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 July 31, 2020 , we have seventy-one real estate
investments or commitments located in twenty states consisting 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
limited liability companies ("LLCs")/limited liability partnerships
("LPs"), one of which is currently under construction, and;
• four preschool and childcare centers.
Forward Looking Statements and Certain Risk Factors
You should carefully review all of the information contained in this Quarterly Report, and should particularly consider any risk factors that we set forth in this Quarterly Report and in other reports or documents that we file from time to time with theSecurities and Exchange Commission (the "SEC"). In this Quarterly Report, we state our beliefs of future events and of our future financial performance. In some cases, you can identify those so-called "forward-looking statements" by 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. You should be aware that those statements are only our predictions. Actual events or results may differ materially. In evaluating those statements, you should specifically consider various factors, including the risks incorporated by reference in Item 1A Risk Factors and described elsewhere herein and in our Annual Report on Form 10-K for the year endedDecember 31, 2019 in Item 1A Risk Factors and in Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations-Forward Looking Statements. Those factors may cause our actual results to differ materially from any of our 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:
• Future operations and financial results of our tenants, and in turn ours,
will likely be materially impacted by numerous factors and future
developments related to COVID-19. Such factors and developments include,
but are not limited to, the length of time and severity of the spread of
the pandemic; the volume of cancelled or rescheduled elective procedures
and the volume of COVID-19 patients treated by the operators of our
hospitals and other healthcare facilities; measures our tenants are taking
to respond to the COVID-19 pandemic; the impact of government and
administrative regulation, including travel bans and restrictions,
shelter-in-place or stay-at-home orders, quarantines, the promotion of
social distancing, business shutdowns and limitations on businessactivity; changes in patient volumes at our tenants' hospitals and other
healthcare facilities due to patients' general concerns related to the
risk of contracting COVID-19 from interacting with the healthcare system;
the impact of stimulus on the health care industry and our tenants;
changes in patient volumes and payer mix caused by deteriorating
macroeconomic conditions (including increases in uninsured and
underinsured patients as the result of business closings and layoffs);
potential disruptions to clinical staffing and shortages and disruptions
related to supplies required for our tenants' employees and patients,
including equipment, pharmaceuticals and medical supplies, particularly
personal protective equipment, or PPE; potential increases to expenses
incurred by our tenants related to staffing, supply chain or other
expenditures; the impact of our indebtedness and the ability to refinance
such indebtedness on acceptable terms; disruptions in the financial
markets and the business of financial institutions as the result of the
COVID-19 pandemic which could impact our ability to access capital orincrease associated borrowing costs; and changes in general economic
conditions nationally and regionally in the markets our properties are
located resulting from the COVID-19 pandemic, including higher sustained
rates of unemployment and underemployment levels and reduced consumer
spending and confidence. There may be significant declines in future bonus
rental revenue earned on our hospital properties leased to subsidiaries of
UHS to the extent that each hospital continues to experience significant
decline in patient volumes and revenues. These factors may result in the
inability or unwillingness on the part of some of our tenants to make
timely payment of their rent to us at current levels or to seek to amend
or terminate their leases which,
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in turn, would have an adverse effect on our occupancy levels and our
revenue and cash flow and the value of our properties, and potentially,
our ability to maintain our dividend at current levels.
• Due to COVID-19 restrictions and its impact on the economy, we mayexperience a decrease in prospective tenants which could unfavorably
impact the volume of new leases, as well as the renewal rate of existing
leases. The COVID-19 pandemic may delay our construction projects which
could result in increased costs and delay the timing of opening and rentalpayments from those projects, although no such delays have yet occurred.
The COVID-19 pandemic could also impact our indebtedness and the ability
to refinance such indebtedness on acceptable terms, as well as risks
associated with disruptions in the financial markets and the business of
financial institutions as the result of the COVID-19 pandemic which could
impact us from a financing perspective; and changes in general economic
conditions nationally and regionally in the markets our properties are
located resulting from the COVID-19 pandemic. We are not able to fullyquantify the impact that these factors will have on our financial results
during 2020, but developments related to the COVID-19 pandemic are likely
to have a material adverse impact on our future financial results.
• Recent legislation, including the Coronavirus Aid, Relief, and Economic
Security Act (the "CARES Act") and the Paycheck Protection Program and
Health Care Enhancement Act ("PPPHCE Act"), has provided funding to
hospitals and other healthcare providers to assist them during theCOVID-19 pandemic. There is a high degree of uncertainty surrounding the
implementation of the CARES Act and the PPPHCE Act, and the federal
government may consider additional stimulus and relief efforts, but we are
unable to predict whether additional stimulus measures will be enacted or
their impact. There can be no assurance as to the total amount of
financial and other types of assistance our tenants will receive under the
CARES Act and the PPPHCE Act, and it is difficult to predict the impact of
such legislation on our tenants' operations or how they will affect
operations of our tenants' competitors. Moreover, we are unable to assess
the extent to which anticipated negative impacts on our tenants (and, in
turn, us) arising from the COVID-19 pandemic will be offset by amounts or
benefits received or to be received under the CARES Act and the PPPHCE
Act.
• A substantial portion of our revenues are dependent upon one operator,
UHS, which comprised approximately 32% and 30% of our consolidated
revenues for the three-month periods ended
respectively, and approximately 32% and 31% if our consolidated revenues
for the six-month periods ended
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 thelease terms, our future revenues and results of operations could decrease
if we were unable 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, signed
into law on December 22, 2017 , which makes significant changes to
corporate and individual tax rates and calculation of taxes, which could
potentially impact our tenants and jurisdictions, both positively andnegatively, 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.
• 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.
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• 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 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 32% and 30% of our consolidated revenues
during the three-month periods ended
and 32% and 31% of our consolidated revenues during the six-month periods
ended
is our Advisor, 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
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 the deterioration in
national, regional and local economic and business conditions, including a
further 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 continuation in the deterioration in general economic conditions which
has resulted 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
declines in patient volumes which could result in decreased occupancy
rates at our medical office buildings.
• A continuation of the worsening of the economic and employment conditions
in the United States will likely materially affect the business of our
operators, including UHS, which will likely unfavorably impact our future
bonus rentals (on the UHS hospital facilities) and may potentially have anegative 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
in the next bullet point 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 , continued the 2% reductions to Medicare reimbursement imposed under the
Budget Control Act of 2011. The CARES Act suspended payment reductions
2030. We cannot predict whether
Medicare payment reductions or what other federal budget deficit reduction
initiatives may be proposed by
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
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failing to maintain health coverage that was part of the original Patient
Protection and Affordable Care Act (the "ACA") and Healthcare and
Education Reconciliation Act of 2010 (collectively referred to as the
"Legislation").
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 theLegislation 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
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 Department of Labor ,
Treasury , and Health and Human Services to expand the availability of
short-term, limited duration health insurance, (iv) eliminating
cost-sharing reduction payments to insurers that would otherwise offsetdeductibles 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,
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 toreduced 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 the entirety of the 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
That ruling was stayed and has been appealed. On
mandate as unconstitutional and sent the case back to the U.S. District
Court in Texas to determine which ACA provisions should be stricken with
the mandate. On March 2, 2020 , the U.S. Supreme Court agreed to hear,during the 2020-2021 term, two consolidated cases, filed by the State of
Oral argument is expected in late 2020, and a ruling is not expected until
after the
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 and results 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.
• The individual and collective impact of the changes made by the CARES Act
on REITs and their security holders are uncertain and may not become
evident for some period of time; it is also possible additional
legislation could be enacted in the future as a result of the COVID-19
pandemic which may affect the holders of our securities.
• 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
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the entire ownership interest of the Offering Member to the Non-Offering
Member ("Offer to Sell") at a price as determined by the Offering Member
("Transfer Price"), or; (ii) purchase the entire ownership interest of theNon-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 the equivalent 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.
• 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 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 24 --------------------------------------------------------------------------------
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.
Results of Operations
During the three-month period ended
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•
facilities located in
that occurred on
facility has remained vacant since the respective date of lease
expiration);
•
primarily due to a decrease in our average cost of borrowings under our
revolving credit agreement, partially offset by an increase in our
average outstanding borrowings, and;
• $368,000 of other combined net increases.
During the six-month period ended
•
facilities located in
that occurred on
facility has remained vacant since the respective date of lease
expiration);
•
during the first six months of 2019;
• $373,000 increase resulting from a decrease in depreciation and
amortization expense;
•
primarily due to a decrease in our average cost of borrowings under our
revolving credit agreement, partially offset by an increase in our
average outstanding borrowings, and;
• $763,000 of other combined net increases.
Total revenues decreased $45,000 , or 0.2% during the three-month period ended
June 30, 2020 , as compared to the comparable quarter of 2019, and increased
$50,000 , or 0.1% during the six-month period ended June 30, 2020 , as compared to
the comparable period of 2019.
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 $4.7 million and $4.5 million for the
three-month periods ended June 30, 2020 and 2019, respectively, and $9.4 million
and $9.0 million for the six-month periods ended June 30, 2020 and 2019,
respectively. 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 or 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
lease revenue in our condensed consolidated statements of income. Included in
our operating expenses for the three and six months ended June 30, 2020 , is
$183,000 and $381,000 , respectively, of aggregate operating expenses related to
the two above-mentioned vacant hospital facilities located in Corpus Christi,
Texas , and Evansville, Indiana .
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, as reflected on the
attached Supplemental Schedules, in accordance with standards established by the
National 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 during the periods presented. 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.
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Below is a reconciliation of our reported net income to FFO for the three and
six-month periods ended
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Net income $ 4,700 $ 4,261 $ 9,254 $ 8,473
Depreciation and amortization expense
on consolidated
investments 6,381 6,426 12,761 13,134
Depreciation and amortization expense
on unconsolidated
affiliates 293 291 579 574
Gain on sale of land - - - (250 )
Funds From Operations $ 11,374 $ 10,978 $ 22,594 $ 21,931
Weighted average number of shares
outstanding - Basic 13,739 13,730 13,737 13,729
Weighted average number of shares
outstanding - Diluted 13,761 13,749 13,759 13,748
Funds From Operations per diluted
share $ 0.83 $ 0.80 $ 1.64 $ 1.60
Our FFO increased $396,000 , or $.03 per diluted share, during the second quarter
of 2020, as compared to the second quarter of 2019. The net increase was
primarily due to: (i) an unfavorable impact of $694,000 , or $.05 per diluted
share, related to the above-mentioned vacancies at two of our hospitals as a
result of lease expirations on June 1, 2019 and September 30, 2019 (excluding
the related interest expense impact); (ii) a favorable impact of $765,000 , or
$.06 per diluted share, resulting from a decrease in interest expense, resulting
primarily from a decrease in our average cost of borrowings pursuant to our
revolving credit agreement, partially offset by an increase in our average
outstanding borrowings, and; (iii) other combined net increases of $325,000 , or
$.02 per diluted share.
Our FFO increased $663,000 , or $.04 per diluted share, during the first six
months of 2020, as compared to the first six months of 2019, primarily due to:
(i) an unfavorable impact of $1.25 million , or $.09 per diluted share, related
to the above-mentioned vacancies at two of our hospitals as a result of lease
expirations on June 1, 2019 and September 30, 2019 (excluding the related
interest expense impact); (ii) a favorable impact of $1.1 million , or $.08 per
diluted share, resulting from a decrease in interest expense, resulting
primarily from a decrease in our average cost of borrowings pursuant to our
revolving credit agreement, partially offset by an increase in our average
outstanding borrowings, and; (iii) other combined net increases of $768,000 , or
$.05 per diluted share.
Other Operating Results
Interest Expense:
As reflected in the schedule below, interest expense was
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2020 2019 2020 2019
Revolving credit agreement
654 674 1,312 1,392
Interest rate swaps/caps
expense/(income), net 182 (b.) - 131 (b.) (122 ) (a.)
Amortization of financing fees 172 157 329 323
Amortization of fair value of
debt (13 ) (13 ) (26 ) (26 )
Capitalized interest on major
projects (61 ) - (126 ) -
Other interest 7 1 7 1
Interest expense, net $ 2,016 $ 2,781 $ 4,325 $ 5,473
(a.) Represents interest paid to us by the counterparties pursuant to two
interest rate caps with a combined notional amount of $60 million , which
expired in March, 2019.
(b.) Represents net interest paid by us to the counterparties pursuant to three
interest rate SWAPs with a combined notional amount of
Interest expense decreased by approximately$765,000 during the three-month period endedJune 30, 2020 , as compared to the comparable period of 2019, due primarily to: (i) a$887,000 decrease in the interest expense on our revolving credit agreement resulting from a decrease in our average cost of borrowings pursuant to our revolving credit agreement (1.7% during the three months endedJune 30, 2020 as compared to 3.7% in the comparable quarter of 2019), partially offset by an increase in our average outstanding borrowings ($215.5 million during the three months endedJune 30, 2020 as compared to$195.9 million in the 27 -------------------------------------------------------------------------------- comparable 2019 quarter); (ii) a$182,000 net increase in interest rate swap expense, resulting from payments made by us to the counterparties pursuant to the terms of the swap agreements (combined notional amount of$140 million ) during the second quarter of 2020; (iii) a$61,000 decrease in interest expense related to capitalized interest on major projects, and; (iv)$1,000 of other combined net increases in interest expense. Interest expense decreased by approximately$1.1 million during the six-month period endedJune 30, 2020 , as compared to the comparable period of 2019, due primarily to: (i) a$1.2 million decrease in the interest expense on our revolving credit agreement resulting from a decrease in our average cost of borrowings pursuant to our revolving credit agreement (2.2% during the six months endedJune 30, 2020 as compared to 3.7% in the comparable six-month period of 2019), partially offset by an increase in our average outstanding borrowings ($214.4 million during the six months endedJune 30, 2020 as compared to$195.0 million in the comparable 2019 six month-period); (ii) a$253,000 net increase in interest rate swap/caps expense during the six-months endedJune 30, 2020 as compared to the comparable period in 2019; (iii) a$80,000 decrease in mortgage interest expense, resulting primarily from the repayment of a mortgage loan during the second quarter of 2019; (iv) a$126,000 decrease in interest expense related to capitalized interest on major projects, and; (v)$12,000 of other combined net increases in interest expense.
COVID-19 Impact
The COVID-19 pandemic began to significantly impactthe United States in mid-March, 2020. As a result of various policies implemented by the federal and state governments, and varying by individual state, many non-essential businesses in the nation were closed for varying time periods. With the exception of the operators of our four preschool and childcare centers, which were closed from mid-March until mid-June, we believe that most of the tenants occupying our hospitals, medical office buildings ("MOBs") and ambulatory care centers were permitted to continue operating if they elected to do so. Tenants representing approximately 98% of our occupied square footage have paid their June rent. We believe that as ofJune 30, 2020 , substantially all of our tenants have resumed operations of their businesses. However, many of our properties are located in states that have experienced significant increases in COVID-19 infections in June, July and early August. Such states includeArizona ,California ,Florida ,Georgia ,Nevada andTexas . Although COVID-19 has not had a material adverse impact on our results of operations throughJune 30, 2020 , we believe that the potentially adverse impact that the pandemic may have on our future operations and financial results of our tenants, and in turn ours, will depend upon many factors, most of which are beyond our, or our tenants', ability to control or predict. Since the underlying businesses in each of our properties are operated by the tenants, we can provide no assurance that the businesses will continue to operate in the future, or stay current with their lease obligations. Since the bonus rents earned by us on the three acute care hospitals leased to wholly-owned subsidiaries of Universal Health Services, Inc., are computed based upon a computation that compares each hospital's current quarter revenue to the corresponding quarter in the base year, we could experience significant declines in future bonus rental revenue earned on these properties should those hospitals continue to experience significant declines in patient volumes and revenues. These hospitals believe that, to the extent that they experience revenue declines and increased expenses resulting from the COVID-19 pandemic, as ultimately measured over the life of the pandemic, they are eligible for emergency fund grants as provided for by the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"). Our financial statements for the three and six-month periods endedJune 30, 2020 include bonus rental attributable to revenues recorded by these three hospitals in connection with CARES Act grants. Throughout the common areas of many properties in our portfolio, we have implemented COVID-19 risk mitigating actions such as, enhanced cleaning protocols including supplemental cleaning and sanitizing of high-touch points, limiting points of entry at certain facilities, and coordinating with health care providers to assess or screen patients prior to entering certain of our MOBs. 28
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Lease Expirations/Vacancies of Two Hospital Facilities
As previously disclosed, the tenants in two of our hospital facilities had provided notice to us that they did not intend to renew the leases upon the scheduled expiration of the respective facilities. The leases on these two hospital facilities, located inEvansville, Indiana , andCorpus Christi, Texas , expired onMay 31, 2019 andJune 1, 2019 , respectively. Prior to the vacancy of the property onSeptember 30, 2019 , the former tenant of the hospital located inEvansville, Indiana , entered into a short-term lease with us, which covered the period ofJune 1, 2019 throughSeptember 30, 2019 , at a substantially increased lease rate as compared to the original lease rate. The combined lease revenue generated at these facilities amounted to$537,000 and$900,000 during the three and six-month periods endedJune 30, 2019 , respectively. The hospital located inEvansville, Indiana , has remained vacant sinceSeptember 30, 2019 and the hospital located inCorpus Christi, Texas , has remained vacant sinceJune 1, 2019 . We continue to market each property for lease to new tenants. However, should these properties continue to remain owned and 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.
Liquidity and Capital Resources
Net cash provided by operating activities
Net cash provided by operating activities was$23.2 million during the six-month period endedJune 30, 2020 as compared to$21.5 million during the comparable period of 2019. The$1.8 million net increase was attributable to:
• A favorable change of
plus/minus the adjustments to reconcile net income to net cash provided
by operating activities (depreciation and amortization, amortization
related to above/below market leases, amortization of debt premium,
amortization of deferred financing costs, stock-based compensation and
gain on sale of land), as discussed above;
• a favorable change of
• a favorable change of$204,000 in leasing costs paid;
• a favorable change of
and prepaid rents, and;
• other combined net unfavorable changes of $645,000 .
Net cash used in investing activities
Net cash used in investing activities was
During the six-month period endedJune 30, 2020 we funded: (i)$13.3 million in additions to real estate investments including$10.1 million of construction costs related to a newly constructed, 108-bed behavioral health care hospital located inClive, Iowa , that is scheduled to be completed in late 2020 or early 2021, and tenant improvements at various MOBs, and; (ii)$3.2 million in equity investments in unconsolidated LLCs. In addition, during the six-months endedJune 30, 2020 , we received$5.2 million of cash distributions from our unconsolidated LLCs, consisting of proceeds generated from a construction loan obtained by Grayson Properties II during the second quarter of 2020. During the six-month period endedJune 30, 2019 we funded: (i)$598,000 in equity investments in unconsolidated LLCs, and; (ii)$3.0 million in capital additions to real estate investments including tenant improvements at various MOBs. In addition, during the six-month period endedJune 30, 2019 we received: (i)$245,000 of cash proceeds from the divestiture of land, and; (ii)$348,000 of cash distributions from our unconsolidated LLCs.
Net cash used in financing activities
Net cash used in financing activities was$11.7 million during the six months endedJune 30, 2020 , as compared to$17.5 million during the six months endedJune 30, 2019 . During the six-month period endedJune 30, 2020 , we paid: (i)$907,000 on mortgage notes payable that are non-recourse to us; (ii)$362,000 of financing costs related to the revolving credit agreement, including amendment fees incurred during the second quarter of 2020, and; (iii)$18.9 million of dividends. Additionally, during the six months endedJune 30, 2020 , we received: (i)$8.3 million of 29
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net borrowings on our revolving credit agreement, and; (ii)
During the six-month period endedJune 30, 2019 , we paid: (i)$4.9 million of net outstanding borrowings under our revolving credit agreement; (ii)$3.4 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; (iii)$35,000 of financing costs related to the revolving credit agreement, and; (iii)$9.3 million of dividends (excluded$9.4 million of dividends declared onJune 12, 2019 that was paid onJuly 2, 2019 ). Additionally, during the six months endedJune 30, 2019 , we received$61,000 of net cash from the issuance of shares of beneficial interest. During the second quarter of 2020, we commenced an at-the-market ("ATM") equity issuance program, pursuant to the terms of which we may sell, from time-to-time, common shares of our beneficial interest up to an aggregate sales price of$100 million to or throughBofA Securities, Inc. ,Credit Agricole Securities (USA) Inc. ,Fifth Third Securities, Inc. ,SunTrust Robinson Humphrey, Inc. andWells Fargo Securities, LLC (collectively, the Agents). Pursuant to this ATM Program, during the second quarter of 2020, we issued 2,704 shares at an average price of$101.30 per share which generated approximately$270,000 of net cash proceeds (net of compensation toBofA Securities, Inc. of approximately$4,000 ). Additionally, we paid or incurred approximately$435,000 in various fees and expenses related to the commencement of our ATM program.
Additional cash flow and dividends paid information for the six-month periods
ended
As indicated on our condensed consolidated statement of cash flows, we generated net cash provided by operating activities of$23.2 million and$21.5 million during the six-month periods endedJune 30, 2020 and 2019, respectively. As also indicated on our statement of cash flows, non-cash expenses including depreciation and amortization expense, amortization related to above/below market leases, amortization of debt premium, amortization of deferred financing costs, stock-based compensation expense and gain on transaction (as applicable) are the primary differences between our net income and net cash provided by operating activities during each period. We declared and paid dividends of$18.9 million during the six months endedJune 30, 2020 and declared dividends of$18.6 million during the six months endedJune 30, 2019 ($9.4 million of which was paid in July, 2019). During the first six months of 2020, the$23.2 million of net cash provided by operating activities was approximately$4.3 million greater than the$18.9 million of dividends paid during the first six months of 2020. During the first six months of 2019, the$21.5 million of net cash provided by operating activities was approximately$2.9 million greater that the$18.6 million of dividends declared during the first six months of 2019. 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 the six months endedJune 30, 2020 and 2019. 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$350 million revolving credit agreement (which had$123.1 million of available borrowing capacity, net of outstanding borrowings and letters of credit as ofJune 30, 2020 ); (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 pursuant to our ATM program, 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
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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$350 million revolving credit facility, the level of borrowings 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 pursuant to our ATM equity issuance program. 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. InJune 2020 , we entered into the first amendment (the "First Amendment") to the revolving credit agreement ("Credit Agreement"), pursuant to which, among other things, an additional tranche of revolving credit commitments in the amount of$50 million , designated as the "Revolving B Facility", was established thereby increasing the aggregate revolving credit commitment to$350 million from$300 million . The Credit Agreement, as amended, which is scheduled to mature inMarch 2022 , provides for a revolving credit facility in an aggregate principal amount of$350 million , including a$40 million sublimit for letters of credit and a$30 million sublimit for swingline/short-term loans. The Credit Agreement also provides for options to extend the maturity date for two additional six month periods. 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. The remainder of the revolving credit commitments provided under the Credit Agreement that were in effect prior to giving effect to the First Amendment, has been designated as the "Revolving A Facility". Borrowings made pursuant to the Revolving A Facility 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 Revolving A Facility of the Credit Agreement. The margins over LIBOR, Base Rate and the facility fee are based upon our total leverage ratio. AtJune 30, 2020 , the applicable margin over the LIBOR rate was 1.20%, the margin over the Base Rate was 0.20%, and the facility fee was 0.20%. Borrowings made pursuant to the Revolving B Facility will bear interest, at our option, at one, two, three, or six months LIBOR plus an applicable margin ranging from 1.85% to 2.10% or at the Base Rate plus an applicable margin ranging from 0.85% to 1.10%. The Credit Agreement defines "Base Rate" as the greatest 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%. The initial applicable margin is 1.95% for LIBOR loans and 0.95% for Base Rate loans. A facility fee of 0.15% to 0.35% will be charged on the total commitment of the Revolving B Facility of the Credit Agreement. The margins over LIBOR, Base Rate and the facility fee are based upon our total leverage ratio. AtJune 30, 2020 , the applicable margin over the LIBOR rate was 1.95%, the margin over the Base Rate was 0.95% and the facility fee was 0.20%. AtJune 30, 2020 , we had$221.3 million of outstanding borrowings and$5.6 million of letters of credit outstanding under our Credit Agreement. We had$123.1 million of available borrowing capacity, net of the outstanding borrowings and letters of credit outstanding as ofJune 30, 2020 . There are no compensating balance requirements. AtDecember 31, 2019 , we had$213.0 million of outstanding borrowings outstanding against our revolving credit agreement and$87.0 million of available borrowing capacity. 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 atJune 30, 2020 andDecember 31, 2019 . We also believe that we would remain in compliance if, based on the assumption that the majority of the potential new borrowings will be used to fund investments, the full amount of our commitment was borrowed. 31
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The following table includes a summary of the required compliance ratios, giving
effect to the covenants contained in the Credit Agreement (dollar amounts in
thousands):
June 30, December 31,
Covenant 2020 2019
Tangible net worth > =$125,000 $ 153,292 $ 167,181
Total leverage < 60% 43.6 % 42.3 %
Secured leverage < 30% 9.0 % 9.1 %
Unencumbered leverage < 60% 40.2 % 38.5 %
Fixed charge coverage > 1.50x 4.3x 4.0x
As indicated on the following table, we have various mortgages, all of which are
non-recourse to us, included on our condensed consolidated balance sheet as of
June 30, 2020 (amounts in thousands):
Outstanding
Balance Interest Maturity
Facility Name (in thousands) (a.) Rate Date
700 Shadow Lane and Goldring MOBs fixed
rate
mortgage loan $ 5,547 4.54 % June, 2022
BRB Medical Office Building fixed rate
mortgage loan 5,614 4.27 % December, 2022
Desert Valley Medical Center fixed rate
mortgage loan 4,587 3.62 % January, 2023
2704 North Tenaya Way fixed rate
mortgage loan 6,653 4.95 % November, 2023
Summerlin Hospital Medical Office
Building III fixed
rate mortgage loan 13,158 4.03 % April, 2024
Tuscan Professional Building fixed rate
mortgage loan 3,216 5.56 % June, 2025
Phoenix Children's East Valley Care
Center fixed rate
mortgage loan 8,841 3.95 % January, 2030
Rosenberg Children's Medical Plaza fixed
rate mortgage loan 12,621 4.42 % September, 2033
Total, excluding net debt premium and
net financing fees 60,237
Less net financing fees (533 )
Plus net debt premium 167
Total mortgages notes payable,
non-recourse to us, net $ 59,871
(a.) All mortgage loans require monthly principal payments through maturity and
either fully amortize or include a balloon principal payment upon
maturity.
The mortgages are secured by the real property of the buildings as well as property leases and rents. The mortgages outstanding as ofJune 30, 2020 had a combined fair value of approximately$62.4 million . AtDecember 31, 2019 , we had various mortgages, all of which were non-recourse to us, included in our condensed consolidated balance sheet. The combined outstanding balance of these various mortgages was$61.1 million and had a combined fair value of approximately$63.1 million .
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.
Off Balance Sheet Arrangements
As ofJune 30, 2020 , we are party to certain off balance sheet arrangements consisting of standby letters of credit and equity and debt financing commitments. Our outstanding letters of credit atJune 30, 2020 totaled$5.6 million related to Grayson Properties II. As ofDecember 31, 2019 , we did not have any off balance sheet arrangements other than equity and debt financing commitments.
Acquisition and Divestiture Activity
Please see Note 4 to the condensed consolidated financial statements for completed transactions.
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