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;
? 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;
? our ability to identify, hire and retain highly qualified personnel in the
future;
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? 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 ofJune 30, 2021 , we owned 94.24% 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;
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
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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 by building on our progress with tenant outreach and data collection to benchmark our portfolio's energy consumption and efficiency. OnJuly 1, 2021 , we submitted our second GRESB assessment. We are working with third-party experts to support our energy monitoring efforts and have 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 and look for opportunities to modestly grow our team.
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. 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. From a governance perspective, the Board has continued to adopt policies with best practices in mind and has joined theNational Association of Corporate Directors , a membership association chartered to increase board strategic awareness and enhance continuous improvement and effectiveness. 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 did not have a material effect on our business in 2020 and the three and six months endedJune 30, 2021 , 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. -37- Table of Contents Executive Summary
The following table summarizes the material changes in our financial statements during the periods presented:
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
(in thousands, except per share and unit amounts)
Rental revenue $ 28,200 $ 22,036 $ 55,525 $ 43,569
Depreciation and amortization
expense $ 11,427 $ 8,941 $ 22,280 $ 16,698
Interest expense $ 5,020 $ 4,375 $ 10,057 $ 8,752
General and administrative expense $ 4,285 $ 1,643 Net income attributable to common stockholders per share $ 0.04 $ 0.00$ 0.08 $ 0.03 FFO per share and unit(1) $ 0.22 $ 0.19$ 0.44 $ 0.38 AFFO per share and unit(1) $ 0.23 $ 0.21$ 0.47 $ 0.41
Dividends per share of common stock $ 0.205 $ 0.20
Weighted average common stock outstanding 61,194 45,404 56,956 44,793 Weighted average OP Units outstanding 1,753 2,023 1,759 2,398 Weighted average LTIP Units outstanding 2,166 1,088 1,990 978 Total weighted average shares and units outstanding 65,113 48,515 60,705 48,169
(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
June 30, December 31,
2021 2020
(dollars in thousands)
Investment in real estate, gross $ 1,260,324 $ 1,142,905
Total debt, net$ 506,760 $
586,578
Weighted average interest rate 3.09 % 3.17 % Total equity (including noncontrolling interest)$ 637,255 $
457,760 Net leasable square feet 4,050,990 3,694,865 Our Properties During the six months endedJune 30, 2021 , we completed 11 acquisitions encompassing an aggregate of 354,429 leasable square feet for an aggregate contractual purchase price of$113.8 million with an aggregate annualized base rent of$8.4 million . As ofJune 30, 2021 , our portfolio consisted of gross investment in real estate of$1.3 billion , which was comprised of 97 facilities with an aggregate of 4.1 million leasable square feet and an aggregate$96.8 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 six months endedJune 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 ofAugust 2, 2021 , we had$23 million remaining under the 2020 ATM Program. -38- 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, 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%. During the six months endedJune 30, 2021 , we borrowed$133.1 million under our Credit Facility and repaid$207.2 million , for a net amount repaid of$74.1 million . As ofJune 30, 2021 , the net outstanding Credit Facility balance was$442.1 million . Recent Developments
Completed Acquisitions Subsequent to
Since
Properties Under Contract
We have three properties under contract for an aggregate purchase price of approximately$23.2 million . We are currently in the due diligence period for our properties under contract. If we identify problems with any of 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.
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 many of our tenants are continuing to operate during the pandemic, it
? is unclear when/if our tenants will return to pre-COVID-19 patient volumes.
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 six months endedJune 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$1.1 billion and$922.9 million as ofJune 30, 2021 and 2020, respectively. -40-
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Three Months EndedJune 30, 2021 Compared to Three Months EndedJune 30, 2020 Three Months Ended June 30, 2021 2020 $ Change (in thousands) Revenue Rental revenue$ 28,200 $ 22,036 $ 6,164 Other income 61 19 42 Total revenue 28,261 22,055 6,206 Expenses General and administrative 4,285 1,643 2,642 Operating expenses 3,303 2,336 967
Management fees - related party - 2,021
(2,021) Depreciation expense 8,292 6,593 1,699 Amortization expense 3,135 2,348 787 Interest expense 5,020 4,375 645
Management internalization expense - 920
(920)
Preacquisition expense 62 147 (85)
Total expenses 24,097 20,383 3,714
Net income $ 4,164 $ 1,672 $ 2,492
Revenue
Total Revenue
Total revenue for the three months ended June 30, 2021 was $28.3 million ,
compared to $22.1 million for the same period in 2020, an increase of $6.2
million . The increase was primarily the result of rental revenue earned from the
facilities that we acquired after June 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 June 30, 2020 . Within that increase,
$2.4 million in revenue was recognized from net lease expense recoveries during
the three months ended June 30, 2021 , compared to $1.9 million for the same
period in 2020. Additionally, total revenue for the three months ended June 30,
2020 reflected the recognition of reserves for approximately $1.0 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 three months ended June 30, 2021
were $4.3 million , compared to $1.6 million for the same period in 2020, an
increase of $2.7 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 $1.6 million for the three months ended June 30,
2021 , compared to $0.9 million for the same period in 2020.
Operating Expenses
Operating expenses for the three months endedJune 30, 2021 were$3.3 million , compared to$2.3 million for the same period in 2020, an increase of$1.0 million . The increase resulted primarily from$2.4 million of recoverable property operating expenses incurred during the three months endedJune 30, 2021 , compared to$1.9 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 endedJune 30, 2021 , compared to$0.2 million for the same period in 2020. -41- Table of Contents
Management Fee Expense - related party
As a result of the completion of the management internalization transaction, we incurred no management fee expense for the three months endedJune 30, 2021 . Management fee expense was$2.0 million for the three months endedJune 30, 2020 and was calculated based on our stockholders' equity balance.
Depreciation Expense
Depreciation expense for the three months endedJune 30, 2021 was$8.3 million , compared to$6.6 million for the same period in 2020, an increase of$1.7 million . The increase resulted primarily from depreciation expense incurred on the facilities that we acquired afterJune 30, 2020 , as well as from the recognition of a full three months of depreciation expense in 2021 from intangible assets recorded during the three months endedJune 30, 2020 .
Amortization Expense
Amortization expense for the three months endedJune 30, 2021 was$3.1 million , compared to$2.3 million for the same period in 2020, an increase of$0.8 million . The increase resulted primarily from amortization expense incurred on intangible assets acquired afterJune 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 endedJune 30, 2020 .
Interest Expense
Interest expense for the three months endedJune 30, 2021 was$5.0 million , compared to$4.4 million for the same period in 2020, an increase of$0.6 million . This increase was due to higher average borrowings during the three months endedJune 30, 2021 , compared to the same period last year, the proceeds of which were used to partially finance our property acquisitions during that time period. The weighted average interest rate of our debt for the three months endedJune 30, 2021 was 3.17% compared to 3.38% for the three months endedJune 30, 2020 . Additionally, the weighted average interest rate and term of our debt was 3.09% and 4.71 years atJune 30, 2021 .
Management Internalization Expense
As a result of the completion of the management internalization transaction, we had no management internalization expense for the three months endedJune 30, 2021 . Management internalization expense was$0.9 million for the three months endedJune 30, 2020 . Net Income
Net income for the three months ended
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Six Months Ended
Six Months Ended June 30,
2021 2020 $ Change
(in thousands)
Revenue
Rental revenue $ 55,525 $ 43,569 $ 11,956
Other income 85 135 (50)
Total revenue 55,610 43,704 11,906
Expenses
General and administrative 8,667 3,482 5,185
Operating expenses 6,991 4,639 2,352Management fees - related party - 4,024
(4,024) Depreciation expense 16,140 12,429 3,711 Amortization expense 6,140 4,269 1,871 Interest expense 10,057 8,752 1,305
Management internalization expense - 1,424
(1,424) Preacquisition expense 128 196 (68) Total expenses 48,123 39,215 8,908 Net (loss) income$ 7,487 $ 4,489 $ 2,998 Revenue Total Revenue Total revenue for the six months endedJune 30, 2021 was$55.6 million , compared to$43.7 million for the same period in 2020, an increase of$11.9 million . The increase is primarily the result of rental revenue earned from the facilities we acquired subsequent toJune 30, 2020 , as well as from the recognition of a full six months of rental revenue in 2021 from acquisitions that were completed during the six months endedJune 30, 2020 . Within that increase,$5.3 million in revenue was recognized from net lease expense recoveries during the six months endedJune 30, 2021 , compared to$3.8 million for the same period in 2020. Additionally, total revenue for the six months endedJune 30, 2020 reflected the recognition of reserves for approximately$1.0 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 six months endedJune 30, 2021 were$8.7 million , compared to$3.5 million for the same period in 2020, an increase of$5.2 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$3.3 million for the six months endedJune 30, 2020 , compared to$1.8 million for the same period in 2020. Operating Expenses Operating expenses for the six months endedJune 30, 2021 were$7.0 million , compared to$4.6 million for the same period in 2020, an increase of$2.4 million . The increase results from$5.3 million of reimbursable property operating expenses incurred during the six months endedJune 30, 2021 , compared to$3.8 million for the same period in 2020. In addition, our operating expenses included$1.0 million of property operating expenses from gross leases for the six months endedJune 30, 2021 , compared to$0.4 million for the same period in 2020. -43- Table of Contents
Management Fees Expense - related party
As a result of the completion of the management internalization transaction, we
incurred no management fee expense for the six months ended
Management fee expense was
Depreciation Expense
Depreciation expense for the six months endedJune 30, 2021 was$16.1 million , compared to$12.4 million for the same period in 2020, an increase of$3.7 million . The increase results primarily from depreciation expense incurred on the facilities we acquired subsequent toJune 30, 2020 , as well as from the recognition of a full six months of depreciation expense in 2021 from acquisitions that were completed during the six months endedJune 30, 2020 .
Amortization Expense Amortization expense for the six months endedJune 30, 2021 was$6.1 million , compared to$4.3 million for the same period in 2020, an increase of$1.8 million . The increase results primarily from amortization expense incurred on intangible assets recorded subsequent toJune 30, 2020 , as well as from the recognition of a full six months of amortization expense in 2021 from intangible assets recorded during the six months endedJune 30, 2020 . Interest Expense
Interest expense for the six months endedJune 30, 2021 was$10.1 million , compared to$8.8 million for the same period in 2020, an increase of$1.3 million . This increase was primarily due to higher average borrowings during the six months endedJune 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 six months endedJune 30, 2021 was 3.16% compared to 3.58% for the six months endedJune 30, 2020 . Additionally, the weighted average interest rate and term of our debt was 3.09% and 4.71 years atJune 30, 2021 .
Management Internalization Expense
As a result of the completion of the management internalization transaction, we had no management internalization expense for the six months endedJune 30, 2021 . Management internalization expense was$1.4 million for the six months endedJune 30, 2020 . Net Income
Net income for the six months ended
Assets and Liabilities
As ofJune 30, 2021 andDecember 31, 2020 , our principal assets consisted of investments in real estate, net, of$1.1 billion and$1.0 billion , respectively. Our liquid assets consisted primarily of cash and cash equivalents and restricted cash of$12.4 million and$10.8 million , as ofJune 30, 2021 andDecember 31, 2020 , respectively. The increase in our investments in real estate, net, to$1.1 billion as ofJune 30, 2021 compared to$1.0 billion as ofDecember 31, 2020 , was the result of the 11 acquisitions that we completed during the six months endedJune 30, 2021 . The increase in our cash and cash equivalents and restricted cash balances to$12.4 million as ofJune 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 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 . -44- Table of Contents
The decrease in our total liabilities to
Liquidity and Capital Resources
General
Our short-term liquidity requirements include:
? Interest expense and scheduled principal payments on outstanding indebtedness,
which includes a near term (under one year) debt maturity of
? General and administrative expenses;
? Operating expenses; and
? Property acquisitions 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 six months endedJune 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 ofAugust 2, 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 ofAugust 2, 2021 , we had unutilized borrowing capacity under the Revolver of approximately$265 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:
Revolver LIBOR Margin Term Loan LIBOR Margin
Leverage 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%
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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 to December 31, 2020 . As
of August 2, 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 in August 2023 and the remaining $200 million mature in August 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 of April 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% through August
2023 . Subsequently, from August 2023 to August 2024 the LIBOR component of the
Term Loan rate will be fixed at 1.61%. Finally, from August 2024 to April 2026
the LIBOR component of the Term Loan rate will be fixed at 1.45%.
LIBOR Transition. On March 5, 2021 , the FCA announced that USD LIBOR will no
longer be published after June 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 by December 31, 2021 .
The Company anticipates that LIBOR will continue to be available at least until
June 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 inthe SOFR markets. Cash Flow Information
Net cash provided by operating activities for the six months endedJune 30, 2021 was$33.1 million , compared to$23.9 million for the same period in 2020. The increase during the 2021 period was primarily due to net income as well as increases in depreciation and amortization expenses for the six months endedJune 30, 2021 compared to the same period in 2020. Net cash used in investing activities for the six months endedJune 30, 2021 was$116.0 million , compared to$76.0 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 six months endedJune 30, 2021 was$84.5 million , compared to$58.2 million for the same period in 2020. The increase during the 2021 period was primarily due to net proceeds received from our common stock offerings, partially offset by net repayments on the Credit Facility, the payment of debt issuance costs related to the Credit Facility, and higher dividends paid to our common stockholders.
Non-GAAP Financial Measures
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. The Company did not record any adjustments for
unconsolidated partnerships and joint ventures during the three or six months
ended June 30, 2021 and 2020. 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
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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. The Company's FFO and AFFO computations may not be comparable to FFO and AFFO reported by other REITs that do not compute FFO in accordance with the NAREIT definition, that interpret the NAREIT definition differently than the Company does, or that compute FFO and AFFO in a different manner. A reconciliation of FFO and AFFO for the three and six months endedJune 30, 2021 and 2020 is as follows: Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 (unaudited, in thousands except per share and unit amounts) Net income$ 4,164 $ 1,672 $ 7,487 $ 4,489 Less: Preferred stock dividends (1,455) (1,455) (2,911) (2,911) Depreciation and amortization expense 11,399 8,941 22,225 16,698 FFO$ 14,108 $ 9,158 $ 26,801 $ 18,276 Amortization of above market leases, net 85 157 145 403 Straight line deferred rental revenue (1,374) (1,259) (2,778) (2,816) Stock-based compensation expense 1,612 897 3,327 1,819 Amortization of debt issuance costs and other 505 319 930 634 Management internalization expense - 920 - 1,424 Preacquisition expense 62 147 128 196 AFFO$ 14,998 $ 10,339 $ 28,553 $ 19,936 Net income attributable to common stockholders per share - basic and diluted $ 0.04 $ - $ 0.08 $ 0.03 FFO per share and unit $ 0.22 $ 0.19 $ 0.44 $ 0.38 AFFO per share and unit $ 0.23 $ 0.21 $ 0.47 $ 0.41 Weighted Average Shares and Units Outstanding - basic and diluted 65,113 48,515 60,705 48,169 Weighted Average Shares and Units Outstanding: Weighted Average Common Shares 61,194 45,404 56,956 44,793 Weighted Average OP Units 1,753 2,023 1,759 2,398 Weighted Average LTIP Units 2,166 1,088 1,990 978 Weighted Average Shares and Units Outstanding - basic and diluted 65,113 48,515 60,705 48,169
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
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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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