(10) IMPACT OF HURRICANE HARVEY

In late August, 2017, five of our medical office buildings listed below located in the Houston, Texas area incurred extensive water damage as a result of Hurricane Harvey. Since the hurricane, each of these properties remain temporarily closed and non-operational as we complete the damage assessments and restoration of the properties to an operational condition. Although we can provide no assurance on the estimated re-opening dates, it is expected that the buildings will continue to be closed through the majority of the second quarter of 2018. In the aggregate, these properties comprised approximately 2% of our consolidated revenues during the six months ended June 30, 2017.

As discussed below, we believe we are entitled to insurance recovery proceeds for substantially all of the costs incurred related to the remediation, repair and reconstruction of each of these properties, subject to certain deductibles and other limitations. In addition, during the period that these properties are non-operational, we believe we are entitled to business interruption insurance recoveries for the lost income related to each of these properties, subject to certain deductibles and other limitations.

Properties damaged and closed from Hurricane Harvey:

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Cypresswood Professional Center – located in Spring, Texas and consisting of two MOBs.

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Professional Buildings at King’s Crossing – located in Kingwood, Texas and consisting of two MOBs.

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Kelsey-Seybold Clinic at King’s Crossing – located in Kingwood, Texas and consisting of one MOB.

Hurricane related expenses and recoveries:

At the time of the hurricane, we maintained insurance policies with a commercial insurance carrier providing for property damage coverage, subject to certain deductibles and other limitations, of up to $20 million in the aggregate applicable to the impacted properties and up to $50 million in the aggregate for business interruption coverage pursuant to a shared limit policy. Additionally, we have insurance coverage under the National Flood Insurance Program providing for property damage coverage of up to $500,000 per each of the 5 buildings, subject to certain deductibles and other limitations.

When all property insurance coverage and deductibles applicable to the above-mentioned hurricane damaged buildings are considered, we believe we are entitled to recovery of substantially all hurricane related expenses and reconstruction costs, less an aggregate net deductible of $25,000. In addition, pursuant to the business interruption policy, we believe we are entitled to substantially all lost income at these properties resulting from the hurricane, less an aggregate deductible of $100,000. However, we can provide no assurance that we will ultimately collect, after satisfaction of the applicable deductibles, substantially all of the hurricane related expenses and reconstruction costs and the lost income resulting from the related interruption of business at the impacted properties.

Included in our financial results for the year ended December 31, 2017 are hurricane related expenses of approximately $5.0 million consisting of $3.6 million related to property damage and $1.4 million related to remediation and demolition expenses. Also included in our financial results for the twelve-month period ended December 31, 2017 are aggregate hurricane related insurance recoveries of approximately $7.0 million, consisting of $5.0 million related to recovery of hurricane related expenses and $2.0 million related to recovery proceeds in excess of the damaged property write-downs.

As of December 31, 2017, our financial statements do not include any business interruption insurance recoveries since no business interruption insurance proceeds were received as of that date. However, we expect that business interruption insurance recoveries will be recognized in future periods when recovery proceeds are probable and/or insurance carrier notifications are received.

The hurricane related expenses and insurance recoveries recorded to date are based upon the damage assessments of the real property at each of the above-mentioned properties. We are unable to assess the ultimate repair cost of the damaged property or the amount of total insurance recoveries we may ultimately receive. As of December 31, 2017, the aggregate hurricane-related insurance recoveries have exceeded the combined net book value of the damaged property and the hurricane related expenses incurred as of that date. Although we expect to receive additional hurricane-related insurance proceeds in the future, the timing and amount of such proceeds cannot be determined at this time since it will be based upon factors such as ultimate replacement costs of damaged assets and the ultimate value of the business interruption claims. Therefore, in connection with Hurricane Harvey, it is likely that we will record additional hurricane related expenses and hurricane related insurance recoveries in future periods, which could be material.

The following amounts are included in our financial results for the year ended December 31, 2017 (amounts in thousands):

Property write-down (a.)	$	3,578
Hurricane related expenses (b.)		1,389
Total hurricane-related expenses	$	4,967
Insurance recoveries received		(7,000	)
Insurance recoveries in excess of damaged property write-down	$	2,033

(a.)

Consists of the aggregate net book values of the estimated damaged depreciable assets at each property based upon our assessments of the real estate assets. Since the net book values of the damaged assets were not separately determinable, the write-downs were determined using a systematic and rational method to allocate the long lives asset’s carrying amounts to the affected components.

(b.)

Consists of the aggregate remediation, demolition and general clean-up costs for the properties listed above.

In addition, the aggregate lost revenue for the hurricane impacted properties mentioned above amounted to approximately $510,000 through December 31, 2017. We believe we will be entitled to insurance recoveries for a substantial portion of these lost revenues pursuant to our business interruption policy, subject to an aggregate deductible, as discussed above.