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EX-32.2 - EXHIBIT 32.2 - Sila Realty Trust, Inc.a2020q210-qexhibit322reiti.htm
EX-32.1 - EXHIBIT 32.1 - Sila Realty Trust, Inc.a2020q210-qexhibit321reiti.htm
EX-31.2 - EXHIBIT 31.2 - Sila Realty Trust, Inc.a2020q210-qexhibit312reiti.htm
EX-31.1 - EXHIBIT 31.1 - Sila Realty Trust, Inc.a2020q210-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 June 30, 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
cvmcriilogob63.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
 
¨
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. ¨
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 August 7, 2020, there were approximately 166,053,000 shares of Class A common stock, 12,542,000 shares of Class I common stock, 39,205,000 shares of Class T common stock and 3,457,000 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)
June 30, 2020
 
December 31, 2019
ASSETS
Real estate:
 
 
 
Land
$
338,340

 
$
343,444

Buildings and improvements, less accumulated depreciation of $162,790 and $128,304, respectively
2,372,309

 
2,422,102

Construction in progress
12,762

 
2,916

Total real estate, net
2,723,411

 
2,768,462

Cash and cash equivalents
74,782

 
69,342

Acquired intangible assets, less accumulated amortization of $80,977 and $64,164, respectively
264,357

 
285,459

Right-of-use assets - operating leases
29,154

 
29,537

Notes receivable, net
31,419

 
2,700

Other assets, net
95,255

 
84,034

Total assets
$
3,218,378

 
$
3,239,534

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
 
 
 
Notes payable, net of deferred financing costs of $2,040 and $2,500, respectively
$
453,562

 
$
454,845

Credit facility, net of deferred financing costs of $6,560 and $7,385, respectively
931,440

 
900,615

Accounts payable due to affiliates
8,149

 
9,759

Accounts payable and other liabilities
65,773

 
45,354

Acquired intangible liabilities, less accumulated amortization of $15,089 and $12,332, respectively
56,781

 
59,538

Operating lease liabilities
31,103

 
31,004

Total liabilities
1,546,808

 
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; 233,203,373 and 231,416,123 shares issued, respectively; 220,865,308 and 221,912,714 shares outstanding, respectively
2,209

 
2,219

Additional paid-in capital
1,972,886

 
1,981,848

Accumulated distributions in excess of earnings
(277,349
)
 
(240,946
)
Accumulated other comprehensive loss
(26,178
)
 
(4,704
)
Total stockholders’ equity
1,671,568

 
1,738,417

Noncontrolling interests
2

 
2

Total equity
1,671,570

 
1,738,419

Total liabilities and stockholders’ equity
$
3,218,378

 
$
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 INCOME (LOSS)
(in thousands, except share data and per share amounts)
(Unaudited)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2020
 
2019
 
2020
 
2019
Revenue:
 
 
 
 
 
 
 
Rental revenue
$
68,875

 
$
46,937

 
$
138,060

 
$
93,404

Expenses:
 
 
 
 
 
 
 
Rental expenses
10,922

 
10,142

 
22,410

 
19,270

General and administrative expenses
4,099

 
1,535

 
7,787

 
2,938

Asset management fees
5,969

 
3,493

 
11,925

 
6,987

Depreciation and amortization
25,294

 
15,610

 
52,359

 
33,856

Total expenses
46,284

 
30,780

 
94,481

 
63,051

Gain on real estate disposition
2,703

 

 
2,703

 

Income from operations
25,294

 
16,157

 
46,282

 
30,353

Interest and other expense, net
14,199

 
9,893

 
29,518

 
19,728

Net income attributable to common stockholders
$
11,095

 
$
6,264

 
$
16,764

 
$
10,625

Other comprehensive loss:
 
 
 
 
 
 
 
Unrealized loss on interest rate swaps, net
$
(1,140
)
 
$
(7,552
)
 
$
(21,474
)
 
$
(11,163
)
Other comprehensive loss
(1,140
)
 
(7,552
)
 
(21,474
)
 
(11,163
)
Comprehensive income (loss) attributable to common stockholders
$
9,955

 
$
(1,288
)
 
$
(4,710
)
 
$
(538
)
Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
220,992,009

 
136,135,710

 
221,285,475

 
136,157,406

Diluted
221,029,409

 
136,161,037

 
221,319,218

 
136,182,819

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

 
$
0.05

 
$
0.08

 
$
0.08

Diluted
$
0.05

 
$
0.05

 
$
0.08

 
$
0.08

Distributions declared per common share
$
0.12

 
$
0.16

 
$
0.24

 
$
0.31

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, March 31, 2020
221,387,100

 
$
2,214

 
$
1,977,360

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

 
$
2

 
$
1,692,666

Issuance of common stock under the distribution reinvestment plan
891,257

 
9

 
7,702

 

 

 
7,711

 

 
7,711

Vesting of restricted stock
2,250

 

 
30

 

 

 
30

 

 
30

Distribution and servicing fees

 

 
26

 

 

 
26

 

 
26

Other offering costs

 

 
(2
)
 

 

 
(2
)
 

 
(2
)
Repurchase of common stock
(1,415,299
)
 
(14
)
 
(12,230
)
 

 

 
(12,244
)
 

 
(12,244
)
Distributions to common stockholders

 

 

 
(26,572
)
 

 
(26,572
)
 

 
(26,572
)
Other comprehensive loss

 

 

 

 
(1,140
)
 
(1,140
)
 

 
(1,140
)
Net income

 

 

 
11,095

 

 
11,095

 

 
11,095

Balance, June 30, 2020
220,865,308

 
$
2,209

 
$
1,972,886

 
$
(277,349
)
 
$
(26,178
)
 
$
1,671,568

 
$
2

 
$
1,671,570


 
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
1,785,000

 
18

 
15,424

 

 

 
15,442

 

 
15,442

Vesting of restricted stock
2,250

 

 
57

 

 

 
57

 

 
57

Distribution and servicing fees

 

 
59

 

 

 
59

 

 
59

Other offering costs

 

 
(9
)
 

 

 
(9
)
 

 
(9
)
Repurchase of common stock
(2,834,656
)
 
(28
)
 
(24,493
)
 

 

 
(24,521
)
 

 
(24,521
)
Distributions to common stockholders

 

 

 
(53,167
)
 

 
(53,167
)
 

 
(53,167
)
Other comprehensive loss

 

 

 

 
(21,474
)
 
(21,474
)
 

 
(21,474
)
Net income

 

 

 
16,764

 

 
16,764

 

 
16,764

Balance, June 30, 2020
220,865,308

 
$
2,209

 
$
1,972,886

 
$
(277,349
)
 
$
(26,178
)
 
$
1,671,568

 
$
2

 
$
1,671,570

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 STOCKHOLDERS' EQUITY
(in thousands, except share data)
(Unaudited)
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
No. of
Shares
 
Par
Value
 
Additional
Paid-in
Capital
 
Accumulated Distributions in Excess of Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total
Stockholders’
Equity
 
Noncontrolling
Interests
 
Total
Equity
Balance, March 31, 2019
136,428,375

 
$
1,364

 
$
1,192,062

 
$
(169,359
)
 
$
2,592

 
$
1,026,659

 
$
2

 
$
1,026,661

Issuance of common stock under the distribution reinvestment plan
1,133,525

 
11

 
10,470

 

 

 
10,481

 

 
10,481

Vesting of restricted stock
2,250

 

 
23

 

 

 
23

 

 
23

Distribution and servicing fees

 

 
42

 

 

 
42

 

 
42

Other offering costs

 

 
(284
)
 

 

 
(284
)
 

 
(284
)
Repurchase of common stock
(1,165,436
)
 
(11
)
 
(10,769
)
 

 

 
(10,780
)
 

 
(10,780
)
Distributions to common stockholders

 

 

 
(21,420
)
 

 
(21,420
)
 

 
(21,420
)
Other comprehensive loss

 

 

 

 
(7,552
)
 
(7,552
)
 

 
(7,552
)
Net income

 

 

 
6,264

 

 
6,264

 

 
6,264

Balance, June 30, 2019
136,398,714

 
$
1,364

 
$
1,191,544

 
$
(184,515
)
 
$
(4,960
)
 
$
1,003,433

 
$
2

 
$
1,003,435


 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
No. of
Shares
 
Par
Value
 
Additional
Paid-in
Capital
 
Accumulated Distributions in Excess of Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
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
2,255,937

 
23

 
20,843

 

 

 
20,866

 

 
20,866

Vesting of restricted stock
2,250

 

 
46

 

 

 
46

 

 
46

Distribution and servicing fees

 

 
94

 

 

 
94

 

 
94

Other offering costs

 

 
(289
)
 

 

 
(289
)
 

 
(289
)
Repurchase of common stock
(2,325,715
)
 
(23
)
 
(21,490
)
 

 

 
(21,513
)
 

 
(21,513
)
Distributions to common stockholders

 

 

 
(42,616
)
 

 
(42,616
)
 

 
(42,616
)
Other comprehensive loss

 

 

 

 
(11,163
)
 
(11,163
)
 

 
(11,163
)
Net income

 

 

 
10,625

 

 
10,625

 

 
10,625

Balance, June 30, 2019
136,398,714

 
$
1,364

 
$
1,191,544

 
$
(184,515
)
 
$
(4,960
)
 
$
1,003,433

 
$
2

 
$
1,003,435

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

6


CARTER VALIDUS MISSION CRITICAL REIT II, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
 
Six Months Ended
June 30,
 
2020
 
2019
Cash flows from operating activities:
 
 
 
Net income attributable to common stockholders
$
16,764

 
$
10,625

Adjustments to reconcile net income attributable to common stockholders to net cash provided by operating activities:
 
 
 
Depreciation and amortization
52,359

 
33,856

Amortization of deferred financing costs
1,893

 
1,229

Amortization of above-market leases
1,500

 
311

Amortization of below-market leases
(2,757
)
 
(2,464
)
Amortization of origination fee
26

 

Reduction in the carrying amount of right-of-use assets - operating leases, net
467

 
224

Gain on real estate disposition
(2,703
)
 

Straight-line rent
(10,911
)
 
(5,656
)
Stock-based compensation
57

 
46

Changes in operating assets and liabilities:
 
 
 
Accounts payable and other liabilities
(543
)
 
(358
)
Accounts payable due to affiliates
21

 
(205
)
Other assets
(433
)
 
963

Net cash provided by operating activities
55,740

 
38,571

Cash flows from investing activities:
 
 
 
Investment in real estate
(5,030
)
 

Proceeds from real estate disposition
6,129

 

Capital expenditures
(13,610
)
 
(6,169
)
Payments of deal costs
(126
)
 
(857
)
Real estate deposit
100

 
(10
)
Net cash used in investing activities
(12,537
)
 
(7,036
)
Cash flows from financing activities:
 
 
 
Payments on notes payable
(1,743
)
 
(717
)
Proceeds from credit facility
95,000

 
15,000

Payments on credit facility
(65,000
)
 

Payments of deferred financing costs
(32
)
 
(1,465
)
Repurchase of common stock
(24,521
)
 
(21,513
)
Offering costs on issuance of common stock
(1,608
)
 
(1,886
)
Distributions to common stockholders
(38,065
)
 
(21,993
)
Net cash used in financing activities
(35,969
)
 
(32,574
)
Net change in cash, cash equivalents and restricted cash
7,234

 
(1,039
)
Cash, cash equivalents and restricted cash - Beginning of period
80,230

 
79,527

Cash, cash equivalents and restricted cash - End of period
$
87,464

 
$
78,488

Supplemental cash flow disclosure:
 
 
 
Interest paid, net of interest capitalized of $281 and $56, respectively
$
29,083

 
$
18,907

Supplemental disclosure of non-cash transactions:
 
 
 
Common stock issued through distribution reinvestment plan
$
15,442

 
$
20,866

Accrued capital expenditures
$
885

 
$

Accrued deal costs
$

 
$
322

Origination of note receivable related to real estate disposition
$
28,000

 
$

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

7


CARTER VALIDUS MISSION CRITICAL REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 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. During the six months ended June 30, 2020, the Company sold one real estate property. See Note 3—"Acquisitions and Dispositions" for additional information. As of June 30, 2020, the Company owned 152 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 October 4, 2019, the Company completed its merger, or the REIT Merger, with Carter Validus Mission Critical REIT, Inc., or REIT I, pursuant to which REIT I merged with and into Lightning Merger Sub, LLC, 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 retained the name “Carter Validus Mission Critical REIT II, Inc.”
On July 28, 2020, the Company and the Operating Partnership entered into a Membership Interest Purchase Agreement, or the Purchase Agreement, intended to provide for the internalization of the Company’s external management functions, or the Internalization Transaction. The Internalization Transaction is expected to close on September 30, 2020, subject to the satisfaction or waiver of certain conditions in the Purchase Agreement.
On July 28, 2020, John E. Carter agreed, pursuant to the Purchase Agreement and as a closing condition therein, to resign from the Company’s board of directors at and upon the closing of the Internalization Transaction. In addition, on July 28, 2020, pursuant to the Purchase Agreement, Mr. Carter resigned as the Chairman of the board of directors, effective immediately. On July 28, 2020, the board of directors elected Jonathan Kuchin, a current independent director of the board of directors and the Chairman of the Audit Committee, as Chairman of the board of directors, effective immediately.
Further, on July 28, 2020, CV Manager, LLC, or Manager Sub, in its post-closing capacity as the Company’s indirect subsidiary, the Company and the Operating Partnership entered into an employment agreement with each of Michael A. Seton and Kay C. Neely, which set forth the terms and conditions of Mr. Seton’s and Ms. Neely’s service as the Company’s Chief Executive Officer and Chief Financial Officer, respectively. Such employment agreements will be effective at and upon the closing of the Internalization Transaction.
For more information regarding the proposed Internalization Transaction, see Note 17—"Subsequent Events."
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 and six months ended June 30, 2020, are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

8


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 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 8—"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):
 
 
Six Months Ended
June 30,
 
 
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
 
74,782

 
66,049

Restricted cash
 
12,682

 
12,439

Cash, cash equivalents and restricted cash
 
$
87,464

 
$
78,488

Notes Receivable
Notes receivable are recorded at their outstanding principal balance, net of any unearned income, unamortized deferred fees and costs and allowances for loan losses. The Company defers notes receivable origination costs and fees and amortizes them as an adjustment of yield over the term of the related note receivable. Amortization of the notes receivable origination costs and fees are recorded in interest and other expense, net, in the accompanying condensed consolidated statements of comprehensive income (loss).
During the six months ended June 30, 2020, in connection with the sale of a healthcare property, a wholly-owned subsidiary of the Company issued a note receivable in the principal amount of $28,000,000. See Note 7—"Notes Receivable, Net" for further discussion.
The Company evaluates the collectability of both interest and principal on each note receivable to determine whether it is collectible, primarily through the evaluation of credit quality indicators, such as the tenant's financial condition, collateral, evaluations of historical loss experience, current economic conditions and other relevant factors, including contractual terms of repayments. Evaluating a note receivable for potential impairment requires management to exercise judgment. The use of

9


alternative assumptions in evaluating a note receivable could result in a different determination of the note'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 note receivable. See "Recently Adopted Accounting Pronouncements- Measurement of Credit Losses on Financial Instruments" section below for further discussion.
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 asset group by estimating whether the Company will recover the carrying value of the asset group 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 asset group, the Company will record an impairment loss to the extent that the carrying value exceeds the estimated fair value of the asset group.
When developing estimates of expected future cash flows, the Company makes certain assumptions regarding future market rental rates 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 and six months ended June 30, 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 June 30, 2020 and 2019, the Company did not record impairment of acquired intangible assets or acquired intangible liabilities.
During the six months ended June 30, 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, by accelerating the amortization of the acquired intangible assets related to a healthcare tenant of the Company that was experiencing financial difficulties and vacated the property on June 19, 2020. During the six months ended June 30, 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 for which the associated lease terminated on June 25, 2019.
Concentration of Credit Risk and Significant Leases
As of June 30, 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 June 30, 2020, the Company owned real estate investments in two micropolitan statistical areas and 67 metropolitan statistical areas, or MSAs, two MSAs 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 11.6% and 10.3%, respectively, of rental revenue for the six months ended June 30, 2020.
As of June 30, 2020, the Company had one exposure to tenant concentration that accounted for 10.0% or more of rental revenue for the six months ended June 30, 2020. The leases with tenants under common control of Post Acute Medical, LLC accounted for 10.1% of rental revenue for the six months ended June 30, 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

10


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. 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. 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 generally honors valid repurchase requests approximately 30 days following the end of the applicable quarter. The Company reached the DRIP funding limitation, and was not able to fully accommodate all repurchase requests for the second quarter repurchase date of 2020, which was April 30, 2020. See Part II, Item 2. "Unregistered Sales of Equity Securities" for further information for the second quarter repurchase date of 2020.
On April 30, 2020, due to the uncertainty surrounding the ongoing coronavirus, or 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 SRP, effective with repurchase requests that would otherwise be processed on the third quarter repurchase date of 2020, which was July 30, 2020. However, the Company will continue to process repurchases due to death in accordance with the terms of its SRP. See Part II, Item 2. "Unregistered Sales of Equity Securities" for more information on the Company's SRP.
During the six months ended June 30, 2020, the Company repurchased 2,834,656 Class A shares, Class I shares, Class T shares and Class T2 shares of common stock (2,197,452 Class A shares, 395,334 Class I shares, 238,206 Class T shares and 3,664 Class T2 shares) for an aggregate purchase price of approximately $24,521,000 (an average of $8.65 per share). During the six months ended June 30, 2019, the Company repurchased 2,325,715 Class A shares, Class I shares, Class T shares and Class T2 shares of common stock (1,749,624 Class A shares, 188,680 Class I shares, 382,012 Class T shares and 5,399 Class T2 shares) for an aggregate purchase price of approximately $21,513,000 (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 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 and six months ended June 30, 2020, diluted earnings per share reflected the effect of approximately 37,000 and 34,000 of non-vested shares of restricted common stock that were outstanding as of each period, respectively. During the three and six months ended June 30, 2019, diluted earnings per share reflected the effect of approximately 25,000 of non-vested shares of restricted common stock that were outstanding as of each period.
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 June 30, 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 reportable 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 12—"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

11


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 income (loss) 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 income (loss) 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 14—"Derivative Instruments and Hedging Activities."
Recently Adopted Accounting Pronouncements
Leases—Rent Concessions
The ongoing COVID-19 pandemic has forced the temporary closure, changes to the operating hours or other temporary changes to the business of certain healthcare and data center tenants 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. An 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.
As a lessor, for leases impacted by COVID-19, the Company elected to account for any rent concessions as if they were part of the enforceable rights and obligations under the existing lease. During the three months ended June 30, 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. During the six months ended June 30, 2020, the Company entered into 29 rent concessions and lease modifications impacted by COVID-19 and collected approximately 97% of rental revenue originally contracted for such period.
As a lessee, the Company did not elect the practical expedient and will apply the lease modification guidance in accordance with ASC 842, Leases, if changes to ground lease agreements occur. The Company had not modified any of its ground lease agreements as of June 30, 2020.
Measurement of Credit Losses on Financial Instruments
On January 1, 2020, the Company adopted ASU 2016-13, Financial Instruments-Credit Losses, or ASU 2016-13. ASU 2016-13 requires a new model for estimating credit losses for certain types of financial instruments, including loans receivable, held-to-maturity debt securities and net investments in direct financing leases, among other financial instruments. The new model for estimated credit losses is applicable to the Company's notes receivable. Other than a few narrow exceptions, ASU 2016-13 requires that all financial instruments subject to the estimated credit loss model have some amount of credit loss reserve. The reserve is to reflect the GAAP principal underlying the estimated credit loss model that all loans, debt securities, and similar assets have an inherent risk of loss, regardless of credit quality, subordinate capital or other mitigating factors. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models and methods for estimating the allowance for credit losses. The standard does not apply to receivables arising from operating leases, which are within the scope of ASC 842, Leases. The adoption of ASU 2016-13 did not have any impact to the Company’s consolidated financial statements.

12


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 six months ended June 30, 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.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current financial statement presentation, with no effect on the Company’s condensed consolidated financial position or results of operations.
Note 3—Acquisitions and Dispositions
2020 Acquisition
During the six months ended June 30, 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 six months ended June 30, 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 six months ended June 30, 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, 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 six months ended June 30, 2020, acquisition fees and costs did not exceed 6.0% of the contract purchase price of the 2020 Acquisition during such period.
2020 Disposition and Origination of Note Receivable
On May 28, 2020, the Company sold one healthcare property, the San Antonio Healthcare Facility II, for an aggregate sale price of $35,000,000, which generated net proceeds of $6,129,000, or the 2020 Disposition. The Company recognized an aggregate gain on sale of $2,703,000, in gain on real estate disposition in the condensed consolidated statements of comprehensive income (loss) for the three and six months ended June 30, 2020. The sale price of $35,000,000 consisted of $7,000,000 cash and a $28,000,000 investment in note receivable. See Note 7—"Notes Receivable, Net" for additional information.

13


Note 4—Acquired Intangible Assets, Net
Acquired intangible assets, net, consisted of the following as of June 30, 2020 and December 31, 2019 (amounts in thousands, except weighted average remaining life amounts):
 
June 30, 2020
 
December 31, 2019
In-place leases, net of accumulated amortization of $77,942 and $62,252, respectively (with a weighted average remaining life of 9.9 years and 10.4 years, respectively)
$
247,829

 
$
266,856

Above-market leases, net of accumulated amortization of $3,035 and $1,912, respectively (with a weighted average remaining life of 9.7 years and 10.5 years, respectively)
16,528

 
18,603

 
$
264,357

 
$
285,459

The aggregate weighted average remaining life of the acquired intangible assets was 9.9 years and 10.4 years as of June 30, 2020 and December 31, 2019, respectively.
Amortization of the acquired intangible assets was $8,254,000 and $5,100,000 for the three months ended June 30, 2020 and 2019, respectively. Amortization of the acquired intangible assets was $18,801,000 and $12,895,000 for the six months ended June 30, 2020 and 2019, respectively. Of the $18,801,000 recorded for the six months ended June 30, 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 $12,895,000 recorded for the six months ended June 30, 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 amortization of the above-market leases is recorded as an adjustment to rental revenue in the accompanying condensed consolidated statements of comprehensive income (loss).
Note 5—Acquired Intangible Liabilities, Net
Acquired intangible liabilities, net, consisted of the following as of June 30, 2020 and December 31, 2019 (amounts in thousands, except weighted average remaining life amounts):
 
June 30, 2020
 
December 31, 2019
Below-market leases, net of accumulated amortization of $15,089 and $12,332, respectively (with a weighted average remaining life of 15.6 years and 16.1 years, respectively)
$
56,781

 
$
59,538

Amortization of the below-market leases was $1,371,000 and $1,232,000 for the three months ended June 30, 2020 and 2019, respectively, and $2,757,000 and $2,464,000 for the six months ended June 30, 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 income (loss).

14


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 June 30, 2020, including optional renewal periods, for the six 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
Six months ending December 31, 2020
 
$
110,167

2021
 
228,670

2022
 
233,625

2023
 
233,547

2024
 
229,008

Thereafter
 
1,619,684

Total (1)
 
$
2,654,701

 
(1)
The total future rent amount of $2,654,701,000 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 December 1, 2020 and 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 50.1 years and 50.7 years as of June 30, 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 its 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 June 30, 2020, for the six 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
Six months ending December 31, 2020
 
$
817

2021
 
1,634

2022
 
1,634

2023
 
1,638

2024
 
1,687

Thereafter
 
136,719

Total undiscounted rental payments
 
144,129

Less imputed interest
 
(113,026
)
Total operating lease liabilities
 
$
31,103


15


Note 7—Notes Receivable, Net
As of June 30, 2020, the Company had two notes receivable outstanding in the amount of $31,419,000 secured by real estate properties.
The following summarizes the notes receivable balances as of June 30, 2020 and December 31, 2019:
 
June 30, 2020
 
December 31, 2019
 
Interest Rate (1)
 
Maturity Date
Note receivable
$
2,700

 
$
2,700

 
6.0%
 
11/05/2020
Note receivable
28,719

 

 
7.0%
 
06/01/2022
Total notes receivable
$
31,419

 
$
2,700

 
 
 
 

(1)
As of June 30, 2020.
As described in Note 3—"Acquisitions and Dispositions", in connection with the sale of the San Antonio Healthcare Facility II on May 28, 2020, a wholly-owned subsidiary of the Company entered into a note receivable agreement in the principal amount of $28,000,000. The note receivable is secured by a first mortgage lien on San Antonio Healthcare Facility II and matures on June 1, 2022, or the Maturity Date. The interest rate of the note receivable is 7.0% per annum for the period commencing May 28, 2020 through May 31, 2021, and 8.0% per annum for the period commencing on June 1, 2021 through the Maturity Date. Monthly payments are interest only, with the outstanding principal due and payable on the Maturity Date; however, the outstanding principal and any unpaid accrued interest can be prepaid at any time without penalty or charge. In connection with the note receivable, the Company incurred a loan origination fee in the amount of $560,000.
During the three and six months June 30, 2020, the Company recognized $185,000 of interest income on notes receivable, offset by amortization of loan origination fee in the amount of $26,000, which were recorded in interest and other expense, net, in the accompanying condensed consolidated statements of comprehensive income (loss). As of June 30, 2020, the Company had unamortized loan origination fee in the amount of $534,000, which was recorded in notes receivable, net, in the accompanying condensed consolidated balance sheets.
Expected Credit Losses
As of June 30, 2020, the Company had two notes receivable, one of which was determined to be a collateral dependent loan and the other the Company does not expect to incur a loss because it is secured by collateral that the Company believes has sufficient value to cover the note receivable in the event of a default by the borrower. The Company's evaluation considered factors such as the potential future value of the collateral, adjustments for current conditions and supportable forecasts for the collateral. As a result of the evaluation, the Company did not record any estimated credit losses for its notes receivable for the three and six months ended June 30, 2020, because the Company believes that the collateral for these loans was sufficient to cover its investment.
Note 8—Other Assets, Net
Other assets, net, consisted of the following as of June 30, 2020 and December 31, 2019 (amounts in thousands):
 
June 30, 2020
 
December 31, 2019
Deferred financing costs, related to the revolver portion of the credit facility, net of accumulated amortization of $6,272 and $5,696, respectively
$
2,050

 
$
2,623

Leasing commissions, net of accumulated amortization of $422 and $240, respectively
11,125

 
10,288

Restricted cash
12,682

 
10,888

Tenant receivables
6,365

 
6,116

Straight-line rent receivable, net
59,437

 
48,526

Accounts receivable due from affiliates
21

 

Prepaid and other assets
3,575

 
4,709

Derivative assets

 
884

 
$
95,255

 
$
84,034


16


Note 9—Accounts Payable and Other Liabilities
Accounts payable and other liabilities consisted of the following as of June 30, 2020 and December 31, 2019 (amounts in thousands):
 
June 30, 2020
 
December 31, 2019
Accounts payable and accrued expenses
$
12,247

 
$
11,448

Accrued interest expense
4,318

 
5,185

Accrued property taxes
4,479

 
3,537

Distributions payable to stockholders
8,753

 
9,093

Tenant deposits
1,014

 
1,500

Deferred rental income
8,784

 
9,003

Derivative liabilities
26,178

 
5,588

 
$
65,773

 
$
45,354

Note 10—Notes Payable and Credit Facility
The Company's debt outstanding as of June 30, 2020 and December 31, 2019, consisted of the following (amounts in thousands):
 
June 30, 2020
 
December 31, 2019
Notes payable:
 
 
 
Fixed rate notes payable
$
218,997

 
$
219,567

Variable rate notes payable fixed through interest rate swaps
236,605

 
237,778

Total notes payable, principal amount outstanding
455,602

 
457,345

Unamortized deferred financing costs related to notes payable
(2,040
)
 
(2,500
)
Total notes payable, net of deferred financing costs
453,562

 
454,845

Credit facility:
 
 
 
Variable rate revolving line of credit
138,000

 
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
938,000

 
908,000

Unamortized deferred financing costs related to the term loan credit facility
(6,560
)
 
(7,385
)
Total credit facility, net of deferred financing costs
931,440

 
900,615

Total debt outstanding
$
1,385,002

 
$
1,355,460

Significant debt activity during the six months ended June 30, 2020 and subsequent, excluding scheduled principal payments, includes:
During the six months ended June 30, 2020, the Company drew $95,000,000 on its credit facility, $20,000,000 of which was related to the 2020 Acquisition (discussed in Note 3—"Acquisitions and Dispositions") and the funding of 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 pandemic. During the six months ended June 30, 2020, the Company repaid $65,000,000 on its credit facility.
During the six months ended June 30, 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.
During the six months ended June 30, 2020, the Company entered into two interest rate swap agreements, with an effective date of July 1, 2020, which will effectively fix LIBOR related to $100,000,000 of the term loans of the credit facility.
For the quarter ended June 30, 2020, the Company was not in compliance with one of its mortgage loan agreements as a result of a covenant requiring the tenant at the property to maintain a certain rent coverage ratio. The tenant at the property is a healthcare tenant that experienced a temporary reduction in patient volume as a result of the COVID-19 pandemic and has not missed any rental payments. The lenders waived compliance with the covenant through June 30, 2020. Consequently, as of June 30, 2020, the Company was in compliance with all covenants in the loan agreement. The

17


mortgage note payable balance was approximately $30,812,000 as of June 30, 2020, and the Company is in discussion with its lenders to amend the loan agreement for this covenant. In the event the Company is not in compliance with the covenants in future periods and is unable to obtain a waiver, the lenders may choose to pursue remedies under the loan agreements, which could include, at the lenders' discretion, declaring the loan to be immediately due and payable, among other remedies.
On July 10, 2020, the Company amended its credit facility. See Note 17—"Subsequent Events" for information.
The principal payments due on the notes payable and credit facility as of June 30, 2020, for the six 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
Six months ending December 31, 2020
 
$
2,181

2021
 
146,026

2022
 
304,209

2023
 
282,710

2024
 
547,360

Thereafter
 
111,116

 
 
$
1,393,602

Note 11—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.
On July 28, 2020, the Company and the Operating Partnership entered into the Purchase Agreement, which is intended to provide for the internalization of the Company’s external management functions. The Internalization Transaction is expected to close on September 30, 2020, subject to the satisfaction or waiver of certain conditions in the Purchase Agreement. See further discussion in Note 17—"Subsequent Events."
Distribution and Servicing Fees
Through the termination of the Offering on November 27, 2018, the Company paid SC Distributors, LLC, an affiliate of the Advisor that served as the dealer manager of the Offerings, or 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 and 2.0% of the amount advanced with respect to loans and similar assets (including without limitation mezzanine loans). 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 June 30, 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.

18


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 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 income (loss).
Property Management Fees
In connection with the rental, leasing, operation and management of the Company’s properties, the Company pays Carter Validus Real Estate Management Services II, LLC, a wholly-owned subsidiary of the Sponsor, or 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 such third parties 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 income (loss).
Leasing Commission Fees
The Company pays the Property Manager a separate fee in connection with leasing properties to new tenants or renewals or expansions of existing leases with existing tenants in an amount not to exceed the fee customarily charged in arm’s-length transactions by others rendering similar services in the same geographic area for similar properties as determined by a survey of brokers and agents in such area and which is typically less than $1,000. 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 the Advisor or its affiliate provide 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.
Special Limited Partner Interest of Advisor
The Advisor, as the special limited partner of 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 Advisor would only become entitled to the compensation after stockholders have, 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.
The Advisor's special limited partnership interest in the Operating Partnership will be redeemed and cancelled at and upon the closing of the Internalization Transaction (as defined and discussed further in Note 17—"Subsequent Events.") and the Advisor will not be entitled to any compensation as a special limited partner of the Operating Partnership.

19


The following table details amounts incurred in connection with the Company's related-party transactions as described above for the three and six months ended June 30, 2020 and 2019 (amounts in thousands):
 
 
 
 
Incurred
 
 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
Fee
 
Entity
 
2020
 
2019
 
2020
 
2019
Distribution and servicing fees(1)
 
SC Distributors, LLC
 
$
(26
)
 
$
(42
)
 
$
(59
)
 
$
(94
)
Acquisition fees and costs
 
Carter Validus Advisors II, LLC and its affiliates
 

 

 
97

 

Asset management fees
 
Carter Validus Advisors II, LLC and its affiliates
 
5,969

 
3,493

 
11,925

 
6,987

Property management fees
 
Carter Validus Real Estate Management Services II, LLC
 
1,792

 
1,228

 
3,588

 
2,437

Operating expense reimbursement
 
Carter Validus Advisors II, LLC and its affiliates
 
1,386

 
1,750

 
2,664

 
2,480

Leasing commission fees
 
Carter Validus Real Estate Management Services II, LLC
 
244

 
95

 
483

 
98

Construction management fees
 
Carter Validus Real Estate Management Services II, LLC
 
162

 
35

 
338

 
164

Disposition fees
 
Carter Validus Advisors II, LLC and its affiliates
 
350

 

 
350

 

Loan origination fees
 
Carter Validus Advisors II, LLC and its affiliates
 
560

 

 
560

 

Total
 
 
 
$
10,437

 
$
6,559

 
$
19,946

 
$
12,072

 
(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 and six months ended June 30, 2020 and June 30, 2019.
The following table details amounts payable to affiliates in connection with the Company's related-party transactions as described above as of June 30, 2020 and December 31, 2019 (amounts in thousands):
 
 
 
 
Payable
 
 
 
 
June 30, 2020
 
December 31, 2019
Fee
 
Entity
 
Distribution and servicing fees
 
SC Distributors, LLC
 
$
4,591

 
$
6,210

Asset management fees
 
Carter Validus Advisors II, LLC and its affiliates
 
1,991

 
2,100

Property management fees
 
Carter Validus Real Estate Management Services II, LLC
 
528

 
433

Operating expense reimbursement
 
Carter Validus Advisors II, LLC and its affiliates
 
479

 
518

Leasing commission fees
 
Carter Validus Real Estate Management Services II, LLC
 
373

 
299

Construction management fees
 
Carter Validus Real Estate Management Services II, LLC
 
187

 
199

Total
 
 
 
$
8,149

 
$
9,759

Additionally, as of June 30, 2020, the Company recorded $21,000 due from Carter Validus Advisors II, LLC for a representations and warranties insurance policy in connection with the Internalization Transaction, the cost of which is shared with the Advisor and was paid by the Company. The receivable due from Carter Validus Advisors II, LLC was recorded in other assets, net, in the accompanying condensed consolidated balance sheets.
Note 12—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 the 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, gain on real estate disposition 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

20


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, notes receivable and deferred financing costs attributable to the revolving line of credit portion of the Company's credit facility not attributable to individual properties.
Summary information for the reportable segments during the three and six months ended June 30, 2020 and 2019 is as follows (amounts in thousands):
 
Data Centers
 
Healthcare
 
Three Months Ended
June 30, 2020
Revenue:
 
 
 
 
 
Rental revenue
$
27,144

 
$
41,731

 
$
68,875

Expenses:
 
 
 
 
 
Rental expenses
(7,027
)
 
(3,895
)
 
(10,922
)
Segment net operating income
$
20,117

 
$
37,836

 
57,953

 
 
 
 
 
 
Expenses:
 
 
 
 
 
General and administrative expenses
 
 
 
 
(4,099
)
Asset management fees
 
 
 
 
(5,969
)
Depreciation and amortization
 
 
 
 
(25,294
)
Gain on real estate disposition
 
 
 
 
2,703

Income from operations
 
 
 
 
25,294

Interest and other expense, net
 
 
 
 
(14,199
)
Net income attributable to common stockholders
 
 
 
 
$
11,095

 
Data Centers
 
Healthcare
 
Three Months Ended
June 30, 2019
Revenue:
 
 
 
 
 
Rental revenue
$
27,838

 
$
19,099

 
$
46,937

Expenses:
 
 
 
 
 
Rental expenses
(8,137
)
 
(2,005
)
 
(10,142
)
Segment net operating income
$
19,701

 
$
17,094

 
36,795

 
 
 
 
 
 
Expenses:
 
 
 
 
 
General and administrative expenses
 
 
 
 
(1,535
)
Asset management fees
 
 
 
 
(3,493
)
Depreciation and amortization
 
 
 
 
(15,610
)
Income from operations
 
 
 
 
16,157

Interest and other expense, net
 
 
 
 
(9,893
)
Net income attributable to common stockholders
 
 
 
 
$
6,264


21


 
Data Centers
 
Healthcare
 
Six Months Ended June 30, 2020
Revenue:
 
 
 
 
 
Rental revenue
$
54,903

 
$
83,157

 
$
138,060

Expenses:
 
 
 
 
 
Rental expenses
(14,176
)
 
(8,234
)
 
(22,410
)
Segment net operating income
$
40,727

 
$
74,923

 
115,650

 
 
 
 
 
 
Expenses:
 
 
 
 
 
General and administrative expenses
 
 
 
 
(7,787
)
Asset management fees
 
 
 
 
(11,925
)
Depreciation and amortization
 
 
 
 
(52,359
)
Gain on real estate disposition
 
 
 
 
2,703

Income from operations
 
 
 
 
46,282

Interest and other expense, net
 
 
 
 
(29,518
)
Net income attributable to common stockholders
 
 
 
 
$
16,764

 
Data Centers
 
Healthcare
 
Six Months Ended
June 30, 2019
Revenue:
 
 
 
 
 
Rental revenue
$
54,515

 
$
38,889

 
$
93,404

Expenses:
 
 
 
 
 
Rental expenses
(15,102
)
 
(4,168
)
 
(19,270
)
Segment net operating income
$
39,413

 
$
34,721

 
74,134

 
 
 
 
 
 
Expenses:
 
 
 
 
 
General and administrative expenses
 
 
 
 
(2,938
)
Asset management fees
 
 
 
 
(6,987
)
Depreciation and amortization
 
 
 
 
(33,856
)
Income from operations
 
 
 
 
30,353

Interest and other expense, net
 
 
 
 
(19,728
)
Net income attributable to common stockholders
 
 
 
 
$
10,625

There were no intersegment sales or transfers during the three and six months ended June 30, 2020 and 2019.
Assets by each reportable segment as of June 30, 2020 and December 31, 2019 are as follows (amounts in thousands):
 
June 30, 2020
 
December 31, 2019
Assets by segment:
 
 
 
Data centers
$
975,230

 
$
989,953

Healthcare
2,142,284

 
2,184,450

All other
100,864

 
65,131

Total assets
$
3,218,378

 
$
3,239,534


22


Capital additions, acquisitions and dispositions, on a cash basis, by reportable segments for the six months ended June 30, 2020 and 2019 are as follows (amounts in thousands):
 
Six Months Ended
June 30,
 
2020
 
2019
Capital additions by segment:


 


Data centers
$
3,450

 
$
6,019

Healthcare
10,160

 
150

Total
13,610

 
6,169

Acquisitions by segment:
 
 
 
Healthcare
5,030

 

Total
5,030

 

Proceeds from Dispositions by segment:
 
 
 
Healthcare
(6,129
)
 

Total
(6,129
)
 

Net cash outflows from capital additions, acquisitions and dispositions
$
12,511

 
$
6,169

Note 13—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 $233,833,000 and $222,816,000 as of June 30, 2020 and December 31, 2019, respectively, as compared to the outstanding principal of $218,997,000 and $219,567,000 as of June 30, 2020 and December 31, 2019, respectively. The estimated fair value of notes payablevariable rate fixed through interest rate swap agreements (Level 2) was approximately $243,136,000 and $238,555,000 as of June 30, 2020 and December 31, 2019, respectively, as compared to the outstanding principal of $236,605,000 and $237,778,000 as of June 30, 2020 and December 31, 2019, respectively.
Credit facilityVariable Rate—The outstanding principal of the credit facility—variable rate was $538,000,000 and $658,000,000, which approximated its fair value as of June 30, 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 $419,760,000 and $251,907,000 as of June 30, 2020 and December 31, 2019, respectively, as compared to the outstanding principal of $400,000,000 and $250,000,000 as of June 30, 2020 and December 31, 2019, respectively.
Notes receivable—The outstanding principal balance of the notes receivable in the amount of $30,700,000 and $2,700,000 approximated the fair value as of June 30, 2020 and December 31, 2019, respectively. The fair value was determined based on its respective collateral and 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 June 30, 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 14—"Derivative Instruments and Hedging Activities" for further discussion of the Company's derivative instruments.

23


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 June 30, 2020 and December 31, 2019 (amounts in thousands):
 
June 30, 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
$

 
$
26,178

 
$

 
$
26,178

Total liabilities at fair value
$

 
$
26,178

 
$

 
$
26,178

 
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 14—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) income 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 $10,113,000 will be reclassified from accumulated other comprehensive loss as an increase to interest and other expense, net.
See Note 13—"Fair Value"