(3) NEW CONSTRUCTION, ACQUISITIONS, DISPOSITIONS AND PROPERTY EXCHANGE TRANSACTION

New Construction:

During the first quarter of 2016, we committed to invest up to $21.1 million in the development and construction of the Henderson Medical Plaza, an MOB located on the campus of the Henderson Hospital. Henderson Hospital, which is owned and operated by a subsidiary of UHS, is a newly constructed, 130-bed acute care hospital that was completed and opened during the fourth quarter of 2016. Henderson Medical Plaza, which contains approximately 78,800 rentable square feet, is scheduled to be completed and opened during the first quarter of 2017. A ground lease has been executed between the limited liability company that owns the MOB and a subsidiary of UHS, the terms of which include a seventy-five year lease term with two, ten-year renewal options at the lessee’s option at an adjusting lease rate. We have invested $9.5 million on the development and construction for this MOB as of December 31, 2016.

2016:

Acquisitions:

During 2016, we paid approximately $60.4 million in cash, and assumed approximately $7.1 million of third-party debt that is non-recourse to us, to:

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purchase the 2704 North Tenaya Way MOB located in Las Vegas, Nevada, during the fourth quarter for a total purchase price of approximately $15.3 million, including the assumption of approximately $7.1 million of third-party debt that is non-recourse to us. The property consists of approximately 45,000 rentable square feet and is fully occupied pursuant to the terms of a triple-net lease with a remaining lease term of approximately 7.1 years at the time of acquisition.

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purchase the Frederick Memorial Hospital Crestwood, an MOB located in Frederick, Maryland, during the third quarter for approximately $24.3 million. The property, which consists of approximately 62,300 rentable square feet, is fully occupied pursuant to the terms of triple-net leases with an average remaining lease term of approximately 12 years at the time of acquisition.

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purchase the Chandler Corporate Center III located in Chandler, Arizona, during the second quarter for approximately $18.0 million. The property, which consists of 82,000 rentable square feet, is currently 92% occupied by one tenant pursuant to the terms of a twelve year escalating triple-net lease, with a ten year fair-market value renewal option. The lease had a remaining lease term of approximately 11.3 years at the time of acquisition.

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purchase the Madison Professional Office Building located in Madison, Alabama, during the first quarter for approximately $10.1 million, including a $150,000 deposit paid in 2015. This multi-tenant property consists of approximately 30,100 rentable square feet and is fully occupied with an average remaining lease term of approximately 6.2 years at the time of acquisition.

The aggregate purchase price for these acquisitions was allocated to the assets acquired and liabilities assumed consisting of tangible property and intangible assets and liabilities, based on the fair value estimated or finalized at acquisition as detailed in the table below. Previous reported estimated purchase price allocations that have been finalized in the fourth quarter did not have a material impact on our consolidated financial statements. The intangible assets include the value of in-place leases at the properties at the time of acquisition as well as the above market lease values. The value of the in-place leases will be amortized over the average remaining lease terms of approximately 6 to 12 years at the time of acquisition (aggregate weighted average of 8.0 years at December 31, 2016). The above/below market leases, which are reflected below as intangible assets/below-market intangibles will be amortized over the remaining term of the respective leases. The estimated aggregate allocation is as follows:


Land	$9,914
Buildings and improvements	50,117
Intangible assets	9,211
Below-market lease intangibles	(1,287)
Deposit paid in 2015………………………………………...………………………………..	(150)
Debt (including fair value adjustment of $362)…...……..……………………………….…..	(7,499)
Financing fees paid on debt acquired……………...……..……………………………….…..	83

Net cash paid	$60,389

For these properties acquired during 2016, we recorded aggregate net revenue of approximately $2.4 million since the date of acquisition. The aggregate net losses generated by these properties since the date of acquisition, including the cost of borrowings and advisory fee expenses was approximately $134,000.

Assuming the 2016 acquisitions occurred on January 1, 2015, our unaudited pro forma net revenues for the year ended December 31, 2015 would have been approximately $67.8 million and our unaudited pro forma net income for the year ended December 31, 2015 would have been approximately $22.4 million, or $1.68 per diluted share. The Chandler Corporate Center III was not operational during the first nine months of 2015. Assuming these acquisitions occurred on January 1, 2016, our unaudited pro forma net revenues for the year ended December 31, 2016, would have been approximately $70.2 million and our unaudited pro forma net income for the year ended December 31, 2016 would have been approximately $16.7 million, or $1.24 per diluted share.

As of December 31, 2016, our net intangible assets total $23.8 million (net of $27.1 million accumulated amortization) and substantially all of the amount is related to acquired, in-place leases which have a weighted average remaining amortization period of 4.3 years.

Divestitures:

There were no divestitures during 2016.

2015:

Property Exchange Transaction:

In May, 2015, in exchange for the real property of Sheffield Medical Building (“Sheffield”), a 73,446 square foot MOB located in Atlanta, Georgia, we received $2 million in cash and the real property of two MOBs located in Sandy Springs and Vinings, Georgia, from an unrelated third party. In connection with the two MOBs acquired in this transaction, triple net, master lease agreements applicable to 100% of the combined 36,700 rentable square feet of these properties were executed with the counterparty. These master lease agreements have initial terms of 15 years and provide for 3% annual rent increases. We recorded an $8.7 million gain which is included in our Consolidated Statements of Income for the year ended December 31, 2015, representing the difference between recorded net book value of Sheffield and the fair values of the properties exchanged, combined with the cash proceeds received.

Acquisitions:

In February, 2015, we purchased the Haas Medical Office Park, two single story buildings having an aggregate of approximately 16,000 rentable square feet, located in Ottumwa, Iowa, for approximately $4.1 million.

In January and February of 2015, we purchased from wholly-owned subsidiaries of UHS, the real property of two newly-constructed and recently opened FEDs located in Weslaco and Mission, Texas, for an aggregate acquisition cost of approximately $12.8 million. Each FED consists of approximately 13,600 square feet and is operated by wholly-owned subsidiaries of UHS. In connection with these acquisitions, ten-year lease agreements with six 5-year renewal terms were executed with UHS for each FED. In connection with the lease agreements, the lessee shall have the option to purchase the leased property upon the expiration of the fixed term and each five-year extended term at the fair market value at that time.

The aggregate purchase price for these three MOBs and two FEDs was allocated to the assets acquired and liabilities assumed consisting of tangible property and identified intangible assets, based on their respective fair values at acquisition as detailed in the table below. Substantially all of the intangible assets include the value of the in-place leases at the MOBs at the time of acquisition which will be amortized over the average remaining lease term of approximately 15.0 years at the time of acquisition (aggregate weighted average of 13.4 years at December 31, 2016) for each of the MOBs located in Sandy Springs and Vinings, Georgia and approximately 10.4 years at the time of acquisition (aggregate weighted average of 8.6 years at December 31, 2016) for the Haas Medical Office Park.



Land	$7,050
Buildings and improvements	17,518
Intangible assets	2,182
Cash received- exchange transaction	2,000
Other liabilities	(116)
Deposit paid in 2014	(100)
Net book value of property divested in exchange transaction	(3,027)
Gain on exchange transaction	(8,742)

Net cash paid	$16,765

2014:

Acquisitions:

In August, 2014, we purchased the Hanover Emergency Center, a 22,000 rentable square feet, free-standing, full service emergency and imaging center, located in Mechanicsville, VA, for approximately $8.6 million. The single-tenant property is occupied pursuant to the terms of a 10-year lease with HCA Health Services of Virginia, Inc.

In January, 2014, we paid an aggregate of $7.2 million, (including a $150,000 deposit made in 2013), to purchase the following in a single transaction: (i) The Children’s Clinic at Springdale – a 9,800 square foot, single-tenant medical office building located in Springdale, Arkansas, and; (ii) The Northwest Medical Center at Sugar Creek – a 13,700 square foot, multi-tenant medical office building located in Bentonville, Arkansas.

The aggregate purchase price for these clinics and MOB was allocated to the assets and liabilities acquired consisting of tangible property and identified intangible assets, based on their respective fair values at acquisition as detailed in the table below. Substantially all of the intangible assets include the value of the in-place leases at the clinics and MOB at the time of acquisition which will be amortized over the average remaining lease term of approximately 9.8 years at the time of acquisition (aggregate weighted average of 7.5 years at December 31, 2016) for the Hanover Emergency Center and approximately 9.7 years at the time of acquisition (aggregate weighted average of 6.7 years at December 31, 2016) for the Arkansas facilities.



Land	$3,010
Buildings and improvements	10,664
Intangible assets	2,076
Deposit paid in 2013	(150)

Net cash paid	$15,600

Additionally, during January and August, 2014, we spent an aggregate of $7.0 million, including $4.7 million in cash plus an additional $2.3 million in the form of a note payable to the previous third-party member (which was fully repaid in January, 2015) to purchase the minority ownership interests held by third party members in eight LLCs (as noted in the table below) in which we previously held various non-controlling majority ownership interests ranging from 85% to 95%.

Name of LLC/LP	Ownership prior to minority interest purchase		Property Owned by LLC	Effective Date
Palmdale Medical Properties		95%	Palmdale Medical Plaza	January 1, 2014
Sparks Medical Properties		95%	Vista Medical Terrace & Sparks MOB	January 1, 2014
DVMC Properties		90%	Desert Valley Medical Center	August 1, 2014
Santa Fe Scottsdale		90%	Santa Fe Professional Plaza	August 1, 2014
PCH Medical Properties		85%	Rosenberg Children’s Medical Plaza	August 1, 2014
Sierra Medical Properties		95%	Sierra San Antonio Medical Plaza	August 1, 2014
PCH Southern Properties		95%	Phoenix Children’s East Valley Care Center	August 1, 2014
3811 Bell Medical Properties		95%	3811 E. Bell	August 1, 2014

As a result of these minority ownership purchases, we now own 100% of each of these LLCs, which own medical office buildings, and began accounting for each on a consolidated basis at the effective date as noted in the table above. Pursuant to current accounting standards, at the effective date, we were required to record each property’s assets and liabilities at their fair values which resulted in the recording of a $25.4 million non-cash gain, which is included in our Consolidated Statement of Income for the twelve months ended December 31, 2014, representing the difference between the fair values and the equity method carrying value of each investment. The calculated fair value, categorized in level 3 of the fair value hierarchy and utilizing the income capitalization approach, is based upon the basis of capitalization of the net estimated earnings expectancy of the property, assuming continued use similar to the existing use of the acquired property. Each property’s continued cash flow analysis were also utilized in estimating the fair value of the property, whereby cash flows from the various tenants are calculated based upon lease commencement and termination dates. The capitalization rate and discount rate ranged from 7%-8.75% and 8%-9.75%, respectively.

The aggregate purchase price for these MOBs was allocated to net tangible property ($84.0 million), identified intangible assets ($6.5 million), and long term debt ($29.8 million). Substantially all of the intangible assets include the value of the in-place leases at these MOBs at the time of acquisition which will be amortized over the combined average remaining lease term of approximately 4.7 years at the time of acquisition (aggregate weighted average of 4.0 years at December 31, 2016) for the August, 2014 transactions and 5.3 years at the time of acquisition (aggregate weighted average of 3.9 years at December 31, 2016) for the January, 2014 transactions. Other than the increased depreciation and amortization expense resulting from the amortization of the intangible assets recorded in connection with these transactions, there was no material impact on our net income as a result of the consolidation of these LLCs.

Divestitures:

In December, 2014, upon expiration of The Bridgeway’s lease term, a wholly-owned subsidiary of UHS exercised its option to purchase the real property of the facility. The sale of The Bridgeway, a 103-bed behavioral health facility located in North Little Rock, Arkansas, generated $17.3 million of sale proceeds. Pursuant to the terms of the lease, we and the wholly-owned subsidiary of UHS were both required to obtain independent appraisals of the property to determine its fair market value of $17.3 million. A $13.0 gain is included in our Consolidated Statement of Income for the twelve months ended December 31, 2014, representing the difference between the fair market value and the book value of this property.