UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2017
OR
☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-37887
MEDEQUITIES REALTY TRUST, INC.
(Exact Name of Registrant as Specified in its Charter)
Maryland |
46-5477146 |
( State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer
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3100 West End Avenue, Suite 1000 Nashville, TN |
37203 |
(Address of principal executive offices) |
(Zip Code) |
Registrant’s telephone number, including area code: (615) 627-4710
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 |
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Accelerated filer |
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Non-accelerated filer |
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☒ (Do not check if a small reporting company) |
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Small reporting company |
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☐ |
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Emerging growth company |
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☒ |
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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 ☒
As of May 3, 2017 the registrant had 31,774,499 shares of common stock outstanding.
MEDEQUITIES REALTY TRUST, INC. AND SUBSIDIARIES
Table of Contents
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Page |
PART I. |
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Item 1. |
3 |
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3 |
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4 |
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5 |
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6 |
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7 |
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8 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
15 |
Item 3. |
25 |
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Item 4. |
25 |
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PART II. |
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Item 1. |
25 |
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Item 1A. |
25 |
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Item 2. |
26 |
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Item 3. |
26 |
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Item 4. |
26 |
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Item 5. |
26 |
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Item 6. |
26 |
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27 |
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28 |
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2
PART I. FINANCI AL INFORMATION
MEDEQUITIES REALTY TRUST, INC. AND SUBSIDIARIES
(in thousands, except per share amounts)
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March 31, 2017 |
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December 31, 2016 |
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(Unaudited) |
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Assets |
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Real estate properties |
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Land |
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$ |
39,584 |
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$ |
39,584 |
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Building and improvements |
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441,100 |
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440,927 |
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Intangible lease assets |
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11,387 |
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11,387 |
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Furniture, fixtures, and equipment |
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2,976 |
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2,976 |
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Less accumulated depreciation and amortization |
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(29,777 |
) |
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(26,052 |
) |
Total real estate properties, net |
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465,270 |
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468,822 |
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Mortgage notes receivable, net |
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22,417 |
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9,915 |
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Cash and cash equivalents |
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7,806 |
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9,509 |
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Other assets, net |
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33,202 |
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31,507 |
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Total Assets |
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$ |
528,695 |
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$ |
519,753 |
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Liabilities and Equity |
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Liabilities |
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Debt, net |
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$ |
155,699 |
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$ |
144,000 |
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Accounts payable and accrued liabilities |
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14,414 |
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15,244 |
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Deferred revenue |
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1,365 |
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2,251 |
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Total liabilities |
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171,478 |
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161,495 |
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Commitments and contingencies |
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Equity |
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Common stock, $0.01 par value. Authorized 400,000 shares; 31,775 and 31,757 issued and outstanding at March 31, 2017 and December 31, 2016, respectively |
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314 |
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314 |
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Additional paid in capital |
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373,518 |
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372,615 |
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Dividends declared |
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(47,719 |
) |
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(40,951 |
) |
Retained earnings |
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28,305 |
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23,774 |
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Accumulated other comprehensive income |
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370 |
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- |
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Total MedEquities Realty Trust, Inc. stockholders' equity |
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354,788 |
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355,752 |
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Noncontrolling interest |
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2,429 |
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2,506 |
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Total equity |
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357,217 |
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358,258 |
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Total Liabilities and Equity |
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$ |
528,695 |
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$ |
519,753 |
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See accompanying notes to interim consolidated financial statements.
3
MEDEQUITIES REALTY TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(in thousands, except per share amounts)
(Unaudited)
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Three Months Ended March 31, |
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2017 |
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2016 |
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Revenues |
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Rental income |
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$ |
13,839 |
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$ |
14,604 |
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Interest on mortgage notes receivable |
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433 |
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229 |
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Interest on notes receivable |
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10 |
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15 |
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Total revenues |
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14,282 |
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14,848 |
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Expenses |
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Depreciation and amortization |
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3,618 |
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3,659 |
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Property related |
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352 |
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321 |
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Acquisition related |
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66 |
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17 |
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Franchise, excise and other taxes |
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86 |
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105 |
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General and administrative |
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3,171 |
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2,771 |
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Total operating expenses |
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7,293 |
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6,873 |
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Operating income |
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6,989 |
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7,975 |
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Other income (expense) |
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Interest and other income |
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1 |
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1 |
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Interest expense |
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(1,515 |
) |
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(3,125 |
) |
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(1,514 |
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(3,124 |
) |
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Net income |
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$ |
5,475 |
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$ |
4,851 |
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Less: Preferred stock dividends |
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- |
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(2,465 |
) |
Less: Net income attributable to noncontrolling interest |
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(944 |
) |
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(1,355 |
) |
Net income attributable to common stockholders |
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$ |
4,531 |
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$ |
1,031 |
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Net income attributable to common stockholders per share |
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Basic and diluted |
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$ |
0.14 |
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$ |
0.09 |
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Weighted average shares outstanding |
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Basic |
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31,415 |
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10,959 |
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Diluted |
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31,415 |
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11,054 |
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Dividends declared per common share |
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$ |
0.21 |
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$ |
- |
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See accompanying notes to interim consolidated financial statements.
4
MEDE QUITIES REALTY TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(in thousands)
(Unaudited)
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Three Months Ended March 31, |
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2017 |
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2016 |
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Net income |
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$ |
5,475 |
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$ |
4,851 |
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Other comprehensive income: |
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Increase in fair value of cash flow hedge |
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370 |
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- |
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Total other comprehensive income |
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|
370 |
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- |
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Comprehensive income |
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5,845 |
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4,851 |
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Less: comprehensive income attributable to noncontrolling interest |
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(944 |
) |
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(1,355 |
) |
Comprehensive income attributable to common stockholders |
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$ |
4,901 |
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$ |
3,496 |
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See accompanying notes to interim consolidated financial statements.
5
MEDEQUITIES REALTY TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Equity
(in thousands)
(Unaudited)
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Common Stock |
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Additional Paid-In |
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Retained |
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Dividends |
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Accumulated other comprehensive |
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Non- controlling |
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Shares |
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Par Value |
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Capital |
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Earnings |
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Declared |
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income |
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Interest |
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Total Equity |
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Balance at December 31, 2016 |
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31,757 |
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$ |
314 |
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$ |
372,615 |
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$ |
23,774 |
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$ |
(40,951 |
) |
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$ |
- |
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$ |
2,506 |
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$ |
358,258 |
|
Grants of restricted stock |
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34 |
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- |
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- |
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- |
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- |
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- |
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- |
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- |
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Issuance of common stock, net of costs |
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- |
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- |
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(3 |
) |
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- |
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- |
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- |
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- |
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(3 |
) |
Repurchase and cancellation of restricted stock |
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(5 |
) |
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- |
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(50 |
) |
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- |
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- |
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- |
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- |
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(50 |
) |
Retirement of common stock |
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(11 |
) |
|
|
- |
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|
- |
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- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other comprehensive income |
|
|
- |
|
|
|
- |
|
|
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- |
|
|
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- |
|
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|
- |
|
|
|
370 |
|
|
|
- |
|
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|
370 |
|
Distributions to noncontrolling interest |
|
|
- |
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- |
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|
- |
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|
|
- |
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- |
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|
- |
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(1,021 |
) |
|
|
(1,021 |
) |
Stock-based compensation |
|
|
- |
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|
|
- |
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|
956 |
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|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
956 |
|
Net income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,531 |
|
|
|
- |
|
|
|
- |
|
|
|
944 |
|
|
|
5,475 |
|
Dividends to common stockholders |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(6,768 |
) |
|
|
- |
|
|
|
- |
|
|
|
(6,768 |
) |
Balance at March 31, 2017 |
|
|
31,775 |
|
|
$ |
314 |
|
|
$ |
373,518 |
|
|
$ |
28,305 |
|
|
$ |
(47,719 |
) |
|
$ |
370 |
|
|
$ |
2,429 |
|
|
$ |
357,217 |
|
See accompanying notes to interim consolidated financial statements.
6
MEDEQUITIES REALTY TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
|
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Three Months Ended March 31, |
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2017 |
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2016 |
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Operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
5,475 |
|
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$ |
4,851 |
|
Adjustments to reconcile net income to net cash provided by operating activities |
|
|
|
|
|
|
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Depreciation and amortization |
|
|
4,217 |
|
|
|
4,650 |
|
Stock-based compensation |
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|
956 |
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|
|
647 |
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Straight-line rent receivable |
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(1,243 |
) |
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(514 |
) |
Straight-line rent liability |
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40 |
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|
42 |
|
Write-off of pre-offering costs |
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- |
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|
89 |
|
Changes in operating assets and liabilities |
|
|
|
|
|
|
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Other assets |
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|
1,523 |
|
|
|
(1,880 |
) |
Accounts payable and accrued liabilities |
|
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(1,102 |
) |
|
|
(1,134 |
) |
Deferred revenues |
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(878 |
) |
|
|
(2,346 |
) |
Net cash provided by operating activities |
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8,988 |
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|
4,405 |
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Investing activities |
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Acquisitions of real estate |
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|
- |
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(60 |
) |
Capital expenditures for real estate |
|
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(173 |
) |
|
|
- |
|
Funding of mortgage note and note receivable |
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(12,500 |
) |
|
|
(1,662 |
) |
Repayments of notes receivable |
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|
50 |
|
|
|
1,662 |
|
Capitalized pre-acquisition costs, net |
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|
(109 |
) |
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|
(230 |
) |
Capital expenditures for corporate property |
|
|
(4 |
) |
|
|
- |
|
Net cash used in investing activities |
|
|
(12,736 |
) |
|
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(290 |
) |
Financing activities |
|
|
|
|
|
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Proceeds from borrowings on term loan |
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|
125,000 |
|
|
|
- |
|
Net repayments on secured revolving credit facility |
|
|
(112,500 |
) |
|
|
- |
|
Dividends paid to common stockholders |
|
|
(6,647 |
) |
|
|
(3,370 |
) |
Deferred loan costs |
|
|
(2,711 |
) |
|
|
(6 |
) |
Distributions to noncontrolling interest |
|
|
(1,021 |
) |
|
|
(703 |
) |
Cancellation of restricted stock |
|
|
(50 |
) |
|
|
- |
|
Offering costs related to initial public offering of common stock |
|
|
(26 |
) |
|
|
- |
|
Dividends paid to preferred stockholders |
|
|
- |
|
|
|
(2,461 |
) |
Capitalized pre-offering costs |
|
|
- |
|
|
|
(258 |
) |
Net cash provided by (used in) financing activities |
|
|
2,045 |
|
|
|
(6,798 |
) |
Decrease in cash and cash equivalents |
|
|
(1,703 |
) |
|
|
(2,683 |
) |
Cash and cash equivalents, beginning of period |
|
|
9,509 |
|
|
|
12,474 |
|
Cash and cash equivalents, end of period |
|
$ |
7,806 |
|
|
$ |
9,791 |
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
775 |
|
|
$ |
2,378 |
|
Accrued pre-acquisition costs |
|
|
65 |
|
|
|
38 |
|
Accrued deferred loan costs |
|
|
27 |
|
|
|
- |
|
Accrued pre-offering costs |
|
|
- |
|
|
|
875 |
|
Texas gross margins taxes paid, net of reimbursement |
|
|
- |
|
|
|
63 |
|
See accompanying notes to interim consolidated financial statements.
7
MEDEQUITIES REALTY TRUST, INC. AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
Unaudited
March 31, 2017
Note 1 - Organization and Nature of Business
MedEquities Realty Trust, Inc. (the “Company”), which was incorporated in the state of Maryland on April 23, 2014, is a self-managed and self-administered company that invests in a diversified mix of healthcare properties and healthcare-related real estate debt investments. As of March 31, 2017, the Company had investments of $487.7 million, net in 24 real estate properties and two mortgage notes receivable. The Company owns 100% of all of its properties and investments, other than Baylor Scott & White Medical Center - Lakeway (“Lakeway Hospital”), in which the Company owns a 51% interest through a consolidated partnership (the “Lakeway Partnership”). The Company has elected to be taxed as a real estate investment trust (“REIT”) for U.S. federal tax purposes.
Note 2 - Accounting Policies and Related Matters
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial statements. In the opinion of management, the accompanying unaudited consolidated financial statements reflect all adjustments consisting of normal recurring adjustments necessary for a fair presentation of its financial position and results of operations. Interim results of operations are not necessarily indicative of the results that may be achieved for a full year. The financial statements and related notes do not include all information and footnotes required by GAAP for annual reports. These interim consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2016, included in the Company’s 2016 Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 27, 2017.
The interim consolidated financial statements include the accounts of the Company’s wholly owned subsidiaries and subsidiaries in which the Company has a controlling interest. All material intercompany transactions and balances have been eliminated in consolidation.
For information about significant accounting policies, refer to the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2016 included in the Company’s 2016 Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 27, 2017. During the three months ended March 31, 2017, there were no material changes to these policies except as noted below.
Derivatives: In the normal course of business, the Company is subject to risk from adverse fluctuations in interest rates. The Company has chosen to manage this risk through the use of derivative financial instruments, primarily interest rate swaps. Counterparties to these contracts are major financial institutions. The Company is exposed to credit loss in the event of nonperformance by these counterparties. The Company does not use derivative instruments for trading or speculative purposes. The Company’s objective in managing exposure to interest risk is to limit the impact on cash flows.
To qualify for hedge accounting, the Company’s interest rate swaps must effectively reduce the risk exposure that they are designed to hedge. In addition, at inception of a qualifying cash flow hedging relationship, the underlying transactions must be, and be expected to remain, probable of occurring in accordance with our related assertions. All of the Company’s hedges are cash flow hedges.
The Company recognizes all derivative instruments as assets or liabilities at their fair value in the Consolidated Balance Sheets. Changes in the fair value of derivative instruments that are not designated as hedges or that do not meet the criteria of hedge accounting are recognized in earnings. For derivatives designed in qualified cash flow hedging relationships, the change in fair value of the effective portion of the derivatives is recognized in accumulated other comprehensive income, whereas the change in fair value of the ineffective portion is recognized in earnings. Gains and losses are reclassified from accumulated other comprehensive income into earnings once the underlying hedged transaction is recognized in earnings.
Recent Accounting Developments: In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,” a comprehensive new revenue recognition standard that supersedes most of the existing revenue recognition guidance. This standard’s core principle is that a company will recognize revenue when it transfers goods or services to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods and services. In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers: Deferral of the Effective Date,” which deferred the effective date of this standard by one year. This standard is effective beginning after January 1, 2018 and interim periods therein. The guidance permits two implementation approaches, one requiring retrospective application of the new standard with restatement of prior years and one requiring prospective application of the new standard with disclosure of results under old standards. The Company continues to evaluate this standard. However, the standard is not expected to have a significant impact on the Company’s consolidated financial position, results of
8
operations and cash flows since the Company’s revenues consist primarily of rental income from leasing arrangements, which are specifically excluded from the guidance in ASU 2014-09.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” which amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheet and making targeted improvements to lessor accounting. The guidance requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The guidance will be effective beginning January 1, 2019. Early adoption is permitted. The Company is currently evaluating the impact of adopting this new accounting standard on the Company’s consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting,” which amends the accounting for share-based payment transactions, including income tax effects, equity versus liability classification and classification on the statement of cash flows. The guidance became effective for annual and interim periods beginning January 1, 2017. The adoption of this guidance had no impact on our results of operations, financial condition, statement of cash flows or liquidity.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326),” which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The standard also requires additional disclosures related to significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. The amended guidance is effective for fiscal years, and interim periods within those years, beginning January 1, 2020 with early adoption permitted for the fiscal years, and interim periods within those fiscal years, beginning January 1, 2019. The Company is currently evaluating the impact of adopting this new accounting standard on the Company’s consolidated financial statements and expects that it will not have a material impact.
In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows - Restricted Cash,” which required that a statement of cash flows explains the change during the period in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The new guidance is effective for fiscal years, and interim periods within those years, beginning January 1, 2018. The adoption of this guidance will change the presentation of restricted cash on the Company’s consolidated statement of cash flows; however, it will have no impact on the Company’s results of operations, financial condition, or liquidity.
Note 3 – Investment Activity
2017 Mortgage Note Receivable Funding
On January 30, 2017, the Company invested $12.5 million through a newly originated interest-only loan at an interest rate of 9.6% and secured by a first mortgage on a licensed general acute care surgical hospital that consists of 23,300 square feet with four operating rooms, two special procedure rooms, four inpatient rooms and four full-size extended recovery rooms. Beginning on October 1, 2017, the Company will have the exclusive option to purchase the hospital for $12.5 million. The interest-only loan matures on February 1, 2018, with an automatic extension until September 30, 2019 if the Company does not exercise its purchase option prior to maturity.
Concentrations of Credit Risks
The following table contains information regarding tenant concentration in the Company’s portfolio, based on the percentage of revenue for the three months ended March 31, 2017 and 2016, related to tenants, or affiliated tenants, that exceed 10% of revenues.
|
|
% of Total Revenue for the three months ended March 31, |
|
|||||
|
|
2017 |
|
|
2016 |
|
||
BSW Health |
|
|
25.8% |
|
|
|
- |
|
GruenePointe Holdings |
|
|
24.9% |
|
|
|
23.9% |
|
Life Generations Healthcare |
|
|
15.1% |
|
|
|
14.5% |
|
Fundamental Healthcare |
|
|
14.2% |
|
|
|
13.9% |
|
Vibra Healthcare |
|
|
13.6% |
|
|
|
12.2% |
|
LRMC (1) |
|
|
- |
|
|
|
31.7% |
|
|
(1) |
Lakeway Regional Medical Center (“LRMC”) was the prior tenant at Lakeway Hospital, in which the Company owns a 51% interest through the Lakeway Partnership. The lease with LRMC was terminated and a new lease with Baylor Scott & White Health (“BSW Health”) commenced on September 1, 2016. |
9
The following table contains information regarding the geographic concentration of the properties in the Company’s portfolio as of March 31, 2017, which includes percentage of rental income for the three months ended March 31, 2017 and 2016 (dollars in tho usands).
|
|
|
|
|
|
|
|
% of Total |
|
|
% of Rental Income |
|
||||||
State |
|
Number of Properties |
|
Gross Investment |
|
|
Real Estate Property Investments |
|
|
Three months ended March 31, 2017 |
|
|
Three months ended March 31, 2016 |
|
||||
Texas |
|
14 |
|
$ |
270,898 |
|
|
|
54.7% |
|
|
|
63.1% |
|
|
|
64.9% |
|
California |
|
7 |
|
|
154,727 |
|
|
|
31.3% |
|
|
|
25.1% |
|
|
|
23.7% |
|
Nevada |
|
2 |
|
|
49,422 |
|
|
|
10.0% |
|
|
|
8.3% |
|
|
|
8.1% |
|
South Carolina |
|
1 |
|
|
20,000 |
|
|
|
4.0% |
|
|
|
3.5% |
|
|
|
3.3% |
|
|
|
24 |
|
$ |
495,047 |
|
|
|
100.0% |
|
|
|
100.0% |
|
|
|
100.0% |
|
Note 4 – Debt
The table below details the Company’s debt balance at March 31, 2017 and December 31, 2016 (in thousands):
|
|
March 31, 2017 |
|
|
December 31, 2016 |
|
||
Term loan- secured |
|
$ |
125,000 |
|
|
$ |
- |
|
Revolving credit facility- secured |
|
|
31,500 |
|
|
|
144,000 |
|
Unamortized deferred financing costs |
|
|
(801 |
) |
|
|
- |
|
|
|
$ |
155,699 |
|
|
$ |
144,000 |
|
On February 10, 2017, the Company entered into a second amended and restated credit agreement, which provides for a $300 million revolving credit facility that matures in February 2021 and a $125 million term loan that matures in February 2022. The revolving credit facility has one 12-month extension option, subject to certain conditions, including the payment of a 0.15% extension fee. The new facility replaced the Company’s prior $300 million secured revolving credit facility, which was scheduled to mature in November 2017.
Amounts outstanding under the amended credit facility bear interest at LIBOR plus a margin between 1.75% and 3.00% or a base rate plus a margin between 0.75% and 2.00%, in each case depending on the Company’s leverage. The revolving credit facility includes an unused facility fee of 0.25% of the amount of the unused portion of the revolving credit facility if amounts borrowed are equal to or greater than 50.0% of the total commitments or 0.35% if amounts borrowed are less than 50.0% of such commitments. Prior to the February 10, 2017 amendment, amounts outstanding under the facility bore interest at LIBOR plus a margin between 2.75% and 3.75% or a base rate plus a margin between 2.00% and 2.50%, in each case depending on the Company’s leverage.
The amended credit agreement also includes an accordion feature that allows the total borrowing capacity, including the term loan component, to be increased to up to $700 million, subject to certain conditions, including obtaining additional commitments from lenders. The amount available to borrow under the amended credit facility is limited according to a borrowing base valuation of assets owned by subsidiaries of our operating partnership. The amended credit facility is secured by a pledge of the Company’s operating partnership’s equity interests in its subsidiaries that own borrowing base assets, which is substantially all of the Company’s assets. The amended credit agreement includes the ability to convert to an unsecured credit facility when certain conditions are met, including the Company having a minimum gross asset value of $1.0 billion, a minimum borrowing base of $500 million, less than 50% leverage and continued compliance with the covenants under the amended credit agreement.
At March 31, 2017 and 2016, the weighted average interest rate under the credit agreement was 2.6% and 3.7%, respectively.
The Company incurred fees associated with the second amended and restated credit facility of approximately $2.7 million, of which $1.9 million is associated with the revolving credit facility. Total costs related to the revolving credit facility were $3.2 million, gross ($3.1 million, net). These costs are included in other assets on the consolidated balance sheet at March 31, 2017 and will be amortized to interest expense through February 2021, the maturity date of the amended revolving credit facility. The total amount of deferred financing costs associated with the term loan was $0.8 million at March 31, 2017. These costs are netted against the balance outstanding on the term loan on the Company’s consolidated balance sheet and will be amortized to interest expense through February 2022, the maturity date of the term loan.
The Company recognized amortization expense of deferred financing costs, included in interest expense on the consolidated statements of income, of $0.3 million and $0.7 million for the three months ended March 31, 2017 and 2016, respectively.
The maximum available capacity under the credit facility was $261.9 million at March 31, 2017. At May 8, 2017, the Company had $156.5 million in borrowings outstanding, of which $31.5 million was outstanding under the revolving credit facility with an interest rate of 2.74% and $125.0 million was outstanding on the term loan. The Company has $105.4 million in additional borrowing capacity under the revolving credit facility, based on our current borrowing base assets.
10
To mitigate exposure to interest rate risk, on February 10, 2017, the Company entered into four interest rate swap agreements, effective April 10, 2017, on the full $125 million term loan to fix the variable LIBOR interest rate at 1.84%, plus the LIBOR spread under the amended credit agreement, which was 1.75% at May 8, 2017.
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
Amounts reported in accumulated other comprehensive income related to these interest rate swaps will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the next 12 months, the Company estimates that an additional $0.7 million will be reclassified from other comprehensive income as an increase to interest expense.
The fair value of the Company’s derivative financial instruments at March 31, 2017 was approximately $0.4 million and was included in other assets on the consolidated balance sheet. The Company did not have any derivative financial instruments at December 31, 2016.
The Company did not have any amounts reclassified from accumulated comprehensive income into income related to its derivative relationships for the three months ended March 31, 2017.
As of March 31, 2017, the Company did not have any derivatives in a net liability position including accrued interest but excluding any adjustment for nonperformance risk.
Covenants
The second amended and restated credit agreement contains customary financial and operating covenants, including covenants relating to the Company’s total leverage ratio, fixed charge coverage ratio, tangible net worth, maximum distribution/payout ratio and restrictions on recourse debt, secured debt and certain investments. The credit agreement also contains customary events of default, in certain cases subject to customary cure periods, including among others, nonpayment of principal or interest, material breach of representations and warranties, and failure to comply with covenants. Any event of default, if not cured or waived, could result in the acceleration of any outstanding indebtedness under the credit agreement. The Company was in compliance with all financial covenants as of March 31, 2017.
Note 5 - Incentive Plan
The Company’s Amended and Restated 2014 Equity Incentive Plan (the “Plan”) provides for the grant of stock options, share awards (including restricted common stock and restricted stock units), stock appreciation rights, dividend equivalent rights, performance awards, annual incentive cash awards and other equity-based awards, including Long Term Incentive Plan (“LTIP”) units, which are convertible on a one-for-one basis into OP units. As of March 31, 2017, the Plan had 1,356,723 shares authorized for issuance with 261,930 shares available for future issuance, subject to certain adjustments set forth in the Plan. On May 3, 2017, stockholders approved amendments to the Plan to increase the number of shares of the Company’s common stock authorized for issuance under the Plan by 2,000,000 shares to an aggregate of 3,356,723 shares and extend the term of the Plan to May 2, 2027.
Restricted Stock
Awards of restricted stock are awards of the Company’s common stock that are subject to restrictions on transferability and other restrictions as established by the Company’s compensation committee on the date of grant that are generally subject to forfeiture if employment terminates prior to vesting. Upon vesting, all restrictions would lapse. Except to the extent restricted under the award agreement, a participant awarded restricted stock will have all of the rights of a stockholder as to those shares, including, without limitation, the right to vote and the right to receive dividends on the shares. The awards generally cliff vest over three years or vest ratably over three years from the date of grant. The value of the awards is determined based on the market value of the Company’s common stock on the date of grant. The Company expenses the cost of restricted stock ratably over the vesting period.
Restricted Stock Units
The Company’s restricted stock unit (“RSU”) awards represent the right to receive unrestricted shares of common stock based on the achievement of Company performance objectives as determined by the Company’s compensation committee. Grants of RSUs prior to 2016 generally entitle recipients to shares of common stock equal to 0% up to 100% of the number of units granted at the vesting date, based on two independent criteria measured over a three-year period – (i) the Company’s absolute total stockholder return (“TSR”) and (ii) Company’s TSR relative to the MSCI US REIT Index (symbol: RMS). Grants of RSUs in 2016, granted on December 30, 2016, generally entitle recipients to shares of common stock equal to 0% up to 150% of the number of units granted at the vesting date, based on four independent criteria measured over a three-year period – (i) the Company’s growth in gross real estate
11
investments, (ii) the Company’s growth in Adjusted Funds From Operations (“AFFO”) per share, (iii) the Company’s absolute TSR and (iv) the Company’s TSR relative to the FTSE NAREIT Equity Healthcare REIT Index.
RSUs are not eligible to vote or subject to receive dividend equivalents prior to vesting. Dividend equivalents are credited to the recipient and are paid only to the extent the applicable criteria are met, the RSUs vest, and the related common stock is issued.
The grant date fair value of RSUs subject to vesting based on the Company’s absolute TSR and TSR relative to a REIT index is estimated using a Monte Carlo simulation that utilizes inputs such as expected future volatility of the Company’s common stock, volatilities of certain peer companies included in the applicable indexes upon which the relative TSR performance is measured, estimated risk-free interest rate and the expected service periods of three years. The grant date fair value of RSUs subject to vesting based on the Company’s growth in gross real estate investments and the Company’s growth in AFFO per share is determined based on the market value of the Company’s common stock on the date of grant. The Company assesses the probability of achievement of the growth in gross real estate investments and growth in AFFO per share and records expense for the awards based on the probable achievement of these metrics. The Company recognizes the cost of restricted stock units ratably over the vesting period. The following table summarizes the stock-based award activity for the three months ended March 31, 2017 and 2016:
|
|
Restricted Stock Awards |
|
|
Weighted-Average Grant Date Fair Value Per Restricted Stock Award |
|
|
RSU Awards |
|
|
Weighted-Average Grant Date Fair Value Per RSU |
|
||||
Outstanding as of December 31, 2016 |
|
|
352,793 |
|
|
$ |
14.57 |
|
|
|
575,775 |
|
|
$ |
8.51 |
|
Granted |
|
|
33,780 |
|
|
|
11.10 |
|
|
|
- |
|
|
|
- |
|
Vested |
|
|
(11,110 |
) |
|
|
15.00 |
|
|
|
- |
|
|
|
- |
|
Cancelled |
|
|
(5,368 |
) |
|
|
15.00 |
|
|
|
- |
|
|
|
- |
|
Forfeited |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Outstanding as of March 31, 2017 |
|
|
370,095 |
|
|
$ |
14.24 |
|
|
|
575,775 |
|
|
$ |
8.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Awards |
|
|
Weighted-Average Grant Date Fair Value Per Restricted Stock Award |
|
|
RSU Awards |
|
|
Weighted-Average Grant Date Fair Value Per RSU |
|
||||
Outstanding as of December 31, 2015 |
|
|
280,080 |
|
|
$ |
15.49 |
|
|
|
359,025 |
|
|
$ |
7.91 |
|
Granted |
|
|
16,665 |
|
|
|
15.00 |
|
|
|
- |
|
|
|
- |
|
Vested |
|
|
(5,555 |
) |
|
|
15.00 |
|
|
|
- |
|
|
|
- |
|
Forfeited |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Outstanding as of March 31, 2016 |
|
|
291,190 |
|
|
$ |
15.47 |
|
|
|
359,025 |
|
|
$ |
7.91 |
|
All of the shares that vested during the three months ended March 31, 2017 and 2016 related to grants of restricted shares to non-employee directors. RSUs are included in the preceding table as if the participants earn shares equal to 100% of the units granted. All cancelled shares for the three months ended March 31, 2017 relate to non-employee director compensation and is described in Note 7 under the heading “Arrangements with BlueMountain.”
The table below summarizes compensation expense related to share-based payments, included in general and administrative expenses, for the three months ended March 31, 2017 and 2016 (in thousands):
|
|
For the three months ended March 31, |
|
|||||
|
|
2017 |
|
|
2016 |
|
||
Restricted stock |
|
$ |
548 |
|
|
$ |
410 |
|
Restricted stock units |
|
|
408 |
|
|
|
237 |
|
Stock-based compensation |
|
$ |
956 |
|
|
$ |
647 |
|
The remaining unrecognized cost from stock-based awards at March 31, 2017 was approximately $5.0 million and will be recognized over a weighted-average period of 1.9 years.
Note 6 - Commitments and Contingencies
Commitments
In April 2017, the Company agreed to make available an aggregate amount of up to $11.0 million for the construction and equipping of certain new surgical suites at Mountain’s Edge Hospital, subject to certain terms and conditions. The Company will provide advances over an estimated 12-month period as construction occurs. The base rent associated with this property will be
12
increase d by an amount equal to 9.25% of the amount advanced, as advances are made. As of May 8, 2017, approximately $0.4 million has been funded pursuant to this commitment.
Contingencies
From time to time, the Company or its properties may be subject to claims and suits in the ordinary course of business. The Company’s lessees and borrowers have indemnified, and are obligated to continue to indemnify, the Company against all liabilities arising from the operations of the properties and are further obligated to indemnify it against environmental or title problems affecting the real estate underlying such facilities. The Company is not aware of any pending or threatened litigation that, if resolved against the Company, would have a material adverse effect on its consolidated financial condition, results of operations or cash flows.
Note 7 - Equity
Common Stock Dividends
On January 3, 2017, the Company’s board of directors declared a cash dividend of $0.21 per shares. The dividend was paid on January 31, 2017 to stockholders of record on January 17, 2017.
On May 3, 2017, the Company’s board of directors declared a cash dividend of $0.21 per share. The dividend will be paid on May 31, 2017 to stockholders of record on May 17, 2017.
Arrangements with BlueMountain
In connection with BlueMountain Capital Management, LLC’s (“BlueMountain”) purchase of shares of the Company’s common stock in a private placement in July 2014, the Company entered into the BlueMountain Rights Agreement with BlueMountain, which currently allows for BlueMountain to designate two directors on the Company’s board of directors. Pursuant to BlueMountain’s internal policies, all compensation payable to the BlueMountain director designees who are employees of BlueMountain is paid or transferred to BlueMountain, including an aggregate of 16,108 restricted shares of common stock granted to the BlueMountain director designees in 2014 and 2015. Due to adverse tax implications for BlueMountain related to its receipt of restricted stock, the Company and BlueMountain agreed to the following, which occurred on March 28, 2017: (i) BlueMountain forfeited 10,740 vested shares of common stock previously granted to the BlueMountain director designees; (ii) the Company repurchased and cancelled the remaining 5,368 unvested restricted shares of common stock held by BlueMountain for approximately $50,000; and (iii) BlueMountain repaid to the Company approximately $29,000, which represented all dividends previously paid on the 16,108 restricted shares previously granted to the BlueMountain director designees.
Noncontrolling interest
The Company owns Lakeway Hospital through a consolidated partnership, which, based on a total equity cash contribution of $2.0 million, is owned 51% by the Company and 49% by an entity that is owned indirectly by a physicians group and a non-physician investor. The partnership was formed on March 20, 2015. The Company’s equity contribution to the Lakeway Partnership was $1.0 million, and the Company’s transfer of the original $50.0 million note and $23.0 million of cash to the Lakeway Partnership was structured as an intercompany $73.0 million loan (the “Lakeway Intercompany Mortgage Loan”) to the Lakeway Partnership that is secured by a first mortgage lien on Lakeway Hospital. The Lakeway Intercompany Mortgage Loan has a ten-year term and requires payments of principal and interest at a rate of 8.0% per annum based on a 25-year amortization schedule. The interest rate on the Lakeway Intercompany Mortgage Loan will reset after five years based upon then-current market rates. At March 31, 2017 and December 31, 2016, the Lakeway Intercompany Mortgage Loan had an outstanding principal balance of $71.4 million and $71.8 million, respectively.
Distributions to the noncontrolling interest holder in the Lakeway Partnership subsequent to March 31, 2017 were approximately $0.2 million.
13
The Company applies the two-class method for determining earnings per common share as its outstanding restricted common stock with non-forfeitable dividend rights are considered participating securities. The following table sets forth the computation of earnings per common share for the three months ended March 31, 2017 and 2016 (amounts in thousands, except per share amounts):
|
|
Three Months Ended March 31, |
|
|||||
Numerator: |
|
2017 |
|
|
2016 |
|
||
Net income |
|
$ |
5,475 |
|
|
$ |
4,851 |
|
Less: Net income attributable to noncontrolling interest |
|
|
(944 |
) |
|
|
(1,355 |
) |
Less: Dividends on preferred shares |
|
|
- |
|
|
|
(2,465 |
) |
Net income attributable to common stockholders |
|
|
4,531 |
|
|
|
1,031 |
|
Less: Allocation to participating securities |
|
|
(78 |
) |
|
|
- |
|
Net income available to common stockholders |
|
$ |
4,453 |
|
|
$ |
1,031 |
|
|
|
|
|
|
|
|
|
|
Denominator |
|
|
|
|
|
|
|
|
Basic weighted-average common shares |
|
|
31,415 |
|
|
|
10,959 |
|
Dilutive potential common shares |
|
|
- |
|
|
|
95 |
|
Diluted weighted-average common shares |
|
|
31,415 |
|
|
|
11,054 |
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per common share |
|
$ |
0.14 |
|
|
$ |
0.09 |
|
The effects of restricted shares of common stock and restricted stock units outstanding were excluded from the calculation of diluted income per share for the three months ended March 31, 2017 because their effects were not dilutive. The effects of restricted stock units outstanding were excluded from the calculation of diluted income per share for the three months ended March 31, 2016 because their effects were not dilutive.
Note 9 - Fair Value of Financial Instruments
Financial Assets and Liabilities Measured at Fair Value
The Company’s financial assets and liabilities measured at fair value on a recurring basis currently include derivative financial instruments. These derivative financial instruments are valued in the market using discounted cash flow techniques. These techniques incorporate Level 1 and Level 2 inputs. The market inputs are utilized in the discounted cash flow calculation considering the instrument’s term, notional amount, discount rate and credit risk. Significant inputs to the derivative valuation model for interest rate swaps are observable in active markets and are classified as Level 2 in the hierarchy. The fair value of the Company’s interest rate swaps asset, which is included in other assets on the consolidated balance sheet, is approximately $0.4 million at March 31, 2017. The Company did not have any financial assets or liabilities measured at fair value at December 31, 2016.
Financial Assets and Liabilities Not Carried at Fair Value
The carrying amounts of cash and cash equivalents, restricted cash, receivables and payables are reasonable estimates of their fair value as of March 31, 2017 due to their short-term nature (Level 1). The fair value of the Company’s mortgage and other notes receivable as of March 31, 2017 is estimated by using Level 2 inputs such as discounting the estimated future cash flows using current market rates for similar loans that would be made to borrowers with similar credit ratings and for the same remaining maturities.
At March 31, 2017, the Company’s indebtedness was comprised of borrowings under the credit facility, including both a term loan and revolver component, that bear interest at LIBOR plus a margin. The fair value of borrowings under the credit facility is considered to be equivalent to their carrying value as the debt is at variable rates currently available and resets on a monthly basis.
Fair value estimates are made at a specific point in time, are subjective in nature, and involve uncertainties and matters of significant judgment. Settlement at such fair value amounts may not be possible. As of March 31, 2017, the fair value of the Company’s $22.5 million mortgage notes receivable was estimated to be approximately $22.6 million.
14
Item 2. Management’s Disc ussion and Analysis of Financial Condition and Res ults of Operations
The following discussion should be read together with the consolidated financial statements and notes thereto appearing elsewhere is this report. References to “we,” “our,” “us,” and “Company” refer to MedEquities Realty Trust, Inc., together with its consolidated subsidiaries.
Forward-Looking Statements
We make statements in this report that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Forward-looking statements provide our current expectations or forecasts of future events and are not statements of historical fact. These forward-looking statements include information about possible or assumed future events, discussion and analysis of our future financial condition, results of operations, funds from operations, adjusted funds from operations, our strategic plans and objectives, cost management, potential property acquisitions, anticipated capital expenditures (and access to capital), amounts of anticipated cash distributions to our stockholders in the future and other matters. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “might,” “should,” “result” and variations of these words and other similar expressions are intended to identify forward-looking statements. Such statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and/or could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. You are cautioned to not place undue reliance on forward-looking statements. Except as otherwise may be required by law, we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or actual operating results. Factors that may impact forward-looking statements include, among others, the following:
|
• |
risks and uncertainties related to the national, state and local economies, particularly the economies of Texas, California, and Nevada, and the real estate and healthcare industries in general; |
|
• |
availability and terms of capital and financing; |
|
• |
the ability of certain of our tenants to improve their operating results, which may not occur on the schedule or to the extent that we anticipate, or at all; |
|
• |
the impact of existing and future healthcare reform legislation on our tenants, borrowers and guarantors; |
|
• |
adverse trends in the healthcare industry, including, but not limited to, changes relating to reimbursements available to our tenants by government or private payors; |
|
• |
our tenants’ ability to make rent payments, particularly those tenants comprising a significant portion of our portfolio and those tenants occupying recently developed properties; |
|
• |
adverse effects of healthcare regulation and enforcement on our tenants, operators, borrowers, guarantors, and managers, and us; |
|
• |
our guarantors’ ability to ensure rent payments; |
|
• |
our possible failure to maintain our qualification as a real estate investment trust (“REIT”) and the risk of changes in laws governing REITs; |
|
• |
our dependence upon key personnel whose continued service is not guaranteed; |
|
• |
availability of appropriate acquisition, development and redevelopment opportunities; |
|
• |
our ability to source off-market and target-marketed deal flow; |
|
• |
fluctuations in mortgage and interest rates; |
|
• |
risks and uncertainties associated with property ownership and development; |
|
• |
failure to integrate acquisitions successfully; |
|
• |
potential liability for uninsured losses and environmental liabilities; and |
|
• |
the potential need to fund improvements or other capital expenditures out of operating cash flow. |
See Item 1A. Risk Factors in our Annual Report for the year ended December 31, 2016 for further discussion of these and other risks, as well as the risks, uncertainties and other factors discussed in this report and identified in other documents we file with the Securities and Exchange Commission from time to time. You should carefully consider these risks before making any investment
15
decisions in the Company. New risks and uncertainties may also emerge from time to time that could materially and adversely affect us.
Overview and Background
We are a self-managed and self-administered company that invests in a diversified mix of healthcare properties and healthcare-related real estate debt investments. We were formed on April 23, 2014 and commenced operations upon the completion of our private placements on July 31, 2014 and had no predecessor entity. As of March 31, 2017, we had investments of $465.3 million, net in 24 real estate properties that contain a total of 2,345 licensed beds. Our properties are located in Texas, California, Nevada, and South Carolina and include 17 skilled nursing facilities, two acute care hospitals, two long-term acute care hospitals, one assisted living facility, one inpatient rehabilitation facility and one medical office building. In addition, we have two mortgage notes receivable totaling $22.5 million. As of March 31, 2017, our triple-net leased portfolio was 100% leased and had lease expirations ranging from July 2026 to August 2031.
Our strategy is to become an integral capital partner with high-quality, facility-based, growth-minded providers of healthcare services, primarily through net-leased real estate investments, and to continue to diversify over time based on our facility types, tenants and geographic locations. We invest primarily in real estate across the acute and post-acute spectrum of care, where our management team has extensive experience and relationships and which we believe differentiates us from other healthcare real estate investors. We believe acute and post-acute healthcare facilities have the potential to provide higher risk-adjusted returns compared to other forms of net-leased real estate assets due to the specialized expertise and insight necessary to own, finance and operate these properties, which are factors that tend to limit competition among owners, operators and finance companies. We target healthcare providers or operators that provide higher acuity services, are experienced, growth-minded and that we believe have shown an ability to successfully navigate a changing healthcare landscape. We believe that by investing in facilities that span the acute and post-acute spectrum of care, we will be able to adapt to, and capitalize on, changes in the healthcare industry and support, grow and develop long-term relationships with providers that serve the highest number of patients at the highest-yielding end of the healthcare real estate market. We expect to invest primarily in the following types of healthcare properties: acute care hospitals, skilled nursing facilities, short-stay surgical and specialty hospitals (such as those focusing on orthopedic, heart, and other dedicated surgeries and specialty procedures), dedicated specialty hospitals (such as inpatient rehabilitation facilities, long-term acute care hospitals and facilities providing psychiatric care), large and prominent physician clinics, diagnostic facilities, outpatient surgery centers and facilities that support these services, such as medical office buildings. Over the long-term, we expect our portfolio to be balanced equally between acute and post-acute facilities, although the balance may fluctuate from time to time due to the impact of individual transactions.
Recent Developments
Fundamental Healthcare Lease Modifications
On April 27, 2017, we restructured the four existing leases with affiliates of Fundamental Healthcare on Mountain’s Edge Hospital, Horizon Specialty Hospital of Henderson, Physical Rehabilitation and Wellness Center of Spartanburg (formerly known as Magnolia Place of Spartanburg), and Mira Vista Court to combine them into a single triple-net master lease. The master lease, which was effective March 20, 2017, is for an initial term of 12 years for the Spartanburg and Mira Vista properties, and an initial term of 15 years for the Horizon and Mountain’s Edge properties. The master lease includes two separate renewal terms of five years. Initial annualized base rent under the master lease is approximately $8.5 million and will increase on the first three anniversaries of the commencement date by the lesser of the percentage increase in the consumer price index over the prior 12 months and 1.5%. On the fourth anniversary of the commencement date and every year thereafter during the master lease term, including any renewals, base rent will increase by 2.0% annually.
Mountain’s Edge Hospital Expansion Funding
Pursuant to the master lease, we agreed to make available an aggregate amount of up to $11.0 million for the construction and equipping of certain new surgical suites at Mountain’s Edge Hospital, subject to certain terms and conditions. We will provide advances over an estimated 12-month period as construction occurs. The base rent under the master lease will be increased by an amount equal to 9.25% of the amount advanced, as advances are made.
Amended and Restated Credit Facility
On February 10, 2017, we entered into an amended and restated credit agreement, which provides for a $300 million revolving credit facility and a $125 million term loan. For additional information see “-- Liquidity and Capital Resources” below.
2017 Investment
On January 30, 2017, we invested $12.5 million through a newly originated interest-only loan with an interest rate of 9.6% and secured by a first mortgage on a licensed general acute care surgical hospital that consists of 23,300 square feet with four operating rooms, two special procedure rooms, four inpatient rooms and four full-size extended recovery rooms. Beginning on October 1, 2017,
16
we will have the exclusive option to purch ase the hospital for $12.5 million. The interest-only loan matures on February 1, 2018, with an automatic extension until September 30, 2019 if we do not exercise our purchase option prior to maturity.
Portfolio Summary
At March 31, 2017, our portfolio was comprised of 24 healthcare facilities and two healthcare-related debt investments as presented in the tables below (dollars in thousands). We own 100% of all of our properties and investments, Baylor Scott & White Medical Center- Lakeway (“Lakeway Hospital”), in which we own a 51% interest through a consolidated partnership (the “Lakeway Partnership”).
Healthcare Facilities
Property |
|
Property Type (1) |
|
Gross Investment |
|
|
Lease Expiration(s) (2) |
|
Texas SNF Portfolio (10 properties) |
|
SNF |
|
$ |
145,142 |
|
|
July 2030 |
Life Generations Portfolio (6 properties) |
|
SNF- 5; ALF- 1 |
|
|
96,697 |
|
|
March 2030 |
Lakeway Hospital (3) |
|
ACH |
|
|
75,056 |
|
|
August 2031 |
Kentfield Rehabilitation & Specialty Hospital |
|
LTACH |
|
|
58,030 |
|
|
December 2029 |
Mountain's Edge Hospital |
|
ACH |
|
|
29,412 |
|
|
March 2030 |
Horizon Specialty Hospital of Henderson |
|
LTACH |
|
|
20,010 |
|
|
July 2029 |
Physical Rehabilitation and Wellness Center of Spartanburg (formerly Magnolia Place of Spartanburg) |
|
SNF |
|
|
20,000 |
|
|
July 2026 |
Vibra Rehabilitation Hospital of Amarillo |
|
IRF |
|
|
19,399 |
|
|
September 2030 |
Mira Vista Court |
|
SNF |
|
|
16,000 |
|
|
February 2027 |
North Brownsville Medical Plaza (4) |
|
MOB |
|
|
15,301 |
|
|
May 2017- July 2018 |
Total |
|
|
|
$ |
495,047 |
|
|
|
|
(1) |
LTACH- Long-Term Acute Care Hospital; SNF- Skilled Nursing Facility; MOB- Medical Office Building; ALF- Assisted Living Facility; ACH- Acute Care Hospital; IRF- Inpatient Rehabilitation Facility. |
|
(2) |
On April 27, 2017, pursuant to the Fundamental Healthcare maser lease described above, the lease terms for Physical Rehabilitation and Wellness Center of Spartanburg and Mira Vista Court were modified to an expiration date of March 2029 and the lease terms for Mountain’s Edge Hospital and Horizon Specialty Hospital of Henderson were modified to an expiration date of March 2032. |
|
(3) |
We own the facility through the Lakeway Partnership, a consolidated partnership which, based on total equity contributions of $2.0 million, is owned 51% by us. |
|
(4) |
We are the lessee under a ground lease that expires in 2081, with two ten-year extension options, and provides for annual base rent of approximately $0.2 million in 2017. |
Debt Investments
Loan |
|
Borrower(s) |
|
Principal Amount |
|
|
Term |
|
Initial Interest Rate |
|
|
First Lien Mortgage |
|
Guarantors |
||
Vibra Mortgage Loan |
|
Vibra Healthcare, LLC and Vibra Healthcare II, LLC |
|
$ |
10,000 |
|
|
5/20 years (1) |
|
|
9.0% |
|
|
Vibra Hospital of Western Massachusetts |
|
Vibra Healthcare Real Estate Company II, LLC and Vibra Hospital of Western Massachusetts, LLC |
Advanced Diagnostics Hospital East Mortgage Loan |
|
AD RE East Hospital LLC |
|
$ |
12,500 |
|
|
1 year (2) |
|
|
9.6% |
|
|
AD Hospital East |
|
Atul Chopra, M.D., Chopra Imaging Centers, and AD Hospital East, LLC |
|
(1) |
Following the initial interest-only five-year term, this loan will automatically convert to a 15-year amortizing loan requiring payments of principal and interest unless prepaid. This loan may be prepaid during the initial five-year term only if Vibra Healthcare, LLC or Vibra Healthcare II, LLC, or one of their respective affiliates, enters into a replacement asset transaction with us equal to or exceeding $25.0 million in value. |
17
|
exercised our option to purchase, with the interest rate due on the loan increasing on the day after the initial maturity date to approximately 9.8%. |
Summary of Investments by Type
The following table summarizes our investments in healthcare facilities and mortgage notes receivable by type as of and for the three months ended March 31, 2017 (dollars in thousands). Revenue includes rental income and interest on mortgage notes receivable.
|
|
Properties/ Debt Investments |
|
Gross Investment |
|
|
% of Gross Investment |
|
|
Revenue |
|
|||
Skilled nursing facilities/ Assisted living facility (1) |
|
18 |
|
$ |
277,839 |
|
|
|
53.7% |
|
|
$ |
6,587 |
|
Acute care hospitals |
|
2 |
|
|
104,468 |
|
|
|
20.2% |
|
|
|
4,537 |
|
Long term acute care hospitals |
|
2 |
|
|
78,040 |
|
|
|
15.1% |
|
|
|
1,753 |
|
Inpatient rehabilitation facility |
|
1 |
|
|
19,399 |
|
|
|
3.7% |
|
|
|
399 |
|
Medical office building |
|
1 |
|
|
15,301 |
|
|
|
3.0% |
|
|
|
563 |
|
Mortgage notes receivable |
|
2 |
|
|
22,500 |
|
|
|
4.3% |
|
|
|
433 |
|
|
|
26 |
|
$ |
517,547 |
|
|
|
100.0% |
|
|
$ |
14,272 |
|
|
(1) |
Includes one assisted living facility connected to a skilled nursing facility. |
Geographic Concentration
The following table contains information regarding the geographic concentration of the healthcare facilities in our portfolio as of March 31, 2017 and for the three months ended March 31, 2017 and 2016 (dollars in thousands).
|
|
|
|
|
|
|
|
% of Total |
|
|
% of Rental Income |
|
||||||
State |
|
Number of Properties |
|
Gross Investment |
|
|
Real Estate Property Investments |
|
|
Three months ended March 31, 2017 |
|
|
Three months ended March 31, 2016 |
|
||||
Texas |
|
14 |
|
$ |
270,898 |
|
|
|
54.7% |
|
|
|
63.1% |
|
|
|
64.9% |
|
California |
|
7 |
|
|
154,727 |
|
|
|
31.3% |
|
|
|
25.1% |
|
|
|
23.7% |
|
Nevada |
|
2 |
|
|
49,422 |
|
|
|
10.0% |
|
|
|
8.3% |
|
|
|
8.1% |
|
South Carolina |
|
1 |
|
|
20,000 |
|
|
|
4.0% |
|
|
|
3.5% |
|
|
|
3.3% |
|
|
|
24 |
|
$ |
495,047 |
|
|
|
100.0% |
|
|
|
100.0% |
|
|
|
100.0% |
|
Tenant Concentration
The following table contains information regarding the largest tenants, guarantors and borrowers in our portfolio as a percentage of total revenues for the three months ended March 31, 2017 and 2016 and as a percentage of total real estate assets (gross real estate properties and mortgage notes receivable) as of March 31, 2017 and December 31, 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
% of Total Revenue for the three months ended March 31, |
|
|
% of Total Real Estate Assets |
|
||||||||||
|
|
2017 |
|
|
2016 |
|
|
March 31, 2017 |
|
|
March 31, 2016 |
|
||||
BSW Health |
|
|
25.8% |
|
|
- |
|
|
|
14.5% |
|
|
- |
|
||
GruenePointe Holdings |
|
|
24.9% |
|
|
|
23.9% |
|
|
|
28.0% |
|
|
|
28.6% |
|
Life Generations Healthcare |
|
|
15.1% |
|
|
|
14.5% |
|
|
|
18.7% |
|
|
|
21.0% |
|
Fundamental Healthcare |
|
|
14.2% |
|
|
|
13.9% |
|
|
|
16.5% |
|
|
|
16.8% |
|
Vibra Healthcare |
|
|
13.6% |
|
|
|
12.2% |
|
|
|
16.9% |
|
|
|
15.7% |
|
LRMC (1) |
|
- |
|
|
|
31.7% |
|
|
- |
|
|
|
14.8% |
|
|
(1) |
Lakeway Regional Medical Center (“LRMC”) was the prior tenant at Lakeway Hospital. The lease with LRMC was terminated and a new lease with Baylor Scott & White Health (“BSW Health”) commenced on September 1, 2016. |
18
Refer to our audited consolidated financial statements and notes thereto for the year ended December 31, 2016 for a discussion of our accounting policies, including the critical accounting policies of revenue recognition, real estate investments, asset impairment, stock-based compensation, and our accounting policy on consolidation, which are included in the 2016 Annual Report on Form 10-K, which was filed with the SEC on February 27, 2017. During the three months ended March 31, 2017, there were no material changes to these policies.
Factors That May Influence Future Results of Operations
Our revenues are derived from rents earned pursuant to the lease agreements entered into with our tenants and from interest income from loans that we make to other facility owners. Our tenants operate in the healthcare industry, generally providing medical, surgical and rehabilitative care to patients. The capacity of our tenants/borrowers to pay our rents and interest is dependent upon their ability to conduct their operations at profitable levels. We believe that the business environment in which our tenants operate is generally positive for efficient operators. However, our tenants’ operations are subject to economic, regulatory and market conditions that may affect their profitability, which could impact our results of operations. Accordingly, we actively monitor certain key factors, including changes in those factors that we believe may provide early indications of conditions that may affect the level of risk in our lease and loan portfolio.
Key factors that we consider in underwriting prospective tenants, borrowers and guarantors and in monitoring the performance of existing tenants, borrowers and guarantors include, but are not limited to, the following:
|
• |
the current, historical and projected cash flow and operating margins of each tenant and at each facility; |
|
• |
the ratio of our tenants’ operating earnings both to facility rent and to facility rent plus other fixed costs, including debt costs; |
|
• |
the quality and experience of the tenant and its management team; |
|
• |
construction quality, condition, design and projected capital needs of the facility; |
|
• |
the location of the facility; |
|
• |
local economic and demographic factors and the competitive landscape of the market; |
|
• |
the effect of evolving healthcare legislation and other regulations on our tenants’ profitability and liquidity; and |
|
• |
the payor mix of private, Medicare and Medicaid patients at the facility. |
We also actively monitor the credit risk of our tenants. The methods used to evaluate a tenant’s liquidity and creditworthiness include reviewing certain periodic financial statements, operating data and clinical outcomes data of the tenant. Over the course of a lease, we also have regular meetings with the facility management teams. Through these means we are able to monitor a tenant’s credit quality. Our approach to our investments in real estate-related debt investments is similar to our process when seeking to purchase the underlying property. We service our debt investments in-house and monitor both the credit quality of the borrower as well as the value of our collateral on an ongoing basis.
Certain business factors, in addition to those described above that directly affect our tenants and borrowers, will likely materially influence our future results of operations:
|
• |
the financial and operational performance of our tenants and borrowers, particularly those that account for a significant portion of the income generated by our portfolio, such as GruenePointe Holdings, BSW Health, Life Generations Healthcare, Fundamental Healthcare and Vibra Healthcare; |
|
• |
trends in the cost and availability of capital, including market interest rates, that our prospective tenants may use for financing their real estate assets through lease structures; |
|
• |
unforeseen changes in healthcare regulations that may limit the incentives for physicians to participate in the ownership of healthcare providers and healthcare real estate; |
|
• |
reductions in reimbursements from Medicare, state healthcare programs and commercial insurance providers that may reduce our tenants’ profitability impacting our lease rates; and |
|
• |
competition from other financing sources. |
19
Three Months Ended March 31, 2017 Compared to March 31, 2016 (dollars in thousands)
|
|
For the three months ended |
|
|
Change |
|
||||||||||
|
|
March 31, 2017 |
|
|
March 31, 2016 |
|
|
$ |
|
|
% |
|
||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income |
|
$ |
13,839 |
|
|
$ |
14,604 |
|
|
$ |
(765 |
) |
|
|
(5 |
%) |
Interest on mortgage notes receivable |
|
|
433 |
|
|
|
229 |
|
|
|
204 |
|
|
|
89 |
% |
Interest on notes receivable |
|
|
10 |
|
|
|
15 |
|
|
|
(5 |
) |
|
|
(33 |
%) |
Total revenues |
|
|
14,282 |
|
|
|
14,848 |
|
|
|
(566 |
) |
|
|
(4 |
%) |
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
3,618 |
|
|
|
3,659 |
|
|
|
(41 |
) |
|
|
(1 |
%) |
Property related |
|
|
352 |
|
|
|
321 |
|
|
|
31 |
|
|
|
10 |
% |
Acquisition related |
|
|
66 |
|
|
|
17 |
|
|
|
49 |
|
|
|
288 |
% |
Franchise, excise and other taxes |
|
|
86 |
|
|
|
105 |
|
|
|
(19 |
) |
|
|
(18 |
%) |
General and administrative |
|
|
3,171 |
|
|
|
2,771 |
|
|
|
400 |
|
|
|
14 |
% |
Total operating expenses |
|
|
7,293 |
|
|
|
6,873 |
|
|
|
420 |
|
|
|
6 |
% |
Operating income |
|
|
6,989 |
|
|
|
7,975 |
|
|
|
(986 |
) |
|
|
(12 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income |
|
|
1 |
|
|
|
1 |
|
|
|
- |
|
|
|
0 |
% |
Interest expense |
|
|
(1,515 |
) |
|
|
(3,125 |
) |
|
|
1,610 |
|
|
|
(52 |
%) |
|
|
|
(1,514 |
) |
|
|
(3,124 |
) |
|
|
1,610 |
|
|
|
(52 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
5,475 |
|
|
$ |
4,851 |
|
|
$ |
624 |
|
|
|
13 |
% |
Less: Preferred stock dividends |
|
|
- |
|
|
|
(2,465 |
) |
|
|
2,465 |
|
|
|
(100 |
%) |
Less: Net income attributable to noncontrolling interest |
|
|
(944 |
) |
|
|
(1,355 |
) |
|
|
411 |
|
|
|
(30 |
%) |
Net income attributable to common stockholders |
|
$ |
4,531 |
|
|
$ |
1,031 |
|
|
$ |
3,500 |
|
|
|
339 |
% |
Total revenues for the three months ended March 31, 2017 decreased approximately $0.6 million, or 4%, over the prior-year period as a result of a $0.8 million decrease in rental income, which was partially offset by a $0.2 million increase in mortgage interest related to the addition of the Advanced Diagnostics Hospital East mortgage loan on January 30, 2017. The decrease in rental income was primarily the result of a $0.9 million reduction in rental revenue at Lakeway Hospital during the three months ended March 31, 2017 compared to the prior-year period. Under the terms of the lease with the prior tenant at Lakeway Hospital, contractual base rent increased ratably during the first two quarters of 2016 by approximately $1.7 million per quarter (representing the difference between the pre-stabilized quarterly base rent of $1.5 million due for the second and third quarters of 2015 and the stabilized rent of $3.2 million per quarter thereafter). The contractual base rent under the existing lease with BSW Health that was effective September 1, 2016 is the stabilized rent of $3.2 million per quarter. This difference in base rent was partially offset by the effects of straight-line rent under the two leases.
Total operating expenses for the three months ended March 31, 2017 increased approximately $0.4 million, or 6%, over the prior-year period. This increase related to an increase in general and administrative expenses of $0.4 million, which was comprised of a $0.3 million increase in stock-based compensation expense related to the December 30, 2016 and January 1, 2017 grants and a $0.1 million increase in other expenses.
Interest expense for the three months ended March 31, 2017 decreased approximately $1.6 million, or 52%, over the prior-year period. This decrease was comprised of the following:
|
• |
A decrease of approximately $1.2 million in interest and unused credit facility fees as a result of (i) an approximately $94.4 million decrease in the weighted-average outstanding balance under the credit facility for the three months ended March 31, 2017 compared to the prior-year period and (ii) a decrease in the weighted-average interest rate under the credit facility to 2.6% for the three months ended March 31, 2017 from 3.7% for the prior-year period; and |
|
• |
A decrease of approximately $0.4 million in amortization of deferred financing costs, primarily associated with the amendment and restatement of the credit agreement in February 2017, which extended the maturity dates of amounts due under the revolving credit facility and term loan to February 2021 and February 2022, respectively. |
20
Earnings attributable to noncontrolling interest represent the proportionate share of our partner in t he operating results of the consolidated Lakeway Partnership. The net income attributable to noncontrolling interest was $0.9 million for the three months ended March 31, 2017, compared to $1.4 million for the prior year period. The decrease is a result o f the change in rental income recognized at Lakeway Hospital described above.
Liquidity and Capital Resources
Overview
Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain our assets and operations, make distributions to our stockholders and other general business needs. Our primary sources of cash include operating cash flows, borrowings, including borrowings under our revolving credit facility and secured term loan, and net proceeds from equity issuances. Our primary uses of cash include funding acquisitions and investments consistent with our investment strategy, repaying principal and interest on outstanding borrowings, making distributions to our stockholders, funding our operations and paying accrued expenses. At March 31, 2017, we had $7.8 million of cash and cash equivalents.
Our long-term liquidity needs consist primarily of funds necessary to pay for the costs of acquiring additional healthcare properties and making additional loans and other investments, including potential future developments and redevelopments, and principal and interest payments on our debt. In addition, although the terms of our net leases generally obligate our tenants to pay capital expenditures necessary to maintain and improve our net-leased properties, we from time to time may fund the capital expenditures for our net-leased properties through loans to the tenants or advances, some of which may increase the amount of rent payable with respect to the properties. We expect to meet our long-term liquidity requirements through various sources of capital, including future equity issuances (including OP units) or debt offerings, net cash provided by operations, borrowings under our revolving credit facility, long-term mortgage indebtedness and other secured and unsecured borrowings.
We may utilize various types of debt to finance a portion of our acquisition and investment activities, including long-term, fixed-rate mortgage loans, variable-rate term loans, secured revolving lines of credit, such as those under our secured credit agreement, and construction financing facilities. Under our credit agreement, we are subject to continuing covenants and are required to make continuing representations and warranties, and future indebtedness that we may incur may contain similar provisions. In addition, borrowings under our credit agreement are secured by pledges of substantially all of our assets. In the event of a default, the lenders could accelerate the timing of payments under the debt obligations and we may be required to repay such debt with capital from other sources, which may not be available on attractive terms, or at all, which would have a material adverse effect on our liquidity, financial condition, results of operations and ability to make distributions to our stockholders.
Credit Agreement
On February 10, 2017, we entered into a second amended and restated credit agreement, which provides for a $300 million secured revolving credit facility that matures on February 10, 2021 and a $125 million secured term loan that matures on February 10, 2022. The revolving credit facility has one 12-month extension option, subject to certain conditions, including the payment of a 0.15% extension fee. The new facility replaced our prior $300 million secured revolving credit facility, which was scheduled to mature in November 2017.
Prior to completing our initial public offering (“IPO”) in October 2016, amounts outstanding under our prior credit facility bore interest at LIBOR plus a margin between 2.75% and 3.75% or a base rate plus a margin between 1.75% and 2.75%, in each case depending on our leverage. Effective November 1, 2016, due to the completion of our IPO, amounts outstanding under our prior credit facility bore interest at LIBOR plus a margin between 2.00% and 2.50% or a base rate plus a margin between 1.00% and 1.50%, in each case depending on our leverage.
At March 31, 2017 and March 31, 2016, the weighted average interest rate under our credit facility was 2.6% and 3.7%, respectively. The weighted average balance outstanding under the credit agreement was approximately $153.0 million and $247.4 million for the three months ended March 31, 2017 and 2016, respectively.
Amounts outstanding under our amended credit facility bear interest at LIBOR plus a margin between 1.75% and 3.00% or a base rate plus a margin between 0.75% and 2.00%, in each case depending on our leverage. In addition, the revolving credit facility includes an unused facility fee 0.25% of the amount of the unused portion of the revolving credit facility if amounts borrowed are equal to or greater than 50% of the total commitments or 0.35% if amounts borrowed are less than 50% of such commitments.
The amended credit agreement also includes an accordion feature that allows the total borrowing capacity, including the term loan component, to be increased to up to $700 million, subject to certain conditions, including obtaining additional commitments from lenders. The amount available to borrow under the amended credit facility is limited according to a borrowing base valuation of assets owned by subsidiaries of our operating partnership. The amended credit facility is secured by a pledge of our operating partnership’s equity interests in its subsidiaries that own borrowing base assets, which is substantially all of our assets. The amended credit agreement includes the ability to convert to an unsecured credit facility when certain conditions are met, including our having a minimum gross asset value of $1.0 billion, a minimum borrowing base of $500 million, less than 50% leverage, and continued compliance with the covenants under the amended credit agreement.
21
At May 8, 2017, we had $156.5 million outstanding under amended credit facility, which was comprised of $31.5 million under the revolving credit facility and $125 million unde r the term loan, and we had $105.4 million in additional available borrowing capacity under the revolving credit facility, based on our current borrowin g base assets. The interest rate under the amended credit facility was 2.74% as of May 8, 2017.
Our ability to borrow under the amended credit facility is subject to ongoing compliance with various customary restrictive covenants, including with respect to liens, indebtedness, investments, distributions, mergers and asset sales. In addition, the amended credit agreement requires us to satisfy certain financial covenants, including:
|
• |
Total consolidated indebtedness not exceeding 60% of gross asset value (or 65% for up to two consecutive quarters following any acquisition with a purchase price equal to or greater than $150 million but only up to two times during the term of the secured credit facility); |
|
• |
A minimum fixed charge coverage ratio (defined as the ratio of consolidated earnings before interest, taxes, depreciation and amortization to consolidated fixed charges) of 1.75 to 1.00; |
|
• |
A minimum consolidated tangible net worth (defined as gross asset value less total consolidated indebtedness) of $275.0 million plus 75% of the sum of any additional offering proceeds; |
|
• |
A minimum aggregate occupancy rate of 85% for borrowing base properties; |
|
• |
A minimum weighted-average remaining initial lease term of five years for borrowing base properties; and |
|
• |
Minimum borrowing base assets of at least ten borrowing base properties with an aggregate appraised value of $375.0 million. |
The amended credit agreement also contains customary events of default, in certain cases subject to customary periods to cure, including among others, nonpayment of principal or interest, material breach of representations and warranties, and failure to comply with covenants. The occurrence of an event of default, following the applicable cure period, would permit the lenders to, among other things, declare the unpaid principal, accrued and unpaid interest and all other amounts payable under the amended credit facility to be immediately due and payable.
Our operating partnership is the borrower under the amended credit facility, and we and certain of our subsidiaries serve as guarantors under the facility.
Interest Rate Swap Agreements
We may use interest rate derivatives from time to time to manage our exposure to interest rate risks. On February 10, 2017, we entered into interest rate swap agreements, effective on April 10, 2017, on the full $125 million on the term loan to fix the variable LIBOR rate at 1.84%, plus the LIBOR spread under the amended credit agreement, which was 1.75% at May 8, 2017.
Sources and Uses of Cash
The sources and uses of cash reflected in our consolidated statements of cash flows for the three months ended March 31, 2017 and 2016 are summarized below (dollars in thousands):
|
|
For the three months ended March 31, |
|
|
|
|
|
|||||
|
|
2017 |
|
|
2016 |
|
|
Change |
|
|||
Cash and cash equivalents at beginning of period |
|
$ |
9,509 |
|
|
$ |
12,474 |
|
|
$ |
(2,965 |
) |
Net cash provided by operating activities |
|
|
8,988 |
|
|
|
4,405 |
|
|
|
4,583 |
|
Net cash used in investing activities |
|
|
(12,736 |
) |
|
|
(290 |
) |
|
|
(12,446 |
) |
Net cash provided by (used in) financing activities |
|
|
2,045 |
|
|
|
(6,798 |
) |
|
|
8,843 |
|
Cash and cash equivalents at end of period |
|
$ |
7,806 |
|
|
$ |
9,791 |
|
|
$ |
(1,985 |
) |
Operating Activities- Cash flows from operating activities increased by $4.6 million during the three months ended March 31, 2017 compared to the same period in 2016. Operating cash flows were primarily impacted by a net increase in cash of $3.4 million related to other operating assets and liabilities and the net $1.5 million reduction in deferred revenues based on the timing of rents collected.
Investing Activities- Cash used in investing activities during the three months ended March 31, 2017 increased by $12.4 million compared to the same period in 2016. This is primarily due to the funding of the $12.5 million mortgage note secured by Advanced Diagnostics Hospital East.
Financing Activities- Cash provided by financing activities was $2.0 million for the three months ended March 31, 2017, compared to cash used by financing activities of $6.8 million for the same period in 2016. The change resulted primarily from a $12.5 million increase in borrowings under the credit facility to fund the Advanced Diagnostics Hospital East mortgage note during the three months ended March 31, 2017. This was offset by (i) an increase of $2.7 million in deferred financing costs related to the credit
22
facility amendment in February 2017 and (ii) a net increase of $0.8 million in dividends paid resulting from the increase in the number of shares of common stock outstanding as a result of our IPO in October 2016 and a $2.4 million decrease in preferred stock dividends due to the redemption of the pr eferred stock in October 2016.
Off-Balance Sheet Arrangements
As of March 31, 2017, we had no off-balance sheet arrangements.
Non-GAAP Financial Measures
We consider the following non-GAAP financial measures useful to investors as key supplemental measures of our performance: funds from operations attributable to common stockholders (“FFO”) and adjusted fund from operations attributable to common stockholders (“AFFO”).
Funds from Operations
FFO is a non-GAAP measure used by many investors and analysts that follow the real estate industry. FFO, as defined by the National Association of Real Estate Investment Trusts (“NAREIT”), represents net income (computed in accordance with GAAP), excluding gains (losses) on sales of real estate and impairments of real estate assets, plus real estate-related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. Noncontrolling interest amounts represent adjustments to reflect only our share of depreciation and amortization. We compute FFO in accordance with NAREIT’s definition, which may differ from the methodology for calculating FFO, or similarly titled measures, used by other companies.
Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, most real estate industry investors consider FFO to be helpful in evaluating a real estate company’s operations. We believe that the presentation of FFO provides useful information to investors regarding our operating performance by excluding the effect of real-estate related depreciation and amortization, gains or losses from sales for real estate, including impairments, extraordinary items and the portion of items related to unconsolidated entities, all of which are based on historical cost accounting, and that FFO can facilitate comparisons of operating performance between periods and between REITs, even though FFO does not represent an amount that accrues directly to common stockholders.
Our calculation of FFO may not be comparable to measures calculated by other companies that do not use the NAREIT definition of FFO or do not calculate FFO per diluted share in accordance with NAREIT guidance. FFO should not be considered as an alternative to net income (computed in accordance with GAAP) as an indicator of our financial performance or to cash flow from operating activities (computed in accordance with GAAP) as an indicator of our liquidity.
Adjusted Funds from Operations
AFFO is a non-GAAP measure used by many investors and analysts to measure a real estate company’s operating performance by removing the effect of items that do not reflect ongoing property operations. To calculate AFFO, we further adjust FFO for certain items that are not added to net income in NAREIT’s definition of FFO, such as acquisition expenses, non-real estate-related depreciation and amortization (including amortization of lease incentives and tenant allowances), stock-based compensation expenses, and any other non-comparable or non-operating items, that do not relate to the operating performance of our properties. To calculate AFFO, we also adjust FFO to remove the effect of straight-line rent revenue, which represents the recognition of net unbilled rental income expected to be collected in future periods of a lease agreement that exceeds the actual contractual rent due periodically from tenants for their use of the leased real estate under each lease. Noncontrolling interest amounts represent adjustments to reflect only our share of straight line rent revenue.
Our calculation of AFFO may differ from the methodology used for calculating AFFO by certain other REITs and, accordingly, our AFFO may not be comparable to AFFO reported by other REITs. AFFO should not be considered as an alternative to net income (computed in accordance with GAAP) as an indicator of our financial performance or to cash flow from operating activities (computed in accordance with GAAP) as an indicator of our liquidity.
The table below reconciles net income attributable to common stockholders, the most directly comparable GAAP metric, to FFO and AFFO attributable to common stockholders for the three months ended March 31, 2017 and 2016 and is presented using the weighted average common shares as determined in the Company’s computation of earnings per share. The effects of restricted shares of common stock and restricted stock units outstanding were included in the dilutive weighted-average common shares outstanding for the calculation of FFO and AFFO per common share as their effects were dilutive. Restricted stock units were excluded from the calculation of diluted income per share for all periods presented because their effects were not dilutive. Restricted shares of common stock were excluded from the calculation of diluted income per share for the three months ended March 31, 2017 because their effects were not dilutive.
The increase in FFO attributable to common stockholders and AFFO attributable to common stockholders for the three months ended March 31, 2017 as compared to the same period in the prior year is primarily related to the use of proceeds from our IPO in
23
October 2016 in which we redeemed all outstanding pr eferred stock and partially repaid amounts outstanding on our credit facility resulting in a lower weighted-average balance. The weighted-average interest rate on borrowings on the credit facility was also reduced as a result of completing our IPO.
The amounts presented below are in thousands, except per share amounts.
|
|
For the three months ended March 31, |
|
|||||
|
|
2017 |
|
|
2016 |
|
||
Net income attributable to common stockholders |
|
$ |
4,531 |
|
|
$ |
1,031 |
|
Real estate depreciation and amortization, net of noncontrolling interest |
|
|
3,536 |
|
|
|
3,705 |
|
FFO attributable to common stockholders |
|
|
8,067 |
|
|
|
4,736 |
|
Acquisition costs on completed acquisitions |
|
|
- |
|
|
|
16 |
|
Stock-based compensation expense |
|
|
956 |
|
|
|
647 |
|
Deferred financing costs amortization |
|
|
322 |
|
|
|
747 |
|
Non-real estate depreciation and amortization |
|
|
152 |
|
|
|
9 |
|
Straight-line rent expense |
|
|
40 |
|
|
|
42 |
|
Straight-line rent revenue, net of noncontrolling interest |
|
|
(969 |
) |
|
|
(653 |
) |
AFFO attributable to common stockholders |
|
$ |
8,568 |
|
|
$ |
5,544 |
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding- earnings per share |
|
|
|
|
|
|
|
|
Basic |
|
|
31,415 |
|
|
|
10,959 |
|
Diluted |
|
|
31,415 |
|
|
|
11,054 |
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders per share |
|
|
|
|
|
|
|
|
Basic and diluted |
|
$ |
0.14 |
|
|
$ |
0.09 |
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding- FFO and AFFO |
|
|
|
|
|
|
|
|
Basic |
|
|
31,415 |
|
|
|
10,959 |
|
Diluted |
|
|
31,566 |
|
|
|
11,054 |
|
|
|
|
|
|
|
|
|
|
FFO per common share |
|
|
|
|
|
|
|
|
Basic and diluted |
|
$ |
0.26 |
|
|
$ |
0.43 |
|
|
|
|
|
|
|
|
|
|
AFFO per common share |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.27 |
|
|
$ |
0.51 |
|
Diluted |
|
$ |
0.27 |
|
|
$ |
0.50 |
|
24
Item 3. Quantitative and Qualitative Di sclosures about Market Risk
The primary market risk to which we are exposed is interest rate risk. As of March 31, 2017, we had $31.5 million outstanding under our revolving credit facility and $125.0 million outstanding under our term loan, all of which bears interest at a variable rate, and no other outstanding debt. We entered into interest rate swaps on the term loan that effectively converts it into fixed-rate debt. At March 31, 2017, LIBOR on our outstanding borrowings was 0.94%. Assuming no increase in the amount of our variable-rate debt, if LIBOR increased 100 basis points, our cash flow would decrease by approximately $0.3 million annually. Assuming no increase in the amount of our variable rate debt, if LIBOR were reduced to 0 basis points, our cash flow would increase by approximately $0.3 million annually.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act are controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
In connection with the preparation of this Quarterly Report on Form 10-Q, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2017. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of March 31, 2017.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period covered by this report identified in connection with the evaluation of our disclosure controls and procedures described above that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We are not currently a party, as plaintiff or defendant, to any legal proceedings which, individually or in the aggregate, would be expected to have a material effect on our financial condition or results of operations if determined adversely to us. We may be party from time to time to various lawsuits, claims and other legal proceedings that arise in the ordinary course of our business. There can be no assurance that these matters that arise in the future, individually or in aggregate, will not have a material adverse effect on our financial condition or results of operations in any future period.
During the three months ended March 31, 2017, there were no material changes to the risk factors that were disclosed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2016.
25
Item 2. Unregi stered Sales of Equity Securities and Use of P roceeds
Issuer Repurchase of Equity Securities
As set forth in the table below, during the quarter ended March 31, 2017, the Company repurchased a total of 5,368 shares of its common stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period |
|
Total Number
|
|
Average Price
|
|
Total Number
|
|
|
||||
January 1 - 31, 2017 |
|
|
— |
|
$ |
— |
|
|
— |
|
|
N/A |
February 1 - 28, 2017 |
|
|
— |
|
$ |
— |
|
|
— |
|
|
N/A |
March 1 - 31, 2017 |
|
|
5,368 (1) |
|
$ |
9.23 |
|
|
— |
|
|
N/A |
Total |
|
|
5,368 |
|
$ |
9.23 |
|
|
— |
|
|
— |
___________________
(1) |
On March 28, 2017, the Company repurchased and cancelled 5,368 restricted shares of common stock held by funds managed by BlueMountain Capital Management, LLC for an aggregate purchase price of approximately $50,000 in a privately negotiated transaction. For additional information, see Note 7 to the Company’s interim consolidated financial statements included in this Quarterly Report on Form 10-Q. |
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
None.
Item 6. Exhibits
The exhibits listed in the accompanying Exhibit Index are filed, furnished or incorporated by reference (as stated therein) as part of this Quarterly Report on Form 10-Q.
26
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
|
|
MedEquities Realty Trust, Inc. |
|
|
|
|
|
Date: May 8, 2017 |
|
By: |
/s/ John W. McRoberts |
|
|
|
John W. McRoberts |
|
|
|
Chief Executive Officer (Principal Executive Officer) |
|
|
|
|
Date: May 8, 2017 |
|
By: |
/s/ Jeffery C. Walraven |
|
|
|
Jeffery C. Walraven |
|
|
|
Chief Financial Officer (Principal Financial Officer) |
27
Exhibit Number |
|
Description |
|
|
|
10.1 † |
|
2016 Form of Restricted Stock Unit Award Agreement |
|
|
|
31.1 |
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
31.2 |
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
32.1 |
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
101.INS |
|
XBRL Instance Document |
101.SCH |
|
XBRL Taxonomy Extension Schema Document |
101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF |
|
XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB |
|
XBRL Taxonomy Extension Label Linkbase Document |
101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
|
† Management contract or compensatory plan or arrangement.
28
Exhibit 10.1
MEDEQUITIES REALTY TRUST, INC.
2014 EQUITY INCENTIVE PLAN
STOCK UNITS AGREEMENT
MedEquities Realty Trust, a Maryland corporation (the “ Company ”), hereby grants stock units (“ Stock Units ”) for shares of its common stock, $0.01 par value per share (“ Common Stock ”), to the Grantee named below, subject to the vesting and other conditions set forth below. Additional terms and conditions of the grant are set forth in this cover sheet and in the attachment (collectively, the “ Agreement ”) and in the Company’s 2014 Equity Incentive Plan (as amended from time to time, the “ Plan ”). Capitalized terms used but not defined herein shall have the meanings given them in the Plan.
Name of Grantee:
“Target” Number of Stock Units: [ ] (the “ Target Award ”) *
Grant Date:
*The actual number of Stock Units earned may range from 0% to 150% of the Target Award, depending on the extent to which applicable vesting conditions set forth in the following Vesting Schedule and Exhibit A are satisfied.
Vesting Schedule : Subject to your continuous Service and other limitations set forth in this Agreement and the Plan, the Stock Units shall vest as follows:
|
• |
25% of the Stock Units will vest based on the Company’s absolute total return to stockholders (“ TSR ”) (the “ Absolute TSR Units ”) |
|
• |
25% of the Stock Units will vest based on the Company’s TSR compared to the performance of the FTSE NAREIT Equity Healthcare REIT Index (the “ Relative TSR Units ”) |
|
• |
25% of the Stock Units will vest based on growth in “Gross Real Estate Investments” (defined in Exhibit A) (the “ Asset Growth Units ”) |
|
• |
25% of the Stock Units will vest based on growth in “AFFO Per Share” (defined in Exhibit A) (the “ AFFO Per Share Growth Units ”) |
Except to the extent provided otherwise in the Agreement, for each of the above performance goals, performance will be measured over a three-year performance period commencing on January 1, 2017 and ending on December 31, 2019 (the “ Performance Period ”). The methodology for determining performance during the Performance Period is described in Exhibit A.
By your signature below, you agree to all of the terms and conditions described herein, in the attached Agreement and in the Plan, a copy of which is also attached. You acknowledge that you have carefully reviewed the Plan, and agree that the Plan will control in the event any provision of this cover sheet or Agreement should appear to be inconsistent.
Attachment
This is not a stock certificate or a negotiable instrument.
MEDEQUITIES REALTY TRUST, INC.
2014 EQUITY INCENTIVE PLAN
STOCK UNITS AGREEMENT
Stock Units |
|
This Agreement evidences an award of stock units for Shares in the number set forth on the cover sheet and subject to the vesting and other conditions set forth herein, in the Plan and on the cover sheet (the “ Stock Units ”). |
|
|
|
Transfer of Unvested Stock Units |
|
Except as authorized by the Committee in writing, unvested Stock Units may not be sold, assigned, transferred, pledged, hypothecated or otherwise encumbered, whether by operation of law or otherwise, nor may the Stock Units be made subject to execution, attachment or similar process. If you attempt to do any of these things without the Committee’s written authorization, the Stock Units will immediately become forfeited. |
|
|
|
Vesting |
|
The Company will issue your Stock Units in the name set forth on the cover sheet.
Your rights under this Stock Units grant and this Agreement shall vest in accordance with the vesting schedule set forth on the cover sheet so long as you continue in Service through the vesting dates set forth on the cover sheet.
|
Change in Control
|
|
Notwithstanding the vesting schedule set forth above or anything to the contrary contained in the Plan or any employment or other written agreement between the Company or any Affiliate, as applicable, and you, (i) if a Change in Control that is not an Unfavorable Limited Change in Control (as that term is defined in the Amended and Restated Employment Agreement between the Company and you (the “ Employment Agreement ”)) occurs before July 1, 2019, the unvested Stock Units will become fully vested (which shall be interpreted as meaning 150% of the “Target Award” will vest) as of the date of the Change in Control, and (ii) if a Change in Control that is not an Unfavorable Limited Change in Control (as that term is defined in the Employment Agreement)) occurs on or after July 1, 2019, and on or before December 31, 2019, performance under all performance goals will be measured up to the date of the Change in Control in the manner described in Exhibit A, with any Stock Units that vest based on such performance being deemed vested as of the date of the Change in Control, and any Stock Units that do not vest based on such performance being forfeited as of the date of the Change in Control. |
Delivery |
|
As your Stock Units vest, the Company will issue the Shares to which the then vested Stock Units relate. The resulting aggregate number of vested Shares will be rounded to the nearest whole number, and you cannot vest in more than the maximum number of Shares covered by this grant. The issuance of Shares underlying any Stock Units that vest shall be made within two and one-half months after the last day of the Performance Period (or, if for any reason the Stock Units vest before the last day of the Performance Period, within two and one-half months after the date the Stock Units vest). |
Evidence of Issuance |
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The issuance of the Shares under the grant of Stock Units evidenced by this Agreement shall be evidenced in such a manner as the Company, in its discretion, will deem appropriate, including, without limitation, book-entry, registration or issuance of one or more Share certificates. You will have no further rights with regard to a Stock Unit once the Share related to such Stock Unit has been issued. |
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Forfeiture of Unvested Stock Units |
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Unless the termination of your Service triggers accelerated vesting of your Stock Units, or other treatment pursuant to the terms of this Agreement, the Plan, or in an employment or any other written agreement between the Company or any Affiliate, as applicable, and you, you will automatically forfeit to the Company all of the unvested Stock Units in the event you are no longer providing Service for any reason. To the extent any such agreement or arrangement provides for “full” (or words of similar import) vesting of the Stock Units, it shall be interpreted as meaning 150% of the “Target Award” will vest. |
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Leaves of Absence |
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For purposes of this Agreement, your Service does not terminate when you go on a bona fide leave of absence that was approved by your employer in writing if the terms of the leave provide for continued Service crediting, or when continued Service crediting is required by applicable law. Your Service terminates in any event when the approved leave ends unless you immediately return to active employee work.
Your employer may determine, in its discretion, which leaves count for this purpose, and when your Service terminates for all purposes under the Plan in accordance with the provisions of the Plan. Notwithstanding the foregoing, the Company may determine, in its discretion, that a leave counts for this purpose even if your employer does not agree. |
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Dividend Equivalent Rights |
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You shall also be entitled to Dividend Equivalent Rights with respect to your Stock Units, as described herein. If the Company declares a normal cash dividend on its Shares and the record date of such dividend is prior to the earlier of the date your Stock Units are settled in full or terminate, you will receive a dividend equivalent credit equal to such normal cash dividend for each outstanding Stock Unit. Any such dividend equivalent credits shall be accumulated (without interest) and shall be subject to the same terms and conditions as are applicable to the Stock Units to which the dividend equivalents relate, including, without limitation, the restrictions on transfer, forfeiture, vesting and payment provisions contained in this Agreement. For avoidance of doubt, dividend equivalents shall be paid in cash on the date the Stock Units to which they relate are converted into Shares. |
Clawback |
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If the Company adopts a “clawback” or recoupment policy, this Award will be subject to repayment to the Company to the extent so provided under the terms of such policy.
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This Agreement will be interpreted and enforced under the laws of the State of Maryland, other than any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Agreement to the substantive law of another jurisdiction. |
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The Plan |
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The text of the Plan is incorporated in this Agreement by reference.
Certain capitalized terms used in this Agreement are defined in the Plan, and have the meaning set forth in the Plan.
This Agreement and the Plan constitute the entire understanding between you and the Company regarding this grant; except that any written employment, consulting, confidentiality, non-competition, non-solicitation and/or severance agreement between you and the Company or any Affiliate shall supersede this Agreement with respect to its subject matter, except as set forth above under “Change in Control.” Any other prior agreements, commitments or negotiations concerning this grant are superseded. |
Data Privacy |
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In order to administer the Plan, the Company may process personal data about you. Such data includes, but is not limited to, information provided in this Agreement and any changes thereto, other appropriate personal and financial data about you such as your contact information, payroll information and any other information that might be deemed appropriate by the Company to facilitate the administration of the Plan.
By accepting this grant, you give explicit consent to the Company to process any such personal data. |
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Code Section 409A |
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It is intended that this Award comply with Code Section 409A or an exemption to Code Section 409A, and this Award shall be interpreted accordingly. To the extent that the Company determines that you would be subject to the additional 20% tax imposed on certain non-qualified deferred compensation plans pursuant to Code Section 409A as a result of any provision of this Agreement, such provision shall be deemed amended to the minimum extent necessary to avoid application of such additional tax. The nature of any such amendment shall be determined by the Company. For purposes of this Award, a termination of Service only occurs upon an event that would be a separation from service within the meaning of Code Section 409A. |
By signing this Agreement, you agree to all of the terms and conditions described above and in the Plan.
The number of Stock Units that vest (determined separately with respect to each category of Stock Units, with each category representing 25% of the Target Award*) will be determined as follows (rounded down to the nearest whole share):
Absolute TSR Units |
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Absolute TSR |
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% of Units That Vest |
25.5% |
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0% |
29.5% |
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50% |
33.5% |
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100% |
37.5% or greater |
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150% |
Relative TSR Units |
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TSR Compared to FTSE NAREIT Equity Healthcare REIT Index |
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% of Units That Vest |
Index -3% |
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0% |
= Index |
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50% |
Index +3% or greater |
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100% |
Index +6% or greater |
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150% |
Asset Growth Units |
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Asset Growth |
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% of Units That Vest |
0% |
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0% |
72.8% |
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50% |
119.7% |
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100% |
174.4% |
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150% |
AFFO Per Share Growth Units |
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AFFO Per Share Growth |
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% of Units That Vest |
0% |
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0% |
7.69% |
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50% |
15.76% |
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100% |
24.23% |
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150% |
*The “Target Award” is the total “Target” number of Stock Units awarded, as reflected on the first page of the Stock Unit Agreement.
To the extent performance is between any two designated amounts, the percentage of the Target Award earned will be determined using a straight line linear interpolation between the two designated amounts.
For purposes of calculating the number of Absolute TSR Units that vest, the Company’s TSR will be equal to (i) (a) the value per Share at the end of the Performance Period, assuming reinvestment on the payment date of dividends and any other stockholder payouts during the Performance Period in additional Shares, less (b) the value per Share at the beginning of the Performance Period, divided by (ii) the value per Share at the beginning of the Performance Period, expressed as a percentage (rounded to the nearest tenth of a percent (0.1%)). For this purpose, the value per Share at the beginning of the Performance Period will be the average closing stock price over last fifteen (15) trading days ending on the last trading day in 2016, and the value per Share at the end of the Performance Period will be (y) if the Shares are listed on a Stock Exchange or publicly traded on a Securities Market, the average closing stock price over last fifteen (15) trading days ending on the last trading day of the Performance Period, or (z) if the Shares are not listed on a Stock Exchange or publicly traded on a Securities Market, as determined by the Committee in good faith.
Relative TSR Units :
For purposes of calculating the number of Relative TSR Units that vest, the Company’s TSR will be compared to the compounded annual growth rate, expressed as a percentage (rounded to the nearest tenth of a percent (0.1%)), in the value of total return version of the FTSE NAREIT Equity Healthcare REIT Index over the Performance Period, calculated from information publicly available in a manner consistent with the manner for calculating TSR. If the FTSE NAREIT Equity Healthcare REIT Index is discontinued, a comparable index will be selected by the Committee in good faith and used for purposes of determining the number of Relative TSR Units Earned.
Asset Growth Units :
For purposes of calculating the number of Asset Growth Units that vest, “ Asset Growth ” shall equal be equal to (i)(a) the Company’s “Gross Real Estate Investments” at the end of the performance period less (b) the Company’s “Gross Real Estate Investments” as of December 31, 2016, divided by (ii) the Company’s “Gross Real Estate Investments” as of December 31, 2016, expressed as a percentage (rounded to the nearest tenth of a percent (0.1%)). For this purpose, “ Gross Real Estate Investments ” shall mean the gross purchase price paid or funded for real estate investments (including, but not limited to, properties, mortgage notes receivable, equity method investments, cost method investments, partnerships, and joint ventures), including any debt assumed or incurred at acquisition to fund the acquisition of the real estate investment, which generates incremental revenue to the Company as documented in the lease or other underlying contractual arrangements.
Further guidance in the determination of Gross Real Estate Investments is as follows:
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1. |
The determination of Gross Real Estate Investments will ignore the balance sheet classification resulting from the purchase price allocation for GAAP accounting purposes |
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as required by ASC 805, Business Combinations (“ ASC 805 ”) , including asset acquisitions. |
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2. |
Costs directly attributable to the acquisition of real estate investments, referred to as acquisition costs, shall be excluded unless these costs generate incremental cash revenue to the Company from such investment as outlined in the underlying contractual arrangements. |
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3. |
Any non-cash impairment charges incurred on real estate investments shall reduce the amount of Gross Real Estate Investments at the time such impairment charge is recognized. |
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4. |
Any increase in Gross Real Estate Investments as a result of the application of GAAP accounting principles included in ASC 805 (including asset acquisition accounting) shall be reduced by any corresponding liability recorded, whether partially or in total. |
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5. |
Any non-cash gain or loss recognized upon initial application of ASC 805 to a real estate acquisition shall be excluded. This would include any adjustments to the fair value of assumed debt in a real estate investment transaction. |
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6. |
Any lease incentives, tenant allowances or other amounts that generate incremental cash revenue to the Company under the contractual arrangement shall be included in the determination of Gross Real Estate Investments, whether or not such amounts increase real estate investments for GAAP accounting purposes. All other such items shall be excluded. |
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7. |
Any capital expenditures paid by the Company on owned real estate properties shall be included in the determination of Gross Real Estate Investments to the extent the Company earns a return on those invested dollars. |
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8. |
The Gross Real Estate Investment attributable to Lakeway Hospital shall be determined as the Company’s consolidated basis, less any equity cash contributions by non-controlling interests. |
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9. |
Any other consolidated non-wholly owned investments shall be included at the Company’s consolidated basis, after application of the guidance for determining Gross Real Estate Investments included herein, less any equity cash contributions from third-party non-controlling interest holders. |
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10. |
Any items not specifically addressed in this section impacting the Company’s basis in its real estate investments for GAAP accounting purposes shall follow the GAAP accounting treatment. |
AFFO Per Share Growth Units :
For purposes of calculating the number of AFFO Per Share Growth Units that vest, except to the extent adjusted pursuant to the “Leverage Adjustment” (described below), the Company’s AFFO Per Share Growth will be equal to (i) (a) the Company’s AFFO Per Share in 2017, 2018 and 2019, which shall be calculated by adding the quarterly AFFO Per Share for each of the 12 quarters commencing with Q1 of 2017 and ending with Q4 of 2019, and dividing the sum thereof
by 3 , less (b) the Company’s 2016 AFFO Per Share , divided by (ii) the 2016 AFFO Per Share , expressed as a percentage (rounded to the nearest one-hundredth of a percent (0. 0 1%)) . For this purpose, “ AFFO Per Share ” means Adjusted Funds From Operations attributable to common stockholders per share on a diluted basis , as reported by the Company in its periodic filings with the Securities and Exchange Commission , and “ 2016 AFFO Per Share ” is calculated by multiplying the Company’s AFFO Per Share in Q 4 of 2016 by 4 .
“Leverage Adjustment”
To the extent that the Company’s leverage ratio (calculated as net debt divided by total assets as reflected in the Company’s balance sheet (calculated in accordance with GAAP), plus accumulated depreciation (gross assets)) exceeds 50% during any consecutive 12 months or more within the Performance Period (the “ Excess Leverage Period ”), AFFO Per Share for each quarterly reporting period within the Excess Leverage Period shall be adjusted as follows:
Step 1: Determine the amount by which net debt would need to be reduced to lower the leverage ratio to 50% for the entire period that the leverage ratio exceeds the 50% leverage threshold (such amount, the “ Excess Indebtedness ”).
Step 2: Convert the Excess Indebtedness into “Pro Forma Common Stock” by dividing the Excess Indebtedness by the “Pro Forma Common Stock Offering Price.” For this purpose, the “ Pro Forma Common Stock Offering Price ” shall be the average closing market price of the Company’s common stock during the quarterly period in which the leverage ratio exceeds the 50% leverage threshold, reduced by 7% (representing a 3% market rate discount and a 4% as an underwriting discount).
The amount of Pro Forma Common Stock shall increase the denominator used in the determination of Quarterly AFFO Per Share for each quarterly reporting period in the Excess Leverage Period. When only a portion of a quarter is impacted by the excess leverage, the Pro Forma Common Stock adjustment shall be prorated for the period of time the leverage ratio exceeded 50%. The numerator used in the determination of Quarterly AFFO Per Share for each quarterly reporting period in the Excess Leverage Period shall be adjusted by an amount representing the decrease in interest expense that would have resulted from the net proceeds received in the deemed pro forma common stock offering. This pro forma interest adjustment shall be determined by multiplying the Excess Indebtedness (which represents the net proceeds from the pro forma common stock offering) by the respective quarterly weighted-average interest rate on indebtedness during the quarterly reporting period in the Excess Leverage Period. When only a portion of a quarterly reporting period has experienced Excess Indebtedness, the weighted-average interest rate from the date the Excess Indebtedness was incurred shall be used.
Change in Control :
Notwithstanding the foregoing, if, pursuant to the Agreement, performance is to be measured up to the date of a Change in Control rather than through the last day of the Performance Period, the number of Stock Units that vest will be determined as follows (rounded down to the nearest whole share): (i) the number of Absolute TSR Units, the Asset Growth Units and the AFFO Per
Share Growth Units that vest, if any, shall be calculated based on the Company’s actual performance through the date immediately preceding the date of the Change in Control (such date, the “Measurement Date”) , with the percentages in the left column of the tables on the first page of this Exhibit A prorated by multiplying such percentages by a fraction, the numerator of which is the number of days from and including the first day of the Performance Period through the Measurement Date , and the denominator of which is 1,095; and (ii) the number of Relative TSR Units that vest, if any, shall be calculated in accordance with this Exhibit A based on TSR calculated through the Measurement Date . Notwithstanding the foregoing, for purposes of the AFFO Per Share Growth Units only, the Measurement Date shall be the last day of the most recently completed quarter for which financial statements are available.
Exhibit 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John W. McRoberts, certify that:
1. |
I have reviewed this quarterly report on Form 10-Q of the registrant, MedEquities Realty Trust, Inc.; |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) [Language omitted in accordance with SEC Release Nos. 34-47986 and 34-54942] for the registrant and have: |
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(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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(b) |
[Language omitted in accordance with SEC Release Nos. 34-47986 and 34-54942]; |
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(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. |
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
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(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: May 8, 2017 |
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By: |
/s/ John W. McRoberts |
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John W. McRoberts |
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Chief Executive Officer |
Exhibit 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Jeffery C. Walraven, certify that:
1. |
I have reviewed this quarterly report on Form 10-Q of the registrant, MedEquities Realty Trust, Inc.; |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) [Language omitted in accordance with SEC Release Nos. 34-47986 and 34-54942] for the registrant and have: |
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(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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(b) |
[Language omitted in accordance with SEC Release Nos. 34-47986 and 34-54942]; |
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(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. |
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
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(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: May 8, 2017 |
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By: |
/s/ Jeffery C. Walraven |
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Jeffery C. Walraven |
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Executive Vice President and Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Each of the undersigned hereby certifies, for the purposes of 18 U.S.C. Section 1350, as added by Section 906 of the Sarbanes-Oxley Act of 2002, that, to the undersigned’s best knowledge and belief, the Quarterly Report on Form 10-Q of MedEquities Realty Trust, Inc. (“Company”) for the period ended March 31, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”):
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(1) |
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: May 8, 2017 |
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By: |
/s/ John W. McRoberts |
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John W. McRoberts |
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Chief Executive Officer |
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By: |
/s/ Jeffery C. Walraven |
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Jeffery C. Walraven |
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Executive Vice President and Chief Financial Officer
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