable and deferred financing costs attributable to the revolving line of credit portion of the Company's credit facility not attributable to individual properties.

17


Summary information for the reportable segments during the three months ended March 31, 2020 and 2019 is as follows (amounts in thousands):
 
Data Centers
 
Healthcare
 
Three Months Ended March 31, 2020
Revenue:
 
 
 
 
 
Rental revenue
$
27,759

 
$
41,426

 
$
69,185

Expenses:
 
 
 
 
 
Rental expenses
(7,149
)
 
(4,339
)
 
(11,488
)
Segment net operating income
$
20,610

 
$
37,087

 
57,697

 
 
 
 
 
 
Expenses:
 
 
 
 
 
General and administrative expenses
 
 
 
 
(3,688
)
Asset management fees
 
 
 
 
(5,956
)
Depreciation and amortization
 
 
 
 
(27,065
)
Income from operations
 
 
 
 
20,988

Interest and other expense, net
 
 
 
 
(15,319
)
Net income attributable to common stockholders
 
 
 
 
$
5,669

 
Data Centers
 
Healthcare
 
Three Months Ended
March 31, 2019
Revenue:
 
 
 
 
 
Rental revenue
$
26,677

 
$
19,790

 
$
46,467

Expenses:
 
 
 
 
 
Rental expenses
(6,965
)
 
(2,163
)
 
(9,128
)
Segment net operating income
$
19,712

 
$
17,627

 
37,339

 
 
 
 
 
 
Expenses:
 
 
 
 
 
General and administrative expenses
 
 
 
 
(1,403
)
Asset management fees
 
 
 
 
(3,494
)
Depreciation and amortization
 
 
 
 
(18,246
)
Income from operations
 
 
 
 
14,196

Interest and other expense, net
 
 
 
 
(9,835
)
Net income attributable to common stockholders
 
 
 
 
$
4,361

There were no intersegment sales or transfers during the three months ended March 31, 2020 and 2019.
Assets by each reportable segment as of March 31, 2020 and December 31, 2019 are as follows (amounts in thousands):
 
March 31, 2020
 
December 31, 2019
Assets by segment:
 
 
 
Data centers
$
984,789

 
$
989,953

Healthcare
2,177,655

 
2,184,450

All other
143,234

 
65,131

Total assets
$
3,305,678

 
$
3,239,534


18


Capital additions and acquisitions, on a cash basis, by reportable segments for the three months ended March 31, 2020 and 2019 are as follows (amounts in thousands):
 
Three Months Ended
March 31,
 
2020
 
2019
Capital additions by segment:


 


Data centers
$
2,018

 
$
995

Healthcare
3,423

 
78

Total
5,441

 
1,073

Acquisitions by segment:
 
 
 
Healthcare
5,024

 

Total
5,024

 

Total capital additions and acquisitions
$
10,465

 
$
1,073

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 $233,628,000 and $222,816,000 as of March 31, 2020 and December 31, 2019, respectively, as compared to the outstanding principal of $219,281,000 and $219,567,000 as of March 31, 2020 and December 31, 2019, respectively. The estimated fair value of notes payablevariable rate fixed through interest rate swap agreements (Level 2) was approximately $243,546,000 and $238,555,000 as of March 31, 2020 and December 31, 2019, respectively, as compared to the outstanding principal of $237,294,000 and $237,778,000 as of March 31, 2020 and December 31, 2019, respectively.
Credit facilityVariable Rate—The outstanding principal of the credit facility—variable was $603,000,000 and $658,000,000, which approximated its fair value as of March 31, 2020 and December 31, 2019, respectively. The fair value of the Company's variable rate credit facility is estimated based on the interest rates currently offered to the Company by financial institutions.
Credit facilityFixed Rate—The estimated fair value of the credit facility—variable rate fixed through interest rate swap agreements (Level 2) was approximately $417,950,000 and $251,907,000 as of March 31, 2020 and December 31, 2019, respectively, as compared to the outstanding principal of $400,000,000 and $250,000,000 as of March 31, 2020 and December 31, 2019, respectively.
Note receivable—The outstanding principal balance of the note receivable in the amount of $2,700,000 approximated its fair value as of March 31, 2020 and December 31, 2019. The fair value was measured using significant other observable inputs (Level 2), which requires certain judgments to be made by management.
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 determined that the majority of the inputs used to value its interest rate swaps fall within Level 2 of the fair value hierarchy. The credit valuation adjustments associated with these instruments utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by the Company and the respective counterparty. However, as of March 31, 2020, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions, and determined that the credit valuation adjustments are not significant to the overall valuation of its interest rate swaps. As a result, the Company determined that its interest rate swaps valuation in its entirety is classified in Level 2 of the fair value hierarchy. See Note 13—"Derivative Instruments and Hedging Activities" for further discussion of the Company's derivative instruments.

19


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 March 31, 2020 and December 31, 2019 (amounts in thousands):
 
March 31, 2020
 
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
Liabilities:
 
 
 
 
 
 
 
Derivative liabilities
$

 
$
25,038

 
$

 
$
25,038

Total liabilities at fair value
$

 
$
25,038

 
$

 
$
25,038

 
December 31, 2019
 
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
$

 
$
884

 
$

 
$
884

Total assets at fair value
$

 
$
884

 
$

 
$
884

Liabilities:
 
 
 
 
 
 
 
Derivative liabilities
$

 
$
5,588

 
$

 
$
5,588

Total liabilities at fair value
$

 
$
5,588

 
$

 
$
5,588

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.
Changes in the fair value of derivatives designated, and that qualify, as cash flow hedges are recorded in accumulated other comprehensive loss in the accompanying condensed consolidated statements of stockholders' equity and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.
Amounts reported in accumulated other comprehensive loss related to derivatives will be reclassified to interest and other 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 $9,093,000 will be reclassified from accumulated other comprehensive loss as an increase to interest and other expense, net.
See Note 12—"Fair Value" for further discussion of the fair value of the Company’s derivative instruments.
The following table summarizes the notional amount and fair value of the Company’s derivative instruments (amounts in thousands):
Derivatives
Designated as
Hedging
Instruments
 
Balance
Sheet
Location
 
Effective
Dates
 
Maturity
Dates
 
March 31, 2020
 
December 31, 2019
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
01/01/2020
 
12/22/2020 to
12/31/2024
 
$
637,294

 
$

 
$
(25,038
)
 
$
637,778

 
$
884

 
$
(5,588
)
The notional amount under the agreements is an indication of the extent of the Company’s involvement in each instrument at the time, but does not represent exposure to credit, interest rate or market risks.

20


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 credit facility and notes payable. The change in fair value of the derivative instruments that are designated as hedges are recorded in other comprehensive loss, or OCI, in the accompanying condensed consolidated statements of comprehensive (loss) income.
The table below summarizes the amount of loss recognized on the interest rate derivatives designated as cash flow hedges for the three months ended March 31, 2020 and 2019 (amounts in thousands):
Derivatives in Cash Flow
Hedging Relationships
 
Amount of Loss Recognized
in OCI on Derivatives
 
Location of Loss
Reclassified From
Accumulated Other
Comprehensive Loss to
Net Income
 
Amount of (Loss) Income
Reclassified From
Accumulated Other
Comprehensive Loss to
Net Income
 
Total Amount of Interest and Other Expense, Net Presented in Condensed Consolidated Statements of Comprehensive (Loss) Income
Three Months Ended March 31, 2020
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
(20,593
)
 
Interest and other expense, net
 
$
(259
)
 
$
15,319

Total
 
$
(20,593
)
 
 
 
$
(259
)
 
 
Three Months Ended March 31, 2019
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
(2,955
)
 
Interest and other expense, net
 
$
656

 
$
9,835

Total
 
$
(2,955
)
 
 
 
$
656

 
 
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 March 31, 2020, the fair value of derivatives in a net liability position was $26,161,000, inclusive of accrued interest but excluding any adjustment for nonperformance risk related to the agreement. As of March 31, 2020, 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 March 31, 2020 and December 31, 2019 (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
December 31, 2019
 
$
884

 
$

 
$
884

 
$
(5
)
 
$

 
$
879

Offsetting of Derivative Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Balance Sheet
 
 
 
 
Gross
Amounts of
Recognized
Liabilities
 
Gross Amounts
Offset in the
Balance Sheet
 
Net Amounts of
Liabilities
Presented in the
Balance Sheet
 
Financial Instruments
Collateral
 
Cash Collateral
 
Net
Amount
March 31, 2020
 
$
25,038

 
$

 
$
25,038

 
$

 
$

 
$
25,038

December 31, 2019
 
$
5,588

 
$

 
$
5,588

 
$
(5
)
 
$

 
$
5,583

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

21


Note 14—Accumulated Other Comprehensive Loss
The following table presents a rollforward of amounts recognized in accumulated other comprehensive (loss) income by component for the three months ended March 31, 2020 and 2019 (amounts in thousands):
 
 
Unrealized Loss on Derivative
Instruments
Balance as of December 31, 2019
 
$
(4,704
)
Other comprehensive loss before reclassification
 
(20,593
)
Amount of loss reclassified from accumulated other comprehensive loss to net income
 
259

Other comprehensive loss
 
(20,334
)
Balance as of March 31, 2020
 
$
(25,038
)
 
 
Unrealized Loss on Derivative
Instruments
Balance as of December 31, 2018
 
$
6,100

Cumulative effect of accounting change
 
103

Balance as of January 1, 2019
 
6,203

Other comprehensive loss before reclassification
 
(2,955
)
Amount of income reclassified from accumulated other comprehensive income to net income
 
(656
)
Other comprehensive loss
 
(3,611
)
Balance as of March 31, 2019
 
$
2,592

The following table presents reclassifications out of accumulated other comprehensive (loss) income for the three months ended March 31, 2020 and 2019 (amounts in thousands):
Details about Accumulated Other
Comprehensive (Loss) Income Components
 
Amounts Reclassified from
Accumulated Other Comprehensive (Loss) Income to
Net Income
 
Affected Line Items in the Condensed Consolidated Statements of Comprehensive (Loss) Income
 
 
Three Months Ended
March 31,
 
 
 
 
2020
 
2019
 
 
Interest rate swap contracts
 
$
259

 
$
(656
)
 
Interest and other expense, net
Note 15—Commitments and Contingencies
In the ordinary course of business, the Company may become subject to litigation or claims. As of March 31, 2020, there were, and currently there are, no material pending legal proceedings to which the Company is a party. While the resolution of a lawsuit or proceeding may have an impact to the Company's financial results for the period in which it is resolved, the Company believes that the final resolution of the lawsuits or proceedings in which it is currently involved, either individually or in the aggregate, will not have a material adverse effect on its financial position, results of operations or liquidity.
Note 16—Subsequent Events
Distributions Paid to Stockholders
The following table summarizes the Company's distributions paid on April 1, 2020, for the period from March 1, 2020 through March 31, 2020 (amounts in thousands):
Payment Date
 
Common Stock
 
Cash
 
DRIP
 
Total Distribution
April 1, 2020
 
Class A
 
$
5,448

 
$
1,602

 
$
7,050

April 1, 2020
 
Class I
 
321

 
210

 
531

April 1, 2020
 
Class T
 
656

 
708

 
1,364

April 1, 2020
 
Class T2
 
55

 
67

 
122

 
 
 
 
$
6,480

 
$
2,587

 
$
9,067


22


The following table summarizes the Company's distributions paid on May 1, 2020, for the period from April 1, 2020 through April 30, 2020 (amounts in thousands):
Payment Date
 
Common Stock
 
Cash
 
DRIP
 
Total Distribution
May 1, 2020
 
Class A
 
$
5,261

 
$
1,569

 
$
6,830

May 1, 2020
 
Class I
 
312

 
205

 
517

May 1, 2020
 
Class T
 
635

 
687

 
1,322

May 1, 2020
 
Class T2
 
53

 
64

 
117

 
 
 
 
$
6,261

 
$
2,525

 
$
8,786

Distributions Authorized
The following tables summarize the daily distributions approved and authorized by the board of directors of the Company subsequent to March 31, 2020:
Authorization Date (1)
 
Common Stock
 
Daily Distribution Rate (1)
 
Annualized Distribution Per Share
May 8, 2020
 
Class A
 
$
0.001366120

 
$
0.50

May 8, 2020
 
Class I
 
$
0.001366120

 
$
0.50

May 8, 2020
 
Class T
 
$
0.001129781

 
$
0.41

May 8, 2020
 
Class T2
 
$
0.001129781

 
$
0.41

 
(1)
Distributions approved and authorized to stockholders of record as of the close of business on each day of the period commencing on June 1, 2020 and ending on June 30, 2020. The distributions will be calculated based on 366 days in the calendar year. The distributions declared for each record date in June 2020 will be paid in July 2020. The distributions will be payable to stockholders from legally available funds therefor.
Partial Suspension of the SRP
On April 30, 2020, due to the uncertainty surrounding the COVID-19 pandemic and any impact it may have on the Company, the Company's board of directors decided to temporarily suspend share repurchases under the Company’s SRP, effective with repurchase requests that would otherwise be processed on the third quarter repurchase date, which is expected to be July 30, 2020. However, the Company will continue to process repurchases due to death in accordance with the terms of its SRP. The Company will announce any updates concerning its SRP in a Current Report on Form 8-K. Any unprocessed requests will automatically roll over to be considered for repurchase when the Company fully reopens its SRP, unless a stockholder withdraws the request for repurchase 15 days prior to the next announced repurchase date.
Proration of Shares Repurchased in Second Quarter
On May 1, 2020, the Company announced it had reached the DRIP funding limitation for the 2020 second quarter repurchase date. Consequently, all repurchase requests will not be fully processed for such repurchase date. Therefore, properly submitted repurchase requests that the Company received by March 31, 2020, were repurchased in accordance with the SRP as follows (unless they were below the SRP’s account minimum threshold of $2,000, in which case they were repurchased in full): (i) first, pro rata as to repurchases upon the death or qualifying disability of a stockholder; (ii) next, pro rata as to repurchases to stockholders who demonstrated, in the discretion of the Company's board of directors, another involuntary exigent circumstance, such as bankruptcy; (iii) next, pro rata as to repurchases to stockholders subject to a mandatory distribution requirement under such stockholder’s IRA; and (iv) finally, pro rata as to all other repurchase requests. Repurchases of shares received by the Company during the prorated period within categories (i) and (ii) above were repurchased in full. There were no repurchases of shares received by the Company within category (iii) above. Repurchase of shares received by the Company within category (iv) above were repurchased based on a proration of approximately 8.25% of the shares made in the requests. All outstanding repurchase requests will automatically roll over to be considered for repurchase when the Company fully reopens its SRP, unless a stockholder or his or her estate, heir or beneficiary, as applicable, withdraws a repurchase request in whole or in part at any time up to 15 days prior to the next announced repurchase date. See Part II, Item 2. "Unregistered Sales of Equity Securities" for more information on the Company's SRP.
Renewal of the Management Agreement
On May 8, 2020, the board of directors, including all independent directors of the Company, after review of the Property Manager’s performance during the last year, authorized the Company to execute a mutual consent to renew the management agreement by and among the Company, the Operating Partnership and the Property Manager, dated May 19, 2014, as amended and renewed. The renewal will be for a one-year term and will be effective as of May 19, 2020.

23


Renewal of the Advisory Agreement
On May 8, 2020, the board of directors, including all independent directors of the Company, after review of the Advisor’s performance during the last year, authorized the Company to execute a mutual consent to renew the amended and restated advisory agreement, by and among the Company, the Operating Partnership and the Advisor, dated October 4, 2019, as amended and renewed. The renewal will be for a one-year term and will be effective as of May 8, 2020.

24


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the notes thereto and the other financial information appearing elsewhere in this Quarterly Report on Form 10-Q.
The following discussion should also be read in conjunction with our audited consolidated financial statements, and the notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the U.S. Securities and Exchange Commission, or the SEC, on March 27, 2020, or the 2019 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 2019 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 United States generally accepted accounting principles, 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. We evaluate these estimates on a regular basis. 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 raised the equity capital for our real estate investments through two public offerings, or the Offerings, from May 2014 through November 2018, and we have offered shares pursuant to our distribution reinvestment plan, or the DRIP, pursuant to two Registration Statements on Form S-3 (each, a “DRIP Offering” and together the "DRIP Offerings") since November 2017. As of March 31, 2020, we had accepted investors’ subscriptions for and issued approximately 148,601,000 shares of Class A, Class I, Class T and Class T2 common stock in our Offerings, resulting in receipt of gross proceeds of approximately $1,444,846,000, before share repurchases of $99,746,000, selling commissions and dealer manager fees of approximately $96,734,000 and other offering costs of approximately $27,585,000.
On December 17, 2019, our board of directors, at the recommendation of our audit committee, which is comprised solely of independent directors, established an estimated net asset value, or the NAV, per share of our common stock, or the Estimated Per Share NAV, calculated as of October 31, 2019, of $8.65. Therefore, effective January 1, 2020, shares of common stock are offered pursuant to the Second DRIP Offering for a price per share of $8.65. The Estimated Per Share NAV was calculated 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. The Estimated Per Share NAV was determined by our board of directors after consultation with Carter Validus Advisors II, LLC, or our Advisor, and an independent third-party valuation firm. 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.

25


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 by and among us, our Operating Partnership 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 our liquidation stage. SC Distributors, LLC, an affiliate of the Advisor, or the Dealer Manager, served as the dealer manager of our Offerings. The Dealer Manager received fees for services related to the Offerings. We continue to pay the Dealer Manager a distribution and servicing fee with respect to Class T and Class T2 shares that were sold in our Offerings.
On October 4, 2019, Carter Validus Mission Critical REIT, Inc. merged with and into one of our wholly-owned subsidiaries, or the REIT Merger. The total consideration transferred for the REIT Merger to REIT I stockholders was approximately $952.8 million consisting of $178.8 million in cash and $774.0 million in equity.
We currently operate through two reportable segments – commercial real estate investments in data centers and healthcare. As of March 31, 2020, we had purchased 153 properties, inclusive of 60 properties acquired in the REIT Merger, or Legacy REIT I properties, comprising of approximately 8,696,000 of rentable square feet for an aggregate purchase price of approximately $3,135.1 million.
Since inception through March 31, 2020, we sold a portion related to one healthcare property for an aggregate sale price of $3.1 million and generated net proceeds of $2.9 million. The sale occurred during 2019.
On April 24, 2020, Robert M. Winslow resigned from our board of directors, effective immediately. Mr. Winslow’s resignation was not a result of any disagreement with our board of directors on any matter relating to our operations, policies or practices. As a result of Mr. Winslow’s resignation, our board of directors reduced its size so that is now has six members, four of whom are independent directors.
Recent Developments
In March 2020, the World Health Organization declared the outbreak of a novel coronavirus and the disease it causes, or COVID-19, as a global health pandemic, which continues to spread throughout the United States. As a result, the global markets and economies have experienced a significant amount of volatility.
The global outbreak of COVID-19 has forced the temporary closure or changes to the operating hours of certain healthcare properties of the Company. In response, some of our tenants are seeking rent concessions, including decreased rent or rent deferrals for COVID-19 affected periods. We have been in discussions with our tenants and granted rent deferrals to an insignificant number of tenants impacted by COVID-19, relative to the overall portfolio. We anticipate a relatively short duration of the decreased rent and rent deferral repayments with no impact on the collectability of tenant receivables over their respective term of the lease.
As noted above, we have no paid employees and we rely on our Advisor to provide substantially all of our services. Our Advisor’s personnel has successfully transitioned to a remote work environment with the ability to maintain our operations, financial reporting, internal and disclosure controls and procedures. If the global pandemic continues for an extended period of time, we do not anticipate that the remote work environment will have an impact on our internal control over financial reporting.
Additionally, due to the uncertainty surrounding COVID-19 and any impact it may have on us, our board of directors decided to temporarily suspend share repurchases under our share repurchase program, or SRP, effective with repurchase requests that would otherwise be processed on the third quarter repurchase date, which is expected to be July 30, 2020. However, we will continue to process repurchases due to death in accordance with the terms of its share repurchase program. Further, to secure our liquidity position and provide financial flexibility given uncertain market conditions, we drew approximately $75.0 million on our credit facility. See "Liquidity and Capital Resources".
Critical Accounting Policies
Our critical accounting policies were disclosed in our 2019 Annual Report on Form 10-K. There have been no material changes to our critical accounting policies as disclosed therein.

26


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 2019 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 Adopted 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 11—"Segment Reporting" to our condensed consolidated financial statements that are a part of this Quarterly Report on Form 10-Q for additional information about 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 2019 Annual Report on Form 10-K and in Part II, Item 1A. "Risk Factors" of this Quarterly Report on Form 10-Q. However, due to the recent outbreak of COVID-19 in the U.S. and globally, our tenants and their operations, and, thus, their ability to pay rent, may be impacted. The impact of COVID-19 on our future results could be significant and will largely depend on future developments, which are highly uncertain and cannot be predicted, including new information, which may emerge concerning the severity of COVID-19, the success of actions taken to contain or treat COVID-19 and reactions by consumers, companies, governmental entities and capital markets.

27


Results of Operations
Our results of operations are influenced by the timing of acquisitions and the operating performance of our operating real estate properties. The following table shows the property statistics of our real estate properties as of March 31, 2020 and 2019:
 
March 31,
 
2020
 
2019
Number of operating real estate properties (1)
151

 
85

Leased square feet
8,236,000

 
5,672,000

Weighted average percentage of rentable square feet leased
95
%
 
98
%
 
(1)
As of March 31, 2020, we owned 153 real estate properties, two of which were under construction.
The following table summarizes our real estate activity for the three months ended March 31, 2020 and 2019:
 
Three Months Ended
March 31,
 
2020
 
2019
Operating real estate properties acquired
1

 

Aggregate purchase price of operating real estate properties acquired
$
5,030,000

 
$

Leased square feet of operating real estate property additions
15,000

 

This section describes and compares our results of operations for the three months ended March 31, 2020 and 2019. We generate almost all of our revenue 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. Legacy REIT I property activities represent amounts recorded since the REIT Merger.
By evaluating the revenue and expenses of our same store and Legacy REIT I 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 March 31, 2020 Compared to Three Months Ended March 31, 2019
Changes in our revenues are summarized in the following table (amounts in thousands):
 
Three Months Ended
March 31,
 
 
 
 
 
2020
 
2019
 
$ Change
 
% Change
Same store rental revenue
$
41,060

 
$
40,680

 
$
380

 
0.9
 %
Non-same store rental revenue
1,448

 

 
1,448

 
100.0
 %
Legacy REIT I properties rental revenue
20,025

 

 
20,025

 
100.0
 %
Same store tenant reimbursements
5,904

 
5,690

 
214

 
3.8
 %
Non-same store tenant reimbursements
7

 

 
7

 
100.0
 %
Legacy REIT I properties tenant reimbursements
731

 

 
731

 
100.0
 %
Other operating income
10

 
97

 
(87
)
 
(89.7
)%
Total rental revenue
$
69,185

 
$
46,467

 
$
22,718

 
48.9
 %
Non-same store rental revenue and tenant reimbursements, which is a non-GAAP metric, increased due to the acquisition of six operating properties since January 1, 2019.
Legacy REIT I properties' rental revenue and tenant reimbursements represent revenue recorded subsequent to the REIT Merger on October 4, 2019. During the three months ended March 31, 2020, we wrote-off approximately $0.3 million of rental revenue, attributable to one tenant that was experiencing financial difficulties, by accelerating the amortization of one above-market lease intangible asset.

28


Changes in our expenses are summarized in the following table (amounts in thousands):
 
Three Months Ended
March 31,
 
 
 
 
 
2020
 
2019
 
$ Change
 
% Change
Same store rental expenses
$
9,264

 
$
9,128

 
$
136

 
1.5
%
Non-same store rental expenses
156

 

 
156

 
100.0
%
Legacy REIT I properties rental expenses
2,068

 

 
2,068

 
100.0
%
General and administrative expenses
3,688

 
1,403

 
2,285

 
162.9
%
Asset management fees
5,956

 
3,494

 
2,462

 
70.5
%
Depreciation and amortization
27,065

 
18,246

 
8,819

 
48.3
%
Total expenses
$
48,197

 
$
32,271

 
$
15,926

 
49.4
%
Non-same store rental expenses, certain of which are subject to reimbursement by our tenants, increased primarily due to the acquisition of six operating properties since January 1, 2019.
Legacy REIT I properties rental expenses represent expenses recorded subsequent to the REIT Merger on October 4, 2019.
General and administrative expenses increased primarily due to an increase in administrative costs of managing and operating our real estate properties in connection with our growth, an increase in legal fees, and an increase in transfer agent fees. During the period we were selling shares of common stock pursuant to our Offerings, costs related to our transfer agent were recorded in the condensed consolidated statements of stockholders' equity as other offering costs.
Asset management fees increased due to an increase in our real estate properties since January 1, 2019 primarily as a result of the REIT Merger.
Depreciation and amortization increased due to an increase in the weighted average depreciable basis of operating real estate properties since January 1, 2019, coupled with the accelerated amortization of one in-place lease intangible asset in the amount of $1.5 million, related to a tenant that was experiencing financial difficulties. During the three months ended March 31, 2019, we accelerated the amortization of one in-place lease intangible asset in the amount of $2.7 million, related to a tenant that was experiencing financial difficulties and whose lease terminated on June 25, 2019.
Changes in interest and other expense, net, are summarized in the following table (amounts in thousands):
 
Three Months Ended
March 31,
 
 
 
 
 
2020
 
2019
 
$ Change
 
% Change
Interest and other expense, net:
 
 
 
 
 
 
 
Interest on notes payable
$
5,072

 
$
5,175

 
$
(103
)
 
(2.0
)%
Interest on credit facility
9,537

 
4,197

 
5,340

 
127.2
 %
Amortization of deferred financing costs
946

 
606

 
340

 
56.1
 %
Cash deposits interest
(91
)
 
(120
)
 
29

 
(24.2
)%
Capitalized interest
(145
)
 
(23
)
 
(122
)
 
530.4
 %
Total interest and other expense, net
$
15,319

 
$
9,835

 
$<