Attached files

file filename
EX-32.2 - EXHIBIT 32.2 - Sila Realty Trust, Inc.a2020q310-qex32209302020.htm
EX-32.1 - EXHIBIT 32.1 - Sila Realty Trust, Inc.a2020q310-qex32109302020.htm
EX-31.2 - EXHIBIT 31.2 - Sila Realty Trust, Inc.a2020q310-qex31209302020.htm
EX-31.1 - EXHIBIT 31.1 - Sila Realty Trust, Inc.a2020q310-qex31109302020.htm
EX-10.9 - EXHIBIT 10.9 - Sila Realty Trust, Inc.a2020q310-qex10909302020.htm
EX-10.8 - EXHIBIT 10.8 - Sila Realty Trust, Inc.a2020q310-qex10809302020.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 September 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
silalogotm.jpg
SILA REALTY TRUST, 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)
Carter Validus Mission Critical REIT II, Inc.
(Former name, former address or former fiscal year, if changed since last report)
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 November 6, 2020, there were approximately 166,290,000 shares of Class A common stock, 12,603,000 shares of Class I common stock, 39,400,000 shares of Class T common stock and 3,467,000 shares of Class T2 common stock of Sila Realty Trust, Inc. outstanding.
 



SILA REALTY TRUST, 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.
SILA REALTY TRUST, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
(Unaudited)
September 30, 2020
 
December 31, 2019
ASSETS
Real estate:
 
 
 
Land
$
338,340

 
$
343,444

Buildings and improvements, less accumulated depreciation of $180,136 and $128,304, respectively
2,366,225

 
2,422,102

Construction in progress
19,552

 
2,916

Total real estate, net
2,724,117

 
2,768,462

Cash and cash equivalents
75,505

 
69,342

Acquired intangible assets, less accumulated amortization of $83,168 and $64,164, respectively
254,433

 
285,459

Goodwill
39,529

 

Right-of-use assets - operating leases
30,168

 
29,537

Right-of-use assets - finance leases
2,533

 

Notes receivable, net
31,327

 
2,700

Other assets, net
103,413

 
84,034

Total assets
$
3,261,025

 
$
3,239,534

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
 
 
 
Notes payable, net of deferred financing costs of $2,027 and $2,500, respectively
$
452,496

 
$
454,845

Credit facility, net of deferred financing costs of $6,343 and $7,385, respectively
976,657

 
900,615

Accounts payable due to affiliates

 
9,759

Accounts payable and other liabilities
84,903

 
45,354

Acquired intangible liabilities, less accumulated amortization of $12,827 and $12,332, respectively
53,657

 
59,538

Operating lease liabilities
32,214

 
31,004

Finance lease liabilities
2,854

 

Total liabilities
1,602,781

 
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; 234,091,351 and 231,416,123 shares issued, respectively; 221,528,870 and 221,912,714 shares outstanding, respectively
2,215

 
2,219

Additional paid-in capital
1,978,604

 
1,981,848

Accumulated distributions in excess of earnings
(298,981
)
 
(240,946
)
Accumulated other comprehensive loss
(23,594
)
 
(4,704
)
Total stockholders’ equity
1,658,244

 
1,738,417

Noncontrolling interests

 
2

Total equity
1,658,244

 
1,738,419

Total liabilities and stockholders’ equity
$
3,261,025

 
$
3,239,534

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

3


SILA REALTY TRUST, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands, except share data and per share amounts)
(Unaudited)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2020
 
2019
 
2020
 
2019
Revenue:
 
 
 
 
 
 
 
Rental revenue
$
70,667

 
$
48,063

 
$
208,727

 
$
141,467

Expenses:
 
 
 
 
 
 
 
Rental expenses
12,068

 
10,740

 
34,478

 
30,010

General and administrative expenses
3,578

 
2,239

 
9,960

 
5,177

Internalization transaction expenses
2,235

 

 
3,640

 

Asset management fees
5,989

 
3,540

 
17,914

 
10,527

Depreciation and amortization
28,249

 
16,254

 
80,608

 
50,110

Impairment loss on real estate

 
13,000

 

 
13,000

Total expenses
52,119

 
45,773

 
146,600

 
108,824

Gain on real estate dispositions

 

 
2,703

 

Income from operations
18,548

 
2,290

 
64,830

 
32,643

Interest and other expense, net
13,284

 
11,920

 
42,802

 
31,648

Net income (loss) attributable to common stockholders
$
5,264

 
$
(9,630
)
 
$
22,028

 
$
995

Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized income (loss) on interest rate swaps, net
$
2,584

 
$
(2,123
)
 
$
(18,890
)
 
$
(13,286
)
Other comprehensive income (loss)
2,584

 
(2,123
)
 
(18,890
)
 
(13,286
)
Comprehensive income (loss) attributable to common stockholders
$
7,848

 
$
(11,753
)
 
$
3,138

 
$
(12,291
)
Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
221,346,730

 
137,063,509

 
221,293,405

 
136,461,135

Diluted
221,406,461

 
137,063,509

 
221,335,874

 
136,484,303

Net income (loss) per common share attributable to common stockholders:
 
 
 
 
 
 
 
Basic
$
0.02

 
$
(0.07
)
 
$
0.10

 
$
0.01

Diluted
$
0.02

 
$
(0.07
)
 
$
0.10

 
$
0.01

Distributions declared per common share
$
0.12

 
$
0.16

 
$
0.36

 
$
0.47

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

4


SILA REALTY TRUST, 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, June 30, 2020
220,865,308

 
$
2,209

 
$
1,972,886

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

 
$
2

 
$
1,671,570

Issuance of common stock under the distribution reinvestment plan
879,728

 
9

 
7,604

 

 

 
7,613

 

 
7,613

Vesting of restricted stock
8,250

 

 
45

 

 

 
45

 

 
45

Purchase of noncontrolling interest

 

 

 

 

 

 
(2
)
 
(2
)
Distribution and servicing fees

 

 
6

 

 

 
6

 

 
6

Repurchase of common stock
(224,416
)
 
(3
)
 
(1,937
)
 

 

 
(1,940
)
 

 
(1,940
)
Distributions to common stockholders

 

 

 
(26,896
)
 

 
(26,896
)
 

 
(26,896
)
Other comprehensive income

 

 

 

 
2,584

 
2,584

 

 
2,584

Net income

 

 

 
5,264

 

 
5,264

 

 
5,264

Balance, September 30, 2020
221,528,870

 
$
2,215

 
$
1,978,604

 
$
(298,981
)
 
$
(23,594
)
 
$
1,658,244

 
$

 
$
1,658,244


 
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
2,664,728

 
27

 
23,028

 

 

 
23,055

 

 
23,055

Vesting of restricted stock
10,500

 

 
102

 

 

 
102

 

 
102

Purchase of noncontrolling interest

 

 

 

 

 

 
(2
)
 
(2
)
Distribution and servicing fees

 

 
65

 

 

 
65

 

 
65

Other offering costs

 

 
(9
)
 

 

 
(9
)
 

 
(9
)
Repurchase of common stock
(3,059,072
)
 
(31
)
 
(26,430
)
 

 

 
(26,461
)
 

 
(26,461
)
Distributions to common stockholders

 

 

 
(80,063
)
 

 
(80,063
)
 

 
(80,063
)
Other comprehensive loss

 

 

 

 
(18,890
)
 
(18,890
)
 

 
(18,890
)
Net income

 

 

 
22,028

 

 
22,028

 

 
22,028

Balance, September 30, 2020
221,528,870

 
$
2,215

 
$
1,978,604

 
$
(298,981
)
 
$
(23,594
)
 
$
1,658,244

 
$

 
$
1,658,244

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

5


SILA REALTY TRUST, 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, June 30, 2019
136,398,714

 
$
1,364

 
$
1,191,544

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

 
$
2

 
$
1,003,435

Issuance of common stock under the distribution reinvestment plan
1,125,174

 
11

 
10,398

 

 

 
10,409

 

 
10,409

Vesting of restricted stock
7,500

 

 
18

 

 

 
18

 

 
18

Distribution and servicing fees

 

 
5

 

 

 
5

 

 
5

Other offering costs

 

 
(188
)
 

 

 
(188
)
 

 
(188
)
Repurchase of common stock
(93,045
)
 
(1
)
 
(860
)
 

 

 
(861
)
 

 
(861
)
Distributions to common stockholders

 

 

 
(21,798
)
 

 
(21,798
)
 

 
(21,798
)
Distributions to noncontrolling interests

 

 

 

 

 

 
(1
)
 
(1
)
Other comprehensive loss

 

 

 

 
(2,123
)
 
(2,123
)
 

 
(2,123
)
Net loss

 

 

 
(9,630
)
 

 
(9,630
)
 

 
(9,630
)
Balance, September 30, 2019
137,438,343

 
$
1,374

 
$
1,200,917

 
$
(215,943
)
 
$
(7,083
)
 
$
979,265

 
$
1

 
$
979,266


 
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
3,381,111

 
34

 
31,241

 

 

 
31,275

 

 
31,275

Vesting of restricted stock
9,750

 

 
64

 

 

 
64

 

 
64

Distribution and servicing fees

 

 
99

 

 

 
99

 

 
99

Other offering costs

 

 
(477
)
 

 

 
(477
)
 

 
(477
)
Repurchase of common stock
(2,418,760
)
 
(24
)
 
(22,350
)
 

 

 
(22,374
)
 

 
(22,374
)
Distributions to common stockholders

 

 

 
(64,414
)
 

 
(64,414
)
 

 
(64,414
)
Distributions to noncontrolling interests

 

 

 

 

 

 
(1
)
 
(1
)
Other comprehensive loss

 

 

 

 
(13,286
)
 
(13,286
)
 

 
(13,286
)
Net income

 

 

 
995

 

 
995

 

 
995

Balance, September 30, 2019
137,438,343

 
$
1,374

 
$
1,200,917

 
$
(215,943
)
 
$
(7,083
)
 
$
979,265

 
$
1

 
$
979,266

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

6


SILA REALTY TRUST, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
 
Nine Months Ended
September 30,
 
2020
 
2019
Cash flows from operating activities:
 
 
 
Net income attributable to common stockholders
$
22,028

 
$
995

Adjustments to reconcile net income attributable to common stockholders to net cash provided by operating activities:
 
 
 
Depreciation and amortization
80,607

 
50,110

Amortization of deferred financing costs
2,883

 
1,876

Amortization of above-market leases
1,983

 
467

Amortization of below-market leases
(6,050
)
 
(3,905
)
Amortization of origination fee
96

 

Reduction in the carrying amount of right-of-use assets - operating leases, net
701

 
365

Reduction in the carrying amount of right-of-use assets - finance lease, net
1

 

Gain on real estate disposition
(2,703
)
 

Impairment loss on real estate

 
13,000

Straight-line rent
(16,146
)
 
(8,440
)
Stock-based compensation
102

 
64

Changes in operating assets and liabilities:
 
 
 
Accounts payable and other liabilities
1,745

 
(316
)
Accounts payable due to affiliates
(3,350
)
 
(150
)
Other assets
(1,293
)
 
(1,526
)
Net cash provided by operating activities
80,604

 
52,540

Cash flows from investing activities:
 
 
 
Investment in real estate
(16,064
)
 
(69,830
)
Investment in the Internalization Transaction
(25,000
)
 

Proceeds from real estate disposition
6,125

 

Capital expenditures
(21,251
)
 
(6,978
)
Payments of deal costs
(126
)
 
(1,016
)
Real estate deposit
600

 

Net cash used in investing activities
(55,716
)
 
(77,824
)
Cash flows from financing activities:
 
 
 
Payments on notes payable
(2,822
)
 
(1,280
)
Proceeds from credit facility
140,000

 
85,000

Payments on credit facility
(65,000
)
 

Payments of deferred financing costs
(622
)
 
(1,385
)
Repurchase of common stock
(26,461
)
 
(22,374
)
Offering costs on issuance of common stock
(2,384
)
 
(2,825
)
Distributions to common stockholders
(57,321
)
 
(33,329
)
Distributions to noncontrolling interests

 
(1
)
Purchase of noncontrolling interests
(2
)
 

Net cash (used in) provided by financing activities
(14,612
)
 
23,806

Net change in cash, cash equivalents and restricted cash
10,276

 
(1,478
)
Cash, cash equivalents and restricted cash - Beginning of period
80,230

 
79,527

Cash, cash equivalents and restricted cash - End of period
$
90,506

 
$
78,049

Supplemental cash flow disclosure:
 
 
 
Interest paid, net of interest capitalized of $463 and $69, respectively
$
42,103

 
$
30,248

Supplemental disclosure of non-cash transactions:
 
 
 
Common stock issued through distribution reinvestment plan
$
23,055

 
$
31,275

Credit facility revolving loan to term loan conversion
$

 
$
30,000

Accrued capital expenditures
$
1,186

 
$

Accrued deal costs
$
13

 
$
1,966

Deferred internalization transaction purchase price
$
14,674

 
$

Right-of-use assets in exchange for lease liability - operating leases
$
1,060

 
$

Right-of-use assets in exchange for lease liability - finance lease
$
2,854

 
$

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


SILA REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2020
Note 1—Organization and Business Operations
Sila Realty Trust, Inc., formerly known as 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 Sila Realty Operating Partnership, LP f/k/a 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 and, prior to the completion of the Internalization Transaction (as defined herein) on September 30, 2020, Carter Validus Advisors II, LLC, or the Former Advisor, was the special limited partner of the Operating Partnership. As of the closing of the Internalization Transaction, the Company owns directly or indirectly, all of the interests in the Operating Partnership.
Prior to September 30, 2020, the Former Advisor was responsible for managing the Company’s affairs on a day-to-day basis and for identifying and making investments on the Company’s behalf pursuant to an advisory agreement among the Company, the Operating Partnership and the Former Advisor. On July 28, 2020, the Company and the Operating Partnership, entered into a Membership Interest Purchase Agreement, or the Purchase Agreement, to provide for the internalization of the external management functions previously performed for the Company and the Operating Partnership by the Former Advisor and its affiliates, or the Internalization Transaction. On September 30, 2020, the Company closed the Internalization Transaction. Effective September 30, 2020, as a result of the Internalization Transaction, the Former Advisor is no longer affiliated with the Company.
Upon completion of the Internalization, the Company’s current 76 employees, who were previously employed by an affiliate of the Former Advisor, became employees of the Company and the functions previously performed by the Former Advisor were internalized by the Company. As an internally managed company, the Company will no longer pay the Former Advisor and its affiliates any fees or expense reimbursements arising from the advisory agreement.
In addition, on September 30, 2020, the Operating Partnership redeemed the Former Advisor’s limited partner interest (including special limited partner interest) in the Operating Partnership in connection with the Internalization Transaction. On September 30, 2020, the Company and Sila REIT, LLC, f/k/a Carter Validus Mission Critical REIT II, LLC, a Maryland limited liability company that is the sole limited partner of the Operating Partnership, entered into the Third Amended and Restated Agreement of Limited Partnership of the Operating Partnership, or the Third A&R LP Agreement, in order to reflect the completion of the Internalization Transaction.
On September 30, 2020, Articles of Amendment changing the Company’s name from “Carter Validus Mission Critical REIT II, Inc.” to “Sila Realty Trust, Inc.” were filed and accepted for record by the State Department of Assessment and Taxation of the State of Maryland, and thereby became effective as part of the Company’s charter.
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 nine months ended September 30, 2020, the Company acquired two real estate properties and sold one real estate property. See Note 4—"Acquisitions and Dispositions" for additional information. As of September 30, 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, or each, a DRIP Offering and together the DRIP Offerings, since November 2017.
Except as the context otherwise requires, the “Company” refers to Sila Realty Trust, 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 responsibility of management. These accounting policies conform to United States generally accepted

8


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 nine months ended September 30, 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 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, taxes, 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 9—"Other Assets, Net."
The following table presents a reconciliation of the beginning of period and end of period cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets to the totals shown in the condensed consolidated statements of cash flows (amounts in thousands):
 
 
Nine Months Ended
September 30,
 
 
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
 
75,505

 
67,969

Restricted cash
 
15,001

 
10,080

Cash, cash equivalents and restricted cash
 
$
90,506

 
$
78,049

Allocation of Purchase Price of Real Estate
Upon the acquisition of real properties, the Company evaluates whether the acquisition is a business combination or an asset acquisition. For both business combinations and asset acquisitions we allocate the purchase price of properties to acquired tangible assets, consisting of land, buildings and improvements, and acquired intangible assets and liabilities, consisting of the value of above-market and below-market leases and the value of in-place leases. For asset acquisitions, the Company capitalizes transaction costs and allocates the purchase price using a relative fair value method allocating all accumulated costs. For business combinations, the Company expenses transaction costs incurred and allocates the purchase price based on the estimated fair value of each separately identifiable asset and liability. During the nine months ended September 30, 2020, the

9


Company acquired two real estate properties that were determined to be asset acquisitions and closed on the Internalization Transaction that was determined to be a business combination. See Note 3—"Internalization Transaction" and Note 4—"Acquisitions and Dispositions" for additional information. Acquisition fees and costs associated with transactions determined to be asset acquisitions are capitalized in total real estate, net, and acquired intangible assets and acquired intangible liabilities in the accompanying condensed consolidated balance sheets. Transaction costs associated with the Internalization Transaction are expensed and recorded in internalization transaction expenses in the accompanying condensed consolidated statements of comprehensive income (loss).
The fair values of the tangible assets of an acquired property (which includes land, buildings and improvements) are determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land and buildings and improvements based on management’s determination of the relative fair value of these assets. Management determines the as-if-vacant fair value of a property using methods similar to those used by independent appraisers. Factors considered by management in performing these analyses include an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases, including leasing commissions and other related costs. In estimating carrying costs, management includes real estate taxes, insurance, and other operating expenses during the expected lease-up periods based on current market conditions.
The fair values of above-market and below-market in-place leases are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) an estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease including any fixed rate bargain renewal periods, with respect to a below-market lease. The above-market and below-market lease values are capitalized as intangible lease assets or liabilities. Above-market lease values are amortized as an adjustment of rental revenue over the remaining terms of the respective leases. Below-market leases are amortized as an adjustment of rental revenue over the remaining terms of the respective leases, including any fixed rate bargain renewal periods. If a lease were to be terminated prior to its stated expiration, all unamortized amounts of above-market and below-market in-place lease values related to that lease would be recorded as an adjustment to rental revenue.
The fair values of in-place leases include an estimate of direct costs associated with obtaining a new tenant and opportunity costs associated with lost rentals that are avoided by acquiring an in-place lease. Direct costs associated with obtaining a new tenant include commissions, tenant improvements, and other direct costs and are estimated based on management’s consideration of current market costs to execute a similar lease. The value of opportunity costs is calculated using the contractual amounts to be paid pursuant to the in-place leases over a market absorption period for a similar lease. These lease intangibles are amortized to depreciation and amortization expense over the remaining terms of the respective leases. If a lease were to be terminated prior to its stated expiration, all unamortized amounts of in-place lease assets relating to that lease would be expensed.
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.

10


Impairment of Real Estate
During the three and nine months ended September 30, 2020, no impairment losses were recorded on real estate assets.
During the three and nine months ended September 30, 2019, real estate assets related to one healthcare property were determined to be impaired due to a tenant of the property, which was experiencing financial difficulty, vacating its space, and a second tenant indicating its desire to terminate its lease early, which the Company determined would be consistent with its strategic plans for the property. On November 8, 2019, the Company terminated the lease with the second tenant. The aggregate carrying amount of the assets of $40,266,000 exceeded their fair value. The carrying value of the property was reduced to its estimated fair value of $27,266,000, resulting in an impairment charge of $13,000,000, which is included in impairment loss on real estate in the condensed consolidated statements of comprehensive income (loss).
Impairment of Acquired Intangible Assets and Acquired Intangible Liabilities
During the three months ended September 30, 2020, the Company recognized an impairment of one in-place lease intangible asset in the amount of approximately $3,189,000, by accelerating the amortization of the acquired intangible asset related to a tenant in a data center property of the Company that was experiencing financial difficulty due to deteriorating economic conditions driven by the impact of the COVID-19 pandemic and the pandemic’s acceleration of the tenant’s modification of work strategy to a remote environment. During the nine months ended September 30, 2020, the Company recognized impairments of two in-place lease intangible assets in the amount of approximately $4,673,000 and one above-market lease intangible asset in the amount of approximately $344,000, by accelerating the amortization of the acquired intangible assets. Of $4,673,000 in-place lease intangible assets written off, $3,189,000 related to the tenant of the data center property discussed above and $1,484,000 related to one healthcare tenant of the Company that was experiencing financial difficulties and vacated the property on June 19, 2020.
During the three and nine months ended September 30, 2020, the Company wrote off one below-market lease intangible liability in the amount of approximately $1,974,000, by accelerating the amortization of the acquired intangible liability related to one tenant of the data center property discussed above.
During the three and nine months ended September 30, 2019, the Company recognized impairments of in-place lease intangible assets in the amount of approximately $537,000 and $3,195,000, respectively, by accelerating the amortization of the acquired intangible assets related to two tenants in the healthcare property discussed above.
During the three and nine months ended September 30, 2019, the Company wrote off one below-market lease intangible liability in the amount of approximately $212,000, by accelerating the amortization of the acquired intangible liability related to one tenant in the healthcare property discussed above.
Revenue Recognition, Tenant Receivables and Allowance for Uncollectible Accounts
Effective January 1, 2018, the Company recognizes non-rental related revenue in accordance with Accounting Standards Codification, or ASC, 606, Revenue from Contracts with Customers, or ASC 606. The Company has identified its revenue streams as rental income from leasing arrangements and tenant reimbursements, which are outside the scope of ASC 606. The core principle of ASC 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Non-rental revenue, subject to ASC 606, is immaterial to the Company's condensed consolidated financial statements.
The majority of the Company's revenue is derived from rental revenue, which is accounted for in accordance with ASC 842, Leases, or ASC 842. In accordance with ASC 842, minimum rental revenue is recognized on a straight-line basis over the term of the related lease (including rent holidays). For lease arrangements when it is not probable that the Company will collect all or substantially all of the remaining lease payments under the term of the lease, rental revenue is limited to the lesser of the rental revenue that would be recognized on a straight-line basis or the lease payments that have been collected from the lessee. Differences between rental income recognized and amounts contractually due under the lease agreements are credited or charged to straight-line rent receivable or straight-line rent liability, as applicable. Tenant reimbursements, which are comprised of additional amounts recoverable from tenants for common area maintenance expenses and certain other recoverable expenses, is recognized when the services are provided and the performance obligations are satisfied.
Prior to the adoption of ASC 842, tenant receivables and straight-line rent receivables were carried net of the provision for credit losses. The provision for credit losses was established for estimated losses resulting from the inability of certain tenants to meet the contractual obligations under their lease agreements. The Company’s determination of the adequacy of these provisions was based primarily upon evaluations of historical loss experience, the tenant’s financial condition, security deposits, letters of credit, lease guarantees, current economic conditions and other relevant factors. Effective January 1, 2019, upon adoption of ASC 842, the Company is no longer recording a provision for credit losses but is, instead, assessing whether or not it is probable that the Company will collect all or substantially all of the remaining lease payments under the term of the lease.

11


Where it is not probable that the Company will collect all or substantially all of the remaining lease payments under the term of the lease, rental revenue is limited to the lesser of the rental revenue that would be recognized on a straight-line basis or the lease payments that have been collected from the lessee. During the three months ended September 30, 2020 and 2019, the Company recorded $118,000 and $85,000, respectively, as a reduction in rental revenue in the accompanying condensed consolidated statements of comprehensive income (loss). During the nine months ended September 30, 2020 and 2019, the Company recorded $118,000 and $655,000, respectively, as a reduction rental revenue in the accompanying condensed consolidated statements of comprehensive income (loss).
Goodwill
Goodwill represents the excess of the amount paid over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed in a business combination and is allocated to an entity's reporting units. The Company's reporting unit represents each individual operating real estate property. Goodwill has an indefinite life and is not amortized. On September 30, 2020, the Company recorded $39,529,000 of goodwill related to the Internalization Transaction. The Company will evaluate goodwill for impairment when an event occurs or circumstances change that indicate the carrying value may not be recoverable, or at least annually. The Company will evaluate potential triggering events that may affect the estimated fair value of the Company’s reporting units to assess whether any goodwill impairment exists. Deteriorating or adverse market conditions for certain reporting units may have a significant impact on the estimated fair value of these reporting units and could result in future impairments of goodwill. The Company will adopt an annual goodwill testing date during the fourth quarter of 2020. See Note 3—"Internalization Transaction" for details.
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 nine months ended September 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 8—"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 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.
Concentration of Credit Risk and Significant Leases
As of September 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 September 30, 2020, the Company owned real estate investments in two micropolitan statistical areas and 68 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 12.7% and 10.2%, respectively, of rental revenue for the nine months ended September 30, 2020.
As of September 30, 2020, the Company had one exposure to tenant concentration that accounted for 10.0% or more of rental revenue for the nine months ended September 30, 2020. The leases with tenants under common control of Post Acute Medical, LLC accounted for 10.1% of rental revenue for the nine months ended September 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

12


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 and any amendments to the plan, as more fully described below, the SRP is generally 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 continues 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.
Effective as of the closing of the Internalization Transaction, the Operating Partnership redeemed the limited partner interest held by the Former Advisor for an aggregate purchase price of approximately $2,000. Additionally, the Company repurchased 29,362 Class A shares of common stock held by Carter Validus REIT Management Company II, LLC, the Former Sponsor, for an aggregate purchase price of approximately $254,000 (an average of $8.65 per share).
During the nine months ended September 30, 2020, the Company repurchased 3,059,072 Class A shares, Class I shares, Class T shares and Class T2 shares of common stock (2,382,166 Class A shares, 395,334 Class I shares, 258,550 Class T shares and 23,022 Class T2 shares) for an aggregate purchase price of approximately $26,461,000 (an average of $8.65 per share). During the nine months ended September 30, 2019, the Company repurchased 2,418,760 Class A shares, Class I shares, Class T shares and Class T2 shares of common stock (1,816,319 Class A shares, 189,947 Class I shares, 407,095 Class T shares and 5,399 Class T2 shares) for an aggregate purchase price of approximately $22,374,000 (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.
Stock-based Compensation
On March 6, 2020, the Company's board of directors approved the Amended and Restated 2014 Restricted Share Plan, or the A&R Incentive Plan, pursuant to which the Company has the authority and power to grant awards of restricted shares of its Class A common stock to its directors, officers and employees. The Company uses the straight-line method to recognize expenses for service awards with graded vesting. The Company's board of directors has authorized a total of 5,000,000 Class A shares of common stock for issuance under the A&R Incentive Plan on a fully diluted basis at any time. On March 6, 2020, the Company's board of directors determined to revise the amounts of restricted Class A shares of common stock the independent directors are entitled to receive each year. On July 1, 2020, the Company granted each independent director $60,000 in restricted shares of Class A common stock. Restricted shares of Class A common stock issued to the Company’s independent directors in July 2020 will vest over a three-year period following the first anniversary of the date of grant in increments of 33.34% per annum.
The Company’s board of directors determined that, effective upon the closing of the Internalization Transaction, the independent directors are entitled to receive $70,000 each year in restricted shares of Class A common stock of the Company at the most recently determined estimated net asset value per share (was prorated through June 30, 2021), which were issued pursuant to the Company’s A&R Incentive Plan. Restricted shares of Class A common stock issued to the independent directors will vest over a one-year period.
On October 1, 2020, the Company granted each independent director $7,500 in restricted shares of Class A common stock, which will vest over a one-year period.

13


Executive Awards
Concurrently with, and as a condition to the execution and delivery of the Purchase Agreement on July 28, 2020, the Company entered into an employment agreement with each of Michael A. Seton and Kay C. Neely, or the Executives, pursuant to which Mr. Seton and Ms. Neely shall serve from and after the closing of the Internalization Transaction as the Company’s Chief Executive Officer and Chief Financial Officer, respectively. Such employment agreements became effective on September 30, 2020.
Subject to each Executive’s continued employment through the grant date, in the first quarter of calendar year 2021, each Executive will receive an award of time-based restricted shares of Class A common stock, or the Time-Based 2021 Award, and an award of performance-based restricted stock units, or the Performance-Based 2021 Award, and together with the Time-Based 2021 Award, the “2021 Awards”, each to be granted under and subject to the terms of the Company’s A&R Incentive Plan and award agreements. In the case of Mr. Seton, the combined value of the shares of the Company’s common stock underlying the 2021 Awards on the grant date will be $1,800,000, with 50% of the grant date value of the 2021 Awards consisting of the Performance-Based 2021 Award and 50% consisting of the Time-Based 2021 Award. In the case of Ms. Neely, the combined value of the shares of the Company’s common stock underlying the 2021 Awards will be $700,000, with 50% of the grant date value of the 2021 Awards consisting of the Performance-Based 2021 Award and 50% consisting of the Time-Based 2021 Award. The performance objectives and other terms and conditions of the Performance-Based 2021 Award will be determined by the Company's compensation committee, which was established and effective upon the closing of the Internalization Transaction. The Time-Based 2021 Award will vest ratably over four years following the grant date, subject to the Executive’s continued employment through the applicable vesting dates, with certain exceptions.
On October 1, 2020, Mr. Seton and Ms. Neely received a grant of 231,214 and 115,607 time-based restricted shares of Class A common stock, respectively, with a grant date fair value of $2,000,000 and $1,000,000, respectively, which, subject to the Executive’s continuous employment through the applicable vesting dates, with certain exceptions, will vest on December 31, 2024, or, if earlier, on the 15th month anniversary of the date of a “qualified event” (such as a listing of the Company’s stock on a nationally recognized stock exchange or an underwritten public offering of the Company’s stock). The awards were granted under and subject to the terms of the A&R Incentive Plan and an award agreement.
Additionally, on October 1, 2020, the Company granted one-time awards of approximately 206,936 restricted shares of Class A common stock to certain employees at the most recent estimated net asset value per share of $8.65. The granted shares will vest on December 31, 2024, or, if earlier, on the 15th month anniversary of the date of a “qualified event” defined above. The awards were granted under and subject to the terms of the A&R Incentive Plan and an award agreement.
Earnings Per Share
The Company calculates basic earnings per share by dividing net income (loss) 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 nine months ended September 30, 2020, diluted earnings per share reflected the effect of approximately 60,000 and 42,000 of non-vested shares of restricted common stock that were outstanding as of each period, respectively. During the three months ended September 30, 2019, diluted earnings per share was computed the same as basic earnings per share because the Company recorded a net loss attributable to common stockholders, which would make potentially dilutive shares related to non-vested shares of restricted common stock, antidilutive. During the nine months ended September 30, 2019, diluted earnings per share reflected the effect of approximately 23,000 of non-vested shares of restricted common stock that were outstanding as of such period.
Reportable Segments
ASC, 280, Segment Reporting, establishes standards for reporting financial and descriptive information about an enterprise’s reportable segments. As of September 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 13—"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

14


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 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 income (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 15—"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 tenants in healthcare and data center 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. 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 nine months ended September 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 nine months ended September 30, 2020, the Company entered into 30 rent concessions and lease modifications impacted by COVID-19 and collected approximately 98% 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 September 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. 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 new model for estimated credit losses is applicable to the Company's notes receivable and tenant reimbursements related to the finance lease. 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.

15


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 nine months ended September 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.

16


Note 3—Internalization Transaction
Overview
On July 28, 2020, the Company and the Operating Partnership entered into the Purchase Agreement, to effectively provide for the internalization of the Company’s external management functions. The Purchase Agreement was entered into with the Former Advisor, and various affiliates of the Former Advisor, or the Sellers, and Sila Realty Management Company, LLC, f/k/a CV Manager, LLC, a newly formed Delaware limited liability company, or Manager Sub.
The Internalization Transaction closed on September 30, 2020. A special committee comprised entirely of independent and disinterested members of the Company's board of directors, negotiated the Internalization Transaction and, after consultation with its independent legal and financial advisors, determined that the Internalization Transaction is advisable, fair and reasonable to and in the Company’s best interests and on terms and conditions no less favorable to the Company than those available from unaffiliated third parties. The Company anticipates that the Internalization Transaction will provide various benefits, including cost savings, continuity of management and further alignment of interests between management and its stockholders, as well as a potential benefit for ultimate liquidity given the preference for an internal management structure in traded equity REITs.
Under the Purchase Agreement and related agreements, immediately prior to the closing of the Internalization Transaction, the Sellers assigned to Manager Sub all of the assets necessary to operate the business of the Company and its subsidiaries, or the Business, and delegated all obligations of the Sellers in connection with the Business to Manager Sub pursuant to an assignment and acceptance agreement.
On September 30, 2020, or the Closing, under the Purchase Agreement, the Operating Partnership (i) acquired 100% of the membership interests in Manager Sub for an aggregate cash purchase price of $40,000,000, subject to certain adjustments, or the Purchase Price, and (ii) redeemed the Former Advisor’s limited partner interest (including special limited partner interest) in the Operating Partnership. The Purchase Price will be paid as follows, subject to certain acceleration provisions: (i) $25,000,000 was paid at the closing, (ii) $7,500,000 will be due and payable on March 31, 2021, and (iii) $7,500,000 will be due and payable on March 31, 2022.
Concurrently with, and as a condition to the execution and delivery of the Purchase Agreement, the Company entered into an employment agreement with each of Michael A. Seton and Kay C. Neely, pursuant to which Mr. Seton and Ms. Neely shall serve from and after the closing as the Company’s Chief Executive Officer and Chief Financial Officer, respectively. Such employment agreements were effective at and upon the Closing.
Allocation of Purchase Price
The Internalization Transaction was accounted for as a business combination and the following table summarizes management’s allocation of the fair value of the Internalization Transaction (amounts in thousands):
 
September 30, 2020
Goodwill
$
39,529

Right-of-use assets - operating lease
1,205

Total assets acquired
40,734

Operating lease liabilities
(1,060
)
Deferred internalization transaction purchase price
(14,674
)
Total liabilities acquired
(15,734
)
Net assets allocated at acquisition
$
25,000


17


Pro Forma Financial Information
Assuming the Internalization Transaction had occurred on January 1, 2019, pro forma revenues and net income attributable to common stockholders would have been as follows for the periods presented below (amounts in thousands, except per share amounts, unaudited):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2020
 
2019
 
2020
 
2019
Pro forma basis:
 
 
 
 
 
 
 
Revenues
$
70,667

 
$
48,063

 
$
208,727

 
$
141,467

Net income (loss) attributable to common stockholders
$
12,879

 
$
(8,171
)
 
$
42,175

 
$
6,560

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

 
$
(0.06
)
 
$
0.19

 
$
0.05

Diluted
$
0.06

 
$
(0.06
)
 
$
0.19

 
$
0.05

The condensed pro forma financial statements for the three and nine months ended September 30, 2020 and 2019 include pro forma adjustments related to the Internalization Transaction during 2019 and 2020. The pro forma information for the three and nine months ended September 30, 2020 was adjusted to exclude approximately $2,235,000 and $3,640,000, respectively, of internalization transaction expenses. Internalization transaction expenses consist primarily of legal fees, as well as fees for other professional and financial advisors. The pro forma information may not be indicative of what actual results of operations would have been had the transaction occurred at the beginning of 2019, nor is it necessarily indicative of future operating results.

18


Note 4—Acquisitions and Dispositions
2020 Real Estate Property Acquisitions
During the nine months ended September 30, 2020, the Company purchased two real estate properties, or the 2020 Acquisitions, both of which were determined to be asset acquisitions. Upon the completion of each 2020 Acquisition, the Company allocated the purchase price of the real estate properties to acquired tangible assets, consisting of land, buildings and improvements and tenant improvements, acquired intangible assets, consisting of in-place leases, and acquired intangible liabilities, consisting of ground lease liabilities and below-market leases, based on the relative fair value method of allocating all accumulated costs.
The following table summarizes the consideration transferred for the 2020 Acquisitions during the nine months ended September 30, 2020:
Property Description
 
Date Acquired
 
Ownership Percentage
 
Purchase Price
(amounts in thousands)
Grimes Healthcare Facility
 
02/19/2020
 
100%
 
$
5,030

Tampa Healthcare Facility
 
09/08/2020
 
100%
 
11,047

Total
 
 
 
 
 
$
16,077

The following table summarizes the Company's purchase price allocation of the 2020 Acquisitions during the nine months ended September 30, 2020 (amounts in thousands):
 
 
Total
Land
 
$
831

Buildings and improvements
 
13,524

Tenant improvements
 
463

In-place leases
 
1,748

Right-of-use assets - finance lease
 
2,534

Total assets acquired
 
19,100

Finance lease liabilities
 
(2,854
)
Below-market leases
 
(169
)
Total liabilities acquired
 
(3,023
)
Net assets acquired
 
$
16,077

Acquisition fees and costs associated with transactions determined to be asset acquisitions are capitalized. The Company capitalized acquisition fees and costs of approximately $252,000 related to the 2020 Acquisitions, 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 nine months ended September 30, 2020, acquisition fees and costs did not exceed 6.0% of the contract purchase price of the 2020 Acquisitions during such period.
2020 Real Estate Property 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 $6,125,000, 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 nine months ended September 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 8—"Notes Receivable, Net" for additional information.

19


Note 5—Acquired Intangible Assets, Net
Acquired intangible assets, net, consisted of the following as of September 30, 2020 and December 31, 2019 (amounts in thousands, except weighted average remaining life amounts):
 
September 30, 2020
 
December 31, 2019
In-place leases, net of accumulated amortization of $79,650 and $62,252, respectively (with a weighted average remaining life of 10.0 years and 10.4 years, respectively)
$
238,388

 
$
266,856

Above-market leases, net of accumulated amortization of $3,518 and $1,912, respectively (with a weighted average remaining life of 10.1 years and 10.5 years, respectively)
16,045

 
18,603

 
$
254,433

 
$
285,459

The aggregate weighted average remaining life of the acquired intangible assets was 10.0 years and 10.4 years as of September 30, 2020 and December 31, 2019, respectively.
Amortization of the acquired intangible assets was $11,163,000 and $5,644,000 for the three months ended September 30, 2020 and 2019, respectively. Amortization of the acquired intangible assets was $29,964,000 and $18,539,000 for the nine months ended September 30, 2020 and 2019, respectively. Of the $11,163,000 recorded for the three months ended September 30, 2020, $3,189,000 was attributable to accelerated amortization due to the impairment of one in-place lease intangible asset. Of the $29,964,000 recorded for the nine months ended September 30, 2020, $5,017,000 was attributable to accelerated amortization due to the impairment of two in-place lease intangible assets and one above-market lease intangible asset. Of the $5,644,000 and $18,539,000 recorded for the three and nine months ended September 30, 2019, respectively, $537,000 and $3,195,000, respectively, was attributable to accelerated amortization due to the impairment of two in-place lease intangible assets. 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 6—Acquired Intangible Liabilities, Net
Acquired intangible liabilities, net, consisted of the following as of September 30, 2020 and December 31, 2019 (amounts in thousands, except weighted average remaining life amounts):
 
September 30, 2020
 
December 31, 2019
Below-market leases, net of accumulated amortization of $12,827 and $12,332, respectively (with a weighted average remaining life of 16.4 years and 16.1 years, respectively)
$
53,657

 
$
59,538

Amortization of the below-market leases was $3,293,000 and $1,441,000 for the three months ended September 30, 2020 and 2019, respectively, and $6,050,000 and $3,905,000 for the nine months ended September 30, 2020 and 2019, respectively. Of the $3,293,000 and $6,050,000 recorded for the three and nine months ended September 30, 2020, respectively, $1,974,000 was attributable to accelerated amortization of a below-market lease intangible liability. Of the $1,441,000 and $3,905,000 recorded for the three and nine months ended September 30, 2019, respectively, $212,000 was attributable to accelerated amortization of a below-market lease intangible liability. Amortization of below-market leases is recorded as an adjustment to rental revenue in the accompanying condensed consolidated statements of comprehensive income (loss).

20


Note 7—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-cancellable operating leases in effect as of September 30, 2020, including optional renewal periods, for the three 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
Three months ending December 31, 2020
 
$
54,645

2021
 
224,360

2022
 
231,872

2023
 
234,526

2024
 
230,762

Thereafter
 
1,642,130

Total (1)
 
$
2,618,295

 
(1)
The total future rent amount of $2,618,295,000 includes approximately $54,440,000 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
Operating Leases
The Company has entered into various non-cancellable operating lease agreements for 17 ground leases and one office lease related to the Company’s principal executive office in Tampa, Florida, or the Corporate Lease. Of the 17 ground operating leases entered into, four do not have corresponding operating lease liabilities because the Company did not have future payment obligations at the acquisition of these leases.
In connection with the Internalization Transaction on September 30, 2020, the Company acquired the Corporate Lease, with an operating lease liability of $1,060,000. The Corporate Lease of 24,555 square feet of office space expires on January 21, 2022.
The Company incurred operating lease costs associated with its ground operating leases of $642,000 and $271,000 for the three months ended September 30, 2020 and 2019, respectively, and $1,926,000 and $766,000 for the nine months ended September 30, 2020 and 2019, respectively, which are recorded as rental expenses in the condensed consolidated statements of comprehensive income (loss). The Company was reimbursed by tenants who sublease the ground leases $401,000 and $127,000 for incurred operating lease costs for the three months ended September 30, 2020 and 2019, respectively, and $1,202,000 and $380,000 for the nine months ended September 30, 2020 and 2019, respectively. The tenant reimbursements for ground leases are recorded as rental revenue in the condensed consolidated statements of comprehensive income (loss). The Company did not incur any operating lease costs associated with its Corporate Lease for the three and nine months ended September 30, 2020.

21


The future rent payments, discounted by the Company's incremental borrowing rates, under non-cancellable operating leases, as of September 30, 2020, for the three 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
Three months ending December 31, 2020
 
$
613

2021
 
2,464

2022
 
1,682

2023
 
1,638

2024
 
1,687

Thereafter
 
136,719

Total undiscounted rental payments
 
144,803

Less imputed interest
 
(112,589
)
Total operating lease liabilities
 
$
32,214

The Company's operating and finance leases do not provide an implicit interest rate. In order to calculate the present value of the remaining operating and finance 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 operating or finance lease.
As of September 30, 2020, the IBRs ranged between 3.5% and 6.6%, with the weighted average IBR for the Company's operating leases of 5.7%. The weighted average remaining lease term for the Company's operating leases was 48.3 years and 50.7 years as of September 30, 2020 and December 31, 2019, respectively.
Finance Leases
During the three and nine months ended September 30, 2020, the Company entered into one non-cancellable ground lease agreement for an aggregate present value of future rent payments of $2,854,000. The ground lease obligations generally require fixed annual rental payments and may also include escalation clauses. The lease represents a finance lease, as defined in ASC 842, Leases. Ground lease expenses for finance lease payments are recognized as amortization expense of the ROU asset - finance lease and interest expense on the finance lease liability over the lease term.
The Company recognized amortization expense of the ROU asset - finance lease of $1,000 for the three and nine months ended September 30, 2020, and is recorded as depreciation and amortization in the condensed consolidated statements of comprehensive income (loss). The Company recognized interest on the finance lease liability of $10,000 for the three and nine months ended September 30, 2020, and is recorded as interest and other expense, net, in the condensed consolidated statements of comprehensive income (loss).
The future rent payments, discounted by the Company's incremental borrowing rates, under non-cancellable finance leases, as of September 30, 2020, for the three 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
Three months ending December 31, 2020
 
$
37

2021
 
147

2022
 
147

2023
 
147

2024
 
152

Thereafter
 
7,264

Total undiscounted rental payments
 
7,894

Less imputed interest
 
(5,040
)
Total finance lease liabilities
 
$
2,854

As of September 30, 2020, the Company's IBR for its finance lease was 5.3% and a remaining lease term of 43.7 years.

22


Note 8—Notes Receivable, Net
As of September 30, 2020, the Company had two notes receivable outstanding in the amount of $31,327,000 secured by real estate properties.
The following summarizes the notes receivable balances as of September 30, 2020 and December 31, 2019:
 
September 30, 2020
 
December 31, 2019
 
Interest Rate (1)
 
Maturity Date
Note receivable
$
2,700

 
$
2,700

 
6.0%
 
11/05/2020
Note receivable
28,627

 

 
7.0%
 
06/01/2022
Total notes receivable
$
31,327

 
$
2,700

 
 
 
 

(1)
As of September 30, 2020.
As described in Note 4—"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 nine months ended September 30, 2020, the Company recognized $501,000 and $686,000, respectively, of interest income on notes receivable, offset by amortization of a loan origination fee in the amount of $70,000 and $96,000, respectively, which were both recorded in interest and other expense, net, in the accompanying condensed consolidated statements of comprehensive income (loss). As of September 30, 2020, the Company had an unamortized loan origination fee in the amount of $464,000, which was recorded in notes receivable, net, in the accompanying condensed consolidated balance sheets.
On November 5, 2020, one of the Company's notes receivable with an outstanding balance of $2,700,000, became delinquent. The note receivable is secured by (i) a payment guaranty from a parent company to the borrower of the note receivable, and (ii) the equity interest in a healthcare real estate property that the Company believes has sufficient value to cover the note receivable if the Company exercises its rights to take possession of the asset. The Company is in process of evaluating its options for repayment, including the option to continue to attempt collection, enforcing the guaranty or other legal options of recovering the note receivable's value.
Expected Credit Losses
As of September 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 nine months ended September 30, 2020, because the Company believes that the collateral for these loans was sufficient to cover its investment.

23


Note 9—Other Assets, Net
Other assets, net, consisted of the following as of September 30, 2020 and December 31, 2019 (amounts in thousands):
 
September 30, 2020
 
December 31, 2019
Deferred financing costs, related to the revolver portion of the credit facility, net of accumulated amortization of $6,584 and $5,696, respectively
$
1,951

 
$
2,623

Leasing commissions, net of accumulated amortization of $601 and $240, respectively
11,624

 
10,288

Restricted cash
15,001

 
10,888

Tenant receivables
6,482

 
6,116

Straight-line rent receivable, net
64,672

 
48,526

Prepaid and other assets
3,683

 
4,709

Derivative assets

 
884

 
$
103,413

 
$
84,034

Note 10—Accounts Payable and Other Liabilities
Accounts payable and other liabilities consisted of the following as of September 30, 2020 and December 31, 2019 (amounts in thousands):
 
September 30, 2020
 
December 31, 2019
Accounts payable and accrued expenses
$
14,920

 
$
11,448

Accrued interest expense
4,258

 
5,185

Accrued property taxes
6,131

 
3,537

Distribution and servicing fees
3,818

 

Distributions payable to stockholders
8,780

 
9,093

Tenant deposits
1,058

 
1,500

Deferred rental income
7,670

 
9,003

Deferred internalization transaction purchase price (1)
14,674

 

Derivative liabilities
23,594

 
5,588

 
$
84,903

 
$
45,354

 
(1)
Represents the assumed liability recorded at fair value as a part of the Internalization Transaction. See Note 3—"Internalization Transaction" for additional information.

24


Note 11—Notes Payable and Credit Facility
The Company's debt outstanding as of September 30, 2020 and December 31, 2019, consisted of the following (amounts in thousands):
 
September 30, 2020
 
December 31, 2019
Notes payable:
 
 
 
Fixed rate notes payable
$
218,712

 
$
219,567

Variable rate notes payable fixed through interest rate swaps
235,811

 
237,778

Total notes payable, principal amount outstanding
454,523

 
457,345

Unamortized deferred financing costs related to notes payable
(2,027
)
 
(2,500
)
Total notes payable, net of deferred financing costs
452,496

 
454,845

Credit facility:
 
 
 
Variable rate revolving line of credit
183,000

 
108,000

Variable rate term loan fixed through interest rate swaps
500,000

 
250,000

Variable rate term loans
300,000

 
550,000

Total credit facility, principal amount outstanding
983,000

 
908,000

Unamortized deferred financing costs related to the term loan credit facility
(6,343
)
 
(7,385
)
Total credit facility, net of deferred financing costs
976,657

 
900,615

Total debt outstanding
$
1,429,153

 
$
1,355,460

Significant debt activity during the nine months ended September 30, 2020 and subsequent, excluding scheduled principal payments, includes:
During the nine months ended September 30, 2020, the Company drew $140,000,000 on its credit facility, $20,000,000 of which was related to a property acquisition and the funding of share repurchases, $75,000,000 was drawn to provide additional liquidity due to the uncertainty in overall economic conditions created by the COVID-19 pandemic and $45,000,000 was related to another property acquisition and the Internalization Transaction. During the nine months ended September 30, 2020, the Company repaid $65,000,000 on its credit facility. Additionally, on November 12, 2020, the Company repaid $45,000,000 on its credit facility.
During the nine months ended September 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 London Interbank Offered Rate, or LIBOR, related to $150,000,000 of the term loans of the credit facility.
During the nine months ended September 30, 2020, two interest rate swap agreements, which the Company entered into in June 2020, with an effective date of July 1, 2020, effectively fixed 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. During the quarter ended September 30, 2020, the Company amended the mortgage loan agreement to, among other things, modify the rent coverage ratio beginning with the quarter ended September 30, 2020, through the quarter ending June 30, 2021. As of September 30, 2020, the Company was in compliance with all covenants in the mortgage loan agreement.
On July 10, 2020, the Company, the Operating Partnership, certain of the Company's subsidiaries, KeyBank National Association and the other lenders listed as lenders in the Company’s credit agreement and term loan agreement entered into second amendments to such agreements due to certain rent concessions provided to tenants as a result of the COVID-19 pandemic and their impact on the amount available to be drawn under the Company’s credit facility. In particular, the second amendments (i) modify the calculation of Adjusted Net Operating Income, or ANOI, such that beginning with the second quarter of 2020 and continuing thereafter, ANOI is calculated using a trailing 12 month accrual method, rather than a trailing six month annualized cash-based approach, and waives a rent coverage ratio requirement with respect to certain healthcare pool properties beginning with the quarter ended June 30, 2020 through and including the quarter ending June 30, 2021, and (ii) provide updated provisions for the conversion of the benchmark interest rate from LIBOR to an alternate index rate adopted by the Federal Reserve Board and the Federal Reserve Bank of New York following the occurrence of certain transition events.

25


The principal payments due on the notes payable and credit facility as of September 30, 2020, for the three 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
Three months ending December 31, 2020
 
$
1,102

2021
 
146,026

2022
 
349,209

2023
 
282,710

2024
 
547,360

Thereafter
 
111,116

 
 
$
1,437,523

Note 12—Related-Party Transactions and Arrangements
Prior to the closing of the Internalization Transaction, the Company had no direct employees. Substantially all of the Company's business was managed by the Former Advisor. The employees of the Former Advisor and its affiliates provided services to the Company related to acquisitions, property management, asset management, accounting, investor relations and all other administrative services.
Upon completion of the Internalization, the Company’s current employees, who were previously employed by an affiliate of the Former Advisor, became employees of the Company and the functions previously performed by the Former Advisor were internalized by the Company. As an internally managed company, the Company will no longer pay the Former Advisor and its affiliates any fees or expense reimbursements arising from the advisory agreement. Additionally, the Company concluded that there were no preexisting relationships between the Former Advisor and the Company that had to be settled and accounted for as separate transactions from the Internalization Transaction.
Special Limited Partner Interest of Advisor
Prior to the closing of the Internalization Transaction, the Former Advisor, as the special limited partner of the Operating Partnership, was 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 Former 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.
The Former Advisor's special limited partnership interest in the Operating Partnership was redeemed and cancelled at the closing of the Internalization Transaction and the Former Advisor did not receive any compensation as a special limited partner of the Operating Partnership.
Distribution and Servicing Fees
Through the termination of the Offering on November 27, 2018, the Company paid SC Distributors, LLC, an affiliate of the Former 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. Effective September 30, 2020, as a result of the Internalization Transaction, the Dealer Manager is no longer a related party of the Company.
Acquisition Fees and Expenses
Prior to entering into the Purchase Agreement for the Internalization Transaction on July 28, 2020, the Company paid to the Former 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).
Since the Company's formation through the closing of the Internalization Transaction on September 30, 2020, the Company reimbursed the Former 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 did not

26


close), such as legal fees and expenses, costs of real estate due diligence, appraisals, non-refundable option payments on properties not acquired, travel and communications expenses, accounting fees and expenses and title insurance premiums, whether or not the property was acquired. The Company reimbursed the Former Advisor expenses of approximately 0.01% of the aggregate purchase price all of properties acquired. In connection with Tampa Healthcare Facility acquired on September 8, 2020, the Company did not pay acquisition fees to its Former Advisor, in accordance with the Purchase Agreement.
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
Prior to the closing of the Internalization Transaction, the Company paid to the Former 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 was payable monthly, in arrears.
Operating Expense Reimbursement
Prior to the closing of the Internalization Transaction, the Company reimbursed the Former 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 exceeded the greater of (a) 2% of average invested assets or (b) 25% of net income, subject to certain adjustments, were not reimbursed unless the independent directors determined such excess expenses were justified. The Company did not reimburse the Former Advisor for personnel costs in connection with services for which the Former Advisor received 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, prior to the closing of the Internalization Transaction, the Company paid Carter Validus Real Estate Management Services II, LLC, a wholly-owned subsidiary of the Former Sponsor, or the Former Property Manager, and its affiliates, aggregate fees equal to 3.0% of gross revenues from the properties managed, or property management fees. The Company reimbursed the Former Property Manager and its affiliates for property-level expenses that any of them paid or incurred on the Company’s behalf, including certain salaries, bonuses and benefits of persons employed by the Former Property Manager and its affiliates, except for the salaries, bonuses and benefits of persons who also served as one of its executive officers. For certain properties the Former Property Manager and its affiliates subcontracted the performance of their duties to third parties and paid all or a portion of the property management fee to the third parties with whom they contracted for those services. When the Company contracted directly with third parties for such services, it paid such third parties customary market fees and paid the Former Property Manager an oversight fee equal to 1.0% of the gross revenues of the properties managed. In no event did the Company pay the Former 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
Prior to the closing of the Internalization Transaction, the Company paid the Former 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. 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
Prior to the closing of the Internalization Transaction, 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 paid the Former 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.

27


Disposition Fees
Prior to the closing of the Internalization Transaction, the Company paid its Former Advisor, or its affiliates, if the Former Advisor or its affiliate provided 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 was also involved, without exceeding the lesser of 6.0% of the contract sales price or a reasonable, customary and competitive real estate commission.
The following table details amounts incurred in connection with the Company's related-party transactions as described above for the three and nine months ended September 30, 2020 and 2019 (amounts in thousands):
 
 
 
 
Incurred
 
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
Fee
 
Entity
 
2020
 
2019
 
2020
 
2019
Distribution and servicing fees(1)
 
SC Distributors, LLC
 
$
(6
)
 
$
(5
)
 
$
(65
)
 
$
(99
)
Acquisition fees and costs
 
Carter Validus Advisors II, LLC and its affiliates
 

 
1,366

 
97

 
1,366

Asset management fees
 
Carter Validus Advisors II, LLC and its affiliates
 
5,989

 
3,540

 
17,914

 
10,527

Property management fees
 
Carter Validus Real Estate Management Services II, LLC
 
1,702

 
1,195

 
5,290

 
3,632

Operating expense reimbursement
 
Carter Validus Advisors II, LLC and its affiliates
 
1,302

 
766

 
3,966

 
3,246

Leasing commission fees
 
Carter Validus Real Estate Management Services II, LLC
 
111

 

 
594

 
98

Construction management fees
 
Carter Validus Real Estate Management Services II, LLC
 
97

 
(14
)
 
435

 
150

Disposition fees
 
Carter Validus Advisors II, LLC and its affiliates
 

 

 
350

 

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

 

 
560

 

Total
 
 
 
$
9,195

 
$
6,848

 
$
29,141

 
$
18,920

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

 
$
6,210

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

 
2,100

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

 
433

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

 
518

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

 
299

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

 
199

Total
 
 
 
$

 
$
9,759

Note 13—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, internalization transaction expenses, asset management fees, gain on real estate disposition, impairment loss on real estate 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

28


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, notes receivable, right-of-use assets - operating leases attributable to the Corporate Lease and deferred financing costs attributable to the revolving line of credit portion of the Company's credit facility not attributable to individual properties.
On September 30, 2020, the Company recorded $39,529,000 of goodwill related to the Internalization Transaction that was allocated to a separately identified reporting unit. The Company's reporting unit represents each individual operating real estate property and meets aggregation criteria to be grouped into two reportable segments- data centers and healthcare.
Summary information for the reportable segments during the three and nine months ended September 30, 2020 and 2019 is as follows (amounts in thousands):
 
Data Centers
 
Healthcare
 
Three Months Ended
September 30, 2020
Revenue:
 
 
 
 
 
Rental revenue
$
29,945

 
$
40,722

 
$
70,667

Expenses:
 
 
 
 
 
Rental expenses
(7,663
)
 
(4,405
)
 
(12,068
)
Segment net operating income
$
22,282

 
$
36,317

 
58,599

 
 
 
 
 
 
Expenses:
 
 
 
 
 
General and administrative expenses
 
 
 
 
(3,578
)
Internalization transaction expenses
 
 
 
 
(2,235
)
Asset management fees
 
 
 
 
(5,989
)
Depreciation and amortization
 
 
 
 
(28,249
)
Income from operations
 
 
 
 
18,548

Interest and other expense, net
 
 
 
 
(13,284
)
Net income attributable to common stockholders
 
 
 
 
$
5,264


 
Data Centers
 
Healthcare
 
Three Months Ended
September 30, 2019
Revenue:
 
 
 
 
 
Rental revenue
$
28,230

 
$
19,833

 
$
48,063

Expenses:
 
 
 
 
 
Rental expenses
(8,414
)
 
(2,326
)
 
(10,740
)
Segment net operating income
$
19,816