UNIVERSAL HEALTH REALTY INCOME TRUST Overview
We are a real estate investment trust ("REIT") that commenced operations in
1986. We invest in healthcare and human service related facilities currently
including acute care hospitals, behavioral health care hospitals, specialty
hospitals, free-standing emergency departments, childcare centers and
medical/office buildings. As of
• seven hospital facilities consisting of three acute care, one behavioral
health care (currently under construction), one rehabilitation (currently
vacant) and two sub-acute (one of which is currently vacant);
• four free-standing emergency departments ("FEDs");
• fifty-six medical/office buildings, including five owned by unconsolidated
LLCs/LPs, one of which is currently under construction, and;
• four preschool and childcare centers.
Forward Looking Statements
This report contains "forward-looking statements" that reflect our current estimates, expectations and projections about our future results, performance, prospects and opportunities. Forward-looking statements include, among other things, information concerning our possible future results of operations, business and growth strategies, financing plans, expectations that regulatory developments or other matters will not have a material adverse effect on our business or financial condition, our competitive position and the effects of competition, the projected growth of the industry in which we operate, and the benefits and synergies to be obtained from our completed and any future acquisitions, and statements of our goals and objectives, and other similar expressions concerning matters that are not historical facts. Words such as "may," "will," "should," "could," "would," "predicts," "potential," "continue," "expects," "anticipates," "future," "intends," "plans," "believes," "estimates," "appears," "projects" and similar expressions, as well as statements in future tense, identify forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by which, such performance or results will be achieved. Forward-looking information is based on information available at the time and/or our good faith belief with respect to future events, and is subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements. Such factors include, among other things, the following:
• a substantial portion of our revenues are dependent upon one operator,
Universal Health Services, Inc. ("UHS"), which comprised approximately
31%, 30% and 32% of our consolidated revenues for the years ended December
31, 2019, 2018 and 2017, respectively. We cannot assure you that
subsidiaries of UHS will renew the leases on our three acute care
hospitals (two of which are scheduled to expire in December, 2021 and one
of which is scheduled to expire in December, 2026) and two FEDs at
existing lease rates or fair market value lease rates. In addition, if
subsidiaries of UHS exercise their options to purchase the respective
leased hospital facilities and FEDs upon expiration of the lease terms,
our future revenues and results of operations could decrease if we wereunable to earn a favorable rate of return on the sale proceeds received,
as compared to the rental revenue currently earned pursuant to these
leases;
• in certain of our markets, the general real estate market has been
unfavorably impacted by increased competition/capacity and decreases in
occupancy and rental rates which may adversely impact our operating
results and the underlying value of our properties;
• a number of legislative initiatives have recently been passed into law
that may result in major changes in the health care delivery system on a
national or state level to the operators of our facilities, including UHS.
No assurances can be given that the implementation of these new laws will
not have a material adverse effect on the business, financial condition or
results of operations of our operators;
• the potential indirect impact of the Tax Cuts and Jobs Act of 2017 (the
"2017 Tax Act"), signed into law on
significant changes to corporate and individual tax rates and calculation
of taxes, which could potentially impact our tenants and jurisdictions,
both positively and negatively, in which we do business, as well as the
overall investment thesis for REITs;
• a subsidiary of UHS is our Advisor and our officers are all employees of a
wholly-owned subsidiary of UHS, which may create the potential for
conflicts of interest;
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• lost revenues resulting from the exercise of purchase options, lease
expirations and renewals and other restructuring (see Item 2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Hospital Leases, for additional disclosure related to lease
expirations and subsequent vacancies that occurred during the second and
third quarters of 2019 on two hospital facilities that, on a combined
basis, comprised approximately 2% of our consolidated revenues during each
of the years ended
• our ability to continue to obtain capital on acceptable terms, including
borrowed funds, to fund future growth of our business;
• the outcome and effects of known and unknown litigation, government
investigations, and liabilities and other claims asserted against us, UHS
or the other operators of our facilities. UHS and its subsidiaries are
subject to pending legal actions, purported shareholder class actions and
shareholder derivative cases, governmental investigations and regulatory
actions and the effects of adverse publicity relating to such matters.
Since UHS comprised approximately 31% of our consolidated revenues during
the year ended December 31, 2019 , and since a subsidiary of UHS is ourAdvisor, you are encouraged to obtain and review the disclosures contained
in the Legal Proceedings section of Universal Health Services, Inc.'s
Forms 10-Q and 10-K, as publicly filed with the Securities and Exchange
Commission. Those filings are the sole responsibility of UHS and are not
incorporated by reference herein;
• failure of UHS or the other operators of our hospital facilities to comply
with governmental regulations related to the Medicare and Medicaid
licensing and certification requirements could have a material adverse
impact on our future revenues and the underlying value of the property;
• the potential unfavorable impact on our business of deterioration in
national, regional and local economic and business conditions, including a
worsening of credit and/or capital market conditions, which may adversely
affect our ability to obtain capital which may be required to fund the
future growth of our business and refinance existing debt with near term
maturities;
• a deterioration in general economic conditions which could result in
increases in the number of people unemployed and/or insured and likely
increase the number of individuals without health insurance; as a result,
the operators of our facilities may experience decreases in patient
volumes which could result in decreased occupancy rates at our medical
office buildings;
• a worsening of the economic and employment conditions in
could materially affect the business of our operators, including UHS,
which may unfavorably impact our future bonus rentals (on the UHS hospital
facilities) and may potentially have a negative impact on the future lease
renewal terms and the underlying value of the hospital properties;
• real estate market factors, including without limitation, the supply and
demand of office space and market rental rates, changes in interest rates
as well as an increase in the development of medical office condominiums
in certain markets;
• the impact of property values and results of operations of severe weather
conditions, including the effects of hurricanes;
• government regulations, including changes in the reimbursement levels
under the Medicare and Medicaid programs;
• the issues facing the health care industry that affect the operators of
our facilities, including UHS, such as: changes in, or the ability to
comply with, existing laws and government regulations; unfavorable changes
in the levels and terms of reimbursement by third party payors or
government programs, including Medicare (including, but not limited to,
the potential unfavorable impact of future reductions to Medicarereimbursements resulting from the Budget Control Act of 2011, as discussed
below) and Medicaid (most states have reported significant budget deficits
that have, in the past, resulted in the reduction of Medicaid funding to
the operators of our facilities, including UHS); demographic changes; the
ability to enter into managed care provider agreements on acceptable
terms; an increase in uninsured and self-pay patients which unfavorably
impacts the collectability of patient accounts; decreasing in-patient
admission trends; technological and pharmaceutical improvements that may
increase the cost of providing, or reduce the demand for, health care,
and; the ability to attract and retain qualified medical personnel,
including physicians;
• pending limits for most federal agencies and programs aimed at reducing
budget deficits by
report released by the
provisions, the law established a bipartisan Congressional committee,
known as the
Committee"), which was tasked with making recommendations aimed at
reducing future federal budget deficits by an additional
over 10 years. The Joint Committee was unable to reach an agreement by the
November 23, 2011 deadline and, as a result, across-the-board cuts todiscretionary, national defense and Medicare spending were implemented on
March 1, 2013 resulting in Medicare payment reductions of up to 2% per fiscal year with a uniform percentage reduction across all Medicare programs. The Bipartisan Budget Act of 2015, enacted onNovember 2, 2015 , 32
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continued the 2% reductions to Medicare reimbursement imposed under the
2011 Act. We cannot predict whether Congress will restructure theimplemented Medicare payment reductions or what other federal budget
deficit reduction initiatives may be proposed by
forward. We also cannot predict the effect these enactments will have on
the operators of our properties (including UHS), and thus, our business;
• an increasing number of legislative initiatives have been passed into law
that may result in major changes in the health care delivery system on a
national or state level. Legislation has already been enacted that has
eliminated the penalty for failing to maintain health coverage that was
part of the original Legislation. President Trump has already takenexecutive actions: (i) requiring all federal agencies with authorities and
responsibilities under the Legislation to "exercise all authority and
discretion available to them to waiver, defer, grant exemptions from, or
delay" parts of the Legislation that place "unwarranted economic and
regulatory burdens" on states, individuals or health care providers; (ii)
the issuance of a final rule in June, 2018 by the
enable the formation of association health plans that would be exempt from
certain Legislation requirements such as the provision of essential health
benefits; (iii) the issuance of a final rule in August, 2018 by the
availability of short-term, limited duration health insurance, (iv)
eliminating cost-sharing reduction payments to insurers that would
otherwise offset deductibles and other out-of-pocket expenses for health
plan enrollees at or below 250 percent of the federal poverty level; (v)
relaxing requirements for state innovation waivers that could reduce
enrollment in the individual and small group markets and lead to
additional enrollment in short-term, limited duration insurance and
association health plans; (vi) the issuance of a final rule in June, 2019
by the Departments of Labor,
would incentivize the use of health reimbursement arrangements by
employers to permit employees to purchase health insurance in the
individual market, and; (vii) directing the issuance of federal rulemaking
by executive agencies to increase transparency of healthcare price and
quality information. The uncertainty resulting from these Executive Branch
policies has led to reduced Exchange enrollment in 2018 and 2019 and is
expected to further worsen the individual and small group market risk
pools in future years. It is also anticipated that these and future
policies may create additional cost and reimbursement pressures on
hospitals, including ours. In addition, while attempts to repeal theentirety of the Affordable Care Act ("ACA") have not been successful to
date, a key provision of the ACA was repealed as part of the Tax Cuts and
Jobs Act and on
has been appealed. On
voted 2-1 to strike down the ACA individual mandate as unconstitutional
and sent the case back to the
which ACA provisions should be stricken with the mandate. It is likely
this matter will ultimately be appealed to the U.S. Supreme Court . We are
unable to predict the final outcome of this matter which has caused
greater uncertainty regarding the future status of the ACA. If all or any
parts of the ACA are ultimately found to be unconstitutional, it could
have a material adverse effect on the business, financial condition andresults of operations of the operators of our properties, and, thus, our
business;
• there can be no assurance that if any of the announced or proposed changes
described above are implemented there will not be negative financial
impact on the operators of our hospitals, which material effects may
include a potential decrease in the market for health care services or adecrease in the ability of the operators of our hospitals to receive
reimbursement for health care services provided which could result in a
material adverse effect on the financial condition or results of
operations of the operators of our properties, and, thus, our business;
• competition for properties include, but are not limited to, other REITs,
private investors and firms, banks and other companies, including UHS. In
addition, we may face competition from other REITs for our tenants;
• the operators of our facilities face competition from other health care
providers, including physician owned facilities and other competing
facilities, including certain facilities operated by UHS but the real
property of which is not owned by us. Such competition is experienced in
markets including, but not limited to,
County,
Valley Campus, a 130-bed acute care hospital;
• changes in, or inadvertent violations of, tax laws and regulations and
other factors than can affect REITs and our status as a REIT;
• should we be unable to comply with the strict income distribution
requirements applicable to REITs, utilizing only cash generated by
operating activities, we would be required to generate cash from other
sources which could adversely affect our financial condition;
• our ownership interest in five LLCs/LPs in which we hold non-controlling
equity interests. In addition, pursuant to the operating and/or
partnership agreements of the four LLCs/LPs in which we continue to hold
non-controlling ownership interests, the third-party member and the Trust,at any time, potentially subject to certain conditions, have the right to
make an offer ("Offering Member") to the other member(s) ("Non-Offering
Member") in which it either agrees to: (i) sell the entire ownership
interest of the Offering Member to the Non-Offering Member ("Offer to
Sell") at a price as
33
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determined by the Offering Member ("Transfer Price"), or; (ii) purchase
the entire ownership interest of the Non-Offering Member ("Offer to
Purchase") at the equivalent proportionate Transfer Price. The
Non-Offering Member has 60 to 90 days to either: (i) purchase the entire
ownership interest of the Offering Member at the Transfer Price, or;
(ii) sell its entire ownership interest to the Offering Member at theequivalent proportionate Transfer Price. The closing of the transfer must
occur within 60 to 90 days of the acceptance by the Non-Offering Member;
• fluctuations in the value of our common stock, and;
• other factors referenced herein or in our other filings with the
Securities and Exchange Commission .
Given these uncertainties, risks and assumptions, you are cautioned not to place
undue reliance on such forward-looking statements. Our actual results and
financial condition, including the operating results of our lessees and the
facilities leased to subsidiaries of UHS, could differ materially from those
expressed in, or implied by, the forward-looking statements.
Forward-looking statements speak only as of the date the statements are made. We
assume no obligation to publicly update any forward-looking statements to
reflect actual results, changes in assumptions or changes in other factors
affecting forward-looking information, except as may be required by law. All
forward-looking statements attributable to us or persons acting on our behalf
are expressly qualified in their entirety by this cautionary statement.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted inthe United States of America requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. We consider our critical accounting policies to be those that require us to make significant judgments and estimates when we prepare our financial statements, including the following: Purchase Accounting for Acquisition of Investments in Real Estate: Purchase accounting is applied to the assets and liabilities related to all real estate investments acquired from third parties. In accordance with current accounting guidance, we account for our property acquisitions as acquisitions of assets, which requires the capitalization of acquisition costs to the underlying assets and prohibits the recognition of goodwill or bargain purchase gains. The fair value of the real estate acquired is allocated to the acquired tangible assets, consisting primarily of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, and acquired ground leases, based in each case on their fair values. Loan premiums, in the case of above market rate assumed loans, or loan discounts, in the case of below market assumed loans, are recorded based on the fair value of any loans assumed in connection with acquiring the real estate. The fair values of the tangible assets of an acquired property are determined based on comparable land sales for land and replacement costs adjusted for physical and market obsolescence for the improvements. The fair values of the tangible assets of an acquired property are also determined by valuing the property as if it were vacant, and the "as-if-vacant" value is then allocated to land, building and tenant improvements based on management's determination of the relative fair values of these assets. Management determines the as-if-vacant fair value of a property based on assumptions that a market participant would use, which is similar to methods used by independent appraisers. In addition, there is intangible value related to having tenants leasing space in the purchased property, which is referred to as in-place lease value. Such value results primarily from the buyer of a leased property avoiding the costs associated with leasing the property and also avoiding rent losses and unreimbursed operating expenses during the hypothetical lease-up period. Factors considered by management in performing these analyses include an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rental revenue during the expected lease-up periods based on current market demand. Management also estimates costs to execute similar leases including leasing commissions, tenant improvements, legal and other related costs. The value of in-place leases are amortized to expense over the remaining initial terms of the respective leases. In allocating the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease values are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) estimated fair market lease rates from the perspective of a market participant for the corresponding in-place leases, measured, for above-market leases, over a period equal to the remaining non-cancelable term of the lease and, for 34
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below-market leases, over a period equal to the initial term plus any below
market fixed rate renewal periods. The capitalized above-market lease values are
amortized as a reduction of rental income over the remaining non-cancelable
terms of the respective leases. The capitalized below-market lease values, also
referred to as acquired lease obligations, are amortized as an increase to
rental income over the initial terms of the respective leases.
Asset Impairment: We review each of our properties for indicators that its
carrying amount may not be recoverable. Examples of such indicators may include
a significant decrease in the market price of the property, a change in the
expected holding period for the property, a significant adverse change in how
the property is being used or expected to be used based on the underwriting at
the time of acquisition, an accumulation of costs significantly in excess of the
amount originally expected for the acquisition or development of the property,
or a history of operating or cash flow losses of the property. When such
impairment indicators exist, we review an estimate of the future undiscounted
net cash flows (excluding interest charges) expected to result from the real
estate investment's use and eventual disposition and compare that estimate to
the carrying value of the property. We consider factors such as future operating
income, trends and prospects, as well as the effects of leasing demand,
competition and other factors. If our future undiscounted net cash flow
evaluation indicates that we are unable to recover the carrying value of a real
estate investment, an impairment loss is recorded to the extent that the
carrying value exceeds the estimated fair value of the property. The evaluation
of anticipated cash flows is highly subjective and is based in part on
assumptions regarding future occupancy, rental rates and capital requirements
that could differ materially from actual results in future periods. Since cash
flows on properties considered to be long-lived assets to be held and used are
considered on an undiscounted basis to determine whether the carrying value of a
property is recoverable, our strategy of holding properties over the long-term
directly decreases the likelihood of their carrying values not being recoverable
and therefore requiring the recording of an impairment loss. If our strategy
changes or market conditions otherwise dictate an earlier sale date, an
impairment loss may be recognized and such loss could be material. If we
determine that the asset fails the recoverability test, the affected assets must
be reduced to their fair value.
We generally estimate the fair value of rental properties utilizing a discounted
cash flow analysis that includes projections of future revenues, expenses and
capital improvement costs that a market participant would use based on the
highest and best use of the asset, which is similar to the income approach that
is commonly utilized by appraisers. In certain cases, we may supplement this
analysis by obtaining outside broker opinions of value or third party
appraisals.
In considering whether to classify a property as held for sale, we consider
factors such as whether management has committed to a plan to sell the property,
the property is available for immediate sale in its present condition for a
price that is reasonable in relation to its current value, the sale of the
property is probable, and actions required for management to complete the plan
indicate that it is unlikely that any significant changes will made to the
plan. If all the criteria are met, we classify the property as held for sale.
Upon being classified as held for sale, depreciation and amortization related to
the property ceases and it is recorded at the lower of its carrying amount or
fair value less cost to sell. The assets and related liabilities of the property
are classified separately on the consolidated balance sheets for the most recent
reporting period. Only those assets held for sale that constitute a strategic
shift or that will have a major effect on our operations are classified as
discontinued operations.
An other than temporary impairment of an investment in an unconsolidated LLC is
recognized when the carrying value of the investment is not considered
recoverable based on evaluation of the severity and duration of the decline in
value, including projected declines in cash flow. To the extent impairment has
occurred, the excess carrying value of the asset over its estimated fair value
is charged to income.
Federal Income Taxes: No provision has been made for federal income tax
purposes since we qualify as a REIT under Sections 856 to 860 of the Internal
Revenue Code of 1986, and intend to continue to remain so qualified. To qualify
as a REIT, we must meet certain organizational and operational requirements,
including a requirement to distribute at least 90% of our annual REIT taxable
income to shareholders. As a REIT, we generally will not be subject to federal,
state or local income tax on income that we distribute as dividends to our
shareholders.
We are subject to a federal excise tax computed on a calendar year basis. The
excise tax equals 4% of the amount by which 85% of our ordinary income plus 95%
of any capital gain income for the calendar year exceeds cash distributions
during the calendar year, as defined. No provision for excise tax has been
reflected in the financial statements as no tax was due.
Earnings and profits, which determine the taxability of dividends to
shareholders, will differ from net income reported for financial reporting
purposes due to the differences for federal tax purposes in the cost basis of
assets and in the estimated useful lives used to compute depreciation and the
recording of provision for investment losses.
35
--------------------------------------------------------------------------------Results of Operations
Year ended
For the year ended
•
recovery proceeds received in excess of property damage write-offs recorded
during 2018;
•
interruption insurance recovery proceeds received recorded during 2018,
including approximately
•
connection with a lease termination agreement entered into during the second
quarter of 2018 related to a single tenant MOB located in Texas that
terminated a lease that was scheduled to expire in July, 2020;
•
the sale of the Kings Crossing II MOB and the sale of a parcel of land;
•
located in
30, 2019), that was entered into at a substantially increased lease rate as
compared to the original lease which expired on
has been vacant since
•
hospital facility located in
vacant since
•
facilities, and;
•
expense due primarily to increases in our average outstanding borrowings,
and average cost of borrowings, pursuant to our revolving credit agreement.
Total revenues increased$1.0 million , or 1.3%, during 2019 as compared to 2018. The increase was due primarily to: (i) a$563,000 increase in the bonus rental revenue generated on the UHS hospital facilities; (ii) a$718,000 increase resulting from the increased rental rate in connection with a short-term lease covering the period ofJune 1, 2019 throughSeptember 30, 2019 on a hospital facility located inEvansville, Indiana , that was vacated onSeptember 30, 2019 (see Hospital Leases below), and; (iii) a$428,000 decrease resulting from theJune 1, 2019 lease expiration and tenant vacancy at a hospital facility located inCorpus Christi, Texas , (see Hospital Leases below). Included in our other operating expenses are expenses related to the consolidated medical office buildings and two vacant hospital facilities (as discussed herein), which totaled$19.1 million and$18.6 million for the years endedDecember 31, 2019 and 2018, respectively. Our operating expenses for 2019 include expenses associated with the lease expirations at two of our hospital facilities, which are currently vacant, of approximately$370,000 in the aggregate for the year endedDecember 31, 2019 . A large portion of the expenses associated with our consolidated medical office buildings is passed on directly to the tenants either directly as tenant reimbursements of common area maintenance expenses of included in base rental amounts. Tenant reimbursements for operating expenses are accrued as revenue in the same period the related expenses are incurred and are included as tenant reimbursement revenue in our consolidated statements of income. During 2019, we had a total of 62 new or renewed leases related to the medical office buildings as indicated in Item 2. Properties, in which we have significant investments, some of which are accounted for by the equity method. These leases comprised approximately 24% of the aggregate rentable square feet of these properties (17% related to renewed leases and 7% related to new leases). During 2018, we had a total of 34 new or renewed leases related to the medical office buildings, in which we have significant investments, some of which are accounted for by the equity method. These leases comprised approximately 17% of the aggregate rentable square feet of these properties (14% related to renewed leases and 3% related to new leases). Rental rates, tenant improvement costs and rental concessions vary from property to property based upon factors such as, but not limited to, the current occupancy and age of our buildings, local overall economic conditions, proximity to hospital campuses and the vacancy rates, rental rates and capacity of our competitors in the market. In connection with lease renewals executed during each year, the weighted-average rental rates, as compared to rental rates on the expired leases, remained relatively unchanged during 2019 and decreased 3% during 2018. The weighted-average tenant improvement costs associated with new or renewed leases was approximately$15 and$10 per square foot during 2019 and 2018, respectively. The weighted-average leasing commissions on the new and renewed leases commencing during each year was approximately 2% of base rental revenue over the term of the leases during 2019 and 4% of base rental revenue over the term of the leases during 2018. The average aggregate value of the tenant concessions, generally consisting of rent abatements, provided in connection with new and renewed leases commencing during each year was approximately 0.4% and 0.5% of the future aggregate base rental revenue over the lease terms during 2019 and 2018, respectively. Rent abatements were, or will be, recognized in our results of operations under the straight-line method over the lease term regardless of when payments are due. 36 -------------------------------------------------------------------------------- Funds from operations ("FFO") is a widely recognized measure of performance for Real Estate Investment Trusts ("REITs"). We believe that FFO and FFO per diluted share, which are non-GAAP financial measures, are helpful to our investors as measures of our operating performance. We compute FFO in accordance with standards established by theNational Association of Real Estate Investment Trusts ("NAREIT"), which may not be comparable to FFO reported by other REITs that do not compute FFO in accordance with the NAREIT definition, or that interpret the NAREIT definition differently than we interpret the definition. FFO adjusts for the effects of gains, such as gains on transactions and hurricane recovery proceeds in excess of damaged property write-downs during the periods presented. We adjusted for hurricane insurance recovery proceeds in excess of damaged property write-downs for the twelve months of 2018 since we believe that this gain is similar in nature and has the same characteristics as an adjustment for gains/losses resulting from the sale of depreciable property, which are required to be excluded from FFO under NAREIT's definition. To the extent a REIT recognizes a gain or loss with respect to the sale of incidental assets, such as the sale of land peripheral to operating properties, the REIT has the option to exclude or include such gains and losses in the calculation of FFO. We have opted to exclude gains and losses from sales of incidental assets in our calculation of FFO. FFO does not represent cash generated from operating activities in accordance with GAAP and should not be considered to be an alternative to net income determined in accordance with GAAP. In addition, FFO should not be used as: (i) an indication of our financial performance determined in accordance with GAAP; (ii) an alternative to cash flow from operating activities determined in accordance with GAAP; (iii) a measure of our liquidity, or; (iv) an indicator of funds available for our cash needs, including our ability to make cash distributions to shareholders. Below is a reconciliation of our reported net income to FFO for 2019 and 2018 (in thousands): 2019 2018 Net income$ 18,964 $ 24,196
Depreciation and amortization expense on consolidated investments
25,870 24,337
Depreciation and amortization expense on unconsolidated affiliates 1,141
1,036
Hurricane insurance recovery proceeds in excess of damaged property write-downs
- (4,535 )
Gains on sales of real estate assets (1,951 ) -
Funds From Operations$ 44,024 $
45,034
Weighted average number of shares outstanding - Diluted 13,752
13,722
Funds From Operations per diluted share$ 3.20 $
3.28
Our FFO decreased$1.0 million , or$.08 per diluted share, during 2019 as compared to 2018 due primarily to: (i) a decrease of approximately$1.7 million , or$.12 per diluted share, resulting from a lease termination agreement entered into during 2018 on a single-tenant medical office building located inTexas (this agreement terminated a lease that was scheduled to expire in July, 2020); (ii) a decrease of approximately$500,000 , or$.04 per diluted share, resulting from business interruption insurance recovery proceeds recorded during 2018 that related to the period of August through December of 2017; (iii) an increase of approximately$400,000 , or$.03 per diluted share, consisting of non-recurring repairs and remediation expenses incurred during 2018 at one of our medical office buildings; (iv) an increase of approximately$563,000 , or$.04 per diluted share, resulting from an increase in bonus rent from UHS hospital facilities, and; (v) other combined net increase of approximately$275,000 , or$.02 per diluted share. Hurricane Harvey Impact In late August, 2017, five of our medical office buildings located in theHouston, Texas area, incurred extensive water damage as a result of Hurricane Harvey. Until various times during the second quarter of 2018, these properties were temporarily closed and non-operational as we continued to reconstruct and restore them to operational condition. As ofJune 30, 2018 , reconstruction on all of the occupied space in these properties had been completed and operations had resumed. During the first quarter of 2018, pursuant to the terms of a global settlement with our commercial property insurance carrier, we received$5.5 million of additional insurance recovery proceeds bringing the aggregate hurricane-related insurance recoveries to$12.5 million . The aggregate insurance recovery proceeds, which are net of applicable deductibles, covered substantially all of the costs incurred related to the remediation, repair and reconstruction of each of these properties as well business interruption recoveries for the lost income related to each of these properties during the period they were non-operational. Included in our financial results for the year endedDecember 31, 2018 are hurricane insurance recoveries of approximately$4.5 million consisting of recovery proceeds in excess of the damaged property write-downs. Additionally, during 2018, we recorded approximately$1.2 million of hurricane business interruption insurance recoveries in connection with the damage sustained from Hurricane Harvey. Included in this amount, which covered the period of late August, 2017 through the second quarter of 2018 (after satisfaction of the applicable deductibles), was approximately$500,000 related to the period of August, 2017 through December, 2017. 37 -------------------------------------------------------------------------------- Included in our financial results for the year endedDecember 31, 2017 are hurricane related expenses of approximately$5.0 million consisting of$3.6 million related to property damage and$1.4 million related to remediation and demolition expenses. Also included in our financial results for the twelve-month period endedDecember 31, 2017 are aggregate hurricane related insurance recoveries of approximately$7.0 million , consisting of$5.0 million related to recovery of hurricane related expenses and$2.0 million related to recovery proceeds in excess of the damaged property write-downs. Hospital Leases Included in our portfolio are six hospital facilities, including two which are currently vacant since the leases were not renewed upon expiration of the lease terms onJune 1st andSeptember 30th of 2019. The revenues generated by these six hospital facilities comprised approximately 26%, 25% and 26% of our consolidated revenues in 2019, 2018 and 2017, respectively. The combined revenues generated from the leases on the three UHS hospital facilities, which have existing lease terms that are scheduled to expire in 2021 (two hospitals) or 2026 (one hospital), accounted for approximately 22%, 21% and 22% of our consolidated revenues in 2019, 2018 and 2017, respectively. The combined revenues generated from the leases on the two hospital facilities vacated during 2019 comprised approximately 2% of our consolidated revenues during each of 2019, 2018 and 2017. The two hospital facilities which are currently vacant since the expiration of their leases during 2019 are located inEvansville, Indiana , andCorpus Christi, Texas . The former tenant in theEvansville, Indiana , hospital entered into a short-term lease with us, covering the period ofJune 1, 2019 throughSeptember 30, 2019 , at a substantially increased lease rate as compared to the original lease rate. The lease revenue generated from this facility amounted to$1.4 million during the first nine months of 2019 that it was under lease and occupied, as compared to$714,000 for the year endedDecember 31, 2018 . The hospital inCorpus Christi, Texas , which has been vacant sinceJune 1, 2019 , generated revenues of$310,000 during 2019 as compared to$738,000 during 2018. Although we are in the process of marketing each property for lease to new tenants, should these properties remain vacant for an extended period of time, or should we experience decreased lease rates on future leases, as compared to prior/expired lease rates, or incur substantial renovation costs to make the properties suitable for other operators/tenants, our future results of operations could be materially unfavorably impacted.
Year ended
For the year ended
• a
of 2017 in connection with our purchase of the minority interest in, and
subsequent divestiture of, the
("
• a
recoveries in excess of property damage write-downs recorded during 2018 as
compared to 2017;
• a
entered into during 2018;
• a $1.2 million increase resulting from hurricane-related businessinterruption insurance recovery proceeds recorded during 2018 (approximately
• a
2017 divestiture of
• a decrease of approximately
and remediation expenses incurred during 2018 at one of our medical office
buildings, and;
• other combined net increases of approximately$1.4 million due to the increased net income generated at various properties, including the properties acquired during 2018 and 2017. Total revenues increased$3.9 million , or 5.3%, during 2018 as compared to 2017 due primarily to the revenues generated at MOBs acquired during 2018 and 2017, as well as net increases at various other properties. Included in our other operating expenses are expenses related to the consolidated medical office buildings, which totaled$18.6 million and$17.4 million for the years endedDecember 31, 2018 and 2017, respectively. The increase in operating expenses during 2018 as compared to 2017 is partially due to: (i) the newly constructed medical office building which opened in April, 2017, and; (ii) approximately$400,000 of non-recurring repairs and remediation expenses incurred at one of our medical office buildings. A large portion of the expenses associated with our consolidated medical office buildings is passed on directly to the tenants either directly as tenant reimbursements of common area maintenance expenses of included in base rental amounts. Tenant reimbursements for 38
--------------------------------------------------------------------------------
operating expenses are accrued as revenue in the same period the related expenses are incurred and are included as tenant reimbursement revenue in our consolidated statements of income.
During 2018, we had a total of 34 new or renewed leases related to the medical office buildings as indicated in Item 2. Properties, in which we have significant investments, some of which are accounted for by the equity method. These leases comprised approximately 17% of the aggregate rentable square feet of these properties (14% related to renewed leases and 3% related to new leases). During 2017, we had a total of 38 new or renewed leases related to the medical office buildings, in which we have significant investments, some of which are accounted for by the equity method. These leases comprised approximately 10% of the aggregate rentable square feet of these properties (7% related to renewed leases and 3% related to new leases). Rental rates, tenant improvement costs and rental concessions vary from property to property based upon factors such as, but not limited to, the current occupancy and age of our buildings, local overall economic conditions, proximity to hospital campuses and the vacancy rates, rental rates and capacity of our competitors in the market. The weighted-average tenant improvement costs associated with new or renewed leases was approximately$10 per square foot during each of 2018 and 2017. The weighted-average leasing commissions on the new and renewed leases commencing during each year was approximately 4% of base rental revenue over the term of the leases during 2018 and 2% of base rental revenue over the term of the leases during 2017. The average aggregate value of the tenant concessions, generally consisting of rent abatements, provided in connection with new and renewed leases commencing during each year was approximately 0.5% of the future aggregate base rental revenue over the lease terms during 2018 and approximately 2% of the future aggregate base rental revenue over the lease terms during 2017. Rent abatements were, or will be, recognized in our results of operations under the straight-line method over the lease term regardless of when payments are due. In connection with lease renewals executed during each year, the weighted-average rental rates, as compared to rental rates on the expired leases, decreased by approximately 3% during each of 2018 and 2017. Below is a reconciliation of our reported net income to FFO for 2018 and 2017 (in thousands): 2018 2017 Net income$ 24,196 $ 45,619
Depreciation and amortization expense on consolidated investments
24,337 24,598
Depreciation and amortization expense on unconsolidated affiliates 1,036
1,240
Hurricane insurance recovery proceeds in excess of damaged property write-downs (4,535 ) (2,033 ) Gain on Arlington transaction - (27,196 ) Funds From Operations$ 45,034 $ 42,228 Weighted average number of shares and equivalents outstanding - Diluted 13,722
13,625
Funds From Operations per diluted share$ 3.28 $ 3.10 Our FFO increased$2.8 million , or$.18 per diluted share, during 2018 as compared to 2017 due primarily to: (i) an increase of approximately$1.7 million , or$.12 per diluted share, resulting from a lease termination agreement entered into during 2018 on a single-tenant medical office building located inTexas (this agreement terminated a lease that was scheduled to expire in July, 2020); (ii) an increase of approximately$500,000 , or$.04 per diluted share, resulting from business interruption insurance recovery proceeds recorded during 2018 that related to the period of August through December of 2018; (iii) a decrease of approximately$400,000 , or$.03 per diluted share, consisting of non-recurring repairs and remediation expenses incurred during 2018 at one of our medical office buildings, and; (iv) other combined net increase of approximately$1.0 million due to the increased net income generated at various properties, including the properties acquired during 2018 and 2017.
Effects of Inflation
Inflation has not had a material impact on our results of operations over the last three years. However, since the healthcare industry is very labor intensive and salaries and benefits are subject to inflationary pressures, as are supply and other costs, we and the operators of our hospital facilities cannot predict the impact that future economic conditions may have on our/their ability to contain future expense increases. Depending on general economic and labor market conditions, the operators of our hospital facilities may experience unfavorable labor market conditions, including a shortage of nurses which may cause an increase in salaries, wages and benefits expense in excess of the inflation rate. Their ability to pass on increased costs associated with providing healthcare to Medicare and Medicaid patients is limited due to various federal, state and local laws which have been enacted that, in certain cases, limit their ability to increase prices. Therefore, there can be no assurance that these factors will not have a material adverse effect on the future results of operations of the operators of our facilities which may affect their ability to make lease payments to us.
Most of our leases contain provisions designed to mitigate the adverse impact of inflation. Our hospital leases require all building operating expenses, including maintenance, real estate taxes and other costs, to be paid by the lessee. In addition, certain of
39
--------------------------------------------------------------------------------
the hospital leases contain bonus rental provisions, which require the lessee to
pay additional rent to us based on increases in the revenues of the facility
over a base year amount. In addition, most of our MOB leases require the tenant
to pay an allocable share of operating expenses, including common area
maintenance costs, insurance and real estate taxes. These provisions may reduce
our exposure to increases in operating costs resulting from inflation. To the
extent that some leases do not contain such provisions, our future operating
results may be adversely impacted by the effects of inflation.
Liquidity and Capital Resources
Year ended
Net cash provided by operating activities
Net cash provided by operating activities was
• an unfavorable change of approximately
net income plus/minus the adjustments to reconcile net income to net cash
provided by operating activities (depreciation and amortization,
amortization of debt premium, stock-based compensation, hurricane insurance
recovery proceeds in excess of damaged property write-downs and gains on
sales of real estate assets), as discussed above. This decrease was due
primarily to
lease termination agreement on a single-tenant MOB located in Texas , that
terminated a lease that was scheduled to expire in July, 2020;
• an unfavorable change of
deferred and prepaid rents, primarily resulting from cash received in 2018
from various tenants as reimbursement for their share of the cost of
certain tenant improvements;
• a favorable change of $711,000 in lease and other receivables;
• a favorable change of $299,000 in leasing costs paid;
• a favorable change of $1.3 million in accrued expenses and other
liabilities due to timing of disbursements, and;
• other combined net favorable changes of $796,000 .
Net cash used in investing activities
Net cash used in investing activities was
2019:
During 2019,
• spent
including $1.6 million related to the construction costs for the Texoma
Medical Plaza II located in Denison, Texas , that is currently being
constructed;
• spent approximately
investments including
health care hospital located in
as well as tenant improvements at various MOBs;
• spent approximately
Medicine Center, as discussed in Note 3 to the consolidated financial
statements -
Exchange Transaction;
• received
our unconsolidated LLCs (
• received approximately
sales of real estate assets consisting of an MOB located in
2018:
During 2018,
• spent
• spent approximately
consisting primarily of hurricane related repairs at certain MOBs and
tenant improvements at various MOBs;
40
--------------------------------------------------------------------------------
• spent approximately
statements -
Exchange Transaction;
• spent $192,000 for hurricane related remediation expenses;
• received
our unconsolidated LLCs (
• received approximately
excess of damaged property write-downs.
Net cash used in financing activities
Net cash used in financing activities was
2019:
The
• received
of credit;
• received
interest;
• paid
income tax withholding obligations related to stock-based compensation;
• paid$37.4 million of dividends; • paid$4.2 million on mortgage notes payable that are non-recourse to us, including the repayment of$2.5 million related to a previously outstanding mortgage note payable on one property that was funded utilizing borrowings under our revolving credit agreement, and; • paid$35,000 of financing costs
2018:
The
• received
of credit;
• received
refinancing that are non-recourse to us (these proceeds were utilized to
repay outstanding borrowings under our revolving credit facility);
• received
interest;
• paid $36.8 million of dividends;
• repaid
(one of which was subsequently refinanced with a new $13.0 million
mortgage), and;
• paid $1.7 million of financing costs related to the revolving credit
agreement and a new mortgage note payable that is non-recourse to us.
Year ended
Net cash provided by operating activities
Net cash provided by operating activities was
• a favorable change of approximately
income plus/minus the adjustments to reconcile net income to net cash
provided by operating activities (depreciation and amortization,
amortization of debt premium, stock-based compensation, hurricane insurance
recovery proceeds in excess of damaged property write-downs, hurricane
related expenses and recoveries and gain on
increase included
connection a lease termination agreement on a single-tenant MOB located in
Texas , that terminated a lease that was scheduled to expire in July, 2020; • an unfavorable change of$3.8 million in tenant reserves, deposits and
deferred and prepaid rents, consisting primarily of
in 2017 from a tenant as reimbursement for their share of the cost of
certain tenant improvements;
• a favorable change of $384,000 in lease receivable;
41
--------------------------------------------------------------------------------
• an unfavorable change of$614,000 in leasing costs paid;
• an unfavorable change of
liabilities due to timing of disbursements, and;
• other combined net unfavorable changes of approximately $900,000 Net cash (used in)/provided by investing activities
Net cash used in investing activities was$8.0 million during 2018 as compared to$39.5 million of net cash provided by investing activities during 2017. The factors contributing to the$8.0 million of net cash used in investing activities during 2018 are detailed above.
2017:
The
• spent
• spent approximately
including construction costs for the Henderson Medical
property opened in April, 2017), as well as tenant improvements at various
MOBs;
• received
• spent approximately
payments;
• spent approximately $9.0 million in connection with the July and
September, 2017 acquisitions of the
Palmas FED, respectively, as discussed in Note 3 to the consolidated
financial statements - New Construction , Acquisitions, Dispositions and
Property Exchange Transaction;
• spent approximately
majority-owned LLC (
• received
generated in connection with the divestiture of St. Mary's Professional
statements -
Exchange Transaction;
• received
loan advanced to an LLC, and;
• received
from our unconsolidated LLCs (
less $2.4 million of equity in income of unconsolidated LLCs).
Net cash used in financing activities
Net cash used in financing activities was$33.3 million during 2018, as compared to$86.0 million during 2017. The factors contributing to the$33.3 million of net cash used in financing activities during 2018 are detailed above.
2017:
The
• received
that are non-recourse to us;
• received $9.4 million of net cash from the issuance of shares of
beneficial interest, including $9.1 million of net cash received inconnection with our at-the-market equity issuance program, as discussed
below;
• paid $36.1 million of dividends;
• repaid
• repaid
us, including the repayment of an aggregate of
outstanding mortgage notes payable on six properties that were funded
utilizing borrowings under our revolving credit agreement (two of which
were subsequently refinanced with new mortgages aggregating to $22.6
million ), and;
• paid
and new mortgage notes payable that are non-recourse to us.
Pursuant to the terms of our previously outstanding at-the-market equity issuance program, during the twelve months endedDecember 31, 2017 , there were 127,499 shares issued at an average price of$74.71 per share which generated approximately$9.1 42
--------------------------------------------------------------------------------
million of net cash proceeds (net of approximately
Additional cash flow and dividends paid information for 2019, 2018 and 2017:
As indicated on our consolidated statements of cash flows, we generated net cash provided by operating activities of$42.7 million during 2019,$42.9 million during 2018 and$46.0 million during 2017. As also indicated on our statements of cash flows, non-cash expenses including depreciation and amortization expense, amortization of debt premium, stock-based compensation expense, hurricane insurance recovery proceeds in excess of damaged property write-downs, hurricane related expenses and recoveries and gains on transactions (as applicable), are the primary differences between our net income and net cash provided by operating activities for each year. In addition, as reflected in the cash flows from investing activities section, we received$318,000 during 2019,$834,000 during 2018 and$1.2 million during 2017, of cash distributions in excess of income from various unconsolidated LLCs which represents our share of the net cash flow distributions from these entities. These cash distributions in excess of income represent operating cash flows net of capital expenditures and debt repayments made by the LLCs. We therefore generated$43.0 million during 2019,$43.8 million during 2018 and$47.2 million during 2017, related to the operating activities of our properties recorded on a consolidated and an unconsolidated basis. We paid dividends of$37.4 million during 2019,$36.8 million during 2018 and$36.1 million during 2017. During 2019, the$43.0 million of cash generated from the operating activities of our properties was$5.6 million greater than the$37.4 million of dividends paid. During 2018, the$43.8 million of cash generated from the operating activities of our properties was$7.0 million greater than the$36.8 million of dividends paid. During 2017, the$47.2 million of cash generated related to the operating activities of our properties was approximately$11.1 million greater than that$36.1 million of dividends paid. As indicated in the cash flows from investing activities and cash flows from financing activities sections of the statements of cash flows, there were various other sources and uses of cash during each of the last three years. From time to time, various other sources and uses of cash may include items such as investments and advances made to/from LLCs, additions to real estate investments, acquisitions/divestiture of properties, net borrowings/repayments of debt, and proceeds generated from the issuance of equity. Therefore, in any given period, the funding source for our dividend payments is not wholly dependent on the operating cash flow generated by our properties. Rather, our dividends as well as our capital reinvestments into our existing properties, acquisitions of real property and other investments are funded based upon the aggregate net cash inflows or outflows from all sources and uses of cash from the properties we own either in whole or through LLCs, as outlined above. In determining and monitoring our dividend level on a quarterly basis, our management andBoard of Trustees consider many factors in determining the amount of dividends to be paid each period. These considerations primarily include: (i) the minimum required amount of dividends to be paid in order to maintain our REIT status; (ii) the current and projected operating results of our properties, including those owned in LLCs, and; (iii) our future capital commitments and debt repayments, including those of our LLCs. Based upon the information discussed above, as well as consideration of projections and forecasts of our future operating cash flows, management and theBoard of Trustees have determined that our operating cash flows have been sufficient to fund our dividend payments. Future dividend levels will be determined based upon the factors outlined above with consideration given to our projected future results of operations. We expect to finance all capital expenditures and acquisitions and pay dividends utilizing internally generated and additional funds. Additional funds may be obtained through: (i) borrowings under our existing$300 million revolving credit agreement (which had$87.0 million of available borrowing capacity, net of outstanding borrowings as ofDecember 31, 2019 ); (ii) borrowings under or refinancing of existing third-party debt pursuant to mortgage loan agreements entered into by our consolidated and unconsolidated LLCs/LPs; (iii) the issuance of equity, and/or; (iv) the issuance of other long-term debt. We believe that our operating cash flows, cash and cash equivalents, available borrowing capacity under our revolving credit agreement and access to the capital markets provide us with sufficient capital resources to fund our operating, investing and financing requirements for the next twelve months, including providing sufficient capital to allow us to make distributions necessary to enable us to continue to qualify as a REIT under Sections 856 to 860 of the Internal Revenue Code of 1986. In the event we need to access the capital markets or other sources of financing, there can be no assurance that we will be able to obtain financing on acceptable terms or within an acceptable time. Our inability to obtain financing on terms acceptable to us could have a material unfavorable impact on our results of operations, financial condition and liquidity.
Credit facilities and mortgage debt
Management routinely monitors and analyzes the Trust's capital structure in an effort to maintain the targeted balance among capital resources including the level of borrowings pursuant to our$300 million revolving credit agreement, the level of borrowings 43
-------------------------------------------------------------------------------- pursuant to non-recourse mortgage debt secured by the real property of our properties and our level of equity including consideration of additional equity issuances. This ongoing analysis considers factors such as the current debt market and interest rate environment, the current/projected occupancy and financial performance of our properties, the current loan-to-value ratio of our properties, the Trust's current stock price, the capital resources required for anticipated acquisitions and the expected capital to be generated by anticipated divestitures. This analysis, together with consideration of the Trust's current balance of revolving credit agreement borrowings, non-recourse mortgage borrowings and equity, assists management in deciding which capital resource to utilize when events such as refinancing of specific debt components occur or additional funds are required to finance the Trust's growth. OnMarch 27, 2018 , we entered into a revolving credit agreement ("Credit Agreement") which, among other things, increased our borrowing capacity by$50 million to$300 million and extended the maturity date from our previously existing facility. The replacement Credit Agreement, which is scheduled to mature in March, 2022, includes a$40 million sublimit for letters of credit and a$30 million sub limit for swingline/short-term loans. The Credit Agreement also provides for options to extend the maturity date for two additional six month periods. Additionally, the Credit Agreement includes an option to increase the total facility borrowing capacity up to an additional$50 million , subject to lender agreement. Borrowings under the Credit Agreement are guaranteed by certain subsidiaries of the Trust. In addition, borrowings under the Credit Agreement are secured by first priority security interests in and liens on all equity interests in certain of the Trust's wholly-owned subsidiaries. Borrowings made pursuant to the Credit Agreement will bear interest, at our option, at one, two, three, or six month LIBOR plus an applicable margin ranging from 1.10% to 1.35% or at the Base Rate plus an applicable margin ranging from 0.10% to 0.35%. The Credit Agreement defines "Base Rate" as the greater of: (a) the administrative agent's prime rate; (b) the federal funds effective rate plus 1/2 of 1%, and; (c) one month LIBOR plus 1%. A facility fee of 0.15% to 0.35% will be charged on the total commitment of the Credit Agreement. The margins over LIBOR, Base Rate and the facility fee are based upon our total leverage ratio. AtDecember 31, 2019 , the applicable margin over the LIBOR rate was 1.2%, the margin over the Base Rate was 0.2%, and the facility fee was 0.20%. AtDecember 31, 2019 , we had$213.0 million of outstanding borrowings under our Credit Agreement and$87.0 million of available borrowing capacity. The carrying amount and fair value of borrowings outstanding pursuant to the Credit Agreement was$213.0 million atDecember 31, 2019 . There are no compensating balance requirements. The average amount outstanding under our Credit Agreement during the years endedDecember 31, 2019 , 2018 and, 2017 was$198.3 million ,$191.4 million and$182.4 million , respectively, with corresponding effective interest rates of 3.7%, 3.5% and 2.8%, respectively, including commitment fees. The Credit Agreement contains customary affirmative and negative covenants, including limitations on certain indebtedness, liens, acquisitions and other investments, fundamental changes, asset dispositions and dividends and other distributions. The Credit Agreement also contains restrictive covenants regarding the Trust's ratio of total debt to total assets, the fixed charge coverage ratio, the ratio of total secured debt to total asset value, the ratio of total unsecured debt to total unencumbered asset value, and minimum tangible net worth, as well as customary events of default, the occurrence of which may trigger an acceleration of amounts outstanding under the Credit Agreement. We are in compliance with all of the covenants atDecember 31, 2019 and 2018. We also believe that we would remain in compliance if the full amount of our commitment was borrowed. The following table includes a summary of the required compliance ratios atDecember 31, 2019 and 2018, giving effect to the covenants contained in the Credit Agreements in effect on the respective dates (dollar amounts in thousands): December 31, 2019 December 31, 2018 Covenant UHT Covenant UHT Tangible net worth$ 125,000 $ 167,181 $ 125,000 $ 181,203 Total leverage < 60 % 42.3 % < 60 % 41.3 % Secured leverage < 30 % 9.1 % < 30 % 9.8 % Unencumbered leverage < 60 % 38.5 % < 60 % 37.6 % Fixed charge coverage > 1.50x 4.0x > 1.50x 4.3x 44
-------------------------------------------------------------------------------- As indicated on the following table, we have various mortgages, all of which are non-recourse to us and are not cross-collateralized, included on our consolidated balance sheet as ofDecember 31, 2019 and 2018 (amounts in thousands): As of 12/31/2019 As of 12/31/2018 Outstanding Outstanding Interest Maturity Balance Balance Facility Name Rate Date (in thousands)(a.) (in thousands)Corpus Christi, TX , fixed rate mortgage loan (b.) 6.50 % July, 2019 $ - $ 2,519700 Shadow Lane and Goldring MOBs fixed rate mortgage loan 4.54 % June, 2022 5,654 5,861BRB Medical Office Building fixed rate mortgage loan 4.27 % December, 2022 5,721 5,928Desert Valley Medical Center fixed rate mortgage loan 3.62 % January, 2023 4,661 4,8062704 North Tenaya Way fixed rate mortgage loan 4.95 % November, 2023 6,727 6,871 Summerlin Hospital Medical Office Building III fixed rate mortgage loan 4.03 % April, 2024 13,196 13,198Tuscan Professional Building fixed rate mortgage loan 5.56 % June, 2025 3,492 4,020 Phoenix Children's East Valley Care Center fixed rate mortgage loan 3.95 % January, 2030 8,961 9,194Rosenberg Children's Medical Plaza fixed rate mortgage loan 4.42 % September, 2033 12,732 12,948 Total, excluding net debt premium and net financing fees 61,144 65,345 Less net financing fees (594 ) (711 ) Plus net debt premium 194 247 Total mortgage notes payable, non-recourse to us, net $ 60,744 $ 64,881
(a.) All mortgage loans require monthly principal payments through maturity and
either fully amortize or include a balloon principal payment upon
maturity.
(b.) On
Christi, TX, was fully repaid utilizing borrowings under our Credit
Agreement.
The mortgages are secured by the real property of the buildings as well as property leases and rents. The mortgages outstanding as ofDecember 31, 2019 had a combined carrying value of$61.1 million and a combined fair value of approximately$63.1 million . AtDecember 31, 2018 , we had various mortgages, all of which were non-recourse to us, included in our consolidated balance sheet. The combined outstanding balance of these various mortgages was$65.3 million and these mortgages had a combined fair value of approximately$64.9 million . The fair value of our debt was computed based upon quotes received from financial institutions. We consider these to be "Level 2" in the fair value hierarchy as outlined in the authoritative guidance for disclosures in connection with debt instruments. Changes in market rates on our fixed rate debt impacts the fair value of debt, but it has no impact on interest incurred or cash flow. Contractual Obligations: The following table summarizes the schedule of maturities of our outstanding borrowing under our revolving credit facility ("Credit Agreement"), the outstanding mortgages applicable to our properties recorded on a consolidated basis and our other contractual obligations as ofDecember 31, 2019 (amounts in thousands): Payments Due by Period (dollars in thousands) Less than More than Debt and Contractual Obligation Total 1 Year 2-3 years 4-5 years 5 years Long-term non-recourse debt-fixed (a) (b)$ 61,144 $ 1,913 $ 14,278 $ 25,442 $ 19,511 Long-term debt-variable (c) 212,950 - 212,950 - - Estimated future interest payments on debt outstanding as of December 31, 2019 (d) 29,555 8,922 12,620 2,735 5,278 Operating leases (e) 27,842 480 960 960 25,442
Construction commitments (f) 45,981 45,981 - - - Equity and debt financing commitments (g) 362 362 - - - Total contractual obligations$ 377,834 $ 57,658 $ 240,808 $ 29,137 $ 50,231 45
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(a) The mortgages are secured by the real property of the buildings as well as
property leases and rents. Property-specific debt is detailed above.
(b) Consists of non-recourse debt with an aggregate fair value of approximately
rate debt impacts the fair value of debt, but it has no impact on interest
incurred or cash flow. Excludes
outstanding as of December 31, 2019 , that is non-recourse to us, at the
unconsolidated LLCs in which we hold various non-controlling ownership
interests (see Note 8 to the consolidated financial statements).
(c) Consists of $213.0 million of borrowings outstanding as of
under the terms of our $300 million Credit Agreement which matures on
March 28, 2022 . The amount outstanding approximates fair value as of
December 31, 2019 .
(d) Assumes that all debt outstanding as of
borrowings under the Credit Agreement, and the loans which are non-recourse
to us, remain outstanding until the stated maturity date of the debt
agreements at the same interest rates which were in effect as of
2019. We have the right to repay borrowings under the Credit Agreement at any
time during the term of the agreement, without penalty. Interest payments are
expected to be paid utilizing cash flows from operating activities or
borrowings under our revolving Credit Agreement.
(e) Reflects our future minimum operating lease payment obligations outstanding
as of
Financial Statements, in connection with ground leases at fourteen of our
consolidated properties.
(f) Consists of the remaining estimated construction costs of two new
construction projects, consisting of a 108-bed behavioral health care
facility located in
located in
2020. We are required to build these facilities pursuant to agreements with
third parties.
(g) Consists of equity investment and debt financing commitments remaining in
connection with our investment at Forney Medical
Off Balance Sheet Arrangements
As of
Acquisition and Divestiture Activity
Please see Note 3 to the consolidated financial statements for completed transactions.
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