GLOBAL MEDICAL REIT INC. The following discussion should be read in conjunction with our financial statements, including the notes to those financial statements, included elsewhere in this Quarterly Report on Form 10-Q (this "Report"). Some of the comments we make in this section are forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, see the section below entitled "Special Note Regarding Forward-Looking Statements." Certain risk factors may cause actual results, performance or achievements to differ materially from those expressed or implied by the following discussion. For a discussion of such risk factors, see Item 1A. Risk Factors of our Annual Report on Form 10-K for the year endedDecember 31, 2020 , that was filed with theU.S. Securities and Exchange Commission (the "SEC" or the "Commission") onMarch 8, 2021 and Item 1A. Risk Factors of our Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2021 , that was filed with theSEC onMay 7, 2021 . Unless otherwise indicated, all dollar and share amounts in the following discussion are presented in thousands.
Special Note Regarding Forward-Looking Statements
This Report contains "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")). In particular, statements pertaining to our trends, liquidity, capital resources, and the healthcare industry and the healthcare real estate markets and opportunity, among others, contain forward-looking statements. You can identify forward-looking statements by the use of forward-looking terminology including, but not limited to, "believes," "expects," "may," "will," "should," "seeks," "approximately," "intends," "plans," "estimates" or "anticipates" or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans or intentions. Forward-looking statements involve numerous risks and uncertainties and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise and we may not be able to realize them. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:
the effects of the ongoing novel coronavirus ("COVID-19") pandemic, which are
highly uncertain, cannot be predicted and will depend upon future developments,
including the severity of COVID-19, the duration of the outbreak and potential
resurgences (including any related variants of the COVID-19 virus such as the
? Delta variant, or others), the duration of existing or new social distancing
and shelter-in-place orders, further mitigation strategies taken by applicable
government authorities, the availability and distribution of vaccines,
vaccination rates, adequate testing and treatments and the prevalence of
widespread immunity to COVID-19;
? defaults on or non-renewal of leases by tenants;
? our ability to collect rents;
? our ability to satisfy the covenants in our existing and any future debt
agreements;
? decreased rental rates or increased vacancy rates, including expected rent
levels on acquired properties;
? difficulties in identifying healthcare facilities to acquire and completing
such acquisitions;
? adverse economic or real estate conditions or developments, either nationally
or in the markets in which our facilities are located;
? our failure to generate sufficient cash flows to service our outstanding
obligations;
? fluctuations in interest rates and increased operating costs;
? our failure to effectively hedge our interest rate risk;
? our ability to satisfy our short and long-term liquidity requirements;
? our ability to deploy the debt and equity capital we raise;
? our ability to raise additional equity and debt capital on terms that are
attractive or at all;
? our ability to make distributions on shares of our common and preferred stock;
? expectations regarding the timing and/or completion of any acquisition;
? expectations regarding the timing and/or completion of dispositions, and the
expected use of proceeds therefrom;
? general volatility of the market price of our common and preferred stock;
? changes in our business or our investment or financing strategy;
? our dependence upon key personnel whose continued service is not guaranteed;
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? our ability to identify, hire and retain highly qualified personnel in the
future;
? the degree and nature of our competition;
? changes in healthcare laws, governmental regulations, tax rates and similar
matters;
? changes in current healthcare and healthcare real estate trends;
? changes in expected trends in Medicare, Medicaid and commercial insurance
reimbursement trends;
? competition for investment opportunities;
? our failure to successfully integrate acquired healthcare facilities;
? our expected tenant improvement expenditures;
? changes in accounting policies generally accepted in
America ("GAAP");
? lack of or insufficient amounts of insurance;
? other factors affecting the real estate industry generally;
? changes in the tax treatment of our distributions;
? our failure to qualify and maintain our qualification as a real estate
investment trust ("REIT") for
our ability to qualify for the safe harbors from the "100% Prohibited
? Transactions Tax" under the REIT rules with respect to our property
dispositions; and
? limitations imposed on our business and our ability to satisfy complex
rules relating to REIT qualification for
See Item 1A. Risk Factors in our Annual Report on Form 10-K for the year endedDecember 31, 2020 , that was filed with theSEC onMarch 8, 2021 and Item 1A. Risk Factors of our Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2021 , that was filed with theSEC onMay 7, 2021 , 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 may file with theSEC from time to time. You should carefully consider these risks before making any investment decisions in our company. New risks and uncertainties may also emerge from time to time that could materially and adversely affect us. While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We disclaim any obligation to update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events or other changes after the date of this Report, except as required by applicable law. You should not place undue reliance on any forward-looking statements that are based on information currently available to us or the third parties making the forward-looking statements.
Overview
Global Medical REIT Inc. (the "Company," "us," "we," or "our") is aMaryland corporation engaged primarily in the acquisition of purpose-built healthcare facilities and the leasing of those facilities to strong healthcare systems and physician groups with leading market share. We elected to be taxed as a REIT forU.S. federal income tax purposes commencing with our taxable year endedDecember 31, 2016 . We conduct our business through an umbrella partnership real estate investment trust, or UPREIT, structure in which our properties are owned by wholly owned subsidiaries of our operating partnership,Global Medical REIT L.P. (the "Operating Partnership"). Our wholly owned subsidiary,Global Medical REIT GP LLC , is the sole general partner of ourOperating Partnership and, as ofSeptember 30, 2021 , we owned 94.28% of the outstanding equity interests in ourOperating Partnership .
Our Business Objectives and Investment Strategy
Our principal business objective is to provide attractive, risk-adjusted returns to our stockholders through a combination of (i) reliable dividends and (ii) long-term capital appreciation. Our primary strategies to achieve our business objective are to:
construct a portfolio of healthcare facilities that are primarily located in
? secondary markets and suburbs of primary markets and are situated to take
advantage of the aging of the
healthcare delivery system;
lease our properties to healthcare tenants with profitable practices that are
utilized by an aging population and are highly dependent on their purpose-built
? real estate to deliver core medical procedures, such as cardiovascular
treatment, rehabilitation, eye surgery, gastroenterology, oncology treatment
and orthopedics;
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set aside a portion of our property portfolio for opportunistic acquisitions,
including (i) certain acute-care hospitals and long-term acute care facilities
(LTACs), that we believe provide premium, risk-adjusted returns, (ii) health
? system corporate office and administrative buildings, which we believe will
help us develop relationships with larger health systems and (iii) behavioral
and mental health facilities that are operated by national or regional
operators and are located in markets that demonstrate a need for such services;
and
? lease our facilities under triple-net leases with contractual annual rent
escalations.
Corporate Sustainability and Social Responsibility
Our business values integrate environmental sustainability, social responsibility and strong governance practices throughout our organization.
We continue to improve and expand our efforts in the corporate sustainability arena through tenant outreach and data collection to benchmark our portfolio's energy consumption and efficiency. OnJuly 1, 2021 , we submitted our second GRESB assessment, and we are working with third-party experts to support our energy monitoring efforts. We have also begun to explore potential projects with solar energy providers and on-property electric vehicle charging solutions. Our commitment to employee engagement remains a high-priority, as we continue to make accommodations for health, safety, and work-life balance. With this commitment in mind, and in response to the Company's growth, we have modestly grown our team during 2021. During the first quarter of 2021, our employee ESG working group engagedGeorgetown University's Steers Center for Global Real Estate to help us identify social responsibility initiatives. Their recommendation led to a pilot project that provides transportation to healthcare facilities for those in need. We are working with a ride-share provider and national charitable organization to implement the project in the greaterPhoenix, Arizona metro area. Our Board of Directors (the "Board") continues to lead our social and governance efforts. With its diverse composition, our Board is a strong example of inclusive leadership. In 2021, the Board continued to improve our corporate governance structure by adopting an anti-hedging and anti-pledging policy and executive equity ownership guidelines. The Board has also formed an ESG working group and has worked with management to identify an environmental, social, governance and resilience framework that can guide our ESG work going forward. Climate Change We take climate change and the risks associated with climate change seriously. We are committed to aligning our investment strategy with science and have begun to monitor our portfolio for climate risk factors. We will use this information to evaluate our insurance needs and risk management approach. In addition, the energy consumption data that we are collecting will be used to assess facilities' carbon emission levels. Capturing and tracking this information will help inform future mitigation and remediation efforts where possible. To that end we are exploring ways to mitigate climate risk, should it be present, in our acquisition strategy, as well as ways to contribute to the reduction of climate impact through proactive asset management that looks for ways to incorporate renewable energy resources and energy utilization reduction. We stand with our communities, tenants, and stockholders in supporting meaningful solutions that address this global challenge and contribute to the sustainability of our business objectives.
Impact of COVID-19 and Business Outlook
Although COVID-19 vaccines are generally widely available inthe United States , the rate of vaccination has slowed, the COVID-19 pandemic has not ended and its effects on theU.S. economy will have lasting effects. New and potentially more virulent variants of COVID-19 have been identified, such as the Delta variant, a rapidly spreading strain, that has led to a recent rise in hospitalization and infection rates. Therefore, the risk of further resurgence and possible reimplementation of restrictions remains. Although the COVID-19 pandemic has not had a material effect on our business, a resurgence of COVID-19, including its variants (such as the Delta variant), that affects our tenants' ability to pay rent to us, our lenders' ability to lend to us, or our ability to raise equity capital could have a material adverse effect on us. -39- Table of Contents Executive Summary
The following table summarizes the material changes in our business and
operations during the periods presented. The three and nine months ended
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
(in thousands, except per share and unit amounts)
Rental revenue $ 29,967 $
25,055
11,942 $ 9,517 $ 34,222 $ 26,215
Interest expense $ 4,830 $
4,864
$ 3,852 $
4,027
$ - $ 12,580 $ - $ 14,005
Net income (loss) attributable to common
stockholders per share $ 0.06 $
(0.22) $ 0.13
$ 0.23 $ (0.03) $ 0.67 $ 0.34 AFFO per share and unit(1)
$ 0.24 $ 0.23 $ 0.71 $ 0.65 Dividends per share of common stock
$ 0.205 $ 0.20 $ 0.615 $ 0.60
Weighted average common stock outstanding 64,204 46,908 59,398 45,503 Weighted average OP Units outstanding 1,707 1,958 1,741 2,250 Weighted average LTIP Units outstanding 2,198 1,367 2,040 1,143 Total weighted average shares and units outstanding 68,109 50,233 63,179 48,896
(1) See "-Non-GAAP Financial Measures," for a description of our non-GAAP
financial measures and a reconciliation of our non-GAAP financial measures.
As of
September 30 , December 31,
2021 2020
(dollars in thousands)Investment in real estate, gross$ 1,311,509 $
1,142,905
Total debt, net$ 554,600 $
586,578
Weighted average interest rate 2.91 % 3.17 % Total equity (including noncontrolling interest)$ 630,225 $
457,760
Net leasable square feet 4,238,312 3,694,865
Our Properties
During the nine months ended September 30, 2021 , we completed 16 acquisitions
encompassing an aggregate of 541,496 leasable square feet for an aggregate
contractual purchase price of $163.2 million with an aggregate annualized base
rent of $12.2 million . As of September 30, 2021 , our portfolio consisted of
gross investment in real estate of $1.3 billion , which was comprised of 102
facilities with an aggregate of 4.2 million leasable square feet and an
aggregate $100.8 million of annualized base rent.
Capital Raising Activity
OnMarch 18, 2021 , we closed an underwritten public offering of our common stock, including the related option to purchase additional shares granted to the underwriters. These transactions resulted in the issuance of 8.6 million shares of our common stock at a public offering price of$13.30 per share, generating gross proceeds of$114.7 million . During the nine months endedSeptember 30, 2021 , we generated gross proceeds of$86.6 million through at-the-market ("ATM") equity issuances of 6.1 million shares of our common stock at an average offering price of$14.29 per share. As ofNovember 1, 2021 , we had$23 million remaining under the 2020 ATM Program. -40- Table of Contents Debt Activity OnMay 3, 2021 , we entered into an amended and restated credit facility (the "Credit Facility") to, among other things, (i) increase the overall capacity of the facility from$600 million to$750 million , consisting of a$400 million revolver component (the "Revolver") and a$350 million term loan component (the "Term Loan"), (ii) extend the term of the Revolver toMay 2025 , with two six-month extension options, and extend the maturity of the Term Loan component toMay 2026 , (iii) convert the facility from a secured to an unsecured facility and (iv) implement a new pricing matrix. The Credit Facility includes a$500 million accordion feature. In addition, onMay 4, 2021 , we entered into five forward starting interest rate swaps that will fix the LIBOR component on the Term Loan through its maturity. Currently, our interest rate swaps fix the LIBOR component of the Term Loan at a rate of 1.91% throughAugust 2023 . Subsequently, fromAugust 2023 toAugust 2024 the LIBOR component of the Term Loan rate will be fixed at 1.61%. Finally, fromAugust 2024 toApril 2026 the LIBOR component of the Term Loan rate will be fixed at 1.45%. During the nine months endedSeptember 30, 2021 , we borrowed$187.7 million under our Credit Facility and repaid$207.2 million , for a net amount repaid of$19.5 million . As ofSeptember 30, 2021 , the net outstanding Credit Facility balance was$497.2 million . Recent Developments
Completed Disposition Subsequent to
On
Properties Under Contract for Acquisition or Sale
We have three properties under contract to acquire for an aggregate purchase price of approximately$23.9 million . We are currently in the due diligence period for our properties under contract. If we identify problems with these properties or the operators of any properties during our due diligence review, we may not close the transactions on a timely basis or we may terminate the purchase agreements and not close the transactions. OnOctober 5, 2021 , we entered into an agreement to sell a medical office building located inBelpre, Ohio for gross proceeds of approximately$44.6 million . The property had a net book value of approximately$29.7 million as ofSeptember 30, 2021 . The transaction is expected to be completed no earlier thanMarch 2022 . The buyer is currently in the due diligence period and the transaction is subject to various closing contingencies. Accordingly, the transaction may not close on a timely basis or the buyer may terminate the purchase agreement and not close the transaction. We intend to reinvest the sales proceeds in 2022.
Trends Which May Influence Our Results of Operations
We believe the following trends may positively impact our results of operations:
Growing healthcare expenditures. According to the
Human Services, overall healthcare expenditures are expected to grow at an
? average rate of 5.5% per year through 2027. We believe the long-term growth in
healthcare expenditures will help maintain or increase the value of our healthcare real estate portfolio.
An aging population. According to the 2010
population consisting of people 65 years or older comprise the fastest growing
? segment of the overall
population will utilize many of the services provided at our healthcare
facilities such as orthopedics, cardiac, gastroenterology and rehabilitation.
A continuing shift towards outpatient care. According to the
? Association, patients are demanding more outpatient operations. We believe this
shift in patient preference from inpatient to outpatient facilities will
benefit our tenants as most of our properties consist of outpatient facilities.
Physician practice group and hospital consolidation. We believe the trend
? towards physician group consolidation will serve to strengthen the credit
quality of our tenants if our tenants merge or are consolidated with larger
health systems.
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We believe the following trends may negatively impact our results of operations:
Increased competition for acquisition opportunities. We face increased
competition for our target asset classes from both private funds and other
public REITs. Medical office properties have proven to be a resilient asset
class during the COVID-19 pandemic as many tenants of such properties continued
? to pay rent during the pandemic, which was not the case for many other types of
commercial real estate. Given the resiliency of medical office buildings, many
real estate funds are now competing for acquisition opportunities in medical
real estate, which will cause a decrease in overall capitalization rates and
make it more difficult for us to locate acquisition opportunities that meet our
investment and return criteria. Continuation of the COVID-19 pandemic - Although COVID-19 vaccines are
currently being distributed and administered in the
if the COVID-19 pandemic will subside and the
? Although we do not believe the current state of the COVID-19 pandemic will
negatively affect our ability to collect rents in the near term, a prolonged
pandemic or resurgence of COVID-19, including any related variants of the
COVID-19 virus such as the Delta variant, or others, could put additional
strain on our tenants and could affect their ability to pay rents to us.
Changes in third party reimbursement methods and policies. Even prior to the
COVID-19 pandemic, the price of healthcare services was increasing, and we
believed that third-party payors, such as Medicare and commercial insurance
companies, would continue to scrutinize and reduce the types of healthcare
services eligible for, and the amounts of, reimbursement under their health
insurance plans. Additionally, many employer-based insurance plans were
? continuing to increase the percentage of insurance premiums for which covered
individuals are responsible. We expect these trends will only be exacerbated by
the COVID-19 pandemic, as federal and state budgets are likely to be under
tremendous stress due to the pandemic, which could affect government-sponsored
insurance plans. If these trends continue, our tenants' businesses will
continue to be negatively affected, which may impact their ability to pay rent
to us. Critical Accounting Policy The preparation of financial statements in conformity with GAAP requires us to use judgment in the application of accounting policies, including making estimates and assumptions. We base estimates on the best information available to us at the time, our experience and on various other assumptions believed to be reasonable under the circumstances. These estimates affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to various transactions or other matters had been different, it is possible that different accounting would have been applied, resulting in a different presentation of our financial statements. From time to time, we re-evaluate our estimates and assumptions. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current estimates and assumptions about matters that are inherently uncertain. Please refer to our Annual Report on Form 10-K for the year endedDecember 31, 2020 , filed with the Commission onMarch 8, 2021 , for further information regarding the critical accounting policies that affect our more significant estimates and judgments used in the preparation of our condensed consolidated financial statements included in Part I, Item 1 of this Report.
Consolidated Results of Operations
The major factors that resulted in variances in our results of operations for each revenue and expense category for the three and nine months endedSeptember 30, 2021 compared to the same period in 2020 were the increase in the size of our property portfolio and our management internalization transaction that was completed inJuly 2020 . Our total investments in real estate, net of accumulated depreciation and amortization, was$1.2 billion and$977.5 million as ofSeptember 30, 2021 and 2020, respectively. -42-
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Three Months EndedSeptember 30, 2021 Compared to Three Months EndedSeptember 30, 2020 Three Months Ended September 30, 2021 2020 $ Change (in thousands) Revenue Rental revenue$ 29,967 $ 25,055$ 4,912 Other income 16 42 (26) Total revenue 29,983 25,097 4,886 Expenses
General and administrative 3,852
4,027 (175)
Operating expenses 3,973 3,619 354
Depreciation expense 8,639 6,954 1,685
Amortization expense 3,303 2,563 740
Interest expense 4,830 4,864 (34)Management internalization expense - 12,580 (12,580) Preacquisition expense 18
70 (52)
Total expenses 24,615 34,677 (10,062)
Net income (loss) $ 5,368 $ (9,580) $ 14,948
Revenue
Total Revenue
Total revenue for the three months ended September 30, 2021 was $30.0 million ,
compared to $25.1 million for the same period in 2020, an increase of $4.9
million . The increase was primarily the result of rental revenue earned from the
facilities that we acquired after September 30, 2020 , as well as from the
recognition of a full three months of rental revenue in 2021 from acquisitions
that were completed during the three months ended September 30, 2020 . Within
that increase, $3.2 million in revenue was recognized from net lease expense
recoveries during the three months ended September 30, 2021 , compared to $3.1
million for the same period in 2020.
Expenses
General and Administrative
General and administrative expenses for the three months endedSeptember 30, 2021 were$3.9 million , compared to$4.0 million for the same period in 2020, a decrease of$0.1 million . The decrease resulted primarily from a reduction in non-cash LTIP compensation expense, which was$1.2 million for the three months endedSeptember 30, 2021 , compared to$1.6 million for the same period in 2020.
Operating Expenses
Operating expenses for the three months endedSeptember 30, 2021 were$4.0 million , compared to$3.6 million for the same period in 2020, an increase of$0.4 million . The increase resulted primarily from$3.2 million of recoverable property operating expenses incurred during the three months endedSeptember 30, 2021 , compared to$3.1 million for the same period in 2020. In addition, our operating expenses included$0.5 million of property operating expenses from gross leases for the three months endedSeptember 30, 2021 , compared to$0.4 million for the same period in 2020.
Depreciation Expense
Depreciation expense for the three months endedSeptember 30, 2021 was$8.6 million , compared to$7.0 million for the same period in 2020, an increase of$1.6 million . The increase resulted primarily from depreciation expense incurred on the facilities that we acquired afterSeptember 30, 2020 , as well as from the recognition of a full three months of depreciation expense in 2021 from acquisitions that were completed during the three months endedSeptember 30, 2020 . -43- Table of Contents Amortization Expense
Amortization expense for the three months endedSeptember 30, 2021 was$3.3 million , compared to$2.6 million for the same period in 2020, an increase of$0.7 million . The increase resulted primarily from amortization expense incurred on intangible assets acquired afterSeptember 30, 2020 , as well as from the recognition of a full three months of amortization expense in 2021 from intangible assets recorded during the three months endedSeptember 30, 2020 .
Interest Expense
Interest expense for the three months ended
The weighted average interest rate of our debt for the three months ended
Management Internalization Expense
As a result of the completion of the management internalization transaction, we had no management internalization expense for the three months endedSeptember 30, 2021 . Management internalization expense was$12.6 million for the three months endedSeptember 30, 2020 , which included$12.1 million related to the settlement of a preexisting contractual relationship and$0.5 million of professional fees associated with the transaction.
Net Income (Loss)
Net income for the three months endedSeptember 30, 2021 was$5.4 million , compared to a net loss of$(9.6) million for the same period in 2020, an increase of$15.0 million . The increase resulted primarily from the recognition of$12.6 million of management internalization expense that was incurred during the three months endedSeptember 30, 2020 . -44-
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Nine Months EndedSeptember 30, 2021 Compared to Nine Months EndedSeptember 30, 2020 Nine Months Ended September 30, 2021 2020 $ Change (in thousands) Revenue Rental revenue$ 85,492 $ 68,623$ 16,869 Other income 101 178 (77) Total revenue 85,593 68,801 16,792 Expenses
General and administrative 12,519 7,509 5,010 Operating expenses 10,964 8,256 2,708 Management fees - related party -
4,024 (4,024)
Depreciation expense 24,779 19,383 5,396
Amortization expense 9,443 6,832 2,611
Interest expense 14,887 13,616 1,271Management internalization expense - 14,005 (14,005) Preacquisition expense 146
267 (121)
Total expenses 72,738 73,892 (1,154)
Net income (loss) $ 12,855 $ (5,091) $ 17,946
Revenue
Total Revenue
Total revenue for the nine months ended September 30, 2021 was $85.6 million ,
compared to $68.8 million for the same period in 2020, an increase of $16.8
million . The increase was primarily the result of rental revenue earned from the
facilities we acquired subsequent to September 30, 2020 , as well as from the
recognition of a full nine months of rental revenue in 2021 from acquisitions
that were completed during the nine months ended September 30, 2020 . Within that
increase, $8.5 million in revenue was recognized from net lease expense
recoveries during the nine months ended September 30, 2021 , compared to $6.9
million for the same period in 2020. Additionally, total revenue for the nine
months ended September 30, 2020 reflected the recognition of reserves for
approximately $1.1 million of rent, including approximately $0.4 million of
deferred rent, primarily related to one tenant.
Expenses
General and Administrative
General and administrative expenses for the nine months endedSeptember 30, 2021 were$12.5 million , compared to$7.5 million for the same period in 2020, an increase of$5.0 million . The increase was primarily driven by our recognition of compensation-related costs and other administrative expenses that prior to the management internalization transaction were the obligation of our former advisor. In addition, this increase was due to an increase in non-cash LTIP compensation expense, which was$4.6 million for the nine months endedSeptember 30, 2021 , compared to$3.4 million for the same period in 2020. Operating Expenses
Operating expenses for the nine months endedSeptember 30, 2021 were$11.0 million , compared to$8.3 million for the same period in 2020, an increase of$2.7 million . The increase results from$8.5 million of reimbursable property operating expenses incurred during the nine months endedSeptember 30, 2021 , compared to$6.9 million for the same period in 2020. In addition, our operating expenses included$1.5 million of property operating expenses from gross leases for the nine months endedSeptember 30, 2021 , compared to$0.8 million for the same period in 2020. -45-
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Management Fees Expense - related party
As a result of the completion of the management internalization transaction, we
incurred no management fee expense for the nine months ended
Management fee expense was
Depreciation Expense
Depreciation expense for the nine months endedSeptember 30, 2021 was$24.8 million , compared to$19.4 million for the same period in 2020, an increase of$5.4 million . The increase results primarily from depreciation expense incurred on the facilities we acquired subsequent toSeptember 30, 2020 , as well as from the recognition of a full nine months of depreciation expense in 2021 from acquisitions that were completed during the nine months endedSeptember 30 ,
2020. Amortization Expense
Amortization expense for the nine months endedSeptember 30, 2021 was$9.4 million , compared to$6.8 million for the same period in 2020, an increase of$2.6 million . The increase results primarily from amortization expense incurred on intangible assets recorded subsequent toSeptember 30, 2020 , as well as from the recognition of a full nine months of amortization expense in 2021 from intangible assets recorded during the nine months endedSeptember 30, 2020 .
Interest Expense Interest expense for the nine months endedSeptember 30, 2021 was$14.9 million , compared to$13.6 million for the same period in 2020, an increase of$1.3 million . This increase was primarily due to higher average borrowings during the nine months endedSeptember 30, 2021 , compared to the same period last year, the proceeds of which were used to finance our property acquisitions during that time period.
The weighted average interest rate of our debt for the nine months ended
Management Internalization Expense
As a result of the completion of the management internalization transaction, we had no management internalization expense for the nine months endedSeptember 30, 2021 . Management internalization expense was$14.0 million for the nine months endedSeptember 30, 2020 , which included$12.1 million related to the settlement of a preexisting contractual relationship and$1.9 million of professional fees associated with the transaction.
Net Income (Loss)
Net income for the nine months endedSeptember 30, 2021 was$12.9 million , compared to a net loss of$(5.1) million for the same period in 2020, an increase of$18.0 million . The increase resulted primarily from the recognition of$14.0 million of management internalization expense that was incurred during the nine months endedSeptember 30, 2020 .
Assets and Liabilities
As ofSeptember 30, 2021 andDecember 31, 2020 , our principal assets consisted of investments in real estate, net, of$1.2 billion and$1.0 billion , respectively. Our liquid assets consisted primarily of cash and cash equivalents and restricted cash of$11.9 million and$10.8 million , as ofSeptember 30, 2021 andDecember 31, 2020 , respectively. The increase in our investments in real estate, net, to$1.2 billion as ofSeptember 30, 2021 compared to$1.0 billion as ofDecember 31, 2020 , was the result of the 16 acquisitions that we completed during the nine months endedSeptember 30, 2021 . The increase in our cash and cash equivalents and restricted cash balances to$11.9 million as ofSeptember 30, 2021 , compared to$10.8 million as ofDecember 31, 2020 , was primarily due to net proceeds received from common equity offerings and net cash -46- Table of Contents provided by operating activities. Cash inflows were partially offset by funds used to acquire real estate, paydown debt, pay debt issuance costs related to the Credit Facility, and pay dividends to our common and preferred stockholders and OP Unit and LTIP Unit holders of ourOperating Partnership . The decrease in our total liabilities to$613.1 million as ofSeptember 30, 2021 compared to$643.1 million as ofDecember 31, 2020 , was primarily the result of debt repayments during 2021 and the resulting lower net borrowings outstanding.
Liquidity and Capital Resources
General
Our short-term liquidity requirements include:
? Interest expense and scheduled principal payments on outstanding indebtedness;
? General and administrative expenses;
? Operating expenses;
? Property acquisitions; and
? Capital and tenant improvements.
In addition, we require funds for future distributions expected to be paid to our common and preferred stockholders and OP Unit and LTIP Unit holders in ourOperating Partnership . Our primary sources of cash include rent and reimbursements we collect from our tenants, borrowings under our Credit Facility, secured term loans, and net proceeds received from equity issuances. In addition, we may generate cash from property dispositions. Our long-term liquidity needs consist primarily of funds necessary to pay for acquisitions, capital and tenant improvements at our properties, scheduled debt maturities, general and administrative expenses, operating expenses, and distributions. We expect to satisfy our short and long-term liquidity needs through various sources, including cash flow from operations, debt financing, sales of additional equity securities, the issuance of OP Units in connection with acquisitions of additional properties, proceeds from select property dispositions and joint venture transactions.
Equity Issuances
OnMarch 18, 2021 , we closed an underwritten public offering of our common stock, including the related option to purchase additional shares granted to the underwriters. These transactions resulted in the issuance of 8.6 million shares of our common stock at a public offering price of$13.30 per share, generating gross proceeds of$114.7 million . During the nine months endedSeptember 30, 2021 , we generated gross proceeds of$86.6 million through ATM equity issuances of 6.1 million shares of our common stock at an average offering price of$14.29 per share. As ofNovember 1, 2021 , we had$23 million remaining under the 2020 ATM Program.
Debt Financing
Credit Facility. As described in "Debt Activity," the Credit Facility consists of a$350 million Term Loan and a$400 million Revolver. The Credit Facility also contains a$500 million accordion. As ofNovember 1, 2021 , we had unutilized borrowing capacity under the Revolver of approximately$240 million . The Credit Facility is an unsecured facility with a term of four years for the Revolver (subject to two, six-month extension options) and a term of five years for the Term Loan. The Credit Facility also contains the following interest
rate
pricing grid:
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Revolver LIBOR Margin Term Loan LIBOR MarginLeverage Based Pricing Current Prior Current Prior < 40% 1.25% N/A 1.20% N/A > 40% and < 45% 1.35% 1.40% 1.30% 1.35% > 45% and < 50% 1.50% 1.65% 1.45% 1.60% > 50 % and < 55% 1.75% 1.90% 1.70% 1.85% > 55% 2.00% 2.15% 1.95% 2.10% We are subject to a number of financial covenants under the Credit Facility, including, among other things, the following as of the end of each fiscal quarter, (i) a maximum consolidated unsecured leverage ratio of less than 60%, (ii) a maximum consolidated secured leverage ratio of less than 30%, (iii) a maximum consolidated secured recourse leverage ratio of less than 10%, (iv) a minimum fixed charge coverage ratio of 1.50:1.00, (v) a minimum unsecured interest coverage ratio of 1.50:1.00, (vi) a maximum consolidated leverage ratio of less than 60%, and (vii) a minimum net worth of$345 million plus 75% of all net proceeds raised through equity offerings subsequent toDecember 31, 2020 . As ofNovember 1, 2021 , management believed it was in compliance with all of the financial and non-financial covenants contained in the Credit Facility. Hedging Instruments. We have six interest rate swaps with a total notional amount of$350 million that are used to manage our interest rate risk and fix the LIBOR component on the Term Loan. An aggregate of$150 million of the swaps mature inAugust 2023 and the remaining$200 million mature inAugust 2024 . In addition, we have five forward starting interest rate swaps that will be effective on the maturity dates of the existing interest rate swaps. The forward starting swaps each have a maturity date ofApril 2026 and will fix the LIBOR component on the Term Loan through its maturity. Currently, the interest rate swaps fix the LIBOR component of the Term Loan at a rate of 1.91% throughAugust 2023 . Subsequently, fromAugust 2023 toAugust 2024 the LIBOR component of the Term Loan rate will be fixed at 1.61%. Finally, fromAugust 2024 toApril 2026 the LIBOR component of the Term Loan rate will be fixed at 1.45%. LIBOR Transition. OnMarch 5, 2021 , theFCA announced that USD LIBOR will no longer be published afterJune 30, 2023 . This announcement has several implications, including setting the spread that may be used to automatically convert contracts from LIBOR to SOFR. Additionally, banking regulators are encouraging banks to discontinue new LIBOR debt issuances byDecember 31, 2021 . The Company anticipates that LIBOR will continue to be available at least untilJune 30, 2023 . The Credit Facility provides that, on or about the LIBOR cessation date (subject to an early opt-in election), LIBOR shall be replaced as a benchmark rate in the Credit Facility with a new benchmark rate, with such adjustments as set forth in the Credit Facility. We are not able to predict when LIBOR will cease to be available or when there will be enough liquidity in
the SOFR markets. Cash Flow Information Net cash provided by operating activities for the nine months endedSeptember 30, 2021 was$51.7 million , compared to$18.4 million for the same period in 2020. The increase during the 2021 period was primarily due to the increase in net income as well as increases in depreciation and amortization expenses for the nine months endedSeptember 30, 2021 compared to the same period in 2020. Net cash used in investing activities for the nine months endedSeptember 30, 2021 was$166.7 million , compared to$141.6 million for the same period in 2020. The increase during the 2021 period was primarily the result of greater real estate investment activity in the 2021 period compared to the same period in 2020. Net cash provided by financing activities for the nine months endedSeptember 30, 2021 was$116.2 million , compared to$123.3 million for the same period in 2020. The decrease was primarily due to net repayments on the Credit Facility, principal payments on our notes payable, the payment of debt issuance costs related to the Credit Facility, and higher dividends paid to our common stockholders, partially offset by net proceeds received from our common stock offerings.
Non-GAAP Financial Measures
Management considers certain non-GAAP financial measures to be useful
supplemental measures of the Company's operating performance. A non-GAAP
financial measure is generally defined as one that purports to measure financial
performance, financial position or cash flows, but excludes or includes amounts
that would not be so adjusted in the most comparable measure determined in
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accordance with GAAP. The Company reports non-GAAP financial measures because these measures are observed by management to also be among the most predominant measures used by the REIT industry and by industry analysts to evaluate REITs. For these reasons, management deems it appropriate to disclose and discuss these non-GAAP financial measures. Set forth below are descriptions of the non-GAAP financial measures management considers relevant to the Company's business and useful to investors, as well as reconciliations of those measures to the most directly comparable GAAP financial measure. The non-GAAP financial measures presented herein are not necessarily identical to those presented by other real estate companies due to the fact that not all real estate companies use the same definitions. These measures should not be considered as alternatives to net income, as indicators of the Company's financial performance, or as alternatives to cash flow from operating activities as measures of the Company's liquidity, nor are these measures necessarily indicative of sufficient cash flow to fund all of the Company's needs. Management believes that in order to facilitate a clear understanding of the Company's historical consolidated operating results, these measures should be examined in conjunction with net income and cash flows from operations as presented in the Condensed Consolidated Financial Statements and other financial data included elsewhere in this Quarterly Report on Form 10-Q.
Funds from Operations and Adjusted Funds from Operations
Funds from operations ("FFO") and adjusted funds from operations ("AFFO") are
non-GAAP financial measures within the meaning of the rules of the SEC . The
Company considers FFO and AFFO to be important supplemental measures of its
operating performance and believes FFO is frequently used by securities
analysts, investors, and other interested parties in the evaluation of REITs,
many of which present FFO when reporting their results.
In accordance with the National Association of Real Estate Investment Trusts'
("NAREIT") definition, FFO means net income or loss computed in accordance with
GAAP before noncontrolling interests of holders of OP Units and LTIP Units,
excluding gains (or losses) from sales of property and extraordinary items, less
preferred stock dividends, plus real estate-related depreciation and
amortization (excluding amortization of debt issuance costs and the amortization
of above and below market leases), and after adjustments for unconsolidated
partnerships and joint ventures. Because FFO excludes real estate-related
depreciation and amortization (other than amortization of debt issuance costs
and above and below market lease amortization expense), the Company believes
that FFO provides a performance measure that, when compared period-over-period,
reflects the impact to operations from trends in occupancy rates, rental rates,
operating costs, development activities and interest costs, providing
perspective not immediately apparent from the closest GAAP measurement, net
income or loss.
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. Management calculates AFFO by modifying
the NAREIT computation of FFO by adjusting it for certain cash and non-cash
items and certain recurring and non-recurring items. For the Company these items
include recurring acquisition and disposition costs, loss on the extinguishment
of debt, recurring straight line deferred rental revenue, recurring stock-based
compensation expense, recurring amortization of above and below market leases,
recurring amortization of debt issuance costs, recurring lease commissions,
management internalization costs, and other items.
Management believes that reporting AFFO in addition to FFO is a useful supplemental measure for the investment community to use when evaluating the operating performance of the Company on a comparative basis.
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A reconciliation of net income (loss) to FFO and AFFO for the three and nine
months ended
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
(unaudited, in thousands except per share and unit
amounts)
Net income (loss) $ 5,368 $ (9,580) $ 12,855 $ (5,091) Less: Preferred stock dividends (1,455) (1,455) (4,366) (4,366) Depreciation and amortization expense 11,915 9,517 34,140 26,215 FFO$ 15,828 $ (1,518) $ 42,629 $ 16,758 Internalization expense - settlement of a preexisting contractual relationship - 12,094 - 12,094 Internalization expense - other transaction costs - 486 - 1,911 Amortization of above market leases, net 173 69 318 472
Straight line deferred rental revenue (1,369) (1,520) (4,147) (4,336) Stock-based compensation expense
1,241 1,572 4,568 3,391
Amortization of debt issuance costs
and other 538 396 1,468 1,030
Preacquisition expense 18 70 146 267
AFFO $ 16,429 $ 11,649 $ 44,982 $ 31,587
Net income (loss) attributable to
common stockholders per share - basic
and diluted $ 0.06 $ (0.22) $ 0.13 $ (0.19)
FFO per share and unit $ 0.23 $ (0.03) $ 0.67 $ 0.34
AFFO per share and unit $ 0.24 $ 0.23 $ 0.71 $ 0.65
Weighted Average Shares and Units
Outstanding - basic and diluted 68,109 50,233 63,179 48,896
Weighted Average Shares and Units Outstanding: Weighted Average Common Shares 64,204 46,908
59,398 45,503 Weighted Average OP Units 1,707 1,958 1,741 2,250 Weighted Average LTIP Units 2,198 1,367 2,040 1,143 Weighted Average Shares and Units Outstanding - basic and diluted 68,109 50,233
63,179 48,896
Earnings Before Interest, Taxes, Depreciation and Amortization for Real Estate (EBITDAre and Adjusted EBITDAre)
The Company calculates EBITDAre in accordance with standards established by NAREIT and define EBITDAre as net income or loss computed in accordance with GAAP plus depreciation and amortization, interest expense, gain or loss on the sale of investment properties, and impairment loss, as applicable. The Company defines Adjusted EBITDAre as EBITDAre plus non-cash stock compensation expense, non-cash intangible amortization related to above and below market leases, preacquisition expense and other normalizing items. Management considers EBITDAre and Adjusted EBITDAre important measures because they provide additional information to allow management, investors, and our current and potential creditors to evaluate and compare our core operating results and our ability to service debt.
A reconciliation of net income (loss) to EBITDAre and Adjusted EBITDAre for the
three and nine months ended
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Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
(unaudited and in thousands)
Net income (loss) $ 5,368
$ (9,580)
4,830 4,864 14,887 13,616
Depreciation and amortization expense 11,942 9,517 34,222 26,215
EBITDAre $ 22,140 $ 4,801 $ 61,964 $ 34,740
Stock-based compensation expense 1,241 1,572 4,568 3,391
Internalization expense - settlement of a preexisting contractual relationship
- 12,094 - 12,094
Internalization expense - other transaction costs - 486 - 1,911
Amortization of above market leases, net 173
69 318 472
Preacquisition expense 18 70 146 267
Adjusted EBITDAre $ 23,572 $ 19,092 $ 66,996 $ 52,875
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect or change on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term "off-balance sheet arrangement" generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have (i) any obligation arising under a guarantee contract, derivative instrument or variable interest; or (ii) a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.
Inflation
Historically, inflation has had a minimal impact on the operating performance of our healthcare facilities. Many of our triple-net lease agreements contain provisions designed to mitigate the adverse impact of inflation. These provisions include clauses that enable us to receive payment of increased rent pursuant to escalation clauses which generally increase rental rates during the terms of the leases. These escalation clauses often provide for fixed rent increases or indexed escalations (based upon the CPI or other measures). However, some of these contractual rent increases may be less than the actual rate of inflation. Most of our triple-net lease agreements require the tenant-operator to pay an allocable share of operating expenses, including common area maintenance costs, real estate taxes and insurance. This requirement reduces our exposure to increases in these costs and operating expenses resulting from inflation.
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