10-Q 1 a2018q310qreiti09302018.htm 10-Q Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________
FORM 10-Q
___________________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
OR 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 000-54675
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CARTER VALIDUS MISSION CRITICAL REIT, INC. 
(Exact name of registrant as specified in its charter) 
Maryland
 
27-1550167
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
4890 West Kennedy Blvd., Suite 650
Tampa, FL 33609
 
(813) 287-0101
(Address of Principal Executive Offices; Zip Code)
 
(Registrant’s Telephone Number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
  
Accelerated filer
 
Non-accelerated filer
 
 
  
Smaller reporting company
 
 
 
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for comply with any new or revised financial accounting standards provided pursuant to Section 13(a) of Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
As of November 8, 2018, there were approximately 182,670,119 shares of common stock of Carter Validus Mission Critical REIT, Inc. outstanding.
 



CARTER VALIDUS MISSION CRITICAL REIT, INC.
(A Maryland Corporation)
TABLE OF CONTENTS
 
 
Page
PART I.
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 



PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements.
CARTER VALIDUS MISSION CRITICAL REIT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
(Unaudited)
September 30, 2018
 
December 31, 2017
ASSETS
Real estate:
 
 
 
Land
$
72,894

 
$
73,769

Buildings and improvements, less accumulated depreciation of $95,039 and $86,092, respectively
812,547

 
834,419

Total real estate, net
885,441

 
908,188

Cash and cash equivalents
53,895

 
336,500

Acquired intangible assets, less accumulated amortization of $23,008 and $23,640, respectively
61,493

 
86,938

Other assets, net
53,240

 
79,140

Assets of discontinued operations, net ($929 and $6,852, respectively, related to VIE)
2,648

 
213,833

Total assets
$
1,056,717

 
$
1,624,599

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
 
 
 
Notes payable, net of deferred financing costs of $80 and $875, respectively
$
42,080

 
$
140,602

Credit facility
210,000

 

Accounts payable due to affiliates
1,498

 
2,372

Accounts payable and other liabilities
16,830

 
28,195

Intangible lease liabilities, less accumulated amortization of $5,458 and $4,694, respectively
16,791

 
17,555

Liabilities of discontinued operations, net ($22 and $599, respectively, related to VIE)
389

 
5,058

Total liabilities
287,588

 
193,782

Stockholders’ equity:
 
 
 
Preferred stock, $0.01 par value per share, 50,000,000 shares authorized; none issued and outstanding

 

Common stock, $0.01 par value per share, 300,000,000 shares authorized; 201,795,155 and 196,892,945 shares issued, respectively; 181,774,677 and 186,181,545 shares outstanding, respectively
1,818

 
1,862

Additional paid-in capital
1,605,572

 
1,635,329

Accumulated distributions in excess of earnings
(839,831
)
 
(211,750
)
Accumulated other comprehensive income
849

 
407

Total stockholders’ equity
768,408

 
1,425,848

Noncontrolling interests
721

 
4,969

Total equity
769,129

 
1,430,817

Total liabilities and stockholders’ equity
$
1,056,717

 
$
1,624,599

The accompanying notes are an integral part of these condensed consolidated financial statements.

3


CARTER VALIDUS MISSION CRITICAL REIT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands, except share data and per share amounts)
(Unaudited)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Revenue:
 
 
 
 
 
 
 
Rental revenue
$
20,367

 
$
26,365

 
$
71,825

 
$
79,725

Provision for doubtful accounts related to rental revenue
(3,746
)
 
(3,357
)
 
(35,969
)
 
(11,204
)
Tenant reimbursement revenue
1,356

 
1,298

 
4,637

 
4,770

Provision for doubtful accounts related to tenant reimbursement revenue
(481
)
 
(449
)
 
(4,280
)
 
(1,861
)
Total revenue
17,496

 
23,857

 
36,213

 
71,430

Expenses:
 
 
 
 
 
 
 
Rental expenses
2,663

 
2,798

 
8,623

 
7,890

General and administrative expenses
1,495

 
1,574

 
4,372

 
5,204

Asset management fees
2,464

 
2,679

 
7,408

 
7,985

Depreciation and amortization
7,243

 
8,212

 
43,309

 
24,091

Total expenses
13,865

 
15,263

 
63,712

 
45,170

Income (loss) from operations
3,631

 
8,594

 
(27,499
)
 
26,260

Other income (expense):
 
 
 
 
 
 
 
Other interest and dividend income
1,682

 
497

 
3,603

 
1,551

Interest expense, net
(3,256
)
 
(5,324
)
 
(10,375
)
 
(15,755
)
Provision for loan losses
(571
)
 
(7,459
)
 
(2,750
)
 
(11,631
)
Impairment loss on real estate

 

 
(5,831
)
 

Gain on real estate dispositions

 

 
218

 

Total other expense
(2,145
)
 
(12,286
)
 
(15,135
)
 
(25,835
)
Income (loss) from continuing operations
1,486

 
(3,692
)
 
(42,634
)
 
425

Income from discontinued operations
4,117

 
10,636

 
36,600

 
29,711

Net income (loss)
5,603

 
6,944

 
(6,034
)
 
30,136

Net (income) loss attributable to noncontrolling interests in consolidated partnerships
(33
)
 
(898
)
 
15

 
(3,018
)
Net income (loss) attributable to common stockholders
$
5,570

 
$
6,046

 
$
(6,019
)
 
$
27,118

Other comprehensive income:
 
 
 
 
 
 
 
Unrealized income on interest rate swaps, net
$
18

 
$
207

 
$
442

 
$
1,326

Other comprehensive income
18

 
207

 
442

 
1,326

Comprehensive income (loss)
5,621

 
7,151

 
(5,592
)
 
31,462

Comprehensive (income) loss attributable to noncontrolling interests in consolidated partnerships
(33
)
 
(898
)
 
15

 
(3,018
)
Comprehensive income (loss) attributable to common stockholders
$
5,588

 
$
6,253

 
$
(5,577
)
 
$
28,444

Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
181,260,431

 
186,295,970

 
182,671,045

 
185,834,940

Diluted
181,282,589

 
186,295,970

 
182,671,045

 
185,853,976

Net income (loss) per common share attributable to common stockholders:
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
Continuing operations
$
0.01

 
$
(0.02
)
 
$
(0.23
)
 
$
0.01

Discontinued operations
0.02

 
0.05

 
0.20

 
0.14

Net income (loss) attributable to common stockholders
$
0.03

 
$
0.03

 
$
(0.03
)
 
$
0.15

Diluted:
 
 
 
 
 
 
 
Continuing operations
$
0.01

 
$
(0.02
)
 
$
(0.23
)
 
$
0.01

Discontinued operations
0.02

 
0.05

 
0.20

 
0.14

Net income (loss) attributable to common stockholders
$
0.03

 
$
0.03

 
$
(0.03
)
 
$
0.15

Distributions declared per common share
$
0.11

 
$
0.18

 
$
3.40

 
$
0.52

The accompanying notes are an integral part of these condensed consolidated financial statements.

4


CARTER VALIDUS MISSION CRITICAL REIT, INC. 
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
(Unaudited) 
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Distributions
in Excess
of Earnings
 
Accumulated
Other
Comprehensive
Income
 
Total
Stockholders’
Equity
 
Noncontrolling
Interests
 
Total
Equity
 
No. of
Shares
 
Par
Value
 
 
 
 
 
 
Balance, December 31, 2017
186,181,545

 
$
1,862

 
$
1,635,329

 
$
(211,750
)
 
$
407

 
$
1,425,848

 
$
4,969

 
$
1,430,817

Vesting of restricted stock
9,000

 

 
66

 

 

 
66

 

 
66

Issuance of common stock under the distribution reinvestment plan
4,893,209

 
49

 
34,300

 

 

 
34,349

 

 
34,349

Distributions to noncontrolling interests

 

 

 

 

 

 
(4,233
)
 
(4,233
)
Distributions declared to common stockholders

 

 

 
(622,062
)
 

 
(622,062
)
 

 
(622,062
)
Other offering costs

 

 
(4
)
 

 

 
(4
)
 

 
(4
)
Repurchase of common stock
(9,309,077
)
 
(93
)
 
(64,119
)
 

 

 
(64,212
)
 

 
(64,212
)
Other comprehensive income

 

 

 

 
442

 
442

 

 
442

Net loss

 

 

 
(6,019
)
 

 
(6,019
)
 
(15
)
 
(6,034
)
Balance, September 30, 2018
181,774,677

 
$
1,818

 
$
1,605,572

 
$
(839,831
)
 
$
849

 
$
768,408

 
$
721

 
$
769,129

The accompanying notes are an integral part of these condensed consolidated financial statements.

5


CARTER VALIDUS MISSION CRITICAL REIT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) 
(Unaudited)
 
Nine Months Ended
September 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net (loss) income
$
(6,034
)
 
$
30,136

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
43,309

 
54,491

Amortization of deferred financing costs
1,749

 
2,893

Amortization of above-market leases
231

 
275

Amortization of intangible lease liabilities
(865
)
 
(2,609
)
Gain on real estate dispositions from discontinued operations
(33,251
)
 

Gain on real estate dispositions from continuing operations
(218
)
 

Ineffectiveness of interest rate swaps
(2
)
 

Impairment loss on real estate
5,831

 

Provision for doubtful accounts
22,622

 
11,043

Provision for loan losses
2,750

 
11,631

Loss on debt extinguishment
207

 
15

Straight-line rent
12,863

 
(10,111
)
Stock-based compensation
66

 
66

Change in fair value of contingent consideration

 
(2,920
)
Changes in operating assets and liabilities:
 
 
 
Accounts payable and other liabilities
(9,619
)
 
4,232

Accounts payable due to affiliates
(995
)
 
(111
)
Other assets
(17,358
)
 
(11,091
)
Net cash provided by operating activities
21,286

 
87,940

Cash flows from investing activities:
 
 
 
Proceeds from real estate disposals of continuing and discontinuing operations
241,043

 

Capital expenditures
(4,511
)
 
(19,975
)
Capital distributions from unconsolidated partnership
962

 

Notes receivable, net
(2,700
)
 
(13,000
)
Net cash provided by (used in) investing activities
234,794

 
(32,975
)
Cash flows from financing activities:
 
 
 
Payments on notes payable
(99,317
)
 
(35,643
)
Proceeds from credit facility
285,000

 
75,000

Payments on credit facility
(75,000
)
 

Proceeds from debt extinguishment
338

 

Payments of deferred financing costs
(2,254
)
 
(1,681
)
Repurchase of common stock
(64,212
)
 
(39,198
)
Other offering costs
(4
)
 
(49
)
Distributions to stockholders
(592,517
)
 
(47,128
)
Purchase of noncontrolling interests

 
(500
)
Distributions to noncontrolling interests
(4,233
)
 
(2,503
)
Net cash used in financing activities
(552,199
)
 
(51,702
)
Net change in cash, cash equivalents and restricted cash
(296,119
)
 
3,263

Cash, cash equivalents and restricted cash - Beginning of period
351,914

 
57,605

Cash, cash equivalents and restricted cash - End of period
$
55,795

 
$
60,868

Supplemental cash flow disclosure:
 
 
 
Interest paid, net of interest capitalized of $225 and $2,794, respectively
$
9,335

 
$
26,150

Supplemental disclosure of non-cash transactions:
 
 
 
Common stock issued through distribution reinvestment plan
$
34,349

 
$
50,435

Net unrealized gain on interest rate swaps
$
442

 
$
1,326

Accrued capital expenditures
$

 
$
59

The accompanying notes are an integral part of these condensed consolidated financial statements.

6


CARTER VALIDUS MISSION CRITICAL REIT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2018
Note 1Organization and Business Operations
Carter Validus Mission Critical REIT, Inc., or the Company, a Maryland corporation, was incorporated on December 16, 2009, and has elected to be taxed, and currently qualifies, as a real estate investment trust, or a REIT, under the Internal Revenue Code of 1986, as amended, or the Code, for federal income tax purposes. The Company was organized to acquire and operate a diversified portfolio of income-producing commercial real estate, with a focus on the data center and healthcare property sectors, net leased to creditworthy tenants, as well as to make other real estate-related investments that relate to such property types. During the year ended December 31, 2017, the Company's board of directors made a determination to sell the Company's data center assets. This decision represented a strategic shift that had a major effect on the Company's results and operations and assets and liabilities for the periods presented. As a result, the Company classified the assets in its data centers segment as discontinued operations. During the year ended December 31, 2017, the Company sold 16 properties, which consisted of 15 data center properties and one healthcare property. During the nine months ended September 30, 2018, the Company sold seven properties, which consisted of five data center properties and two healthcare properties. As a result, as of September 30, 2018, the Company had completed the disposition of all its data center properties.
As of September 30, 2018, the Company owned 30 real estate investments, consisting of 61 properties, all of which were part of the healthcare portfolio.
On January 22, 2018, the Company's board of directors declared a special cash distribution of $3.00 per share of common stock. The special cash distribution was funded with the proceeds from the disposition of certain real estate properties between December 2017 and January 2018. The special cash distribution was paid on March 16, 2018, to stockholders of record at the close of business on February 15, 2018, in the aggregate amount of approximately $556,227,000
The Company operates through one reportable segment—commercial real estate investments in healthcare. Substantially all of the Company’s business is conducted through Carter/Validus Operating Partnership, LP, a Delaware limited partnership, or the Operating Partnership. The Company is the sole general partner of the Operating Partnership, and Carter/Validus Advisors, LLC, or the Advisor, the Company’s affiliated advisor, is the special limited partner of the Operating Partnership.
The Company ceased offering shares of common stock in its initial public offering, or the Offering, on June 6, 2014. At the completion of the Offering, the Company had raised gross offering proceeds of approximately $1,716,046,000 (including shares of common stock issued pursuant to a distribution reinvestment plan, or the DRIP). The Company will continue to issue shares of common stock under the DRIP pursuant to the DRIP Offering (as defined below) until such time as the Company sells all of the shares registered for sale under the DRIP Offering, unless the Company files a new registration statement with the Securities and Exchange Commission, or the SEC, or the DRIP Offering is terminated by the Company’s board of directors. The Company refers to the DRIP Offering and the Offering together as the "Offerings."
On May 22, 2017, the Company registered 11,387,512 shares of common stock for a price per share of $9.519, for a proposed maximum offering price of $108,397,727 in shares of common stock under the DRIP pursuant to a Registration Statement on Form S-3, or the DRIP Offering. On December 21, 2017, the Company's board of directors approved an amendment to the DRIP in order for the purchase price per DRIP share to equal the most recent estimated per share net asset value, as determined by the board of directors. As a result, effective February 1, 2018, shares of common stock were offered pursuant to the DRIP Offering for a price per share of $9.26. In connection with a special cash distribution paid on March 16, 2018, to stockholders of record on February 15, 2018, effective February 15, 2018, shares of common stock were offered pursuant to the DRIP Offering for a price per share of $6.26, which was the Company's estimated per share net asset value as of February 15, 2018.
As of September 30, 2018, the Company had issued approximately 201,720,000 shares of common stock in the Offerings for gross proceeds of $1,981,110,000, before share repurchases of $169,123,000 and offering costs, selling commissions and dealer manager fees of $174,849,000.
Except as the context otherwise requires, “we,” “our,” “us,” and the “Company” refer to Carter Validus Mission Critical REIT, Inc., the Operating Partnership, all majority-owned subsidiaries and controlled subsidiaries.

7


Note 2Summary of Significant Accounting Policies
The summary of significant accounting policies presented below is designed to assist in understanding the Company’s condensed consolidated financial statements. Such condensed consolidated financial statements and the accompanying notes thereto are the representation of management. The accompanying condensed consolidated unaudited financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP, for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal and recurring nature considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2018, are not necessarily indicative of the results that may be expected for the year ended December 31, 2018.
The condensed consolidated balance sheet at December 31, 2017, has been derived from the audited consolidated financial statements at that date but does not include all of the information and notes required by GAAP for complete financial statements. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s audited consolidated financial statements as of and for the year ended December 31, 2017, and related notes thereto set forth in the Company’s Annual Report on Form 10-K, filed with the SEC on March 30, 2018.
Principles of Consolidation and Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of the Company, the Operating Partnership, all majority-owned subsidiaries and controlled subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with GAAP necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. These estimates are made and evaluated on an ongoing basis using information that is currently available as well as various other assumptions believed to be reasonable under the circumstances. Actual results could differ from those estimates.
Restricted Cash
Restricted cash consists of restricted cash held in escrow and restricted bank deposits. Restricted cash held in escrow includes cash held by lenders in escrow accounts for tenant and capital improvements, repairs and maintenance and other lender reserves for certain properties, in accordance with the respective lender’s loan agreement. Restricted cash held in escrow is reported in other assets, net, in the accompanying condensed consolidated balance sheets. Restricted bank deposits consist of tenant receipts for certain properties which are required to be deposited into lender controlled accounts in accordance with the respective lender's loan agreement. Restricted bank deposits are reported in other assets, net, in the accompanying condensed consolidated balance sheets. See Note 7—"Other Assets, Net."
The following table presents a reconciliation of the beginning of period and end of period cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets to the totals shown in the condensed consolidated statements of cash flows (amounts in thousands):
 
 
Nine Months Ended
September 30,
Beginning of period:
 
2018
 
2017
Cash and cash equivalents
 
$
336,500

 
$
42,613

Restricted cash (1)
 
15,414

 
14,992

Cash, cash equivalents and restricted cash
 
$
351,914

 
$
57,605

 
 
 
 
 
End of period:
 
 
 
 
Cash and cash equivalents
 
$
53,895

 
$
42,603

Restricted cash (1)
 
1,900

 
18,265

Cash, cash equivalents and restricted cash
 
$
55,795

 
$
60,868

 
(1)
Amount attributable to continuing and discontinued operations.

8


Held for Sale and Discontinued Operations
The Company classifies a real estate property as held for sale upon satisfaction all of the following criteria: (i) management commits to a plan to sell a property, (ii) the property is available for immediate sale in its present condition, subject only to terms that are usual and customary for sales of such properties, (iii) there is an active program to locate a buyer, (iv) the property is being actively marketed for sale, (v) the sale of the property is probable and transfer of the asset is expected to be completed within one year, and (vi) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
Upon the determination to classify a property as held for sale, the Company ceases depreciation and amortization on the real estate properties, including depreciation for tenant improvements, as well as on the amortization of acquired in-place leases. The real estate properties held for sale and associated liabilities are classified separately on the condensed consolidated balance sheets. Such properties are recorded at the lesser of the carrying value or estimated fair value less estimated cost to sell.
The Company classifies real estate properties as discontinued operations for all periods presented if they represent a strategic shift that has (or will have) a major effect on the Company's results and operations. The assets, liabilities and operations for the periods presented are classified on the condensed consolidated balance sheets and condensed consolidated statements of comprehensive income (loss) as discontinued operations for all periods presented. As of September 30, 2018, the Company had completed the disposition of all its data center assets.
Impairment of Long Lived Assets
The Company continually monitors events and changes in circumstances that could indicate that the carrying amounts of its real estate and related intangible assets may not be recoverable. When indicators of potential impairment suggest that the carrying value of real estate and related intangible assets may not be recoverable, the Company assesses the recoverability of the assets by estimating whether the Company will recover the carrying value of the assets through its undiscounted future cash flows and their eventual disposition. If, based on this analysis, the Company does not believe that it will be able to recover the carrying value of the assets, the Company will record an impairment loss to the extent that the carrying value exceeds the estimated fair value of the assets.
When developing estimates of expected future cash flows, the Company makes certain assumptions regarding future market rental income amounts subsequent to the expiration of current lease arrangements, property operating expenses, terminal capitalization and discount rates, the expected number of months it takes to re-lease the property, required tenant improvements and the number of years the property will be held for investment. The use of alternative assumptions in the future cash flow analysis could result in a different determination of the property’s future cash flows and a different conclusion regarding the existence of an impairment, the extent of such loss, if any, as well as the carrying value of the real estate and related assets.
In addition, the Company applies a market approach using comparable sales for certain properties. The use of alternative assumptions in the market approach analysis could result in a different determination of the property’s estimated fair value and a different conclusion regarding the existence of an impairment, the extent of such loss, if any, as well as the carrying value of the real estate and related assets.
For the nine months ended September 30, 2018, the Company recognized an impairment of an in-place lease intangible asset in the amount of approximately $21,296,000 by accelerating the amortization of the intangible as a result of a former tenant of the Company, Bay Area Regional Medical Center, LLC, or Bay Area, experiencing financial difficulty. On August 13, 2018, the Company terminated the lease with Bay Area. As of September 30, 2018, the Company does not have any acquired intangible assets or intangible lease liabilities related to Bay Area.
During the nine months ended September 30, 2018, real estate assets related to one healthcare property with an aggregate carrying amount of $47,375,000 were determined to be impaired, using Level 2 inputs of the fair value hierarchy. The carrying value of the property was reduced to its estimated fair value of $41,544,000, resulting in an impairment charge of $5,831,000, which is included in impairment loss on real estate in the condensed consolidated statements of comprehensive income (loss). See Note 12—"Fair Value" for more details.
Allowance for Uncollectible Accounts
Tenant receivables and unbilled deferred rent receivables are carried net of the allowances for uncollectible amounts. An allowance will be maintained for estimated losses resulting from the inability of certain tenants to meet the contractual obligations under their lease agreements. The Company also maintains an allowance for deferred rent receivables arising from the straight-lining of rents. The Company’s determination of the adequacy of these allowances is based primarily upon evaluations of historical loss experience, the tenant’s financial condition, security deposits, letters of credit, lease guarantees, current economic conditions and other relevant factors. For the three months ended September 30, 2018 and 2017, the Company recorded $3,746,000 and $3,357,000, respectively, and for the nine months ended September 30, 2018 and 2017, the

9


Company recorded $35,969,000 and $11,204,000, respectively, in provision for doubtful accounts for rental revenue and straight-line rent receivable, which are recorded in the accompanying condensed consolidated statements of comprehensive income (loss). Of the $3,746,000 and $35,969,000 recorded for the three and nine months ended September 30, 2018, respectively, $2,830,000 and $33,242,000, respectively, related to Bay Area. As of September 30, 2018, the Company had fully reserved for and written off all its outstanding accounts receivable for rental revenue and had no straight-line rent receivable related to Bay Area.
On October 24, 2018, the Company entered into a lease agreement with a new tenant, the Board of Regents of the University of Texas System, which is an affiliate of the University of Texas Medical Branch, or UTMB, to lease the Bay Area Regional Medical Center property. See Note 16—"Subsequent Events" for further discussion.
For the three months ended September 30, 2018 and 2017, the Company recorded $481,000 and $449,000, respectively, and for the nine months ended September 30, 2018 and 2017, the Company recorded $4,280,000 and $1,861,000, respectively, in provision for doubtful accounts for tenant reimbursement revenue, which are recorded in the accompanying condensed consolidated statements of comprehensive income (loss). Of the $481,000 and $4,280,000 recorded for the three and nine months ended September 30, 2018, respectively, $258,000 and $3,634,000, respectively, related to Bay Area. As of September 30, 2018, the Company had fully reserved for and written off all its accounts receivable for tenant reimbursement revenue related to Bay Area.
Notes Receivable
Notes receivable are reported at their outstanding principal balance, net of any unearned income, unamortized deferred fees and costs and allowances for loan losses. The unamortized deferred fees and costs are amortized over the life of the notes receivable, as applicable and recorded in other interest and dividend income in the accompanying condensed consolidated statements of comprehensive income (loss).
The Company evaluates the collectability of both interest and principal on each note receivable to determine whether it is collectible, primarily through the evaluation of credit quality indicators, such as the tenant's financial condition, collateral, evaluations of historical loss experience, current economic conditions and other relevant factors, including contractual terms of repayments. Evaluating a note receivable for potential impairment requires management to exercise significant judgment. The use of alternative assumptions in evaluating a note receivable could result in a different determination of the note's estimated fair value and a different conclusion regarding the existence of an impairment, the extent of such loss, if any, as well as the carrying value of the note receivable.
As of September 30, 2018 and December 31, 2017, the aggregate balance of the Company's notes receivable, including accrued interest receivable, after allowances for loan losses was $2,700,000 and $20,138,000, respectively, related to Bay Area. The principal balances of the Company's notes receivable are secured by their respective collateral.
For the three months ended September 30, 2018 and 2017, the Company recorded $571,000 and $7,459,000, respectively, and for the nine months ended September 30, 2018 and 2017, the Company recorded $2,750,000 and $11,631,000, respectively, as an allowance to reduce the carrying value of notes receivable, accrued interest and origination fees related to two tenants in provision for loan losses in the accompanying condensed consolidated financial statements. Of the $571,000 and $2,750,000 recorded for the three and nine months ended September 30, 2018, respectively, $248,000 and $1,810,000, respectively, related to Bay Area.
On August 13, 2018, the Company terminated the lease with Bay Area and on August 21, 2018, the Company accepted equipment in exchange for full settlement on a note receivable, which had an outstanding principal balance of $20,000,000. The equipment was accounted for at fair value of $21,000,000, less estimated costs to sell of $100,000, and as a result, the Company recorded income on exchange of assets of $900,000 for the three and nine months ended September 30, 2018, which was recorded in other interest and dividend income in the accompanying condensed consolidated statements of comprehensive income (loss).
On October 22, 2018, the Company sold its equipment held for sale to UTMB for $21,000,000. The equipment held for sale is recorded in other assets, net in the accompanying the condensed consolidated balance sheet.
Concentration of Credit Risk and Significant Leases
As of September 30, 2018, the Company had cash on deposit, including restricted cash, in certain financial institutions that had deposits in excess of current federally insured levels. The Company limits its cash investments to financial institutions with high credit standings; therefore, the Company believes it is not exposed to any significant credit risk on its cash deposits. To date, the Company has experienced no loss of or lack of access to cash in its accounts.
As of September 30, 2018, the Company owned real estate investments in 32 metropolitan statistical areas, or MSAs, three of which accounted for 10.0% or more of revenue from continuing operations. Real estate investments located in the San Antonio-New Braunfels, Texas MSA, the Dallas-Fort Worth-Arlington, Texas MSA and the Akron, Ohio MSA accounted for an

10


aggregate of 12.0%, 10.8% and 10.0%, respectively, of revenue from continuing operations for the nine months ended September 30, 2018.
As of September 30, 2018, the Company had three exposures to tenant concentration that accounted for 10.0% or more of revenue from continuing operations. The leases with Post Acute Medical, LLC, 21st Century Oncology, Inc. and Surgery Partners, Inc. accounted for 21.1%, 13.0% and 10.0%, respectively, of revenue from continuing operations for the nine months ended September 30, 2018.
Share Repurchase Program
The Company’s share repurchase program allows for repurchases of shares of the Company’s common stock when certain criteria are met. The share repurchase program provides that all repurchases during any calendar year, including those redeemable upon death or a qualifying disability of a stockholder, are limited to those that can be funded with equivalent reinvestments pursuant to the DRIP during the prior calendar year and other operating funds, if any, as the board of directors, in its sole discretion, may reserve for this purpose.
Repurchases of shares of the Company’s common stock are at the sole discretion of the Company’s board of directors, provided, however, that the Company will limit the number of shares repurchased during any calendar year to 5.0% of the number of shares of common stock outstanding as of December 31st of the previous calendar year. In addition, the Company will further limit the amount of shares repurchased each quarter, subject to adjustments in accordance with the 5.0% annual share limitation. In addition, the Company’s board of directors, in its sole discretion, may suspend (in whole or in part) the share repurchase program at any time, and may amend, reduce, terminate or otherwise change the share repurchase program upon 30 days' prior notice to the Company’s stockholders for any reason it deems appropriate.
On April 30, 2018, the Company announced it had reached such limitation, and that it would not be able to fully accommodate all repurchase requests for the month of April 2018, and will not process any further requests for the remainder of the year ending December 31, 2018. For repurchase requests received by the Company for the April 30, 2018, repurchase shares were repurchased as follows: (i) first, pro rata as to repurchases upon the death of a stockholder; (ii) next, pro rata as to repurchases to stockholders who demonstrate, in the discretion of the board of directors, another involuntary exigent circumstance, such as bankruptcy; (iii) next, pro rata as to repurchases to stockholders subject to a mandatory distribution requirement under such stockholder’s individual retirement account; and (iv) finally, pro rata as to all other repurchase requests. See Part II, Item 2. "Unregistered Sales of Equity Securities" for more information on the Company's share repurchase program.
On July 26, 2018, the Company's board of directors approved and adopted the first amended and restated share repurchase program (First Amended & Restated SRP), which will be effective when the Company recommences repurchasing shares of common stock in 2019. The First Amended & Restated SRP provides that the Company will repurchase shares on a quarterly, instead of monthly, basis. Subsequent to the quarter ended September 30, 2018, the Company's board of directors approved and adopted the second amended and restated share repurchase program in order to clarify the date on which the Company will process accepted share repurchase requests. See Note 16—"Subsequent Events" for further discussion.
During the nine months ended September 30, 2018, the Company received valid repurchase requests related to approximately 10,061,000 shares, of which approximately 9,309,000 shares of common stock were repurchased for an aggregate purchase price of approximately $64,212,000 (an average of $6.90 per share). During the nine months ended September 30, 2017, the Company received valid repurchase requests related to approximately 3,973,000 shares of common stock, all of which were repurchased in full for an aggregate purchase price of approximately $39,198,000 (an average of $9.87 per share).
Earnings Per Share
Basic earnings per share for all periods presented are computed by dividing net income (loss) attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Shares of non-vested restricted common stock give rise to potentially dilutive shares of common stock. Diluted earnings per share are computed based on the weighted average number of shares outstanding and all potentially dilutive securities. For the three months ended September 30, 2018, diluted earnings per share reflected the effect of approximately 22,000 shares of non-vested restricted common stock that were outstanding as of such period. For the nine months ended September 30, 2018, there were approximately 22,000 shares of non-vested restricted common stock outstanding, but such shares were excluded from the computation of diluted earnings per share because such shares were anti-dilutive during this period. For the three months ended September 30, 2017, there were approximately 17,000 shares of non-vested restricted common stock outstanding, but such shares were excluded from the computation of diluted earnings per share because such shares were anti-dilutive during this period. For the nine months ended September 30, 2017, diluted earnings per share reflected the effect of approximately 19,000 of non-vested shares of restricted common stock that were outstanding as of such period.

11


Distribution Policy and Distributions Payable
In order to maintain its status as a REIT, the Company is required to make distributions each taxable year equal to at least 90% of its REIT taxable income, computed without regard to the dividends paid deduction and excluding capital gains. To the extent funds are available, the Company intends to continue to pay regular distributions to stockholders. Distributions are paid to stockholders of record as of the applicable record dates. As of September 30, 2018, the Company had paid aggregate distributions, since inception, of approximately $1,136,855,000, including the special cash distribution of $556,227,000, ($834,029,000 in cash and $302,826,000 of which were reinvested in shares of common stock pursuant to the DRIP). The Company’s distributions declared per common share were $0.11 and $0.18 for the three months ended September 30, 2018 and 2017, respectively, and $3.40 and $0.52 for the nine months ended September 30, 2018 and 2017, respectively. See Note 16—"Subsequent Events" for further discussion.
On January 22, 2018, the Company's board of directors declared a special cash distribution of $3.00 per share of common stock. The special cash distribution was funded with proceeds from the disposition of certain real estate properties between December 2017 and January 2018 and the Company's unsecured credit facility. The special cash distribution was paid on March 16, 2018 to stockholders of record at the close of business on February 15, 2018.
Distributions to stockholders are determined by the board of directors of the Company and are dependent upon a number of factors relating to the Company, including funds available for the payment of distributions, financial condition, the timing of property acquisitions, capital expenditure requirements, and annual distribution requirements in order to maintain the Company’s status as a REIT under the Internal Revenue Code of 1986, as amended, or the Code.
Reportable Segments
Accounting Standards Codification, or ASC, 280, Segment Reporting, establishes standards for reporting financial and descriptive information about an enterprise’s reportable segments. As of September 30, 2018 and December 31, 2017, 100% of the Company’s consolidated revenues from continuing operations were generated from real estate investments in healthcare properties. The Company’s chief operating decision maker evaluates operating performance of healthcare properties on an individual property level, which are aggregated into one reportable segment due to their similar economic characteristics.
In accordance with the definition of discontinued operations, the Company's decision to sell the properties in the data centers segment represented a strategic shift that had a major effect on the Company's results and operations and assets and liabilities for the periods presented. As a result, the Company no longer has its data centers segment. All activities related to the previously reported data centers segment have been classified as discontinued operations. The assets and liabilities related to discontinued operations are separately classified on the condensed consolidated balance sheets as of September 30, 2018 and December 31, 2017, and the operations have been classified as income from discontinued operations on the condensed consolidated statements of comprehensive income (loss) for the three and nine months ended September 30, 2018 and 2017.
Recently Issued Accounting Pronouncements
On May 28, 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2014-09, Revenue from Contracts with Customers, or ASU 2014-09. The pronouncement was issued to clarify the principles for recognizing revenue and to develop a common revenue standard and disclosure requirements. The pronouncement is effective for reporting periods beginning after December 15, 2017. On February 25, 2016, the FASB released ASU 2016-02, Leases (Topic 842). Upon adoption of ASU 2016-02 in 2019, as discussed below, the Company will be required to separate lease contracts into lease and nonlease components, whereby the nonlease components would be subject to ASU 2014-09. The Company adopted the provisions of ASU 2014-09 effective January 1, 2018, using the modified retrospective approach. Property rental revenue is accounted for in accordance with ASC 840, Leases. The Company's rental revenue consists of (i) contractual revenues from leases recognized on a straight-line basis over the term of the respective lease; (ii) parking revenue; and (iii) the reimbursements of the tenants' share of real estate taxes, insurance and other operating expenses. The Company evaluated the revenue recognition for its contracts within this scope under existing accounting standards and under ASU 2014-09 and concluded that there were no changes to the condensed consolidated financial statements as a result of adoption.
On February 23, 2017, the FASB issued ASU 2017-05, Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets, or ASU 2017-05. ASU 2017-05 clarifies the scope of asset derecognition guidance and accounting for partial sales of nonfinancial assets. Partial sales of nonfinancial assets include transactions in which the seller retains an equity interest in the entity that owns the assets or has an equity interest in the buyer. ASU 2017-05 provides guidance on how entities should recognize sales, including partial sales, of nonfinancial assets (and in-substance non-financial assets) to non-customers. ASU 2017-05 requires the seller to recognize a full gain or loss in a partial sale of non-financial assets, to the extent control is not retained. Any noncontrolling interest retained by the seller would, accordingly, be measured at fair value. ASU 2017-05 was effective for fiscal years beginning after December 15, 2017, including interim reporting periods within those fiscal years. The Company adopted the ASU 2017-05 effective January 1, 2018. The Company disposed certain real estate properties, including land, in cash transactions with no contingencies and no future involvement in

12


the operations, therefore, the adoption of ASU 2017-05 had no impact on the Company's condensed consolidated financial statements.
On February 25, 2016, the FASB established Topic 842, Leases, by issuing ASU 2016-02. ASU 2016-02 establishes the principles to increase the transparency about the assets and liabilities arising from leases. ASU 2016-02 results in a more faithful representation of the rights and obligations arising from leases by requiring lessees to recognize the lease assets and lease liabilities that arise from leases in the statement of financial position and to disclose qualitative and quantitative information about lease transactions and aligns lessor accounting and sale leaseback transactions guidance more closely to comparable guidance in Topic 606, Revenue from Contracts with Customers, and Topic 610, Other Income—Gains and Losses from the Derecognition of Non-financial Assets. Under ASU 2016-02, a lessee is required to record a right of use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. The Company is a lessee on several ground leases, which will result in the recognition of a right of use asset and lease liability upon the adoption of ASU 2016-02. As of September 30, 2018, the total future undiscounted rent obligation amount under non-cancelable ground leases is approximately $37,211,000, which represents approximately 3.5% of total assets. The Company is in the process of determining the appropriate discount rate to measure the right of use asset and lease liability.
In addition, with the adoption of ASU 2016-02, lessor accounting remains largely unchanged, apart from the narrower scope of initial direct costs that can be capitalized. The new standard will result in certain costs, such as legal costs related to lease negotiations, being expensed as general and administrative expenses in the consolidated statements of comprehensive income (loss) rather than capitalized. As a result of the narrower definition of initial direct costs, the Company does not expect that the adoption of ASU 2016-02 related to the leasing commission costs will have a material impact on the Company's condensed consolidated financial statements. In addition, ASU 2016-02 requires lessors to identify and separate the lease and non-lease components, such as the reimbursement of common area maintenance, contained within each lease.
ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. In July 2018, the FASB issued ASU 2018-11, Targeted Improvements, to simplify the guidance by allowing lessors to elect a practical expedient to not separate non-lease components from a lease, which would provide the Company with the option of not bifurcating certain common area maintenance recoveries as a non-lease component. The Company does not believe that the adoption of the practical expedient will have a material impact on the Company's condensed consolidated financial statements.
On June 16, 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses, or ASU 2016-13. ASU 2016-13 requires more timely recording of credit losses on loans and other financial instruments that are not accounted for at fair value through net income (loss), including loans held for investment, held-to-maturity debt securities, trade and other receivables, net investment in leases and other such commitments. ASU 2016-13 requires that financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The amendments in ASU 2016-13 require the Company to measure all expected credit losses based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the financial assets and eliminates the “incurred loss” methodology in current GAAP. ASU 2016-13 is effective for fiscal years, and interim periods within, beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within, beginning after December 15, 2018. The Company is in the process of evaluating the impact ASU 2016-13 will have on the Company’s condensed consolidated financial statements. The Company believes that certain financial statements' accounts may be impacted by the adoption of ASU 2016-13, including allowances for doubtful accounts with respect to accounts receivable, straight-line rent receivable and notes receivable.
On August 17, 2018, the SEC issued a final rule, SEC Final Rule Release No. 33-10532, Disclosure Update and Simplification, that amends certain of its disclosure requirements that have become redundant, duplicative, overlapping, outdated or superseded, in light of other SEC disclosure requirements or GAAP. For filings on Form 10-Q, the final rule, among other items, extends to interim periods the annual requirement to disclose changes in stockholders’ equity. As amended by the final rule, entities must analyze changes in stockholders’ equity, in the form of a reconciliation, for the then current and comparative year-to-date interim periods, with subtotals for each interim period. The final rule becomes effective on November 5, 2018. The SEC staff said it would not object to a registrant waiting to comply with the new interim disclosure requirement until the filing of its Form 10-Q for the first quarter beginning after the effective date of the rule. As a result, the Company will apply these changes in the presentation of stockholders’ equity beginning with its Quarterly Report on Form 10-Q for the three months ended March 31, 2019. The Company has determined this final rule will not have a material impact on the Company's financial condition, results of operations or financial statement disclosures.
On August 28, 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities, or ASU 2017-12. The objectives of ASU 2017-12  are to (i) improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting for hedging relationships with those risk management activities and (ii) reduce the complexity of and simplify the application of hedge accounting by preparers. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018,

13


and interim periods therein. Early adoption is permitted. Upon adoption of ASU 2017-12, the cumulative ineffectiveness previously recognized on existing cash flow hedges will be adjusted and removed from beginning retained earnings and placed in accumulated other comprehensive income (loss). The Company does not expect to have material ineffectiveness related to its outstanding designated cash flow hedges, therefore, the adoption of this standard will not have a material impact on the Company’s condensed consolidated financial statements.
On August 28, 2018, the FASB issued ASU 2018-13, Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, or ASU 2018-13. ASU 2018-13 removes certain disclosure requirements, including the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between the levels and the valuation processes for Level 3 fair value measurements. ASU 2018-13 also adds certain disclosure requirements, including the requirement to disclose the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, and interim periods therein. Early adoption is permitted. The Company is in the process of evaluating the impact that ASU 2018-13 will have on the Company's condensed consolidated financial statements.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current financial statement presentation, with no effect on the Company’s condensed consolidated financial position or results of operations. The Company's assets, liabilities and operations related to the data centers segment in the financial statements are classified on the condensed consolidated balance sheets and condensed consolidated statements of comprehensive income (loss) as discontinued operations for all periods presented.
Note 3Dispositions
The Company sold seven properties (five data center properties and two healthcare properties), or the 2018 Dispositions, during the nine months ended September 30, 2018, for an aggregate sale price of $245,665,000, and generated net proceeds of $241,043,000. For the three and nine months ended September 30, 2018, the Company recognized an aggregate gain on sale of $4,007,000 and $33,251,000, respectively, related to the data center properties sold, as a part of income from discontinued operations on the condensed consolidated statements of comprehensive income (loss). For the three and nine months ended September 30, 2018, the Company recognized an aggregate gain on sale of $0 and $218,000, respectively, related to the two healthcare properties sold, in gain on real estate dispositions on the condensed consolidated statements of comprehensive income (loss).
Dispositions - Discontinued Operations
Dispositions that represent a strategic shift that have a major effect on results and operations qualify as discontinued operations. The following table summarizes the 2018 Dispositions that qualify as discontinued operations. The operations related to these assets have been included in discontinued operations on the condensed consolidated statements of comprehensive income (loss) for the three and nine months ended September 30, 2018 and 2017.
Property Description
 
Disposition Date
 
Ownership Percentage
 
Sale Price
(amounts in thousands)
 
Net Proceeds
(amounts in thousands)
Arizona Data Center Portfolio (1)
 
01/10/2018
 
100%
 
$
142,500

 
$
140,176

Milwaukee Data Center
 
06/11/2018
 
100%
 
21,000

 
20,397

Alpharetta Data Center II
 
06/15/2018
 
100%
 
64,000

 
62,858

Andover Data Center
 
07/25/2018
 
100%
 
15,000

 
14,633

Total
 
 
 
 
 
$
242,500

 
$
238,064

 
(1)
The Arizona Data Center Portfolio was sold as a two-property portfolio consisting of the Phoenix Data Center and the Scottsdale Data Center.

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Dispositions - Continuing Operations
The following table summarizes the 2018 Dispositions that qualify as continuing operations. The operations related to these assets have been included in continuing operations on the condensed consolidated statements of comprehensive income (loss) for the three and nine months ended September 30, 2018 and 2017.
Property Description
 
Disposition Date
 
Ownership Percentage
 
Sale Price
(amounts in thousands)
 
Net Proceeds
(amounts in thousands)
21st Century Oncology-Tamarac
 
05/25/2018
 
100%
 
$
1,575

 
$
1,431

21st Century Oncology-East Naples
 
05/30/2018
 
100%
 
1,590

 
1,548

Total
 
 
 
 
 
$
3,165

 
$
2,979

Note 4Discontinued Operations
Dispositions that represent a strategic shift that has a major effect on the Company's results and operations qualify as discontinued operations. All activities related to the previously reported data centers segment have been classified as discontinued operations. The assets and liabilities related to discontinued operations are separately classified on the condensed consolidated balance sheets as of September 30, 2018 and December 31, 2017, and the operations have been classified as income from discontinued operations on the condensed consolidated statements of comprehensive income (loss) for the three and nine months ended September 30, 2018 and 2017. As of September 30, 2018, the Company had completed the disposition of all its data center assets.
The following table presents the major classes of assets and liabilities of properties classified as discontinued operations presented separately in the condensed consolidated balance sheets as of September 30, 2018 and December 31, 2017 (amounts in thousands):
 
September 30, 2018
 
December 31, 2017
Assets:
 
 
 
Real estate:
 
 
 
Land
$

 
$
21,710

Buildings and improvements, net

 
168,557

Total real estate, net

 
190,267

Acquired intangible assets, net

 
9,617

Other assets, net
2,648

 
13,949

Assets of discontinued operations, net
$
2,648

 
$
213,833

Liabilities:
 
 
 
Accounts payable due to affiliates
39

 
175

Accounts payable and other liabilities
350

 
3,847

Intangible lease liabilities, net

 
1,036

Liabilities of discontinued operations, net
$
389

 
$
5,058


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The operations reflected in discontinued operations on the condensed consolidated statements of comprehensive income (loss) for the three and nine months ended September 30, 2018 and 2017, were as follows (amounts in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Revenue:
 
 
 
 
 
 
 
Rental and parking revenue
$
90

 
$
26,225

 
$
3,918

 
$
79,160

Tenant reimbursement revenue
20

 
3,658

 
166

 
10,529

Total revenue
110

 
29,883

 
4,084

 
89,689

Expenses:
 
 
 
 
 
 
 
Rental and parking expenses

 
5,309

 
413

 
15,371

Change in fair value of contingent consideration

 
(1,880
)
 

 
(2,920
)
Asset management fees

 
2,169

 
322

 
6,509

Depreciation and amortization

 
10,124

 

 
30,400

Total expenses

 
15,722

 
735

 
49,360

Other expense:
 
 
 
 
 
 
 
Interest expense, net

 
(3,525
)
 

 
(10,618
)
Total other expense

 
(3,525
)
 

 
(10,618
)
Income from discontinued operations before real estate dispositions and noncontrolling interest
110

 
10,636

 
3,349

 
29,711

Gain on real estate dispositions
4,007

 

 
33,251

 

Net income from discontinued operations
4,117

 
10,636

 
36,600

 
29,711

Net (income) loss from discontinued operations attributable to noncontrolling interests in consolidated partnerships
(33
)
 
(898
)
 
15

 
(3,018
)
Net income from discontinued operations attributable to common stockholders
$
4,084

 
$
9,738

 
$
36,615

 
$
26,693

Capital expenditures on a cash basis for the three months ended September 30, 2018 and 2017 were $0 and $93,000, respectively, and capital expenditures on a cash basis for the nine months ended September 30, 2018 and 2017 were $0 and $672,000, respectively, related to properties classified within discontinued operations.
Note 5Acquired Intangible Assets, Net
Acquired intangible assets, net, consisted of the following as of September 30, 2018 and December 31, 2017 (amounts in thousands, except weighted average life amounts):
 
September 30, 2018
 
December 31, 2017
In-place leases, net of accumulated amortization of $21,656 and $22,519, respectively (with a weighted average remaining life of 13.8 years and 15.1 years, respectively)
$
57,925

 
$
83,139

Above-market leases, net of accumulated amortization of $1,291 and $1,068, respectively (with a weighted average remaining life of 8.6 years and 9.3 years, respectively)
2,524

 
2,747

Ground lease interest, net of accumulated amortization of $61 and $53, respectively (with a weighted average remaining life of 86.9 years and 87.6 years, respectively)
1,044

 
1,052

 
$
61,493

 
$
86,938

The aggregate weighted average remaining life of the acquired intangible assets was 14.8 years and 15.8 years as of September 30, 2018 and December 31, 2017, respectively.
Amortization of the acquired intangible assets for the three and nine months ended September 30, 2018, was $1,292,000 and $25,445,000, respectively, of which $0 and $21,296,000, respectively, was accelerated amortization due to the impairment of an in-place lease intangible asset related to Bay Area experiencing financial difficulties. Amortization of the acquired intangible assets for the three and nine months ended September 30, 2017, was $1,646,000 and $4,939,000, respectively. Amortization of the above-market leases is recorded as an adjustment to rental income, amortization of the in-place leases is

16


included in depreciation and amortization and amortization of the ground lease interest is included in rental expenses in the accompanying condensed consolidated statements of comprehensive income (loss).
Note 6Intangible Lease Liabilities, Net
Intangible lease liabilities, net, consisted of the following as of September 30, 2018 and December 31, 2017 (amounts in thousands, except weighted average life amounts):
 
September 30, 2018
 
December 31, 2017
Below-market leases, net of accumulated amortization of $4,940 and $4,269, respectively (with a weighted average remaining life of 16.5 years and 17.2 years, respectively)
$
11,984

 
$
12,655

Ground leasehold liabilities, net of accumulated amortization of $518 and $425, respectively (with a weighted average remaining life of 40.5 years and 41.2 years, respectively)
4,807

 
4,900

 
$
16,791

 
$
17,555

The aggregate weighted average remaining life of intangible lease liabilities was 23.2 years and 23.9 years as of September 30, 2018 and December 31, 2017, respectively.
Amortization of the intangible lease liabilities for the three months ended September 30, 2018 and 2017, was $255,000 and $257,000, respectively, and for the nine months ended September 30, 2018 and 2017, was $764,000 and $770,000, respectively. Amortization of below-market leases is recorded as an adjustment to rental income and amortization of ground leasehold liabilities is included in rental expenses in the accompanying condensed consolidated statements of comprehensive income (loss).
Note 7Other Assets, Net
Other assets, net, consisted of the following as of September 30, 2018 and December 31, 2017 (amounts in thousands):
 
September 30, 2018
 
December 31, 2017
Deferred financing costs, related to the revolver portion of the unsecured credit facility, net of accumulated amortization of $8,925 and $7,428, respectively
$
1,517

 
$
762

Lease commissions, net of accumulated amortization of $132 and $63, respectively
1,202

 
1,266

Investments in unconsolidated partnerships
2

 
965

Tenant receivables, net of allowances for doubtful accounts of $31,747 and $9,125, respectively
1,118

 
7,878

Notes receivable, net of allowances for loan losses of $13,365 and $10,615, respectively
2,700

 
20,138

Straight-line rent receivable
23,561

 
36,348

Equipment held for sale
20,900

 

Restricted cash
168

 
10,168

Derivative assets
851

 
407

Prepaid and other assets
1,221

 
1,208

 
$
53,240

 
$
79,140


17


Note 8Accounts Payable and Other Liabilities
Accounts payable and other liabilities, as of September 30, 2018 and December 31, 2017, consisted of the following (amounts in thousands):
 
September 30, 2018
 
December 31, 2017
Accounts payable and accrued expenses
$
2,596

 
$
4,203

Accrued interest expense
870

 
1,558

Accrued property taxes
4,015

 
4,758

Distributions payable to stockholders
6,272

 
11,076

Tenant deposits
625

 
778

Deferred rental income
2,452

 
5,822

 
$
16,830

 
$
28,195

Note 9Notes Payable and Unsecured Credit Facility
The Company's debt outstanding as of September 30, 2018 and December 31, 2017, consisted of the following (amounts in thousands):
 
September 30, 2018
 
December 31, 2017
Notes payable:
 
 
 
Fixed rate notes payable
$
5,717

 
$
18,212

Variable rate notes payable fixed through interest rate swaps
18,024

 
121,066

Variable rate notes payable
18,419

 
2,199

Total notes payable, principal amount outstanding
42,160

 
141,477

Unamortized deferred financing costs related to notes payable
(80
)
 
(875
)
Total notes payable, net of deferred financing costs
42,080

 
140,602

Unsecured credit facility:
 
 
 
Variable rate revolving line of credit fixed through interest rate swaps
38,000

 

Variable rate revolving line of credit
172,000

 

Total unsecured credit facility
210,000

 

Total debt outstanding
$
252,080

 
$
140,602

Significant debt activity during the nine months ended September 30, 2018, excluding scheduled principal payments, includes:
On February 1, 2018, the Operating Partnership and certain of the Company's subsidiaries entered into an amended and restated credit agreement related to the unsecured credit facility to remove one lender and to change the maximum commitment available under the unsecured credit facility to $400,000,000, consisting of a revolving line of credit, with a maturity date of May 28, 2019, subject to the Operating Partnership's right to a 12-month extension. Subject to certain conditions, the unsecured credit facility can be increased to $750,000,000. All other material terms of the unsecured credit facility remained unchanged.
On February 28, 2018, the Company paid off its debt in connection with one of the Company's notes payable with an outstanding principal balance of $12,340,000 at the time of repayment.
On May 4, 2018, the Company paid off its outstanding mortgage note payable related to the Bay Area Regional Medical Center property with an outstanding principal balance of approximately $84,667,000 at the time of repayment. As a result of this extinguishment, the Company expensed $545,000 of unamortized deferred financing costs and $43,000 of termination fees and recognized a gain of $381,000 on the early extinguishment of the hedged debt obligation, which were recognized in interest expense, net, on the Company’s condensed consolidated statements of comprehensive income (loss).
On August 13, 2018, the Operating Partnership and certain of the Company's subsidiaries entered into the First Amendment to the Third Amended and Restated Credit Agreement with KeyBank National Association and certain other lenders to amend certain financial covenants as a result of Bay Area experiencing financial difficulty. The

18


Company is in compliance with the covenants of the First Amendment to the Third Amended and Restated Credit Agreement.
During the nine months ended September 30, 2018, 18 of the Company's properties were resubmitted to the unencumbered pool of the unsecured credit facility, which increased the Company's total unencumbered pool availability under the unsecured credit facility by approximately $61,185,000.
During the nine months ended September 30, 2018, in connection with the 2018 Dispositions, the Company removed five properties from the unencumbered pool of the unsecured credit facility, which decreased the Company's total unencumbered pool availability under the unsecured credit facility by approximately $106,500,000.
During the nine months ended September 30, 2018, in connection with the special distribution in the amount of $556,227,000 paid on March 16, 2018, the Company made a draw of $195,000,000 on its unsecured credit facility.
During the nine months ended September 30, 2018, the Company drew $90,000,000 to pay off its debt related to the Bay Area Regional Medical Center property and to fund other working capital needs. The Company repaid $75,000,000 on its unsecured credit facility with net proceeds from the 2018 Dispositions.
As of September 30, 2018, the Company had a total unencumbered pool availability under the unsecured credit facility of $311,239,000 and an aggregate outstanding principal balance of $210,000,000. As of September 30, 2018, $101,239,000 was available to be drawn on the unsecured credit facility.
The principal payments due on the notes payable and unsecured credit facility for the three months ending December 31, 2018, and for each of the next four years ending December 31, are as follows (amounts in thousands):
Year
 
Amount
Three months ending December 31, 2018 (1)
 
$
5,873

2019 (2)
 
228,756

2020
 
412

2021
 
435

2022
 
16,684

 
 
$
252,160

 
(1)
Of this amount, $5,717,000 relates to a fixed rate note payable that was repaid at maturity on October 11, 2018.
(2)
Of this amount, $210,000,000 relates to the revolving line of credit under the unsecured credit facility. The maturity date on the revolving line of credit under the unsecured credit facility is May 28, 2019, subject to the Company's right to a 12-month extension.
Note 10Related-Party Transactions and Arrangements
The Company pays the Advisor an annual asset management fee of 0.85% of the aggregate asset value plus costs and expenses incurred by the Advisor in providing asset management services. The fee is payable monthly in an amount equal to 0.07083% of the aggregate asset value as of the last day of the immediately preceding month. For the three months ended September 30, 2018 and 2017, the Company incurred $2,464,000 and $4,848,000, respectively, in asset management fees to the Advisor, of which $2,464,000 and $2,679,000 are included in continuing operations, respectively. For the nine months ended September 30, 2018 and 2017, the Company incurred $7,729,000 and $14,494,000, respectively, in asset management fees to the Advisor, of which $7,408,000 and $7,985,000 are included in continuing operations, respectively.
The Company reimburses the Advisor for all expenses it paid or incurred in connection with the services provided to the Company, subject to certain limitations. The Company will not reimburse the Advisor for personnel costs in connection with services for which the Advisor receives an acquisition fee or a disposition fee. For the three months ended September 30, 2018 and 2017, the Advisor allocated $425,000 and $341,000, respectively, and for the nine months ended September 30, 2018 and 2017, the Advisor allocated $1,195,000 and $1,294,000, respectively, in operating expenses incurred on the Company’s behalf, which are recorded in general and administrative expenses in the accompanying condensed consolidated statements of comprehensive income (loss).
The Company has no direct employees. The employees of the Advisor and other affiliates provide services to the Company related to acquisitions, property management, asset management, accounting, investor relations, and all other administrative services. If the Advisor or its affiliates provides a substantial amount of services, as determined by a majority of the Company’s independent directors, in connection with the sale of one or more assets, a merger with a change of control of

19


the Company or a sale of the Company, the Company will pay the Advisor a disposition fee equal to an amount of up to the lesser of 0.5% of the transaction price and one-half of the fees paid in the aggregate to third party investment bankers for such transaction. In no event will the combined real estate commission paid to the Advisor, its affiliates and unaffiliated third parties exceed 6.0% of the contract sales price. In addition, after investors have received a return of their net capital contributions and an 8.0% cumulative non-compounded annual return, then the Advisor is entitled to receive 15.0% of the remaining net sale proceeds, or a subordinated participation in net sale proceeds. During the three and nine months ended September 30, 2018, in connection with the 2018 Dispositions, the Company incurred approximately $75,000 and $1,229,000, respectively, in disposition fees to the Advisor or its affiliates, of which $0 and $16,000, respectively, are included in continuing operations and recorded in gain on real estate dispositions in the accompanying condensed consolidated statements of comprehensive income (loss). As of September 30, 2018, the Company had not incurred a subordinated participation in net sale proceeds to the Advisor or its affiliates.
Upon the listing of the Company’s common stock on a national securities exchange, the Company would pay the Advisor a subordinated incentive listing fee equal to 15.0% of the amount by which the market value of the Company’s outstanding stock plus all distributions paid by the Company prior to listing exceeds the sum of the total amount of capital raised from investors and the amount of cash flow necessary to generate an 8.0% cumulative, non-compounded annual return to investors, or a subordinated incentive listing fee. As of September 30, 2018, the Company had not incurred a subordinated incentive listing fee to the Advisor or its affiliates.
Upon termination or non-renewal of the Advisory Agreement, with or without cause, the Advisor will be entitled to receive distributions from the Operating Partnership equal to 15.0% of the amount by which the sum of the Company’s adjusted market value plus distributions exceeds the sum of the aggregate capital contributed by investors plus an amount equal to an annual 8.0% cumulative, non-compounded return to investors. In addition, the Advisor may elect to defer its right to receive a subordinated distribution upon termination until either shares of the Company’s common stock are listed and traded on a national securities exchange or another liquidity event occurs. As of September 30, 2018, the Company had not incurred any subordinated distribution upon termination fees to the Advisor or its affiliates.
The Company pays Carter Validus Real Estate Management Services, LLC, or the Property Manager, leasing and property management fees for the Company’s properties. Such fees equal 3.0% of monthly gross revenues from single-tenant properties and 4.0% of monthly gross revenues from multi-tenant properties. The Company will reimburse the Property Manager and its affiliates for property-level expenses that any of them pay or incur on the Company’s behalf, including certain salaries, bonuses and benefits of persons employed by the Property Manager and its affiliates, except for the salaries, bonuses and benefits of persons who also serve as one of the Company’s executive officers. The Property Manager and its affiliates may subcontract the performance of their duties to third parties and pay all or a portion of the property management fee to the third parties with whom they contract for these services. If the Company contracts directly with third parties for such services at customary market fees, the Company may pay the Property Manager an oversight fee equal to 1.0% of the gross revenues of the property managed. In no event will the Company pay the Property Manager, the Advisor or its affiliates both a property management fee and an oversight fee with respect to any particular property. The Company will pay the Property Manager a separate fee for the one-time initial rent-up, lease renewals or leasing-up of newly constructed properties. For the three months ended September 30, 2018 and 2017, the Company incurred $162,000 and $1,353,000, respectively, in property management fees to the Property Manager, of which $162,000 and $711,000, respectively, are included in continuing operations and recorded in rental expenses in the accompanying condensed consolidated statements of comprehensive income (loss). For the nine months ended September 30, 2018 and 2017, the Company incurred $1,640,000 and $3,797,000, respectively, in property management fees to the Property Manager, of which $1,526,000 and $1,867,000, respectively, are included in continuing operations and recorded in rental expenses in the accompanying condensed consolidated statements of comprehensive income (loss). For the three months ended September 30, 2018 and 2017, the Company incurred $60,000 and $4,000, respectively, in leasing commissions to the Property Manager, of which $60,000 and $0, respectively, related to continuing operations and are capitalized in other assets, net in the accompanying condensed consolidated balance sheets. For the nine months ended September 30, 2018 and 2017, the Company incurred $60,000 and $281,000, respectively, in leasing commissions to the Property Manger, of which $60,000 and $277,000, respectively, related to continuing operations and are capitalized in other assets, net, in the accompanying condensed consolidated balance sheets.
For acting as general contractor and/or construction manager to supervise or coordinate projects or to provide major repairs or rehabilitation on our properties, the Company may pay the Property Manager up to 5.0% of the cost of the projects, repairs and/or rehabilitation, as applicable, or construction management fees. For the three months ended September 30, 2018 and 2017, the Company incurred $19,000 and $190,000, respectively, and for the nine months ended September 30, 2018 and 2017, the Company incurred $130,000 and $419,000, respectively, in construction management fees, all of which related to continuing operations, to the Property Manager. Construction management fees are capitalized in buildings and improvements in the accompanying condensed consolidated balance sheets.

20


Accounts Payable Due to Affiliates
The following amounts were due to affiliates as of September 30, 2018 and December 31, 2017 (amounts in thousands):
Entity
 
Fee
 
September 30, 2018
 
December 31, 2017
Carter/Validus Advisors, LLC and its affiliates
 
Asset management fees
 
$
839

 
$
980

Carter Validus Real Estate Management Services, LLC
 
Property management fees
 
448

 
473

Carter/Validus Advisors, LLC and its affiliates
 
General, administrative and other costs
 
148

 
98

Carter/Validus Advisors, LLC and its affiliates
 
Disposition fees
 

 
440

Carter Validus Real Estate Management Services, LLC
 
Construction management fees
 
3

 
17

Carter Validus Real Estate Management Services, LLC
 
Leasing commissions
 
60

 
364

 
 
 
 
$
1,498

 
$
2,372

Note 11Future Minimum Rent
Rental Income
The Company’s real estate assets are leased to tenants under operating leases with varying terms. The leases frequently have provisions to extend the lease agreements. The Company retains substantially all of the risks and benefits of ownership of the real estate assets leased to tenants.
The future minimum rent to be received from the Company’s investments in real estate assets under non-cancelable operating leases, including optional renewal periods for which exercise is reasonably assured, for the three months ending December 31, 2018, and for each of the next four years ending December 31 and thereafter, are as follows (amounts in thousands):
Year
 
Amount
Three months ending December 31, 2018
 
$
16,386

2019
 
66,169

2020
 
67,239

2021
 
68,333

2022
 
69,444

Thereafter
 
605,053

 
 
$
892,624

The total future minimum rent amount does not reflect the new lease on the Bay Area Regional Medical Center, which was executed on October 24, 2018 and effective as of October 22, 2018. See Note 16—"Subsequent Events" for further discussion.
Rental Expense
The Company has three ground lease obligations that generally require fixed annual rental payments and may also include escalation clauses and renewal options.
The future minimum rent obligations under non-cancelable ground leases for the three months ending December 31, 2018, and for each of the next four years ended December 31 and thereafter, are as follows (amounts in thousands):
Year
 
Amount
Three months ending December 31, 2018
 
$
165

2019
 
699

2020
 
699

2021
 
699

2022
 
699

Thereafter
 
34,250

 
 
$
37,211


21


Note 12Fair Value
Notes payable – Fixed Rate—The estimated fair value of notes payable – fixed rate measured using observable inputs from similar liabilities (Level 2) was approximately $5,709,000 and $18,189,000 as of September 30, 2018 and December 31, 2017, respectively, as compared to the outstanding principal of $5,717,000 and $18,212,000 as of September 30, 2018 and December 31, 2017, respectively. The estimated fair value of notes payable – variable rate fixed through interest rate swap agreements (Level 2) was approximately $17,278,000 and $120,051,000 as of September 30, 2018 and December 31, 2017, respectively, as compared to the outstanding principal of $18,024,000 and $121,066,000 as of September 30, 2018 and December 31, 2017, respectively.
Notes payable – Variable—The outstanding principal of the notes payable – variable was $18,419,000 and $2,199,000 as of September 30, 2018 and December 31, 2017, respectively, which approximated its fair value. The fair value of the Company's variable rate notes payable is estimated based on the interest rates currently offered to the Company by financial institutions.
Unsecured credit facility—The outstanding principal balance of the unsecured credit facility – variable was $172,000,000 and $0, which approximated its fair value, as of September 30, 2018 and December 31, 2017, respectively. The fair value of the Company's variable rate unsecured credit facility is estimated based on the interest rates currently offered to the Company by financial institutions. The estimated fair value of the unsecured credit facility—variable rate fixed through interest rate swap agreements (Level 2) was approximately $37,583,000 and $0 as of September 30, 2018 and December 31, 2017, respectively, as compared to the outstanding principal of $38,000,000 and $0 as of September 30, 2018 and December 31, 2017, respectively.
Notes receivable—The outstanding principal balance of the notes receivable approximated the fair value as of September 30, 2018 and December 31, 2017. The fair value was measured using significant other observable inputs (Level 2) based on the fair value of the Company's respective note's collateral, which requires certain judgments to be made by management.
Derivative instruments— Considerable judgment is necessary to develop estimated fair values of financial instruments. Accordingly, the estimates presented herein are not necessarily indicative of the amount the Company could realize, or be liable for, on disposition of the financial instruments. The Company has determined that the majority of the inputs used to value its interest rate swaps fall within Level 2 of the fair value hierarchy. The credit valuation adjustments associated with these instruments utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by the Company and the respective counterparty. However, as of September 30, 2018, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions, and determined that the credit valuation adjustments are not significant to the overall valuation of its interest rate swaps. As a result, the Company determined that its interest rate swaps valuation in its entirety is classified in Level 2 of the fair value hierarchy. See Note 13—"Derivative Instruments and Hedging Activities" for a further discussion of the Company’s derivative instruments.

22


The following tables show the fair value of the Company’s financial assets that are required to be measured at fair value on a recurring basis as of September 30, 2018 and December 31, 2017 (amounts in thousands):
 
September 30, 2018
 
Fair Value Hierarchy
 
 
 
Quoted Prices in Active
Markets for Identical
Assets (Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs (Level 3)
 
Total Fair
Value
Assets:
 
 
 
 
 
 
 
Derivative assets
$

 
$
851

 
$

 
$
851

Total assets at fair value
$

 
$
851

 
$

 
$
851

 
 
 
 
 
 
 
 
 
December 31, 2017
 
Fair Value Hierarchy
 
 
 
Quoted Prices in Active
Markets for Identical
Assets (Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs (Level 3)
 
Total Fair
Value
Assets:
 
 
 
 
 
 
 
Derivative assets
$

 
$
407

 
$

 
$
407

Total assets at fair value
$

 
$
407

 
$

 
$
407

Real estate assets— As discussed in Note 2—"Summary of Significant Accounting Policies", during the nine months ended September 30, 2018, real estate assets related to one healthcare property with an aggregate carrying amount of $47,375,000 were determined to be impaired, using Level 2 inputs of the fair value hierarchy. The carrying value of the property was reduced to its estimated fair value of $41,544,000, resulting in an impairment charge of $5,831,000.
The following table shows the fair value of the Company's real estate assets measured at fair value on a non-recurring basis as of September 30, 2018 (amounts in thousands):
 
September 30, 2018
 
 
 
Fair Value Hierarchy
 
 
 
 
 
Quoted Prices in Active
Markets for Identical
Assets (Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs (Level 3)
 
Re-Measured Balance
 
Total Impairment Losses
Real estate assets (1)
$

 
$
41,544

 
$

 
$
41,544

 
$
(5,831
)
 
(1)
Amount represents the fair value of one real estate property impacted by impairment charges as of September 30, 2018. For the three and nine months ended September 30, 2018, the Company recognized an impairment charge of $0 and $5,831,000, respectively. The real estate property is classified as continuing operations as of September 30, 2018.
Note 13Derivative Instruments and Hedging Activities
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish these objectives, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable rate amounts from a counterparty in exchange for the Company making fixed rate payments over the life of the agreements without exchange of the underlying notional amount.
The effective portion of changes in the fair value of derivatives designated, and that qualify, as cash flow hedges is recorded in accumulated other comprehensive income in the accompanying condensed consolidated statement of stockholders' equity and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the nine months ended September 30, 2018, such derivatives were used to hedge the variable cash flows associated with variable rate debt. The ineffective portion of changes in fair value of the derivatives is recognized directly in earnings. During the three and nine months ended September 30, 2018, the Company recognized a gain of $2,000 due to ineffectiveness of its hedges of interest rate risk, which was recorded in interest expense, net in the accompanying condensed consolidated statements of comprehensive income (loss). During the three and nine months ended September 30, 2017no gains or losses were recognized due to ineffectiveness of hedges of interest rate risk. During the nine months ended September 30, 2018, the Company accelerated the reclassification of amounts in other comprehensive income to earnings as a result of a hedged

23


forecasted transaction becoming probable not to occur related to early debt extinguishment at the Bay Area Regional Medical Center property. The accelerated amount was a gain of $381,000 and was recorded in interest expense, net in the accompanying condensed consolidated statements of comprehensive income (loss).
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable rate debt. During the next twelve months, the Company estimates that an additional $395,000 will be reclassified from accumulated other comprehensive income as a decrease to interest expense.
See Note 12—"Fair Value" for a further discussion of the fair value of the Company’s derivative instruments.
The following table summarizes the notional amount and fair value of the Company’s derivative instruments (amounts in thousands):
 
Derivatives
Designated as
Hedging
Instruments
 
Balance
Sheet
Location
 
Effective
Dates
 
Maturity
Dates
 
September 30, 2018
 
December 31, 2017
 
Outstanding
Notional
Amount
 
Fair Value of
 
Outstanding
Notional
Amount
 
Fair Value of
 
Asset
 
Asset
 
 
Interest rate swaps
 
Other assets, net
 
08/03/2015 to
10/11/2017
 
05/28/2019 to
10/11/2022
 
$
56,024

 
$
851

 
$
121,066

 
$
407

The notional amount under the agreements is an indication of the extent of the Company’s involvement in each instrument at the time, but does not represent exposure to credit, interest rate or market risks.
Accounting for changes in the fair value of a derivative instrument depends on the intended use and designation of the derivative instrument. The Company designated the interest rate swaps as cash flow hedges to hedge the variability of the anticipated cash flows on its variable rate notes payable. The change in fair value of the effective portion of the derivative instrument that is designated as a hedge is recorded in other comprehensive income, or OCI, in the accompanying condensed consolidated statements of comprehensive income (loss).
The table below summarizes the amount of income (loss) recognized on interest rate derivatives designated as cash flow hedges for the three and nine months ended September 30, 2018 and 2017 (amounts in thousands):
Derivatives in Cash Flow Hedging Relationships
 
Amount of Income Recognized
in OCI on Derivatives
(Effective Portion)
 
Location of Income
Reclassified from
Accumulated Other
Comprehensive Income to
Net Income (Loss)
(Effective Portion)
 
Amount of Income (Loss)
Reclassified from
Accumulated Other
Comprehensive Income to
Net Income (Loss)
(Effective Portion and Accelerated Amounts)
Three Months Ended September 30, 2018
 
 
 
 
 
 
Interest rate swaps - continuing operations
 
$
96

 
Interest expense, net
 
$
78

Total
 
$
96

 
 
 
$
78

Three Months Ended September 30, 2017
 
 
 
 
 
 
Interest rate swaps - continuing operations
 
$
74

 
Interest expense, net
 
$
45

Interest rate swaps - discontinued operations
 
76

 
Income from discontinued operations
 
(102
)
Total
 
$
150

 
 
 
$
(57
)
Nine Months Ended September 30, 2018
 
 
 
 
 
 
Interest rate swaps - continuing operations
 
$
932

 
Interest expense, net
 
$
490

Total
 
$
932

 
 
 
$
490

Nine Months Ended September 30, 2017
 
 
 
 
 
 
Interest rate swaps - continuing operations
 
$
11

 
Interest expense, net
 
$
(397
)
Interest rate swaps - discontinued operations
 
229

 
Income from discontinued operations
 
(689
)
Total
 
$
240

 
 
 
$
(1,086
)

24


Credit Risk-Related Contingent Features
The Company has agreements with each of its derivative counterparties that contain cross-default provisions, whereby if the Company defaults on certain of its unsecured indebtedness, then the Company could also be declared in default on its derivative obligations, resulting in an acceleration of payment thereunder.
In addition, the Company has agreements with each of its derivative counterparties that contain a provision where if the Company either defaults or is capable of being declared in default on any of its indebtedness, then the Company could also be declared in default on its derivative obligations. The Company records credit risk valuation adjustments on its interest rate swaps based on the respective credit quality of the Company and the counterparty. The Company believes it mitigates its risk by entering into agreements with creditworthy counterparties. As of September 30, 2018, there were no derivatives in a net liability position.
Tabular Disclosure Offsetting Derivatives
The Company has elected not to offset derivative positions in its condensed consolidated financial statements. The following table presents the effect on the Company’s financial position had the Company made the election to offset its derivative positions as of September 30, 2018 and December 31, 2017 (amounts in thousands):
Offsetting of Derivative Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross Amounts Not Offset
 in the Balance Sheet
 
 
 
Gross
Amounts of
Recognized
Assets
 
Gross Amounts
Offset in the
Balance Sheet
 
Net Amounts of
Assets Presented in
the Balance Sheet
 
Financial 
Instruments
Collateral
 
Cash 
Collateral
 
Net
Amount
September 30, 2018
$
851

 
$

 
$
851

 
$

 
$

 
$
851

December 31, 2017
$
407

 
$

 
$
407

 
$

 
$

 
$
407

The Company reports derivative assets attributable to continuing operations as other assets, net, on the condensed consolidated balance sheets.
Note 14Accumulated Other Comprehensive Income
The following table presents a rollforward of amounts recognized in accumulated other comprehensive income, net of noncontrolling interests, by component for the nine months ended September 30, 2018 and 2017 (amounts in thousands):
 
Unrealized Income on Derivative
Instruments
 
Accumulated Other
Comprehensive Income
Balance as of December 31, 2017
$
887

 
$
407

Other comprehensive income before reclassification
932

 
932

Amount of income reclassified from accumulated other comprehensive income to net loss (effective portion and missed forecast)
(490
)
 
(490
)
Other comprehensive income
442

 
442

Balance as of September 30, 2018
$
1,329

 
$
849

 
Unrealized Income on Derivative
Instruments
 
Accumulated Other
Comprehensive Income
Balance as of December 31, 2016
$
2,303

 
$
1,823

Other comprehensive income before reclassification
240

 
240

Amount of loss reclassified from accumulated other comprehensive income to net income (effective portion)
1,086

 
1,086

Other comprehensive income
1,326

 
1,326

Balance as of September 30, 2017
$
3,629

 
$
3,149


25


The following table presents reclassifications out of accumulated other comprehensive income for the nine months ended September 30, 2018 and 2017 (amounts in thousands):
Details about Accumulated Other
Comprehensive Income Components
 
Amounts Reclassified from
Accumulated Other Comprehensive Income to Net Income (Loss)
 
Affected Line Items in the Condensed Consolidated Statements of Comprehensive
Income (Loss)
 
 
Nine Months Ended
September 30,
 
 
 
 
2018
 
2017
 
 
Interest rate swap contracts - continuing operations
 
$
(490
)
 
$
397

 
Interest expense, net
Interest rate swap contracts - discontinued operations
 

 
689

 
Income from discontinued operations
Interest rate swap contracts
 
$
(490
)
 
$
1,086

 
 
Note 15Commitments and Contingencies
Litigation
In the ordinary course of business, the Company may become subject to litigation or claims. As of September 30, 2018, there were, and currently there are, no material pending legal proceedings to which the Company is a party. While the resolution of a lawsuit or proceeding may have an impact to the Company's financial results for the period in which it is resolved, the Company believes that the final disposition of the lawsuits or proceedings in which we are currently involved, either individually or in the aggregate, will not have a material adverse effect on its financial position, results of operations or liquidity.
Note 16Subsequent Events
Distributions Paid
On October 1, 2018, the Company paid aggregate distributions of $6,272,000 ($3,332,000 in cash and $2,940,000 in shares of the Company’s common stock issued pursuant to the DRIP Offering), which related to distributions declared for each day in the period from September 1, 2018 through September 30, 2018.
On November 1, 2018, the Company paid aggregate distributions of $4,953,000 ($2,646,000 in cash and $2,307,000 in shares of the Company’s common stock issued pursuant to the DRIP Offering), which related to distributions declared for each day in the period from October 1, 2018 through October 31, 2018.
Distributions Authorized
On October 24, 2018, the board of directors of the Company, or the Board, approved and authorized a daily distribution to the Company’s stockholders of record as of the close of business on each day of the period commencing on November 1, 2018 and ending on November 30, 2018. The distributions will be calculated based on 365 days in the calendar year and will be equal to $0.000876712 per share of common stock, which will be equal to an annualized distribution rate of 6.0%, based on the estimated per share net asset value of $5.33. The distributions declared for the record date in November 2018 will be paid in December 2018. The distributions will be payable to stockholders from legally available funds therefor.
Bay Area Regional Medical Center Lease
On October 24, 2018, the Company entered into a lease agreement with UTMB to lease the Bay Area Regional Medical Center, which was effective as of October 22, 2018. The lease agreement has an initial 15 year term with three 5-year renewal terms exercisable at the option of UTMB (subject to certain conditions) and provides for a fixed base rent for the first 5 years of the lease term that will be payable monthly, subsequent to a free-rent period from October 1, 2018 to June 30, 2019.
Renewal of Advisory Agreement
On November 8, 2018, the board of directors, including all independent directors of the Company, after review of the Advisor’s performance during the last year, authorized the Company to execute a mutual consent to renew the amended and restated advisory agreement, by and among the Company, the Operating Partnership and the Advisor, dated November 26, 2010, as amended and renewed. The renewal will be for a one-year term and will be effective as of November 26, 2018.

26


Renewal of Property Management Agreement
On November 8, 2018, the board of directors, including all independent directors of the Company, after review of the Property Manager’s performance during the last year, authorized the Company to execute a mutual consent to renew the management agreement by and among the Company, the Operating Partnership and the Property Manager, dated November 12, 2010, as amended and renewed. The renewal will be for a one-year term and will be effective as of November 12, 2018.
Second Amended and Restated Share Repurchase Program
On October 24, 2018, the board of directors approved and adopted the Second Amended and Restated Share Repurchase Program (the “Second Amended & Restated SRP”), which will be effective November 26, 2018. The purpose of the Second Amended & Restated SRP is to update the definition of "Repurchase Date" in order to clarify that the Company will either accept or reject a repurchase request by the first day of each quarter, and will process accepted repurchase requests on or about the tenth day of such quarter. Further, if a repurchase is granted, the Company or its agent will send the repurchase amount to each stockholder, estate, heir, or beneficiary on or about the tenth day of such quarter.

27


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the notes thereto and the other financial information appearing elsewhere in this Quarterly Report on Form 10-Q. The following discussion should also be read in conjunction with our audited consolidated financial statements, and the notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the U.S. Securities and Exchange Commission, or the SEC, on March 30, 2018, or the 2017 Annual Report on Form 10-K.
The terms “we,” “our,” "us" and the “Company” refer to Carter Validus Mission Critical REIT, Inc., Carter/Validus Operating Partnership, LP, all majority-owned subsidiaries and controlled subsidiaries.
Forward-Looking Statements
Certain statements contained in this Quarterly Report on Form 10-Q, other than historical facts, include forward-looking statements that reflect our expectations and projections about our future results, performance, prospects and opportunities. Such statements include, in particular, statements about our plans, strategies, and prospects and are subject to certain risks and uncertainties, as well as known and unknown risks, which could cause actual results to differ materially from those projected or anticipated. Therefore, such statements are not intended to be a guarantee of our performance in future periods. Such forward-looking statements can generally be identified by our use of forward-looking terminology such as “may,” “will,” “would,” “could,” “should,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “continue,” or other similar words. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect our management’s view only as of the date this Quarterly Report on Form 10-Q is filed with the SEC. We make no representation or warranty (express or implied) about the accuracy of any such forward-looking statements contained in this Quarterly Report on Form 10-Q, and we do not undertake to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. See Item 1A. “Risk Factors” of our 2017 Annual Report on Form 10-K for a discussion of some, although not all, of the risks and uncertainties that could cause actual results to differ materially from those presented in our forward-looking statements.
Management’s discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate these estimates. These estimates are based on management’s historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
Overview
We were formed on December 16, 2009, under the laws of Maryland to acquire and operate a diversified portfolio of income-producing commercial real estate in the data center and healthcare sectors. We may also invest in real estate-related investments that relate to such property types. We qualified and elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, or the Code, for federal income tax purposes.
We ceased offering shares of common stock in our initial public offering of up to $1,746,875,000 in shares of common stock, or our Offering, on June 6, 2014. Upon completion of our Offering, we raised gross proceeds of approximately $1,716,046,000 (including shares of common stock issued pursuant to the DRIP). We will continue to issue shares of common stock under the DRIP Offering, defined below, until such time as we sell all of the shares registered for sale under the DRIP Offering, unless we file a new registration statement with the SEC or the DRIP Offering is terminated by our board of directors.
On May 22, 2017, we registered 11,387,512 shares of common stock for a price per share of $9.519, for a proposed maximum offering price of $108,397,727 in shares of common stock under the DRIP pursuant to a new Registration Statement on Form S-3, or the DRIP Offering.
On December 21, 2017, our board of directors, at the recommendation of our audit committee, established an estimated net asset value, or the NAV, per share of our common stock, or the Estimated Per Share NAV, calculated as of September 30, 2017, of $9.26. In connection with a special cash distribution paid on March 16, 2018, our board of directors approved a new Estimated Per Share NAV of $6.26, calculated based on the Estimated Per Share NAV as of September 30, 2017 of $9.26, less the special cash distribution of $3.00 per share, which was paid on March 15, 2018. The updated Estimated Per Share NAV of $6.26 was effective on February 15, 2018, which was the record date of the special cash distribution. On September 27, 2018, our board of directors, at the recommendation of our audit committee, established an updated Estimated Per Share NAV, calculated as of June 30, 2018, of $5.33, for purposes of assisting broker-dealers that participated in our Offering in meeting

28


their customer account statement reporting obligations under NASD Rule 2340. We intend to publish an updated Estimated Per Share NAV on at least an annual basis. The Estimated Per Share NAV was determined by our board of directors after consultation with our Advisor and an independent third-party valuation firm.
On December 21, 2017, our board of directors approved an amendment to the DRIP in order for the purchase price per DRIP share to equal the most recent estimated per share net asset value, as determined by our board of directors. As a result, effective February 1, 2018, shares of common stock were offered pursuant to the DRIP Offering for a price per share of $9.26. In connection with the special cash distribution paid on March 16, 2018, our board of directors approved the updated Estimated Per Share NAV of $6.26, effective on February 15, 2018, which was the record date of the special cash distribution. Therefore, effective February 15, 2018, shares of common stock were offered pursuant to the DRIP Offering for a price per share of $6.26. On September 27, 2018, our board of directors established an updated Estimated Per Share NAV of $5.33. Accordingly, commencing with distributions that will accrue for the month of October 2018, DRIP shares will be issued at $5.33 per share until such time as the Board determines a new estimated per share NAV.
We refer to the DRIP Offering and our Offering together as our "Offerings." As of September 30, 2018, we had issued approximately 201,720,000 shares of common stock in our Offerings for gross proceeds of $1,981,110,000, before share repurchases of $169,123,000 and offering costs, selling commissions and dealer manager fees of $174,849,000.
Effective April 10, 2018, John E. Carter resigned as our Chief Executive Officer. Mr. Carter remains the Chairman of our board of directors. In connection with Mr. Carter's resignation as Chief Executive Officer, the board of directors appointed Michael A. Seton to serve as our Chief Executive Officer, effective April 10, 2018. Mr. Seton continues to serve as our President, a position he has held since August 2010.
On September 13, 2018, Lisa A. Drummond retired as our Secretary, effective immediately. Our board of directors elected Todd M. Sakow as our Secretary, effective September 13, 2018. Mr. Sakow continues to serve as our Chief Financial Officer and Treasurer, positions he has held since August 2010.
Substantially all of our operations are conducted through Carter/Validus Operating Partnership, LP, or our Operating Partnership. We are externally advised by Carter/Validus Advisors, LLC, or our Advisor, pursuant to an advisory agreement between us and our Advisor, which is our affiliate. Our Advisor supervises and manages our day-to-day operations and selects the properties and real estate-related investments we acquire and sell, subject to the oversight and approval of our board of directors. Our Advisor also provides marketing, sales and client services related to real estate on our behalf. Our Advisor engages affiliated entities to provide various services to us. Our Advisor is managed by, and is a subsidiary of, Carter/Validus REIT Investment Management Company, LLC, or our Sponsor. We have no paid employees and rely upon our Advisor to provide substantially all of our services.
Carter Validus Real Estate Management Services, LLC, or our Property Manager, a wholly-owned subsidiary of our Sponsor, serves as our property manager. Our Advisor and our Property Manager received fees during our acquisition stage, and will continue to receive fees during our operational stages and our Advisor may be eligible to receive fees during our liquidation stage.
As of September 30, 2018, we had completed acquisitions of 49 real estate investments, consisting of 84 properties, comprised of 95 buildings and parking facilities and approximately 6,222,000 square feet of gross rentable area (excluding parking facilities), for an aggregate purchase price of $2,189,062,000. We have not acquired any real estate investments since May 2016.
During the year ended December 31, 2017, our board of directors made a determination to sell our data center assets. This decision represented a strategic shift that had a major effect on our results and operations and assets and liabilities for the periods presented. As a result, we have classified our data centers segment as discontinued operations.
As of September 30, 2018, we had disposed of 23 properties (20 data center properties, including one real estate property owned through a consolidated partnership, and three healthcare properties) for an aggregate sale price of $1,398.7 million and generated net proceeds from the sales of those assets of $1,372.6 million. During the year ended December 31, 2017, we sold 16 properties, including 15 data center properties and one healthcare property, and during the nine months ended September 30, 2018, we sold five data center properties and two healthcare properties. As of September 30, 2018, we had completed the disposition of all our data center properties.
As of September 30, 2018, we owned 30 real estate investments, consisting of 61 properties, comprised of 64 buildings and approximately 2,578,000 square feet of gross rentable area, all of which are part of the healthcare portfolio.
On May 4, 2018, Bay Area Regional Medical Center, LLC ("Bay Area"), announced in a press release that it was closing its operations on May 10, 2018, and filing for bankruptcy in the near term. On August 13, 2018, we terminated the lease with Bay Area. In addition, on May 4, 2018, we paid off our outstanding mortgage note payable related to the property in the principal amount of $84,667,000.

29


On October 24, 2018, we entered into a lease agreement with a new tenant, the Board of Regents of the University of Texas System, which is an affiliate of the University of Texas Medical Branch, or UTMB, to lease the Bay Area Regional Medical Center property. The lease agreement was effective as of October 22, 2018. The lease agreement has an initial 15-year term with three 5-year renewal terms exercisable at the option of UTMB (subject to certain conditions) and provides for a fixed base rent for the first 5 years of the lease term that will be payable monthly, subsequent to a free-rent period from October 1, 2018 to June 30, 2019.
Critical Accounting Policies
Our critical accounting policies were disclosed in our 2017 Annual Report on Form 10-K. There have been no material changes to our critical accounting policies as disclosed therein.
Interim Unaudited Financial Data
Our accompanying condensed consolidated financial statements have been prepared by us in accordance with GAAP in conjunction with the rules and regulations of the SEC. Certain information and footnote disclosures required for annual financial statements have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, our accompanying condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. Our accompanying condensed consolidated financial statements reflect all adjustments, which are, in our view, of a normal recurring nature and necessary for a fair presentation of our financial position, results of operations and cash flows for the interim period. Interim results of operations are not necessarily indicative of the results to be expected for the full year; such full year results may be less favorable. Our accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our 2017 Annual Report on Form 10-K.
Qualification as a REIT
We qualified and elected to be taxed as a REIT for federal income tax purposes and we intend to continue to be taxed as a REIT. To maintain our qualification as a REIT, we must continue to meet certain organizational and operational requirements, including a requirement to currently distribute at least 90.0% of our REIT taxable income to our stockholders. As a REIT, we generally will not be subject to federal income tax on taxable income that we distribute to our stockholders.
If we fail to maintain our qualification as a REIT in any taxable year, we would then be subject to federal income taxes on our taxable income at regular corporate rates and would not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year during which qualification is lost unless the Internal Revenue Service, or the IRS, grants us relief under certain statutory provisions. Such an event could have a material adverse effect on our net income (loss) and net cash available for distribution to our stockholders.
Recently Issued Accounting Pronouncements
For a discussion of recently issued accounting pronouncements, see Note 2—“Summary of Significant Accounting Policies—Recently Issued Accounting Pronouncements” to our condensed consolidated financial statements that are a part of this Quarterly Report on Form 10-Q.
Factors That May Influence Results of Operations
We are not aware of any material trends or uncertainties, other than national economic conditions affecting real estate generally, that may reasonably be expected to have a material impact, favorable or unfavorable, on revenues or income from the acquisition, management and operation of our properties other than those set forth in our 2017 Annual Report on Form 10-K and in Part II, Item 1A. "Risk Factors" of this Quarterly Report on Form 10-Q.

30


Results of Operations
During the year ended December 31, 2017, our board of directors made a determination to sell our data center assets. Consistent with the decision, during the fourth quarter of 2017 and the nine months ended September 30, 2018, we sold 20 data center properties (including one real estate property owned through a consolidated partnership) for aggregate consideration of $1,307,500,000. This decision represented a strategic shift that had a major effect on our results and operations and assets and liabilities for the periods presented and qualifies as discontinued operations. The results of operations discussed below reflect the data centers segment presented as discontinued operations.
Our results of operations are influenced by the operating performance of our operating real estate properties. The following table shows the property statistics of our operating real estate properties as of September 30, 2018 and 2017:
 
September 30,
 
2018
 
2017
Number of commercial operating properties (1)
61

 
84

Leased rentable square feet
1,984,000

 
5,875,000

Weighted average percentage of rentable square feet leased
77
%
 
94
%
 
(1)
As of September 30, 2018, we owned 61 operating real estate properties, one of which was vacated by the tenant on June 2, 2017, and one of which was vacated by Bay Area, whose lease we terminated on August 13, 2018. Both properties remained unoccupied as of September 30, 2018. On October 24, 2018, we entered into a lease agreement with UTMB to lease the Bay Area Regional Medical Center property, which was effective as of October 22, 2018. As of October 22, 2018, our weighted average percentage of rentable square feet leased, including the UTMB lease at the Bay Area Regional Medical Center property, was 91.4%.
The following table summarizes the activity of our operating real estate properties for the three and nine months ended September 30, 2018 and 2017:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Operating properties placed in service

 

 

 
1

Operating properties disposed

 

 
2

 

Approximate aggregate cost of properties placed in service
$

 
$

 
$

 
$
19,466,000

Approximate net book value of properties disposed
$

 
$

 
$
2,761,000

 
$

Leased rentable square feet of property placed in service

 

 

 
34,000

These sections describe and compare our results of operations for the three and nine months ended September 30, 2018 and 2017. We generate almost all of our income from property operations. In order to evaluate our overall portfolio, we analyze the net operating income of same store properties. We define "same store properties" as operating properties that were owned and operated for the entirety of both calendar periods being compared and excludes properties under development and properties classified as discontinued operations.
By evaluating the revenue and expenses of our same store properties, management is able to monitor the operations of our existing properties for comparable periods to measure the performance of our current portfolio and determine the effects of our dispositions on net income (loss).

31


Three Months Ended September 30, 2018 Compared to Three Months Ended September 30, 2017
Changes in our revenues are summarized in the following table (amounts in thousands):
 
Three Months Ended
September 30,
 
 
 
2018
 
2017
 
Change
Same store rental revenue
$
16,617

 
$
22,512

 
$
(5,895
)
Non-same store rental revenue

 
472

 
(472
)
Same store tenant reimbursement revenue
875

 
614

 
261

Non-same store tenant reimbursement revenue

 
235

 
(235
)
Other operating income
4

 
24

 
(20
)
Total revenue
$
17,496

 
$
23,857

 
$
(6,361
)
Same store rental revenue decreased primarily due to a decrease in revenue related to Bay Area, which was experiencing financial difficulty. On August 13, 2018, we terminated the lease with Bay Area. On October 24, 2018, we entered into a lease agreement with UTMB to lease the Bay Area Regional Medical Center, which was effective as of October 22, 2018.
Non-same store rental revenue and tenant reimbursement revenue decreased due to the sale of three healthcare properties since July 1, 2017.
Changes in our expenses are summarized in the following table (amounts in thousands):
 
Three Months Ended
September 30,
 
 
 
2018
 
2017
 
Change
Same store rental expenses
$
2,633

 
$
2,488

 
$
145

Non-same store rental expenses
30

 
310

 
(280
)
General and administrative expenses
1,495

 
1,574

 
(79
)
Asset management fees
2,464

 
2,679

 
(215
)
Depreciation and amortization
7,243

 
8,212

 
(969
)
Total expenses
$
13,865

 
$
15,263

 
$
(1,398
)
The increase in same store rental expenses primarily relates to an increase in real estate taxes and legal expenses, offset by a decrease in property management fees, all of which primarily relate to one of our tenants, Bay Area, which was experiencing financial difficulty.
The decreases in non-same store rental expenses, asset management fees and depreciation and amortization are primarily due the sale of three healthcare properties since July 1, 2017.

32


Changes in other income (expense) are summarized in the following table (amounts in thousands):
 
Three Months Ended
September 30,
 
 
 
2018
 
2017
 
Change
Other interest and dividend income:
 
 
 
 
 
Cash deposits interest
$
45

 
$
22

 
$
23

Notes receivable interest
1,637