(7) Debt and Financial Instruments

Debt:

Management routinely monitors and analyzes the Trust’s capital structure in an effort to maintain the targeted balance among capital resources including the level of borrowings pursuant to our $300 million revolving credit agreement, the level of borrowings pursuant to non-recourse mortgage debt secured by the real property of our properties and our level of equity including consideration of additional equity issuances. This ongoing analysis considers factors such as the current debt market and interest rate environment, the current/projected occupancy and financial performance of our properties, the current loan-to-value ratio of our properties, the Trust’s current stock price, the capital resources required for anticipated acquisitions and the expected capital to be generated by anticipated divestitures. This analysis, together with consideration of the Trust’s current balance of revolving credit agreement borrowings, non-recourse mortgage borrowings and equity, assists management in deciding which capital resource to utilize when events such as refinancing of specific debt components occur or additional funds are required to finance the Trust’s growth.

On March 27, 2018, we entered into a revolving credit agreement (“Credit Agreement”) which, among other things, increased our borrowing capacity by $50 million to $300 million and extended the maturity date from our previously existing facility. The replacement Credit Agreement, which is scheduled to mature in March, 2022, includes a $40 million sublimit for letters of credit and a $30 million sub limit for swingline/short-term loans. The Credit Agreement also provides for options to extend the maturity date for two additional six month periods. Additionally, the Credit Agreement includes an option to increase the total facility borrowing capacity up to an additional $50 million, subject to lender agreement. Borrowings under the Credit Agreement are guaranteed by certain subsidiaries of the Trust. In addition, borrowings under the Credit Agreement are secured by first priority security interests in and liens on all equity interests in certain of the Trust’s wholly-owned subsidiaries. Borrowings made pursuant to the Credit Agreement will bear interest, at our option, at one, two, three, or six month LIBOR plus an applicable margin ranging from 1.10% to 1.35% or at the Base Rate plus an applicable margin ranging from 0.10% to 0.35%. The Credit Agreement defines “Base Rate” as the greater of: (a) the administrative agent’s prime rate; (b) the federal funds effective rate plus 1/2 of 1%, and; (c) one month LIBOR plus 1%. A facility fee of 0.15% to 0.35% will be charged on the total commitment of the Credit Agreement. The margins over LIBOR, Base Rate and the facility fee are based upon our total leverage ratio. At September 30, 2018, the applicable margin over the LIBOR rate was 1.15%, the margin over the Base Rate was 0.15%, and the facility fee was 0.20%.

At September 30, 2018, we had $195.0 million of outstanding borrowings under our Credit Agreement and $105.0 million of available borrowing capacity. There are no compensating balance requirements. As disclosed below, during the first nine months of 2018, we repaid an aggregate of $21.7 million on three mortgages utilizing borrowings under our Credit Agreement, one of which was refinanced for $13.0 million during the third quarter of 2018.

The Credit Agreement contains customary affirmative and negative covenants, including limitations on certain indebtedness, liens, acquisitions and other investments, fundamental changes, asset dispositions and dividends and other distributions. The Credit Agreement also contains restrictive covenants regarding the Trust’s ratio of total debt to total assets, the fixed charge coverage ratio, the ratio of total secured debt to total asset value, the ratio of total unsecured debt to total unencumbered asset value, and minimum tangible net worth, as well as customary events of default, the occurrence of which may trigger an acceleration of amounts outstanding under the Credit Agreement. We are in compliance with all of the covenants at September 30, 2018. We also believe that we would remain in compliance if the full amount of our commitment was borrowed.

The following table includes a summary of the required compliance ratios, giving effect to the covenants contained in the Credit Agreement (dollar amounts in thousands):

	Covenant	September 30, 2018
Tangible net worth	> =$125,000	$	185,038
Total leverage	< 60%		41.3	%
Secured leverage	< 30%		9.9	%
Unencumbered leverage	< 60%		37.4	%
Fixed charge coverage	> 1.50x	4.2x

As indicated on the following table, we have nine mortgages, all of which are non-recourse to us, included on our condensed consolidated balance sheet as of September 30, 2018 (amounts in thousands):

Facility Name	Outstanding Balance (in thousands) (a.)			Interest Rate			Maturity Date
Vibra Hospital-Corpus Christi fixed rate mortgage loan	$	2,546			6.50	%	July, 2019
700 Shadow Lane and Goldring MOBs fixed rate mortgage loan		5,911			4.54	%	June, 2022
BRB Medical Office Building fixed rate mortgage loan		5,978			4.27	%	December, 2022
Desert Valley Medical Center fixed rate mortgage loan		4,842			3.62	%	January, 2023
2704 North Tenaya Way fixed rate mortgage loan		6,905			4.95	%	November, 2023
Summerlin Hospital Medical Office Building III fixed rate mortgage loan		13,198			4.03	%	April, 2024
Tuscan Professional Building fixed rate mortgage loan		4,147			5.56	%	June, 2025
Phoenix Children’s East Valley Care Center fixed rate mortgage loan		9,251			3.95	%	January, 2030
Rosenberg Children's Medical Plaza fixed rate mortgage loan		13,000			4.42	%	September, 2033
Total, excluding net debt premium and net financing fees		65,778
Less net financing fees		(728	)
Plus net debt premium		261
Total mortgages notes payable, non-recourse to us, net	$	65,311

(a)

All mortgage loans require monthly principal payments through maturity and either fully amortize or include a balloon principal payment upon maturity.

On February 13, 2018, upon its maturity, a $4.1 million floating rate mortgage loan on the Sparks Medical Building/Vista Medical Terrace was fully repaid utilizing borrowings under our Credit Agreement.

On April 5, 2018, upon its maturity, a $9.7 million floating rate mortgage loan on the Centennial Hills Medical Office Building was fully repaid utilizing borrowings under our Credit Agreement.

On May 2, 2018, upon its maturity, a $7.9 million fixed rate mortgage loan on the Rosenberg Children’s Medical Plaza was fully repaid utilizing borrowings under our Credit Agreement. In August, 2018, we refinanced this property with a $13.0 million fixed rate mortgage, with a maturity date of September, 2033.

The mortgages are secured by the real property of the buildings as well as property leases and rents. The nine mortgages outstanding as of September 30, 2018 had a combined fair value of approximately $65.4 million. The fair value of our debt was computed based upon quotes received from financial institutions. We consider these to be “level 2” in the fair value hierarchy as outlined in the authoritative guidance for disclosure in connection with debt instruments. Changes in market rates on our fixed rate debt impacts the fair value of debt, but it has no impact on interest incurred or cash flow.

At December 31, 2017, we had eleven mortgages, all of which were non-recourse to us, included in our consolidated balance sheet. The combined outstanding balance of these eleven mortgages was $75.7 million and had a combined fair value of approximately $76.3 million.

Financial Instruments:

During the second quarter of 2016, we entered into an interest rate cap on the total notional amount of $30 million whereby we paid a premium of $115,000. In exchange for the premium payment, the counterparties agreed to pay us the difference between 1.50% and one-month LIBOR if one-month LIBOR rises above 1.50% during the term of the cap. This interest rate cap became effective in January, 2017 and expires in March, 2019. From inception through September 30, 2018, we received or accrued approximately $83,000 in payments made to us by the counterparties (all received during the first nine months of 2018) pursuant to the terms of these caps.

During the third quarter of 2016, we entered into an additional interest rate cap agreement on a total notional amount of $30 million whereby we paid a premium of $55,000. In exchange for the premium payment, the counterparties agreed to pay us the difference between 1.5% and one-month LIBOR if one-month LIBOR rises above 1.5% during the term of the cap. This interest rate cap became effective in October, 2016 and expires in March, 2019. From inception through September 30, 2018, we received or accrued approximately $83,000 in payments made to us by the counterparties (all received during the first nine months of 2018) pursuant to the terms of these caps.