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
facilities, free-standing emergency departments, childcare centers and
medical/office buildings. As of May 1, 2022, we have seventy-six real estate
investments or commitments located in twenty-one states consisting of:
• six hospital facilities consisting of three acute care hospitals and three
behavioral health care hospitals;
• four free-standing emergency departments ("FEDs");
• fifty-nine medical/office buildings, including four owned by
unconsolidated limited liability companies ("LLCs")/limited liability
partnerships ("LPs");
• four preschool and childcare centers, and;
• three specialty facilities that are currently vacant.
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
our Annual Report on Form 10-K for the year ended December 31, 2021, this
Quarterly Report and in other reports or documents that we file from time to
time with the Securities and Exchange Commission (the "SEC"). In this Quarterly
Report, we state our beliefs of future events and of our future financial
performance. This Quarterly Report contains "forward-looking statements" that
reflect our current estimates, expectations and projections about our future
results, performance, prospects and opportunities. 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. 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 described elsewhere herein and in our Annual Report on Form
10-K for the year ended December 31, 2021 in Item 1A Risk Factors and in Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations-Forward Looking Statements and in Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations-Forward Looking
Statements and Risk Factors, as included herein. 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 business activity; vaccine
requirements; 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; 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, 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 or increase
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. The nationwide shortage of nurses and other clinical staff and
support personnel has been a significant operating issues facing our
healthcare provider tenants, including UHS. In some areas, the labor
scarcity is putting a strain on the resources of our tenants and their
staff, which has required them to utilize higher-cost temporary labor and
pay premiums
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above standard compensation for essential workers. In addition to
significantly increasing the labor cost of our tenants, the healthcare
staffing shortage could also require the operators of our hospital
facilities to limit the services provided which would have an adverse effect
on their operating revenues. There may be significant declines in future
bonus rental revenue earned on one acute care hospital leased to a
subsidiary of UHS to the extent that the hospital experiences significant
declines 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, 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 may
experience 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 rental payments 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. Although COVID-19 has not previously
had a material adverse impact on our financial results, we are not able to
quantify the impact that these factors could have on our future financial
results and therefore can provide no assurance that developments related to
the COVID-19 pandemic will not have a material adverse impact on our future
financial results.
• The Centers for Medicare and Medicaid Services ("CMS") issued an Interim
Final Rule ("IFR") effective November 5, 2021 mandating COVID-19
vaccinations for all applicable staff at all Medicare and Medicaid certified
facilities. Under the IFR, facilities covered by this regulation must
establish a policy ensuring all eligible staff have received the first dose
of a two-dose COVID-19 vaccine or a one-dose COVID-19 vaccine prior to
providing any care, treatment, or other services by December 5, 2021. All
eligible staff must have received the necessary shots to be fully vaccinated
- either two doses of Pfizer or Moderna or one dose of Johnson & Johnson -
by January 4, 2022. The regulation also provides for exemptions based on
recognized medical conditions or religious beliefs, observances, or
practices. Under the IFR, facilities must develop a similar process or plan
for permitting exemptions in alignment with federal law. If facilities fail
to comply with the IFR by the deadlines established, they are subject to
potential termination from the Medicare and Medicaid program for
non-compliance. In addition, the Occupational Safety and Health
Administration also issued an Emergency Temporary Standard ("ETS") requiring
all businesses with 100 or more employees to be vaccinated by January 4,
2022. Pursuant to the ETS, those employees not vaccinated by that date will
need to show a negative COVID-19 test weekly and wear a face mask in the
workplace. Legal challenges to these rules ensued, and the U.S. Supreme
Court has upheld a stay of the ETS requirements but permitted the IFR
vaccination requirements to go into effect pending additional litigation.
CMS has indicated that hospitals in states not involved in the Supreme Court
litigation are expected to be in compliance with IFR vaccination
requirements consistent with the dates referenced above. Hospitals in states
that were involved in the Supreme Court litigation must now come into
compliance with second dose requirements by March 15, 2022. Hospitals in
Texas must come into compliance with second dose requirements by March 21,
2022 due to the recent termination of separate litigation there. We cannot
predict at this time the potential viability or impact of any such
additional litigation on us or the operators of our
facilities. Implementation of these rules could have an impact on staffing
at the operators of our facilities for those employees that are not
vaccinated in accordance with IFR and ETS requirements, and associated loss
of revenues and increased costs resulting from staffing issues could have a
material adverse effect on our financial results or those of the operators.
• Recent legislation, including the Coronavirus Aid, Relief, and Economic
Security Act (the "CARES Act"), the Paycheck Protection Program and Health
Care Enhancement Act ("PPPHCE Act") and the American Rescue Plan Act of 2021
("ARPA"), has provided grant funding to hospitals and other healthcare
providers to assist them during the COVID-19 pandemic. There is a high
degree of uncertainty surrounding the implementation of the CARES Act, the
PPPHCE Act and ARPA, 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, the PPPHCE Act and the ARPA, 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. There can be no assurance as to whether our tenants would be
required to repay any previously granted funding, due to noncompliance with
grant terms or otherwise. 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, the PPPHCE Act and the ARPA.
• A substantial portion of our revenues are dependent upon one operator, UHS,
which comprised approximately 41% and 36% of our consolidated revenues for
the three-month periods ended March 31, 2022 and 2021, respectively. As
previously disclosed, on December 31, 2021, a wholly-owned subsidiary of UHS
purchased the real estate assets of Inland Valley
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Campus of Southwest Healthcare System from us and in exchange, transferred
the real estate assets of Aiken Regional Medical Center and Canyon Creek
Behavioral Health to us. These transactions were approved by the Independent
Trustees of our Board, as well as the UHS Board of Directors. The aggregate
annual rental revenue during 2022 pursuant to the leases for the two
facilities transferred to us is approximately $5.7 million; there is no
bonus rent component applicable to either of these leases. Pursuant to the
terms of the lease on the Inland Valley Campus, we earned $4.5 million of
lease revenue during year ended December 31, 2021 ($2.6 million in base
rental and $1.9 million in bonus rental). Please see Note 7 to the condensed
consolidated financial statements - Lease Accounting, for additional
information related to this asset purchase and sale transaction between us
and UHS.
• We cannot assure you that subsidiaries of UHS will renew the leases on the
hospital facilities and free-standing emergency departments, upon the
scheduled expirations of the existing lease terms. In addition, if
subsidiaries of UHS exercise their options to purchase the respective leased
hospital facilities and FEDs, and do not enter into a substitution
arrangement upon expiration of the lease terms or otherwise, 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. Please see Note 7
to the consolidated financial statements - Lease Accounting, for additional
information related to a lease renewal between us and Wellington Regional
Medical Center, a wholly-owned subsidiary of UHS.
• 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 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.
• Lost revenues resulting from the exercise of purchase options, lease
expirations and renewals and other transactions (see Note 7 to the condensed
consolidated financial statements - Lease Accounting for additional
disclosure related to lease expirations and subsequent vacancies that
occurred during the second and third quarters of 2019 and the fourth quarter
of 2021 on three specialty hospital facilities).
• Potential unfavorable tax consequences and reduced income resulting from an
inability to complete, within the statutory timeframes, anticipated tax
deferred like-kind exchange transactions pursuant to Section 1031 of the
Internal Revenue Code, if, and as, applicable from time-to-time.
• 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 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 41% of our consolidated revenues during the three months ended
March 31, 2022, and since a subsidiary of UHS 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 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 the 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 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. Under
these
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circumstances, 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 would likely materially affect the business of our
operators, including UHS, which would likely unfavorably impact our future
bonus rental revenue (on one UHS hospital facility) 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 Medicare reimbursements 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.
• The Budget Control Act of 2011 imposed annual spending limits for most
federal agencies and programs aimed at reducing budget deficits by $917
billion between 2012 and 2021, according to a report released by the
Congressional Budget Office. Among its other provisions, the law established
a bipartisan Congressional committee, known as the Joint Select Committee on
Deficit Reduction (the "Joint Committee"), which was tasked with making
recommendations aimed at reducing future federal budget deficits by an
additional $1.5 trillion 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 to discretionary, 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 on
November 2, 2015, continued the 2% reductions to Medicare reimbursement
imposed under the Budget Control Act of 2011. Recent legislation has
suspended payment reductions through December 31, 2021 in exchange for
extended cuts through 2030. Subsequent legislation extended the payment
reduction suspension through March 31, 2022, with a 1% payment reduction
from then until June 30, 2022 and the full 2% payment reduction
thereafter. We cannot predict whether Congress will restructure the
implemented Medicare payment reductions or what other federal budget deficit
reduction initiatives may be proposed by Congress going 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 Patient Protection and Affordable Care Act (the "ACA").
President Biden is expected to undertake executive actions that will
strengthen the ACA and may reverse the policies of the prior administration.
To date, the Biden administration has issued executive orders implementing a
special enrollment period permitting individuals to enroll in health plans
outside of the annual open enrollment period and reexamining policies that
may undermine the ACA or the Medicaid program. The ARPA's expansion of
subsidies to purchase coverage through an exchange is anticipated to
increase exchange enrollment. The Trump Administration had directed the
issuance of final rules: (i) enabling the formation of association health
plans that would be exempt from certain ACA requirements such as the
provision of essential health benefits; (ii) expanding the availability of
short-term, limited duration health insurance, (iii) 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; (iv) 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; and (v)
incentivizing the use of health reimbursement arrangements by employers to
permit employees to purchase health insurance in the individual market. The
uncertainty resulting from these Executive Branch policies had led to
reduced Exchange enrollment in 2018, 2019 and 2020, and is expected to
further worsen the individual and small group market risk pools in future
years. It is also anticipated that these policies, to the extent that they
remain as implemented, 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 eliminated as part of the Tax Cuts and Jobs Act and
on December 14, 2018, a federal U.S. District Court
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Judge in Texas ruled the entire ACA is unconstitutional. That ruling was
appealed and on December 18, 2019, the Fifth Circuit Court of Appeals voted
2-1 to strike down the ACA individual mandate as unconstitutional. The case
was ultimately appealed to the United States Supreme Court, which decided in
California v. Texas that the plaintiffs in the matter lacked standing to
bring their constitutionality claims. As a result, the Legislation will
continue to remain law, in its entirety, likely for the foreseeable
future.
• 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 a decrease 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 includes, but is 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, McAllen, Texas, the site of our
McAllen Medical Center, a 370-bed acute care hospital.
• Changes in, or inadvertent violations of, tax laws and regulations and other
factors that can affect REITs and our status as a REIT, including possible
future changes to federal tax laws that could materially impact our ability
to defer gains on divestitures through like-kind property exchanges.
• 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 four 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 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 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. Please see Note 5 to the condensed
consolidated financial statements - Summarized Financial Information of
Equity Affiliates for additional disclosure related to a fourth quarter,
2021 transaction between us and the minority partner in Grayson Properties,
LP.
• 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 in the United States of America requires us to make estimates
and assumptions that affect the amounts reported in our consolidated financial
statements and accompanying notes.
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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 most real estate
investments acquired from third parties. In accordance with current accounting
guidance, we account for most of 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 most 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. Please see additional disclosure below regarding
"Financing Assets".
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 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.
Financing Assets: As discussed in Note 2 - Relationship with UHS and Related
Party Transactions, on December 31, 2021 we entered into an asset purchase and
sale agreement with UHS and certain of its affiliates. Pursuant to the
agreement, which was amended during the first quarter of 2022, UHS purchased
from us the real estate assets of the Inland Valley Campus of Southwest
Healthcare System ("Inland Valley") and transferred to us the real estate assets
of Aiken Regional Medical Center ("Aiken") and Canyon Creek Behavioral Health
("Canyon Creek"). In connection with this transaction, Aiken and Canyon Creek
(as lessees), entered into a master lease and individual property leases (with
us as lessor), as amended during the first quarter of 2022, for initial lease
terms of approximately twelve years, ending on December 31, 2033. As a result of
UHS' purchase option within the lease agreements of Aiken and Canyon Creek, the
transaction is accounted for as a failed sale leaseback in accordance with U.S.
GAAP and we have accounted for the transaction with UHS as a financing
arrangement. A portion of the monthly lease payment to us from UHS will be
recorded to interest income based upon an imputed interest rate and the
remainder will reduce the outstanding financing receivable. In connection with
this transaction, our Consolidated Balance Sheets at March 31, 2022 and December
31, 2021, reflect financing receivables of $83.7 million and $82.4 million,
respectively. As of March 31, 2022 there are no indicators of impairment and the
financing receivable will be assessed for recoverability in accordance with our
asset impairment policy.
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
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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 March 31, 2022, net income was $5.4 million,
as compared to $5.6 million during the first quarter of 2021. The $181,000
decrease was attributable to:
• a decrease of $884,000 related to a vacant specialty hospital located in
Chicago, Illinois, on which, as discussed in Note 7 to the consolidated
financial statements, the lease expired on December 31, 2021;
• a net increase of $431,000 resulting from the asset purchase and sale
agreement with UHS that occurred on December 31, 2021, as discussed in
Note 7 to the consolidated financial statements;
• an increase of $335,000 resulting from the impact of the fair market
value lease renewal on Wellington Regional Medical Center, which became
effective on January 1, 2022, as discussed in Note 7 to the consolidated
financial statements, and;
• $63,000 of other combined net decreases.
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Revenues increased $1.5 million to $22.2 million during the three-month period
ended March 31, 2022, as compared to $20.7 million during the first quarter of
2021. The increase during the first quarter of 2022, as compared to the first
quarter of 2021, was due to: (i) a $919,000 increase due to the recording on a
consolidated basis of Grayson Properties, LP (effective as of November 1, 2021
as discussed in Note 5 to the consolidated financial statements), resulting from
our purchase of the 5% minority ownership interest in the entity; (ii) a
$335,000 increase resulting from the fair market value lease renewal on
Wellington Regional Medical Center, which became effective on January 1, 2022;
(iii) a $253,000 net increase resulting from the December 31, 2021 asset
purchase and sale agreement with UHS whereby we divested the real estate assets
of the Inland Valley Campus of Southwest Healthcare System and acquired the real
estate assets of Aiken Regional Medical Center and Canyon Creek Behavioral
Health; (iv) a $359,000 aggregate net increase generated at various properties,
including the impact of acquisitions and divestitures, partially offset by; (v)
a $390,000 decrease resulting from the December 31, 2021 lease expiration on the
specialty hospital located in Chicago, Illinois. Although our revenues and
expenses increased during the first quarter of 2022, as compared to the first
quarter of 2021, resulting from the recording of Grayson Properties, LP on a
consolidated basis effective as of November 1, 2021, there was no significant
impact on our net income resulting from the change from the
unconsolidated/equity method basis.
Included in our other operating expenses are expenses related to the
consolidated medical office buildings and three vacant specialty facilities.
Other operating expenses totaled $6.0 million and $4.8 million for the
three-month periods ended March 31, 2022 and 2021, respectively. The $1.2
million increase in our other operating expenses during the first quarter of
2022, as compared to the first quarter of 2021, was due primarily to $494,000 of
operating expenses incurred during the first quarter of 2022 at a vacant
specialty facility located in Chicago, Illinois, on which the lease expired on
December 31, 2021 (the operating expenses for this facility were the tenant's
responsibility through the lease expiration date) and $452,000 of other
operating expenses recorded during the first quarter of 2022 in connection with
Grayson Properties, LP, which as discussed above, was recorded on a consolidated
basis effective as of November 1, 2021. 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.
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 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 certain items, such as gains on transactions that
occurred during the periods presented. To the extent a REIT recognizes a gain or
loss with respect to the sale of incidental assets, 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 the three-month
periods ended March 31, 2022 and 2021 (in thousands):
Three Months Ended
March 31,
2022 2021
Net income $ 5,405 $ 5,586
Depreciation and amortization expense on consolidated
Investments 6,709 6,787
Depreciation and amortization expense on unconsolidated
Affiliates 295 362
Funds From Operations $ 12,409 $ 12,735
Weighted average number of shares outstanding - Diluted 13,785 13,771
Funds From Operations per diluted share
$ 0.90 $ 0.92
Our FFO decreased $326,000, or $.02 per diluted share, during the first quarter
of 2022, as compared to the first quarter of 2021. The net decrease was
primarily due to: (i) the decrease in net income of $181,000, or $.02 per
diluted share, as discussed above, and; (ii) a $145,000 decrease in depreciation
and amortization expense incurred on our consolidated and unconsolidated
affiliates.
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Other Operating Results
Interest Expense:
As reflected in the schedule below, interest expense was $2.2 million and $2.1
million during the three-month periods ended March 31, 2022 and 2021,
respectively (amounts in thousands):
Three Months Three Months
Ended Ended
March 31, March 31,
2022 2021
Revolving credit agreement $ 1,168 $ 967
Mortgage interest 612 635
Interest rate swaps expense, net (a.) 287 309
Amortization of financing fees 178 216
Amortization of fair value of debt (13 ) (13 )
Capitalized interest on major projects (21 ) -
Other interest 11 19
Interest expense, net $ 2,222 $ 2,133
(a.) Represents interest paid by us to the counterparties pursuant to three
interest rate SWAPs with a combined notional amount of $140 million.
Interest expense increased by $89,000 during the three-month period ended March
31, 2022, as compared to the comparable quarter of 2021, due primarily to: (i) a
$201,000 increase in the interest expense on our revolving credit agreement
primarily resulting from an increase in our average outstanding borrowings
($270.2 million during the three months ended March 31, 2022 as compared to
$239.2 million in the comparable quarter of 2021) as well as an increase in our
average cost of borrowings pursuant to our revolving credit agreement (1.76%
average effective rate during the first quarter of 2022, as compared to 1.64%
average effective rate during the comparable quarter of 2021), partially offset
by; (ii) a $38,000 decrease in amortization of financing fees and fair value of
debt; (iii) a $22,000 decrease in interest rate swap expense; (iv) a $21,000
decrease due to an increase in capitalized interest on a major project; (v) a
$23,000 decrease in mortgage interest expense, and; (vi) $8,000 of other
combined net decreases in interest expense.
Disclosures Related to Certain Facilities
Please refer to Note 7 to the consolidated financial statements - Lease
Accounting, for additional information regarding certain of our hospital
facilities including Wellington Regional Medical Center; Aiken Regional Medical
Center; Canyon Creek Behavioral Health; Evansville, Indiana; Corpus Christi,
Texas; Chicago, Illinois, and; PeaceHealth Medical Clinic.
Liquidity and Capital Resources
Net cash provided by operating activities
Net cash provided by operating activities was $11.7 million during the
three-month period ended March 31, 2022 as compared to $11.3 million during the
comparable period of 2021. The $454,000 million net increase was attributable
to:
• an unfavorable change of $312,000 due to a decrease in net income
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 and stock-based compensation),
as discussed above;
• an unfavorable change of $81,000 in lease receivable;
• a favorable change of $489,000 in tenant reserves, deposits and deferred
and prepaid rents;
• an unfavorable change of $117,000 in leasing costs paid, and;
• other combined net favorable change of $475,000, resulting primarily
from the timing of deposits made on acquisitions and prepaid expense
payments.
Net cash used in investing activities
Net cash used in investing activities was $18.3 million during the first three
months of 2022 as compared to $12.2 million during the first three months of
2021.
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During the three-month period ended March 31, 2022 we funded: (i) $13.6 million,
including transaction costs, on the acquisitions of the Beaumont Heart and
Vascular Center in March, 2022, and; the 140 Thomas Johnson Drive medical office
building in January, 2022, as discussed in Note 4 to the consolidated financial
statements-Acquisitions and Divestitures; (ii) $3.5 million in additions to real
estate investments including construction costs related to the Sierra Medical
Plaza I medical office building located in Reno, Nevada, that is scheduled to be
completed during the first quarter of 2023, as well as tenant improvements at
various MOBs, and; (iii) $1.3 million as part of the asset purchase and sale
agreement with UHS, as discussed in Note 2 to the consolidated financial
statements-Relationship with UHS and Related Party Transactions. In addition,
during the three-months ended March 31, 2022, we received approximately $160,000
of cash in excess of income from LLCs.
During the three-month period ended March 31, 2021 we funded: (i) $7.0 million
in additions to real estate investments including construction costs related to
Clive Behavioral Health, a newly constructed behavioral health hospital that was
substantially completed in late December, 2020, as well as tenant improvements
at various MOBs; (ii) $3.5 million in a member loan to an unconsolidated LP;
(iii) $200,000 deposit on a real estate acquisition, and; (iv) $1.5 million in
equity investments in unconsolidated LLCs.
Net cash (used in)/ provided by financing activities
Net cash used in financing activities was $7.0 million during the three months
ended March 31, 2022, as compared to $1.4 million of cash provided by financing
activities during the three months ended March 31, 2021.
During the three-month period ended March 31, 2022, we paid: (i) $536,000 on
mortgage notes payable that are non-recourse to us; (ii) $26,000 of financing
costs related to the revolving credit agreement, and; (iii) $9.7 million of
dividends. Additionally, during the three months ended March 31, 2022, we
received: (i) $3.2 million of net borrowings on our revolving credit agreement,
and; (ii) $55,000 of net cash from the issuance of shares of beneficial
interest.
During the three-month period ended March 31, 2021, we paid: (i) $510,000 on
mortgage notes payable that are non-recourse to us; (ii) $35,000 of financing
costs related to the revolving credit agreement, and; (iii) $9.6 million of
dividends. Additionally, during the three months ended March 31, 2021, we
received: (i) $11.5 million of net borrowings on our revolving credit agreement,
and; (ii) $56,000 of net cash from the issuance of shares of beneficial
interest.
During 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
through our agent banks. No shares were issued pursuant to this ATM equity
program during the first three months of 2022 and no shares were issued pursuant
to this ATM equity program during the year ended December 31, 2021.
Additional cash flow and dividends paid information for the three-month periods
ended March 31, 2022 and 2021:
As indicated on our condensed consolidated statement of cash flows, we generated
net cash provided by operating activities of $11.7 million and $11.3 million
during the three-month periods ended March 31, 2022 and 2021, 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 and stock-based compensation expense are the primary differences between
our net income and net cash provided by operating activities during each period.
We declared and paid dividends of $9.7 million and $9.6 million during the
three-month periods ended March 31, 2022 and 2021, respectively. During the
first three months of 2022, the $11.7 million of net cash provided by operating
activities was approximately $2.0 million greater than the $9.7 million of
dividends paid during the first three months of 2022. During the first three
months of 2021, the $11.3 million of net cash provided by operating activities
was approximately $1.7 million greater than the $9.6 million of dividends paid
during the first three months of 2021.
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 three months ended March 31,
2022 and 2021. 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 and Board 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,
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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 the Board 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 $375 million revolving credit
agreement (which had $96.7 million of available borrowing capacity, net of
outstanding borrowings and letters of credit as of March 31, 2022);
(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 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 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.
On July 2, 2021, we entered into an amended and restated revolving credit
agreement ("Credit Agreement") to amend and restate the previously existing $350
million credit agreement, as amended and dated June 5, 2020 ("Prior Credit
Agreement"). Among other things, under the Credit Agreement, our aggregate
revolving credit commitment was increased to $375 million from $350 million. The
Credit Agreement, which is scheduled to mature on July 2, 2025, provides for a
revolving credit facility in an aggregate principal amount of $375 million,
including a $40 million sublimit for letters of credit and a $30 million
sublimit for swingline/short-term loans. Under the terms of the Credit
Agreement, we may request that the revolving line of credit be increased by up
to an additional $50 million. Borrowings under the new facility are guaranteed
by certain subsidiaries of the Trust. In addition, borrowings under the new
facility are secured by first priority security interests in and liens on all
equity interests in most of the Trust's wholly-owned subsidiaries.
Borrowings under the Credit Agreement will bear interest annually at a rate
equal to, at our option, at either LIBOR (for one, three, or six months) or the
Base Rate, plus in either case, a specified margin depending on our ratio of
debt to total capital, as determined by the formula set forth in the Credit
Agreement. The applicable margin ranges from 1.10% to 1.35% for LIBOR loans and
0.10% to 0.35% for Base Rate loans. The initial applicable margin is 1.25% for
LIBOR loans and 0.25% for Base Rate loans. 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
Trust will also pay a quarterly revolving facility fee ranging from 0.15% to
0.35% (depending on the Trust's ratio of debt to asset value) on the revolving
committed amount of the Credit Agreement. The Credit Agreement also provides for
options to extend the maturity date and borrowing availability for two
additional six-month periods.
The margins over LIBOR, Base Rate and the facility fee are based upon our total
leverage ratio. At March 31, 2022, 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%.
At March 31, 2022, we had $275.1 million of outstanding borrowings and $3.2
million of letters of credit outstanding under our Credit Agreement. We had
$96.7 million of available borrowing capacity, net of the outstanding borrowings
and letters of credit outstanding as of March 31, 2022. There are no
compensating balance requirements. At December 31, 2021, we had $271.9 million
of outstanding borrowings, $3.2 million of outstanding letters of credit and
$99.9 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
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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 then outstanding under the Credit Agreement. We are in compliance with
all of the covenants in the Credit Agreement at March 31, 2022 and were in
compliance with all of the covenants in the Credit Agreement at December 31,
2021. 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.
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):
March 31, December 31,
Covenant 2022 2021
Tangible net worth > =$125,000 $ 225,799 $ 225,355
Total leverage < 60% 42.4 % 43.1 %
Secured leverage < 30% 7.2 % 7.4 %
Unencumbered leverage < 60% 41.3 % 41.9 %
Fixed charge coverage > 1.50x 4.8x 4.8x
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
March 31, 2022 (amounts in thousands):
Outstanding
Balance Interest Maturity
Facility Name (in thousands) (a.) Rate Date
700 Shadow Lane and Goldring MOBs fixed
rate
mortgage loan (b.) $ 5,152 4.54 % June, 2022
BRB Medical Office Building fixed rate
mortgage loan (c.) 5,222 4.27 % December, 2022
Desert Valley Medical Center fixed rate
mortgage loan (c.) 4,316 3.62 % January, 2023
2704 North Tenaya Way fixed rate
mortgage loan 6,377 4.95 % November, 2023
Summerlin Hospital Medical Office
Building III fixed
rate mortgage loan 12,745 4.03 % April, 2024
Tuscan Professional Building fixed rate
mortgage loan 2,190 5.56 % June, 2025
Phoenix Children's East Valley Care
Center fixed rate
mortgage loan 8,401 3.95 % January, 2030
Rosenberg Children's Medical Plaza fixed
rate mortgage loan 12,213 4.42 % September, 2033
Total, excluding net debt premium and
net financing fees 56,616
Less net financing fees (348 )
Plus net debt premium 78
Total mortgages notes payable,
non-recourse to us, net $ 56,346
(a.) All mortgage loans require monthly principal payments through maturity and
either fully amortize or include a balloon principal payment upon
maturity.
(b.) This loan is scheduled to mature in the second quarter of 2022, at which
time we intend on paying off the remaining principal balance utilizing
borrowings under our Credit Agreement.
(c.) This loan is scheduled to mature within the next twelve months, at which
time we will decide whether to refinance pursuant to a new mortgage loan
or by 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 of March 31, 2022 had a
combined fair value of approximately $57.0 million. At December 31, 2021, 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 at December 31, 2021 was $57.2 million and had a combined fair
value of approximately $59.4 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 of March 31, 2022, 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 at March 31, 2022 totaled $3.2
million related to Grayson Properties II.
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As of December 31, 2021 we had off balance sheet arrangements consisting of
standby letters of credit and equity and debt financing commitments. Our
outstanding letters of credit at December 31, 2021 totaled $3.2 million related
to Grayson Properties II.
Acquisition and Divestiture Activity
Please see Note 4 to the consolidated financial statements for completed
transactions.
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