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EX-31.1 - EXHIBIT 31.1 - Carter Validus Mission Critical REIT, Inc.a201710kexhibit311reiti123.htm
EX-99.1 - EXHIBIT 99.1 - Carter Validus Mission Critical REIT, Inc.a201710kexhibit991reiti123.htm
EX-32.2 - EXHIBIT 32.2 - Carter Validus Mission Critical REIT, Inc.a201710kexhibit322reiti123.htm
EX-32.1 - EXHIBIT 32.1 - Carter Validus Mission Critical REIT, Inc.a201710kexhibit321reiti123.htm
EX-31.2 - EXHIBIT 31.2 - Carter Validus Mission Critical REIT, Inc.a201710kexhibit312reiti123.htm
EX-23.1 - EXHIBIT 23.1 - Carter Validus Mission Critical REIT, Inc.a201710kexhibit231reiti123.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
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
cvmcrlogonewcva22.jpg
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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
None
 
None
Securities registered pursuant to Section 12(g) of the Act:
(Common stock, par value $0.01 per share)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☐    No  ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ☐    No  ☒
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  ☒    No  ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☒
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
 
☒ (Do not check if a smaller reporting company)
  
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 7(a)(2)(B) of Securities Act.    ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒
While there is no established market for the Registrant’s shares of common stock, the Registrant has made an initial public offering of its shares of common stock pursuant to a Registration Statement on Form S-11. The Registrant ceased offering shares of common stock in its primary offering on June 6, 2014. The last price paid to acquire a share in the Registrant’s primary offering was $10.00 per share of common stock, with discounts available for certain categories of purchasers. Effective February 15, 2018, the estimated share value of the registrant's common stock is $6.26 per share, which represents the $9.26 per share net asset value as of September 30, 2017 approved by the Registrant's board of directors on December 21, 2017, less the $3.00 special distribution paid on March 16, 2018 to stockholders of record as of February 15, 2018.
As of June 30, 2017, there were approximately 185,986,000 shares of common stock of Carter Validus Mission Critical REIT, Inc. outstanding held by non-affiliates, for an aggregate market value of approximately $1,859,860,000, assuming a market value of $10.02 per share, the most recent estimated per share net asset value of the registrant's common stock established by the registrant's board of directors at that time.
As of March 28, 2018, there were approximately 183,643,000 shares of common stock of Carter Validus Mission Critical REIT, Inc. outstanding.
Documents Incorporated by Reference
Portions of Registrant’s proxy statement for the 2018 annual stockholders meeting, which is expected to be filed no later than April 30, 2018, are incorporated by reference in Part III. Items 10, 11, 12, 13 and 14.
 



CARTER VALIDUS MISSION CRITICAL REIT, INC.
(A Maryland Corporation)
TABLE OF CONTENTS
 
 
Page
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
Item 15.
Item 16.
 
 
 
 



CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report on Form 10-K of Carter Validus Mission Critical REIT, Inc., other than historical facts, may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. We intend for all such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Securities Act and the Exchange Act, as applicable by law. 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 speak only as of the date this Annual Report on Form 10-K is filed with the U.S. Securities and Exchange Commission, or the SEC. We make no representation or warranty (express or implied) about the accuracy of any such forward-looking statements contained in this Annual Report on Form 10-K, 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.
Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. We caution investors not to place undue reliance on forward-looking statements, which reflect our management’s view only as of the date of this Annual Report on Form 10-K. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results. The forward-looking statements should be read in light of the risk factors identified in the Item 1A. Risk Factors section of this Annual Report on Form 10-K.

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PART I
Item 1. Business.
The Company
Carter Validus Mission Critical REIT, Inc., or the Company, or we, a Maryland corporation, was incorporated on December 16, 2009 and 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. We were 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. As of September 30, 2017, we owned 49 real estate investments (including one real estate investment owned through a consolidated partnership), consisting of 84 properties, located in 46 metropolitan statistical areas, or MSAs. During the year ended December 31, 2017, our board of directors made a determination to sell the data center assets. Consistent with the decision, during the fourth quarter, we sold 15 data center properties, (including one real estate property owned through a consolidated partnership). This decision represents a strategic shift that has a major effect on the Company's results and operations and assets and liabilities for the years presented. As a result, the Company has its data centers segment as a part of discontinued operations. As of December 31, 2017, we operate through one reportable segment—commercial real estate investments in healthcare. In addition to the data center property sales, during the fourth quarter ended December 31, 2017, we sold one healthcare property. Therefore, as of December 31, 2017, we owned 34 real estate investments, consisting of 68 properties, located in 38 MSAs. As of December 31, 2017, the rentable space of these real estate investments was 94% leased.
We ceased offering shares of common stock in our initial public offering, or our Offering, on June 6, 2014. At the completion of our Offering, we had raised gross proceeds of approximately $1,716,046,000 (including shares of common stock issued pursuant to a distribution reinvestment plan, or the DRIP). We will continue to issue shares of common stock under the Third DRIP Offering (as defined below) until such time as we sell all of the shares registered for sale under the Third DRIP Offering, unless we file a new registration statement with the SEC or the Third DRIP Offering is terminated by our board of directors.
On April 14, 2014, we registered 10,526,315 shares of common stock with a price per share of $9.50 for a proposed maximum offering price of $100,000,000 in shares of common stock under the DRIP pursuant to a registration statement on Form S-3, or the First DRIP Offering. On November 25, 2015, we ceased offering shares of common stock pursuant to the First DRIP Offering and registered an additional 10,473,946 shares of common stock for a proposed maximum offering price of $100,000,000 in shares of common stock under the DRIP pursuant to a registration statement on Form S-3, or the Second DRIP Offering. On May 22, 2017, we ceased offering shares of common stock pursuant to the Second DRIP Offering and registered an additional 11,387,512 shares of common stock 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 Third DRIP Offering. We refer to the First DRIP Offering, the Second DRIP Offering and the Third DRIP Offering collectively as the DRIP Offerings, and together with our Offering, as our Offerings. As of December 31, 2017, we had issued approximately 196,826,000 shares of common stock in our Offerings for gross proceeds of $1,946,761,000, before share repurchases of $104,911,000 and offering costs, selling commissions and dealer manager fees of $174,845,000.
On November 16, 2015, our board of directors, at the recommendation of the audit committee of the board, or the Audit Committee, which is comprised solely of independent directors, established an estimated net asset value, or NAV, per share of our common stock, or the "Estimated Per Share NAV", calculated as of September 30, 2015, of $10.05 for purposes of assisting broker-dealers that participated in our Offering in meeting their customer account statement reporting obligations under the National Association of Securities Dealers Conduct, or NASD, Rule 2340. On November 28, 2016, our board of directors, at the recommendation of the Audit Committee, established an updated Estimated Per Share NAV, calculated as of September 30, 2016, of $10.02 for purposes of assisting broker-dealers that participated in our Offering in meeting their customer account statement reporting obligations under NASD Rule 2340. On December 21, 2017, our board of directors, at the recommendation of the Audit Committee, established an updated Estimated Per Share NAV, calculated as of September 30, 2017, of $9.26 for purposes of assisting broker-dealers that participated in our Offering in meeting 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. Each Estimated Per Share NAV was determined by our board of directors after consultation with Carter/Validus Advisors, LLC, or our Advisor, and an independent third-party valuation firm.

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On January 22, 2018, our board of directors declared a special cash distribution of $3.00 per share of common stock. The special cash distribution was funded from 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 amount of approximately $556,227,000. In connection with the special cash distribution, our board of directors approved an updated 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. The updated Estimated Per Share NAV of $6.26 was effective on February 15, 2018.
Substantially all of our operations are conducted through Carter/Validus Operating Partnership, LP, or our Operating Partnership. We are externally advised by our Advisor pursuant to an advisory agreement, or the 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, our sponsor, 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, and will continue to receive, fees during the acquisition and operational stages and our Advisor may be eligible to receive fees during the liquidation stage of the Company.
Except as the context otherwise requires, “we,” “our,” “us,” and the “Company” refer to Carter Validus Mission Critical REIT, Inc., our Operating Partnership and all majority-owned subsidiaries and controlled subsidiaries.
Key Developments during 2017 and Subsequent
During the year ended December 31, 2017, we sold 16 properties, which consisted of approximately 2,656,000 rentable square feet, for an aggregate sale price of $1,153,000,000.
During the year ended December 31, 2017, we removed 29 properties from the unencumbered pool of the unsecured credit facility. Out of these 29 properties, a portfolio of 20 healthcare properties was removed due to a tenant undergoing a restructuring of its liabilities and nine data center properties were removed due to our sale of a data center portfolio that occurred on December 21, 2017. As a result of removing 29 properties from the unencumbered pool of the unsecured credit facility, the total unencumbered pool availability decreased by approximately $184,813,000.
During the year ended December 31, 2017, we added three healthcare properties to the unencumbered pool of the credit facility, which increased the unencumbered pool availability by approximately $21,906,000.
As of December 31, 2017, we had a total unencumbered pool availability under the unsecured credit facility of $353,606,000, which was limited to $236,667,000 due to one covenant restriction and an aggregate outstanding principal balance of $0. As of December 31, 2017, $236,667,000 was available to be drawn on the unsecured credit facility.
As of December 31, 2017, we paid aggregate distributions, since inception, of approximately $509,989,000 ($241,512,000 in cash and $268,477,000 reinvested in shares of common stock pursuant to the DRIP and the DRIP Offerings). Additionally, as of March 28, 2018, we paid aggregate distributions, since inception, of approximately $1,098,374,000 ($813,841,000 in cash and $284,533,000 reinvested in shares of common stock pursuant to the DRIP and the DRIP Offerings).
During the year ended December 31, 2017, we repurchased approximately 5,773,000 shares of common stock for an aggregate purchase price of $57,049,000 (an average of $9.88 per share) under our share repurchase program.
On December 21, 2017, our board of directors established an updated Estimated Per Share NAV, calculated as of September 30, 2017, of $9.26.
On January 22, 2018, we declared a special cash distribution of $3.00 per share of common stock. The special cash distribution was funded from 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.

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In connection with the special cash distribution paid on March 16, 2018, our board of directors approved the new Estimated Per Share NAV of $6.26, effective on February 15, 2018, which is the record date of the special cash distribution.
On January 10, 2018, we sold two data center assets, which consisted of 658,000 rentable square feet, for an aggregate sale price of $142,500,000.
As of March 28, 2018, we owned, through wholly-owned subsidiaries, a portfolio of 33 real estate investments consisting of 66 properties, located in 37 MSAs and comprising an aggregate of 2,908,000 gross rental square feet of commercial space. As of March 28, 2018, our properties were 92% leased.
As of March 28, 2018, we had $195,000,000 outstanding under the unsecured credit facility.
Our principal executive offices are located at 4890 West Kennedy Blvd., Suite 650, Tampa, Florida 33609. Our telephone number is (813) 287-0101.
Investment Objectives and Policies
Our primary investment objectives are to:
acquire well-maintained and strategically-located, quality, commercial real estate properties with a focus on the healthcare sector, which provide current cash flows from operations;
pay regular cash distributions to stockholders;
preserve, protect and return capital contributions to stockholders;
realize appreciated growth in the value of our investments upon the sale of such investments; and
be prudent, patient and deliberate with respect to the purchase and sale of our investments considering current and future real estate markets.
We cannot assure you that we will be able to continue to attain these objectives or that our assets will not decrease in value. Our board of directors may revise our investment policies if it determines it is advisable and in the best interest of our stockholders. During the term of the Advisory Agreement, decisions relating to the purchase or sale of investments will be made by our Advisor, subject to the oversight and approval of our board of directors.
Investment Strategy
Primary Investment Focus
There is no limitation on the number, size or type of properties we may acquire. We focus our investment activities on acquiring strategically located, well-constructed income-producing commercial real estate predominantly in the healthcare sector located throughout the continental United States, preferably with long-term net leases to creditworthy tenants, and originating or acquiring real estate debt backed by similar income-producing commercial real estate predominantly in such sectors. The real estate debt we originate or acquire, or securities in which we invest, may include first mortgage debt, bridge loans, mezzanine loans or preferred equity. We have and may continue to invest in real estate-related debt and securities that meet our investment strategy and return criteria. The sizes of individual properties we purchase vary significantly, but we expect most of the properties we acquire in the future will continue to have a purchase price between $25 million and $200 million. The number and mix of properties and other real estate-related investments comprising our portfolio will depend upon real estate market conditions and other circumstances existing at the time we acquire the properties and other real estate-related investments.
Investing in Real Property
Our Advisor generally uses the following criteria to evaluate potential investment opportunities:
assets that we determine are important to the use of our tenants;
leased to creditworthy tenants preferably on a net-leased basis;
leased with terms of at least seven to ten years (on average if multi-tenant building), or otherwise have a strong likelihood of renewing; and
geographically diverse locations with good accessibility.
We consider “mission critical” properties as those properties that are essential to the successful operations of the companies within the industries in which such companies operate.

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As determined appropriate by our Advisor, we may acquire properties in various stages of development or that require substantial refurbishment or renovation. Our Advisor will make this determination based upon a variety of factors, including the available risk-adjusted returns for such properties when compared with other available properties, the effect such properties would have on the diversification of our portfolio, and our investment objectives of realizing both current income and capital appreciation upon the sale of such properties.
To the extent feasible, we seek to achieve a well-balanced portfolio diversified by geographic location within the United States, age and lease maturities of the various properties in our portfolio. We also focus on acquiring properties in the healthcare sector. Tenants of our properties are generally diversified between national, regional and local companies. We generally target properties with lease terms of 10 years or longer. We have acquired and may continue to acquire properties with shorter lease terms if the property is in an attractive location, is difficult to replace, or has other significant favorable attributes. We expect that these investments will provide long-term value by virtue of their size, location, quality and condition, and lease characteristics.
Many healthcare companies currently are entering into sale-leaseback transactions as a strategy for applying capital to their core operating businesses that would otherwise be invested in their real estate holdings. We believe that our investment strategy enables us to take advantage of this trend and companies’ increased emphasis on core business operations and competence in today’s competitive corporate environment as many of these companies attempt to divest of their real estate assets.
We have incurred, and intend to continue to incur, debt to acquire properties when our board of directors determines that incurring such debt is in our best interest. In addition, from time to time, we may acquire properties without financing and later incur mortgage debt secured by one or more of such properties if favorable financing terms are available. There is no limitation on the amount we may borrow against any single improved property. Pursuant to our charter, we are required to limit our aggregate borrowings to 75% of the greater of cost (or 300% of net assets) (before deducting depreciation or other non-cash reserves) or fair market value of our gross assets, unless excess borrowing is approved by a majority of the independent directors and disclosed to stockholders in our next quarterly report along with the justification for such excess borrowing. Our board of directors has adopted a policy to further limit our aggregate borrowings to 50% of the greater of cost (before deducting depreciation or other non-cash reserves) or fair market value of our assets, unless borrowing a greater amount is approved by a majority of our independent directors and disclosed to stockholders in our next quarterly report following any such borrowing along with justification for borrowing such greater amount; provided, however, that this policy limitation does not apply to individual real estate assets or investments.
Creditworthy Tenants
We monitor the credit of our tenants to stay abreast of any material changes in credit quality. We monitor tenant credit by (1) reviewing the credit ratings of tenants (or their parent companies) that are rated by nationally recognized rating agencies, (2) reviewing financial statements that are publicly available or that are required to be delivered to us under the applicable lease, (3) monitoring news reports and other available information regarding our tenants and their underlying businesses, (4) monitoring the timeliness of rent collections, and (5) conducting periodic inspections of our properties to ascertain proper maintenance, repair and upkeep. During the year ended December 31, 2017, we had four tenants who experienced a deterioration in their creditworthiness. As of December 31, 2017, we have not identified any material change in any of our other tenants' credit quality.
A tenant is considered creditworthy if it has a financial profile that our Advisor believes meets our criteria. In evaluating the creditworthiness of a tenant or prospective tenant, our Advisor will not use specific quantifiable standards, but will consider many factors, including, but not limited to, the proposed terms of the property acquisition, the financial condition of the tenant and/or guarantor, the operating history of the property with the tenant, the tenant’s market share and track record within its industry segment, the general health and outlook of the tenant’s industry segment, and the lease length and the terms at the time of the property acquisition.
Description of Leases
We generally acquire properties subject to existing leases with tenants. When spaces in properties become vacant, existing leases expire, or we acquire properties under development or requiring substantial refurbishment or renovation, we anticipate entering into net leases. Net leases typically require tenants to pay all or a majority of the operating expenses, including real estate taxes, special assessments and sales and use taxes, utilities, insurance and building repairs related to the property, in addition to the lease payments. There are various forms of net leases, most typically classified as triple net, or absolute net. Triple net leases typically require the tenant to pay, in addition to a fixed rental, all costs related to real estate taxes, insurance, utilities and common area maintenance of the property, including the roof and structure of the property. Generally, the leases require each tenant to procure, at its own expense, commercial general and excess liability insurance,  and in some cases professional liability or environmental coverage as well as property insurance covering the building for the full replacement value and naming the ownership entity and the lender, if applicable as loss payee, and  additional insured on the policy. As a

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precautionary measure, we may obtain, to the extent available, secondary liability insurance, pollution liability coverage as well as loss of rents insurance that covers two years rent in the event of a rental loss. Tenants will be required to provide proof of insurance by furnishing a certificate of insurance to our Advisor on an annual basis. With respect to multi-tenant properties, we expect to have a variety of lease partnerships with the tenants of these properties. Since each lease is an individually negotiated contract between two or more parties, each lease will have different obligations of both the landlord and tenant. Many large national tenants have standard lease forms that generally do not vary from property to property. We will have limited ability to revise the terms of leases to those tenants. We expect that multi-tenant properties will be subject to “gross” leases. “Gross” leases typically require the tenant to pay a flat rental amount and require us to pay for all property charges regularly associated with ownership of the property.
A majority of our acquisitions have lease terms of ten years or longer at the time of the property acquisition. As of December 31, 2017, the weighted average remaining lease term of our properties was 9.5 years. We have acquired and may continue to acquire properties under which the lease term is in progress and has a partial term remaining. We also may acquire properties with shorter lease terms if the property is in an attractive location, difficult to replace, or has other significant favorable real estate attributes. Under most commercial leases, tenants are obligated to pay a predetermined annual base rent. Some of the leases also will contain provisions that increase the amount of base rent payable at certain points during the lease term. In general, we will not permit leases to be assigned or subleased without our prior written consent. If we do not consent to an assignment or sublease, the original tenant generally will remain fully liable under the lease, unless we release that tenant from its obligations under the lease.
Investment Decisions
Our Advisor may purchase on our account, without the specific prior approval of our board of directors, any property with a purchase price of less than $15,000,000, so long as the investment in the property would not, if consummated, conflict with our investment guidelines or any restrictions on indebtedness and the consideration to be paid for such properties does not exceed the fair market value of such properties. Where the purchase price is equal to or greater than $15,000,000, investment decisions are made by our board of directors upon the recommendation of our Advisor.
In evaluating and presenting investments for approval, our Advisor, to the extent such information is available, considers and provides to our board of directors, with respect to each property, the following:
proposed purchase price, terms and conditions;
physical condition, age, curb appeal and environmental reports;
location, visibility and access;
historical financial performance;
tenant rent roll and tenant creditworthiness;
lease terms, including rent, rent increases, length of lease term, specific tenant and landlord responsibilities, renewal, expansion, termination, purchase options, exclusive and permitted uses provisions, assignment and sublease provisions, and co-tenancy requirements;
local market economic conditions, demographics and population growth patterns;
neighboring properties; and
potential for new property construction in the area.
Investing in and Originating Loans
We have and may continue to originate or may acquire real estate loans. Our criteria for investing in loans are substantially the same as those involved in our investment in properties. We may originate or invest in real estate loans including, but not limited to, investments in first, second and third mortgage loans, wraparound mortgage loans, construction mortgage loans on real property, preferred equity loans, and loans on leasehold interest mortgages. We also may invest in participations in mortgage, bridge or mezzanine loans. Further, we may invest in unsecured loans or loans secured by assets other than real estate; however, we will not make unsecured loans or loans not secured by mortgages unless such loans are approved by a majority of our independent directors. A bridge loan is short-term financing for an individual or business, until permanent or the next stage of financing, can be obtained. A mezzanine loan is a loan made in respect of certain real property that is secured by a lien on the ownership interests of the entity that, directly or indirectly, owns the real property. These loans would be subordinate to the mortgage loans directly on the underlying property.

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Our underwriting process typically involves comprehensive financial, structural, operational and legal due diligence. We do not require an appraisal of the underlying property from a certified independent appraiser or for an investment in mortgage, bridge or mezzanine loans, except for investments in transactions with our directors, our Advisor or any of their affiliates. For each such appraisal obtained, we will maintain a copy of such appraisal in our records for at least five years and will make it available during normal business hours for inspection and duplication by any stockholder at such stockholder’s expense. In addition, we will seek to obtain a customary lender’s title insurance policy or commitment as to the priority of the mortgage or condition of the title.
We will not make or invest in mortgage, bridge or mezzanine loans on any one property if the aggregate amount of all mortgage, bridge or mezzanine loans outstanding on the property, including our borrowings, would exceed an amount equal to 85% of the appraised value of the property, as determined by our board of directors, including a majority of our independent directors, unless substantial justification exists, as determined by our board of directors, including a majority of our independent directors. Our board of directors may find such justification in connection with the purchase of mortgage, bridge or mezzanine loans in cases in which it believes there is a high probability of our foreclosure upon the property in order to acquire the underlying assets and, in respect of transactions with our affiliates, in which the cost of the mortgage loan investment does not exceed the appraised value of the underlying property. Our board of directors may find such justification in connection with the purchase of mortgage, bridge or mezzanine loans that are in default where we intend to foreclose upon the property in order to acquire the underlying assets and, in respect of transactions with our affiliates, where the cost of the mortgage loan investment does not exceed the appraised value of the underlying property.
When evaluating prospective investments in and originations of real estate loans, our management and our Advisor will consider factors such as the following:
the ratio of the total amount of debt secured by property to the value of the property by which it is secured;
the amount of existing debt on the property and the priority of that debt relative to our proposed investment;
the property’s potential for capital appreciation;
expected levels of rental and occupancy rates;
current and projected cash flow of the property;
the degree of liquidity of the investment;
the geographic location of the property;
the condition and use of the property;
the quality, experience and creditworthiness of the borrower;
general economic conditions in the area where the property is located; and
any other factors that our Advisor believes are relevant.
We may originate loans from mortgage brokers or personal solicitations of suitable borrowers, or may purchase existing loans that were originated by other lenders. Our Advisor will evaluate all potential loan investments to determine if the term of the loan, the security for the loan and the loan-to-value ratio meets our investment criteria and objectives. An officer, director, agent or employee of our Advisor will inspect the property securing the loan, if any, during the loan approval process. We do not expect to make or invest in mortgage or mezzanine loans with a maturity of more than ten years from the date of our investment, and anticipate that most loans will have a term of five years. We do not expect to make or invest in bridge loans with a maturity of more than one year (with the right to extend the term for an additional one year) from the date of our investment. Most loans which we will consider for investment would provide for monthly payments of interest and some also may provide for principal amortization, although many loans of the nature which we will consider provide for payments of interest only and a payment of principal in full at the end of the loan term. We will not originate loans with negative amortization provisions.
Investing in Real Estate Securities
We may invest in non-majority owned securities of both publicly-traded and private companies primarily engaged in real estate businesses, including REITs and other real estate operating companies, and securities issued by pass-through entities of which substantially all of the assets consist of qualifying assets or real estate-related assets. We may purchase the common stock, preferred stock, debt, or other securities of these entities or options to acquire such securities. However, any investment in equity securities (including any preferred equity securities) must be approved by a majority of directors, including a majority of independent directors, not otherwise interested in the transaction as being fair, competitive and commercially reasonable.

7


Acquisition Structure
We expect to acquire fee interests in properties (a “fee interest” is the absolute, legal possession and ownership of land, property, or rights), although other methods of acquiring a property may be utilized if we deem it to be advantageous. Our focus is on acquiring commercial real estate predominantly in the healthcare sector, but we also may acquire other real property types, including office, industrial and retail properties.
To achieve our investment objectives, and to further diversify our portfolio, we invest in properties using a number of acquisition structures, which include direct and indirect acquisitions, joint ventures, leveraged investments, issuing units in our Operating Partnership in exchange for properties and making mortgages or other loans secured by the same types of properties which we may acquire. Further, our Advisor and its affiliates may purchase properties in their own name, assume loans in connection with the purchase or loan and temporarily hold title to the properties for the purpose of facilitating acquisition or financing by us or any other purpose related to our business.
Joint Ventures
We have entered into, and may enter into additional, joint ventures, partnerships and other co-ownership arrangements for the purpose of making investments. Some of the potential reasons to enter into a joint venture would be to acquire assets we could not otherwise acquire, to reduce our capital commitment to a particular asset, or to benefit from certain expertise a partner might have. In determining whether to invest in a particular joint venture, we evaluate the assets of the joint venture under the same criteria described elsewhere in this Annual Report on Form 10-K for the selection of our investments. In the case of a joint venture, we also evaluate the terms of the joint venture as well as the financial condition, operating capabilities and integrity of our partner or partners. We may enter into joint ventures with our directors, and our Advisor (or its affiliates) only if a majority of our board of directors, including a majority of our independent directors, not otherwise interested in the transaction approves the transaction as being fair and reasonable to us and on substantially the same terms and conditions as those received by the other joint venturers.
We have entered into, and may enter into additional, joint ventures in which we have a right of first refusal to purchase the co-venturer’s interest in the joint venture if the co-venturer elects to sell such interest. If the co-venturer elects to sell property held in any such joint venture, however, we may not have sufficient funds to exercise our right of first refusal to buy the other co-venturer’s interest in the property held by the joint venture. If any joint venture with an affiliated entity holds interests in more than one property, the interest in each such property may be specially allocated based upon the respective proportion of funds invested by each co-venturer in each such property.
Disposition Policy
We intend to hold each asset we acquire for an extended period of time, generally three to seven years, or for the life of the Company. However, circumstances may arise that could result in the earlier or later sale of some of our assets. The determination of whether an asset will be sold or otherwise disposed of will be made after consideration of relevant factors, including prevailing economic conditions, specific real estate market conditions, tax implications for our stockholders, and other factors, with a view to achieving maximum capital appreciation. We cannot assure our stockholders that this objective will be realized. The requirements for us to maintain our qualification as a REIT for federal income tax purposes also will put some limits on our ability to sell assets after short holding periods.
The selling price of a property that is net-leased will be determined in large part by the amount of rent payable under the lease and the “sales multiple” applied to that rent. If a tenant has a repurchase option at a formula price, we may be limited in realizing any appreciation. In connection with sales of our properties, we may lend the purchaser all or a portion of the purchase price. In these instances, our taxable income may exceed the cash received in the sale. The terms of payment will be affected by industry customs in the area in which the property being sold is located and the then-prevailing economic conditions.
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 and net cash available for distribution to our stockholders.

8


Distribution Policy
Our board of directors began declaring distributions to our stockholders in July 2011, after we made our first real estate investment. The amount of distributions we pay to our stockholders is determined by our board of directors and is dependent on a number of factors, including funds available for payment of distributions, our financial condition, capital expenditure requirements, annual distribution requirements needed to maintain our qualification as a REIT under the Code and restrictions imposed by our organizational documents and Maryland law.
We currently pay, and intend to continue to pay, monthly distributions to our stockholders. We currently calculate our monthly distributions on a daily record and declaration date. Because all of our operations are performed indirectly through our Operating Partnership, our ability to continue to pay distributions depends on our Operating Partnership’s ability to pay distributions to its partners, including to us. If we do not have enough cash from operations to fund distributions, we may borrow, issue additional securities or sell assets in order to fund distributions and have no limits on the amounts of distributions we may pay from such sources. In accordance with our organizational documents and Maryland law, we may not make distributions that would: (1) cause us to be unable to pay our debts as they become due in the usual course of business; (2) cause our total assets to be less than the sum of our total liabilities plus senior liquidation preferences, if any; or (3) jeopardize our ability to maintain our qualification as a REIT.
To the extent that distributions to our stockholders are paid out of our current or accumulated earnings and profits, such distributions are taxable as ordinary income. To the extent that our distributions exceed our current and accumulated earnings and profits, such amounts constitute a return of capital to our stockholders for federal income tax purposes, to the extent of their basis in their stock, and thereafter will constitute capital gain. All or a portion of a distribution to stockholders may be paid from borrowings in anticipation of future cash flow and thus, constitute a return of capital to our stockholders.
See Part II, Item 5. "Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities—Distributions," for further discussion on distribution rates approved by our board of directors.
Financing Strategies and Policies
We believe that utilizing borrowing is consistent with our objective of maximizing returns to our stockholders. Financing for acquisitions and investments may be obtained at the time an asset is acquired or an investment is made or at a later time. In addition, debt financing may be used from time to time for property improvements, tenant improvements, leasing commissions and other working capital needs. The form of our indebtedness will vary and could be long-term or short-term, secured or unsecured, or fixed-rate or floating rate.
We will not enter into interest rate swaps or caps, or similar hedging transactions or derivative arrangements for speculative purposes, but may do so in order to manage or mitigate our interest rate risk on variable rate debt.
We will not borrow from our Advisor, any member of our board of directors, or any of their affiliates unless a majority of our directors, including a majority of our independent directors, not otherwise interested in the transaction, approves the transaction as being fair, competitive and commercially reasonable and no less favorable to us than comparable loans between unaffiliated parties.
Conflicts of Interest
We are subject to various conflicts of interest arising out of our relationship with our Advisor and its affiliates, including conflicts related to the arrangements pursuant to which our Advisor and its affiliates will be compensated by us. Our agreements and compensation arrangements with our Advisor and its affiliates were not determined by arm’s-length negotiations. Some of the potential conflicts of interest in our transactions with our Advisor and its affiliates, and the limitations on our Advisor adopted to address these conflicts, are described below.
Our Advisor and its affiliates try to balance our interests with their duties to other programs. However, to the extent that our Advisor or its affiliates take actions that are more favorable to other entities than to us, these actions could have a negative impact on our financial performance and, consequently, on distributions to our stockholders and the value of our stock. In addition, our directors and officers and certain of our stockholders may engage for their own account in business activities of the types conducted or to be conducted by our subsidiaries and us.
Our independent directors have an obligation to function on our behalf in all situations in which a conflict of interest may arise, and all of our directors have a fiduciary obligation to act on behalf of our stockholders.

9


Interests in Other Real Estate Programs
Affiliates of our Advisor act as executive officers of our Advisor and as directors and/or officers of Carter Validus Mission Critical REIT II, Inc., which is the other publicly registered, non-traded REIT currently offered, distributed and/or managed by affiliates of our Advisor. Affiliates of our officers and entities owned or managed by such affiliates may acquire or develop real estate for their own accounts, and have done so in the past. Furthermore, affiliates of our officers and entities owned or managed by such affiliates may form additional real estate investment entities in the future, whether public or private, which may have the same investment objectives and policies as we do and which may be involved in the same geographic area, and such persons may be engaged in sponsoring one or more of such entities at approximately the same time as our shares of common stock are being offered. Our Advisor, its affiliates and affiliates of our officers are not obligated to present to us any particular investment opportunity that comes to their attention, unless such opportunity is of a character that might be suitable for investment by us. Our Advisor and its affiliates likely will experience conflicts of interest as they simultaneously perform services for us and other affiliated real estate programs.
Any affiliated entity, whether or not currently existing, could compete with us in the sale or operation of the properties. We will seek to achieve any operating efficiencies or similar savings that may result from affiliated management of competitive properties. However, to the extent that affiliates own or acquire a property that is adjacent, or in close proximity, to a property we own, our property may compete with the affiliate’s property for tenants or purchasers.
Every transaction that we enter into with our Advisor or its affiliates is subject to an inherent conflict of interest. Our board of directors may encounter conflicts of interest in enforcing our rights against any affiliate in the event of a default by or disagreement with an affiliate or in invoking powers, rights or options pursuant to any agreement between us and our Advisor or any of its affiliates.
Other Activities of Our Advisor and Its Affiliates
We rely on our Advisor for the day-to-day operation of our business. As a result of the interests of members of its management in other programs sponsored by affiliates of our Advisor and the fact that they also are engaged, and will continue to engage, in other business activities, our Advisor and its affiliates have conflicts of interest in allocating their time between us and other programs sponsored by affiliates of our Advisor and other activities in which they are involved. However, our Advisor believes that it and its affiliates have sufficient personnel to discharge fully their responsibilities to all of the programs sponsored by affiliates of our Advisor and other ventures in which they are involved.
In addition, each of our executive officers also serves as an officer of our Advisor, our Property Manager, and/or other affiliated entities. As a result, these individuals owe fiduciary duties to these other entities, which may conflict with the fiduciary duties that they owe to us and our stockholders.
We may acquire properties or interests in properties from entities affiliated with our Advisor. We will not acquire any properties from entities affiliated with our Advisor unless a majority of our directors, including a majority of our independent directors not otherwise interested in the transaction, determine that the transaction is fair and reasonable to us. The purchase price of any property we acquire from our Advisor, its affiliates or a director will not exceed the current appraised value of the property. In addition, the price of the property we acquire from an affiliate may not exceed the cost of the property to the affiliate, unless a majority of our directors and a majority of our independent directors determine that substantial justification for the excess exists and the excess is reasonable. Since inception we have not purchased any properties from our Advisor, its affiliates or a director.
Competition in Acquiring, Leasing and Operating Properties
Conflicts of interest will exist to the extent that we may acquire, or seek to acquire, properties in the same geographic areas where properties owned by Carter Validus Mission Critical REIT II, Inc., the other publicly registered, non-traded REIT offered, distributed and/or managed by affiliates of our advisor, or any other programs which may be sponsored by affiliates of our advisor in the future, are located. In such a case, a conflict could arise in the acquisition or leasing of properties if we and another program sponsored by affiliates of our Advisor were to compete for the same properties or tenants in negotiating leases, or a conflict could arise in connection with the resale of properties if we and another program sponsored by affiliates of our Advisor were to attempt to sell similar properties at the same time. Conflicts of interest also may exist at such time as we or our affiliates, managing properties on our behalf, seek to employ developers, contractors or building managers, as well as under other circumstances. Our Advisor will seek to reduce conflicts relating to the employment of developers, contractors or building managers by making prospective employees aware of all such properties seeking to employ such persons. In addition, our Advisor will seek to reduce conflicts that may arise with respect to properties available for sale or rent by making prospective purchasers or tenants aware of all such properties. However, these conflicts cannot be fully avoided in that there may be established differing compensation arrangements for employees at different properties or differing terms for resales or leasing of the various properties.

10


Affiliated Property Manager
The properties we acquire are managed and leased by our Property Manager, which is an affiliate of our Advisor, pursuant to a property management and leasing agreement. Our Property Manager is affiliated with the property manager for properties owned by an affiliated real estate program, Carter Validus Mission Critical REIT II, Inc., which may be in competition with our properties. Management fees paid to our Property Manager are based on a percentage of the rental income received by the managed properties.
Joint Ventures with Affiliates of Our Advisor
We may enter into joint ventures with other programs sponsored by affiliates of our Advisor (as well as other parties) for the acquisition, development or improvement of properties. We will not enter into a joint venture with our Sponsor, our Advisor, any director or any affiliate thereof, unless a majority of our directors, including a majority of our independent directors, not otherwise interested in such transaction, approve the transaction as being fair and reasonable to us and on substantially the same terms and conditions as those received by the other joint ventures. Our Advisor and its affiliates may have conflicts of interest in determining which programs sponsored by affiliates of our Advisor should enter into any particular joint venture agreement. The co-venturer may have economic or business interests or goals which are or which may become inconsistent with our business interests or goals. In addition, should any such joint venture be consummated, our Advisor may face a conflict in structuring the terms of the relationship between our interests and the interest of the co-venturer and in managing the joint venture. Since our Advisor and its affiliates will control both us and any affiliated co-venturer, agreements and transactions between the co-venturers with respect to any such joint venture will not have the benefit of arm’s-length negotiation of the type normally conducted between unrelated co-venturers.
Receipt of Fees and Other Compensation by Our Advisor and Its Affiliates
A transaction involving the purchase and sale of properties may result in the receipt of commissions, fees and other compensation by our Advisor and its affiliates, including acquisition and advisory fees, property management and leasing fees, disposition fees, brokerage commissions and participation in net sale proceeds. Subject to oversight by our board of directors, our Advisor will have considerable discretion with respect to all decisions relating to the terms and timing of all transactions. Therefore, our Advisor may have conflicts of interest concerning certain actions taken on our behalf, particularly due to the fact that such fees generally will be payable to our Advisor and its affiliates regardless of the quality of the properties acquired or the services provided to us.
Employees
We have no direct employees. The employees of our Advisor and its affiliates provide services for us related to acquisition, property management, asset management, accounting, investor relations, and all other administrative services.
We are dependent on our Advisor and its affiliates for services that are essential to us, including asset acquisition decisions, property management and other general administrative responsibilities. In the event that our Advisor or its affiliates become unable to provide these services to us, we would be required to obtain such services from other sources.
Insurance
See the section captioned “—Description of Leases” above.
Competition
Should we purchase additional healthcare properties for our portfolio, we would be in competition with other potential buyers for the same properties, and may have to pay more to purchase the property than if there were no other potential acquirers or we may have to locate another property that meets our investment criteria. Although we generally acquire properties subject to existing leases, the leasing of real estate is highly competitive in the current market, and we may experience competition for tenants from owners and managers of competing projects. As a result, we may have to provide free rent, incur charges for tenant improvements, or offer other inducements, or we might not be able to timely lease the space, all of which may have an adverse impact on our results of operations. At the time we elect to dispose of our properties, we will also be in competition with sellers of similar properties to locate suitable purchasers for its properties.

11


Concentration of Credit Risk and Significant Leases
As of December 31, 2017, we had cash on deposit, including restricted cash, in certain financial institutions that had deposits in excess of current federally insured levels. We limit our cash investments to financial institutions with high credit standings; therefore, we believe we are not exposed to any significant credit risk on our cash deposits. To date, we have not experienced loss of or lack of access to cash in our accounts.
Based on leases of our properties in effect as of December 31, 2017, three exposures to tenant concentrations accounted for 10.0% or more of our 2017 contractual rental revenue from continuing operations. The following table shows the tenants that accounted for 10.0% or more of our 2017 contractual rental revenue from continuing operations:
Tenant
 
Property
 
Segment
 
2017 Contractual Rental Revenue
(in thousands)
 (1)
 
Percentage of 2017 Contractual Rental Revenue
 
Gross Leased Area
(Sq Ft)
 
Lease Expiration Date
Bay Area Regional Medical Center, LLC
 
Bay Area Regional Medical Center
 
Healthcare
 
$
19,985

 
20.9
%
 
373,070

 
07/31/2034
Post Acute Medical, LLC (2)
 
(2) 
 
Healthcare
 
11,487

 
12.0
%
 
355,241

 
(2) 
21st Century Oncology, Inc.
 
21st Century Oncology Portfolio
 
Healthcare
 
9,590

 
10.0
%
 
220,163

 
03/31/2028
 
 
 
 
 
 
$
41,062

 
 
 
948,474

 
 
 
(1)
Contractual rental revenue is based on the total revenue, excluding straight-line rental revenue, recognized and reported in the accompanying consolidated statements of comprehensive income.
(2)
The following leases are under common control of the guarantor, Post Acute Medical, LLC:
Tenant
 
Property
 
Lease Expiration Date
Post Acute Medical at San Antonio, LLC
 
Post Acute/Warm Springs Rehab Hospital of Westover Hills
 
08/31/2036
Post Acute Medical at San Antonio, LLC
 
Warm Springs Rehabilitation Hospital
 
08/31/2036
Warm Springs Specialty Hospital of San Antonio, LLC
 
San Antonio Healthcare Facility
 
01/31/2037
Warm Springs Rehabilitation Hospital of Victoria, LLC
 
Post Acute Medical - Victoria I
 
05/22/2036
Post Acute Medical at Victoria, LLC
 
Post Acute Medical - Victoria II
 
05/22/2036
Post Acute Medical of New Braunfels, LLC
 
Post Acute Medical - New Braunfels
 
05/22/2036
PAM II of Covington, LLC
 
Post Acute Medical - Covington
 
05/22/2036
Post Acute Medical at Hammond, LLC
 
Post Acute Medical - Hammond
 
05/22/2036
The following table shows our real estate investments based on contractual rental revenue from continuing operations as of December 31, 2017:
Industry
 
Total Number of Leases
 
Gross Leased Area
(Sq Ft)
 
2017 Contractual Rental Revenue
(in thousands) (1)
 
Percentage of 2017 Contractual Rental Revenue
Healthcare
 
48

 
2,743,177

 
95,728

 
100.0
%
 
(1)
Contractual rental revenue is based on the total revenue, excluding straight-line rental revenue, recognized and reported in the accompanying consolidated statements of comprehensive income.

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Based on leases of our properties in effect as of December 31, 2017, the following table shows the geographic diversification of our real estate properties that accounted for 10.0% or more of our contractual rental revenue from continuing operations as of December 31, 2017:
MSA
 
Total Number of Leases
 
Gross Leased Area
(Sq Ft)
 
2017 Contractual Rental Revenue
(in thousands) (1)
 
Percentage of 2017 Contractual Rental Revenue
Houston-The Woodlands-Sugar Land, TX
 
2

 
387,070

 
$
20,393

 
21.3
%
San Antonio-New Braunfels, TX
 
5

 
307,423

 
9,749

 
10.2
%
Dallas-Ft. Worth-Arlington, TX
 
4

 
368,472

 
9,733

 
10.2
%
 
 
11

 
1,062,965

 
$
39,875

 
 
 
(1)
Contractual rental revenue is based on the total revenue, excluding straight-line rental revenue, recognized and reported in the accompanying consolidated statements of comprehensive income.
Environmental Matters
All real properties and the operations conducted on real property are subject to federal, state and local laws and regulations relating to environmental protection and human health and safety. In connection with ownership and operation of real estate, we may be potentially liable for costs and damages related to environmental matters. We take commercially reasonable steps to protect ourselves from the impact of these laws, including obtaining environmental assessments of all properties that we acquire. We also carry environmental liability insurance on our properties, which provides coverage for pollution liability for third party bodily injury and property damage claims.
Available Information
We electronically file our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports with the SEC. Copies of our filings with the SEC may be obtained from the SEC’s website, http://www.sec.gov. Access to these filings is free of charge. In addition, we make such materials that are electronically filed with the SEC available at www.cvmissioncriticalreit.com as soon as reasonably practicable. They are also available for printing by any stockholder upon request.

13


Item 1A. Risk Factors.
The factors described below represent our principal risks. Other factors may exist that we do not consider to be significant based on information that is currently available or that we are not currently able to anticipate.
Risks Related to an Investment in Carter Validus Mission Critical REIT, Inc.
Our shares have limited liquidity and we are not required, through our charter or otherwise, to provide for a liquidity event. There is no public trading market for our shares and there may never be one; therefore, it may be difficult for our stockholders to sell their shares.
There currently is no public market for our shares and there may never be one. If our stockholders are able to find a buyer for their shares, they may not sell their shares unless the buyer meets applicable suitability and minimum purchase standards and the sale does not violate state securities laws. Our charter also prohibits the ownership of more than 9.8%, or such other percentage as determined by the board of directors, in value of the aggregate of our outstanding shares of stock or more than 9.8%, or such other percentage as determined by the board of directors, (in value or number of shares, whichever is more restrictive) of any class or series of the outstanding shares of our stock by any one person, unless exempted by our board of directors, which may deter large investors from purchasing our stockholders’ shares. Moreover, our share repurchase program includes numerous restrictions that would limit our stockholders ability to sell their shares to us. Our board of directors may reject any request for repurchase of shares, suspend (in whole or in part) the share repurchase program at any time and from time to time upon notice to our stockholders amend or terminate our share repurchase program at any time upon 30 days’ notice to our stockholders. Therefore, it may be difficult for stockholders to sell their shares promptly or at all. If stockholders are able to sell their shares, they likely will have to sell them at a substantial discount to the price they paid for the shares. It also is likely that stockholders’ shares would not be accepted as the primary collateral for a loan.
In addition, we do not have a fixed date or method for providing stockholders with liquidity. We expect that our board of directors will make that determination in the future based, in part, upon advice from our advisor. If we are unable to find a buyer for our stockholders’ shares, our stockholders will likely have to sell them at a substantial discount to their purchase price.
Our properties are, and we expect any future properties primarily will be, located in the continental United States and would be affected by economic downturns, as well as economic cycles and risks inherent to that area.
Our properties are, and we expect any future properties primarily will be, located in the continental United States. Real estate markets are subject to economic downturns, as they have been in the past, and we cannot predict how economic conditions will impact this market in both the short and long term. Declines in the economy or a decline in the real estate market in the continental United States could hurt our financial performance and the value of our properties. The factors affecting economic conditions in the continental United States include, but are not limited to:
financial performance and productivity of the publishing, advertising, financial, technology, retail, insurance and real estate industries;
business layoffs or downsizing;
industry slowdowns;
relocations of businesses;
changing demographics;
increased telecommuting and use of alternative work places;
infrastructure quality;
any oversupply of, or reduced demand for, real estate;
concessions or reduced rental rates under new leases for properties where tenants defaulted;
increased insurance premiums; and
increased interest rates.
Distributions paid from sources other than our cash flows from operations may adversely affect our ability to fund future distributions with cash flows from operations and may adversely affect a stockholder's overall return.
We have paid, and may continue to pay, distributions from sources other than from our cash flows from operations. For the year ended December 31, 2017, our cash flows provided by operations of approximately $105.3 million was a shortfall of $24.8 million, or 19.1%, of our distributions (total distributions were approximately $130.1 million, of which $63.1 million was

14


cash and $67.0 million was reinvested in shares of our common stock pursuant to the DRIP Offerings) during such period and such shortfall was paid from proceeds from our DRIP Offerings. For the year ended December 31, 2016, our cash flows provided by operations of approximately $122.8 million was a shortfall of $5.3 million, or 4.1%, of our distributions (total distributions were approximately $128.1 million, of which $60.0 million was cash and $68.1 million was reinvested in shares of our common stock pursuant to the DRIP Offerings) during such period and such shortfall was paid from net proceeds from our DRIP Offerings. If we cannot maintain certain tenant occupancy levels in our properties, we may not generate sufficient cash flows from operations to pay distributions, which may result in a lower return on a stockholder's investment than he or she may expect.
We may pay, and have no limits on the amounts we may pay, distributions from any source, such as from borrowings, the sale of assets, the sale of additional securities, advances from our Advisor, our Advisor’s deferral, and suspension and/or waiver of its fees and expense reimbursements. Funding distributions from borrowings could restrict the amount we can borrow for investments, which may affect our profitability. Funding distributions from the sale of assets may affect our ability to generate cash flows. Funding distributions from the sale of additional securities could dilute stockholders' interest in us if we sell shares of our common stock to third party investors. Our inability to acquire additional properties or real estate-related investments may have a negative effect on our ability to generate sufficient cash flow from operations from which to pay distributions. As a result, the return investors may realize on their investment may be reduced and investors who invested in us before we generated significant cash flow may realize a lower rate of return than later investors. Payment of distributions from any of the aforementioned sources could restrict our ability to generate sufficient cash flows from operations, affect our profitability and/or affect the distributions payable upon a liquidity event, any or all of which may have an adverse effect on an investment in us.
We have experienced losses in the past, and we may experience additional losses in the future.
Historically, we have experienced net losses and we may not be profitable or realize growth in the value of our investments. Many of our losses can be attributed to start-up costs and operating costs incurred prior to purchasing properties or making other investments that generate revenue and acquisition related expenses. For further discussion of our operational history and the factors affecting our losses, see the “Selected Financial Data” section of the Annual Report on Form 10-K, as well as the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and our consolidated financial statements and the notes included in this Annual Report on Form 10-K for a discussion of our operational history and the factors for our losses.
Our stockholders may not be able to sell their shares under our share repurchase program and, if our stockholders are able to sell their shares under the program, they may not be able to recover the amount of their investment in our shares.
Our share repurchase program includes numerous restrictions that limit our stockholders’ ability to sell their shares. Our stockholders must hold their shares for at least one year in order to participate in the share repurchase program, except for repurchases sought upon a stockholder’s death, qualifying disability, as defined below, or other exigent circumstances. We limit the number of shares we may redeem pursuant to the share repurchase program as follows: during any calendar year, we will not redeem more than 5% of the number of shares of common stock outstanding on December 31st of the previous calendar year. As a result, some or all of a stockholders’ shares may not be repurchased. Funding for the share repurchase program comes exclusively from funds equal to amounts reinvested in the DRIP Offerings during the prior calendar year and other operating funds, if any, as our board of directors in its sole discretion, may reserve for this purpose. We cannot guarantee that the funds set aside for the share repurchase program will be sufficient to accommodate all requests made each month. Our board of directors, in its sole discretion, may amend, suspend, reduce, terminate or otherwise change our share repurchase plan upon 30 days’ prior notice to our stockholders for any reason it deems appropriate.
On December 21, 2017, our board of directors, at the recommendation of the Audit Committee, approved and established an Estimated Per Share NAV of our common stock of $9.26 based on the estimated value of our assets less the estimated value of our liabilities divided by the number of shares outstanding on a fully diluted basis, calculated as of September 30, 2017. Therefore, commencing with share repurchases in February 2018, the repurchase price for all stockholders was $9.26 per share.
On January 22, 2018, our board of directors declared a special cash distribution of $3.00 per share of common stock. The special cash distribution was funded from 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 amount of approximately $556,227,000. In connection with the special cash distribution, our board of directors approved an updated 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. 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. Therefore, commencing with share repurchases in March 2018, the repurchase price for all stockholders is $6.26 per share.

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We currently expect to update our Estimated Per Share NAV at least annually, at which time the repurchase price per share may also change. Because of the restrictions of our share repurchase program, our stockholders may not be able to sell their shares under the program, and if stockholders are able to sell their shares, they may not recover the amount of their investment in us.
The estimated value per share of our common stock may not reflect the value that stockholders will receive for their investment.
On December 21, 2017, our board of directors, at the recommendation of the Audit Committee, approved and established the Estimated Per Share NAV of $9.26 based on the estimated value of our assets less the estimated value of our liabilities divided by the number of shares outstanding on a diluted basis, calculated as of September 30, 2017. We provided the Estimated Per Share NAV to assist fiduciaries of retirement plans subject to the annual reporting requirements of ERISA in the preparation of their reports.
In connection with a special cash distribution paid on March 16, 2018, our board of directors approved an updated 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. 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.
The Estimated Per Share NAV was determined after consultation with the Advisor and Robert A. Stanger & Co, Inc., an independent third-party valuation firm, the engagement of which was approved by the Audit Committee. The Financial Industry Regulatory Authority, or FINRA, rules provide no guidance on the methodology an issuer must use to determine its estimated value per share. As with any valuation methodology, our independent valuation firm's methodology is based upon a number of estimates and assumptions that may not be accurate or complete. Different parties with different assumptions and estimates could derive a different estimated value per share, and these differences could be significant. The Estimated Per Share NAV is not audited and does not represent the fair value of our assets or liabilities according to generally accepted accounting principles in the United States on America, or GAAP. Accordingly, with respect to the Estimated Per Share NAV, we can give no assurance that:
a stockholder would be able to resell his or her shares at the Estimated Per Share NAV;
a stockholder would ultimately realize distributions per share equal to the Estimated Per Share NAV upon liquidation of our assets and settlement of our liabilities or a sale of the company;
our shares of common stock would trade at the Estimated Per Share NAV on a national securities exchange;
an independent third-party appraiser or other third-party valuation firm would agree with the Estimated Per Share NAV; or
the methodology used to estimate our NAV per share would be acceptable to FINRA or comply with ERISA reporting requirements.
Further, the Estimated Per Share NAV is based on the estimated value of our assets less the estimated value of our liabilities divided by the number of shares outstanding, calculated as of September 30, 2017. The value of our shares will fluctuate over time in response to developments related to individual assets in the portfolio and the management of those assets and in response to the real estate and finance markets. We expect to engage an independent valuation firm to update the Estimated Per Share NAV at least annually.
For a full description of the methodologies used to value our assets and liabilities in connection with the calculation of the Estimated Per Share NAV, see our Current Report on Form 8-K filed with the SEC on December 29, 2017.
A high concentration of our properties in a particular geographic area, or of tenants in a similar industry, would magnify the effects of downturns in that geographic area or industry.
As of December 31, 2017, we owned 34 real estate investments, located in 38 MSAs, three of which accounted for 10.0% or more of our contractual rental revenue for the year ended December 31, 2017. Real estate investments located in the Houston-The Woodlands-Sugar Land, Texas MSA, the San Antonio-New Braunfels, Texas MSA and the Dallas-Ft. Worth-Arlington, Texas MSA accounted for 21.3%, 10.2% and 10.2%, respectively, of our contractual rental revenue from continuing operations for the year ended December 31, 2017. Accordingly, there is a geographic concentration of risk subject to fluctuations in each MSA’s economy. Geographic concentration of our properties exposes us to economic downturns in the areas where our properties are located. A regional or local recession in any of these areas could adversely affect our ability to generate or increase operating revenues, attract new tenants or dispose of unproductive properties. Similarly, since the tenants of our properties are in the healthcare industry, any adverse effect to the healthcare industry generally would have a disproportionately adverse effect on our portfolio. For the year ended December 31, 2017, 100.0% of our contractual rental revenue from continuing operations was from the healthcare properties.

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If our Advisor loses or is unable to obtain key personnel, our ability to implement our investment strategies could be delayed or hindered, which could adversely affect our ability to make distributions and the value of our stockholders’ investment.
Our success depends to a significant degree upon the contributions of certain of our executive officers and other key personnel of our Advisor, including John E. Carter, Todd M. Sakow, Michael A. Seton and Lisa A. Drummond, each of whom would be difficult to replace. Our Advisor does not have an employment agreement with any of these key personnel and we cannot guarantee that all, or any particular one, will remain affiliated with us and/or our Advisor. If any of our key personnel were to cease their affiliation with our Advisor, our operating results could suffer. Further, we do not currently intend to separately maintain key person life insurance on Todd M. Sakow, Michael A. Seton and Lisa A. Drummond or any other person, with the exception of John E. Carter. We believe that our future success depends, in large part, upon our Advisor’s ability to hire and retain highly skilled managerial, operational and marketing personnel. Competition for such personnel is intense, and we cannot assure our stockholders that our Advisor will be successful in attracting and retaining such skilled personnel. If our Advisor loses or is unable to obtain the services of key personnel, our ability to implement our investment strategies could be delayed or hindered, and the value of our stockholders’ investment may decline.
Our rights and the rights of our stockholders to recover claims against our officers, directors and our Advisor are limited, which could reduce our stockholders' and our recovery against them if they cause us to incur losses.
Maryland law provides that a director has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in the corporation’s best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. In addition, subject to certain limitations set forth therein or under Maryland law, our charter provides that no director or officer will be liable to us or our stockholders for money damages, requires us to indemnify and advance expenses to our directors, officers and Advisor and our Advisor’s affiliates with approval of our board of directors, to indemnify our employees and agents. Although our charter does not allow us to indemnify or hold harmless an indemnitee to a greater extent than permitted under Maryland law, we and our stockholders may have more limited rights against our directors, officers, employees and agents, and our Advisor and its affiliates, than might otherwise exist under common law, which could reduce our stockholders' and our ability to recover against them. In addition, we may be obligated to fund the defense costs incurred by our directors, officers, employees and agents or our Advisor and its affiliates in some cases, which would decrease the cash otherwise available for distribution to stockholders.
The failure of any bank in which we deposit our funds could reduce the amount of cash we have available to pay distributions, make additional investments and service our debt.
As of December 31, 2017, we had cash and cash equivalents in excess of federally insurable levels. The Federal Deposit Insurance Corporation only insures interest-bearing accounts in amounts up to $250,000 per depositor per insured bank. While we monitor our cash balance in our operating accounts, if any of the banking institutions in which we have deposited funds ultimately fails, we may lose our deposits of over $250,000. The loss of our deposits may have a material adverse effect on our financial condition.
Cybersecurity risks and cyber incidents may adversely affect our business by causing a disruption to our operations, a compromise or corruption of our confidential information, and/or damage to our business relationships, all of which could negatively impact our financial results.
A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of our information resources. These incidents may be an intentional attack or an unintentional event and could involve gaining unauthorized access to our information systems for purposes of misappropriating assets, stealing confidential information, corrupting data or causing operational disruption. The result of these incidents may include disrupted operations, misstated or unreliable financial data, liability for stolen assets or information, increased cybersecurity protection and insurance costs, litigation and damage to our tenant and investor relationships. As our reliance on technology has increased, so have the risks posed to our information systems, both internal and those we have outsourced. There is no guarantee that any processes, procedures and internal controls we have implemented or will implement will prevent cyber intrusions, which could have a negative impact on our financial results, operations, business relationships or confidential information.

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Risks Related to Conflicts of Interest
We are subject to conflicts of interest arising out of our relationships with our Advisor and its affiliates, including the material conflicts discussed below. See the “Conflicts of Interest” section of Part I, Item I. of this Annual Report on Form 10-K.
Our Advisor faces conflicts of interest relating to the purchase and leasing of properties, and such conflicts may not be resolved in our favor, which could adversely affect our investment opportunities.
Affiliates of our Advisor have sponsored and may sponsor one or more other real estate investment programs in the future. We may buy properties at the same time as one or more of the other programs sponsored by affiliates of our Advisor and managed by officers and key personnel of our Advisor. There is a risk that our Advisor will choose a property that provides lower returns to us than a property purchased by another program sponsored by affiliates of our Advisor. We cannot be sure that officers and key personnel acting on behalf of our Advisor and on behalf of managers of other programs sponsored by affiliates of our Advisor will act in our best interests when deciding whether to allocate any particular property to us. In addition, we may acquire properties in geographic areas where other programs sponsored by affiliates of our Advisor own properties. Also, we may acquire properties from, or sell properties to, other programs sponsored by affiliates of our Advisor. If one of the other programs sponsored by affiliates of our Advisor attracts a tenant that we are competing for, we could suffer a loss of revenue due to delays in locating another suitable tenant. Stockholders will not have the opportunity to evaluate the manner in which these conflicts of interest are resolved before or after making their investment. Similar conflicts of interest may apply if our Advisor determines to make or purchase mortgage, bridge or mezzanine loans or participations therein on our behalf, since other programs sponsored by affiliates of our Advisor may be competing with us for these investments.
Our Advisor faces conflicts of interest relating to joint ventures with its affiliates, which could result in a disproportionate benefit to the other venture partners at our expense.
We have entered into, and may enter into additional, joint ventures with other programs sponsored by affiliates of our Advisor for the acquisition, development or improvement of properties. Our Advisor may have conflicts of interest in determining which program sponsored by affiliates of our Advisor should enter into any particular joint venture agreement. In addition, our Advisor may face a conflict in structuring the terms of the relationship between our interests and the interest of the affiliated co-venturer managing the joint venture. Since our Advisor and its affiliates will control both the affiliated co-venturer and, to a certain extent, us, agreements and transactions between the co-venturers with respect to any such joint venture will not have the benefit of arm’s-length negotiation of the type normally conducted between unrelated co-venturers, which may result in the co-venturer receiving benefits greater than the benefits that we receive. In addition, we may assume liabilities related to the joint venture that exceed the percentage of our investment in the joint venture.
Our Advisor and its officers and certain of its key personnel face competing demands relating to their time, and this may cause our operating results to suffer.
Our Advisor and its officers and employees and certain of our key personnel and their respective affiliates are key personnel, general partners and sponsors of other real estate programs having investment objectives and legal and financial obligations similar to ours and may have other business interests as well. Because these persons have competing demands on their time and resources, they may have conflicts of interest in allocating their time between our business and these other activities. During times of intense activity in other programs and ventures, they may devote less time and fewer resources to our business than is necessary or appropriate. If this occurs, the returns on our investments may suffer.
Our officers and directors face conflicts of interest related to the positions they hold with affiliated entities, which could hinder our ability to successfully implement our business strategy and generate returns to our stockholders.
Certain of our executive officers and directors, including John E. Carter, who also serves as the chairman of our board of directors, Mario Garcia, Jr., Todd M. Sakow, Michael A. Seton and Lisa A, Drummond, also are officers and/or directors of our Advisor, our Property Manager and/or other affiliated entities. As a result, these individuals owe fiduciary duties to these other entities and their stockholders and limited partners, which fiduciary duties may conflict with the duties that they owe to us and our stockholders. Their loyalties to these other entities could result in actions or inactions that are detrimental to our business, which could harm the implementation of our business strategy and our investment and leasing opportunities. Conflicts with our business and interests are most likely to arise from involvement in activities related to:
allocation of new investments and management time and services between us and the other entities,
our purchase of properties from, or sale of properties to, affiliated entities,
the timing and terms of the investment in or sale of an asset,
development of our properties by affiliates,
investments with affiliates of our Advisor,

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compensation to our Advisor, and
our relationship with our Property Manager.
If we do not successfully implement our business strategy, we may be unable to generate cash needed to continue to make distributions to our stockholders and to maintain or increase the value of our assets.
Our Advisor faces conflicts of interest relating to the performance fee structure under the Advisory Agreement, which could result in actions that are not necessarily in the long-term best interests of our stockholders.
Under the Advisory Agreement, our Advisor or its affiliates are entitled to fees that are structured in a manner intended to provide incentives to our Advisor to perform in our best interests and in the best interests of our stockholders. However, because our Advisor does not maintain a significant equity interest in us and is entitled to receive substantial minimum compensation regardless of performance, our Advisor’s interests are not wholly aligned with those of our stockholders. In that regard, our Advisor could be motivated to recommend riskier or more speculative investments, or to use additional debt when acquiring assets, in order for us to generate the specified levels of performance or sales proceeds that would entitle our Advisor to fees. In addition, our Advisor’s or its affiliates’ entitlement to fees upon the sale of our assets and to participate in sale proceeds could result in our Advisor recommending sales of our investments at the earliest possible time at which sales of investments would produce the level of return that would entitle our Advisor to compensation relating to such sales, even if continued ownership of those investments might be in our best long-term interest. The Advisory Agreement requires us to pay a performance-based termination fee to our Advisor or its affiliates if we terminate the Advisory Agreement and have not paid our Advisor a subordinated incentive listing fee to our Advisor in connection with the listing of our shares for trading on an exchange. To avoid paying this fee, our independent directors may decide against terminating the Advisory Agreement prior to our listing of our shares even if, but for the termination fee, termination of the Advisory Agreement would be in our best interest. In addition, the requirement to pay the fee to our Advisor or its affiliates at termination could cause us to make different investment or disposition decisions than we would otherwise make in order to satisfy our obligation to pay the fee to the terminated Advisor. Moreover, our Advisor will have the right to terminate the Advisory Agreement upon a change of control of our company and thereby trigger the payment of the performance fee, which could have the effect of delaying, deferring or preventing the change of control.
There is no separate counsel for us and our affiliates, which could result in conflicts of interest.
Morris, Manning & Martin, LLP acts as legal counsel to us and also represents our Advisor and some of its affiliates. There is a possibility in the future that the interests of the various parties may become adverse and, under the Code of Professional Responsibility of the legal profession, Morris, Manning & Martin, LLP may be precluded from representing any one or all such parties. If any situation arises in which our interests appear to be in conflict with those of our Advisor or its affiliates, additional counsel may be retained by one or more of the parties to assure that their interests are adequately protected. Moreover, should a conflict of interest not be readily apparent, Morris, Manning & Martin, LLP may inadvertently act in derogation of the interest of the parties, which could affect our ability to meet our investment objectives.
Risks Related to Our Corporate Structure
The limit on the number of shares a person may own may discourage a takeover that could otherwise result in a premium price to our stockholders and may hinder a stockholder's ability to dispose of his or her shares.
Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. In this connection, among other things, unless exempted by our board of directors, no person may own more than 9.8%, or such other percentage determined by our board of directors, in value of the aggregate of our outstanding shares of stock or more than 9.8%, or such other percentage determined by the board of directors, (in value or number, whichever is more restrictive) of any class or series of the outstanding shares of our stock. This restriction may have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all our assets) that might provide a premium price for holders of our common stock, and may make it more difficult for a stockholder to sell or dispose of his or her shares.

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Our charter permits our board of directors to issue stock with terms that may subordinate the rights of common stockholders or discourage a third party from acquiring us in a manner that might result in a premium price to our stockholders.
Our charter permits our board of directors to issue up to 350,000,000 shares of stock, $0.01 par value per share, consisting of 300,000,000 shares of common stock and 50,000,000 shares of preferred stock. In addition, our board of directors, without any action by our stockholders, may amend our charter from time to time to increase or decrease the aggregate number of shares or the number of shares of any class or series of stock that we have authority to issue. Our board of directors may classify or reclassify any unissued common stock or preferred stock and establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms and conditions of repurchase of any such stock. Thus, if also approved by a majority of our independent directors not otherwise interested in the transaction, who will have access, at our expense, to our legal counsel or independent legal counsel, our board of directors could authorize the issuance of preferred stock with terms and conditions that could have a priority as to distributions and amounts payable upon liquidation over the rights of the holders of our common stock. Preferred stock could also have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all our assets) that might provide a premium price for holders of our common stock.
Maryland law prohibits certain business combinations, which may make it more difficult for us to be acquired and may limit our stockholders’ ability to exit the investment.
The Maryland Business Combination Act provides that certain “business combinations” between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An interested stockholder is defined as:
any person who beneficially owns, directly or indirectly, 10% or more of the voting power of the corporation’s outstanding voting stock; or
an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then outstanding stock of the corporation.
A person is not an interested stockholder under the statute if our board of directors approved in advance the transaction by which he or she otherwise would have become an interested stockholder. However, in approving a transaction, our board of directors may provide that its approval is subject to compliance, at or after the time of the approval, with any terms and conditions determined by our board of directors.
After the five-year prohibition, any such business combination between a Maryland corporation and an interested stockholder generally must be recommended by our board of directors of the corporation and approved by the affirmative vote of at least:
80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation; and
two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom (or with whose affiliate) the business combination is to be effected or held by an affiliate or associate of the interested stockholder.
These super-majority vote requirements do not apply if the corporation’s common stockholders receive a minimum price, as defined under the Maryland Business Combination Act, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares. The Maryland Business Combination Act permits various exemptions from its provisions, including business combinations that are exempted by our board of directors prior to the time that the interested stockholder becomes an interested stockholder. Our board of directors has exempted from the Maryland Business Combination Act any business combination involving our Advisor or any of its affiliates. Consequently, the five-year prohibition and the super-majority vote requirements will not apply to business combinations between us and our Advisor or any of its affiliates. As a result, our Advisor and any of its affiliates may be able to enter into business combinations with us that may not be in the best interest of our stockholders, without compliance with the super-majority vote requirements and the other provisions of the Maryland Business Combination Act. The Maryland Business Combination Act may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer.

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Maryland law limits the ability of a third party to buy a large stake in us and exercise voting power in electing directors.
The Maryland Control Share Acquisition Act provides that a holder of “control shares” of a Maryland corporation acquired in a “control share acquisition” has no voting rights except to the extent approved by stockholders by a vote of two-thirds of the votes entitled to be cast on the matter. Shares of stock owned by the acquirer, by officers or by employees who are directors of the corporation are excluded from shares entitled to vote on the matter. “Control shares” are voting shares of stock which, if aggregated with all other shares of stock owned by the acquirer or in respect of which the acquirer can exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquirer, directly or indirectly, to exercise or direct the exercise of voting power of shares of stock in electing directors within specified ranges of voting power. Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval. A “control share acquisition” means the acquisition of issued and outstanding control shares. The Maryland Control Share Acquisition Act does not apply (a) to shares acquired in a merger, consolidation or statutory share exchange if the corporation is a party to the transaction, or (b) to acquisitions approved or exempted by the charter or bylaws of the corporation. Our bylaws contain a provision exempting from the Maryland Control Share Acquisition Act any and all acquisitions of our stock by any person. This statute could have the effect of discouraging offers from third parties to acquire us and increasing the difficulty of successfully completing this type of offer by anyone other than our Advisor or any of its affiliates. There can be no assurance that this provision will not be amended or eliminated at any time in the future.
Stockholders’ investment return may be reduced if we are required to register as an investment company under the Investment Company Act of 1940.
Neither we nor any of our subsidiaries are registered, and do not intend to register, as an investment company under the Investment Company Act of 1940, or the Investment Company Act. If we or any of our subsidiaries become obligated to register as an investment company, the registered entity would have to comply with a variety of substantive requirements under the Investment Company Act imposing, among other things:
limitations on capital structure;
restrictions on specified investments;
prohibitions on transactions with affiliates; and
compliance with reporting, record keeping, voting, proxy disclosure and other rules and regulations that would significantly change our operations.
We conduct and will continue to conduct our operations directly and through our wholly or majority-owned subsidiaries, so that we and each of our subsidiaries do not fall within the definition of an “investment company” under the Investment Company Act. Under Section 3(a)(1)(A) of the Investment Company Act, a company is deemed to be an “investment company” if it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities. Under Section 3(a)(1)(C) of the Investment Company Act, a company is deemed to be an “investment company” if it is engaged, or proposes to engage, in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire “investment securities” having a value exceeding 40% of the value of its total assets (exclusive of government securities and cash items) on an unconsolidated basis, which we refer to as the “40% test.”
We intend to conduct our operations so that we and most, if not all, of our wholly and majority-owned subsidiaries will comply with the 40% test. We will continuously monitor our holdings on an ongoing basis to determine whether we and each wholly and majority-owned subsidiary comply with this test. We expect that most, if not all, of our wholly-owned and majority-owned subsidiaries will not be relying on exemptions under either Section 3(c)(1) or 3(c)(7) of the Investment Company Act. Consequently, interests in these subsidiaries (which are expected to constitute most, if not all, of our assets) generally will not constitute “investment securities.” Accordingly, we believe that we and most, if not all, of our wholly and majority-owned subsidiaries will not be considered investment companies under Section 3(a)(1)(C) of the Investment Company Act.
Since we are primarily engaged in the business of acquiring real estate, we believe that the Company and most, if not all, of our wholly and majority-owned subsidiaries will not be considered investment companies under Section 3(a)(1)(A) of the Investment Company Act. If we or any of our wholly or majority-owned subsidiaries would ever inadvertently fall within one of the definitions of “investment company,” we intend to rely on the exception provided by Section 3(c)(5)(C) of the Investment Company Act.

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Under Section 3(c)(5)(C), the SEC staff generally requires a company to maintain at least 55% of its assets directly in qualifying assets and at least 80% of the entity’s assets in qualifying assets and in a broader category of real estate-related assets to qualify for this exception. Mortgage-related securities may or may not constitute such qualifying assets, depending on the characteristics of the mortgage-related securities, including the rights that we have with respect to the underlying loans. Our ownership of mortgage-related securities, therefore, is limited by provisions of the Investment Company Act and SEC staff interpretations.
The method we use to classify our assets for purposes of the Investment Company Act will be based in large measure upon no-action positions taken by the SEC staff in the past. These no-action positions were issued in accordance with factual situations that may be substantially different from the factual situations we may face, and a number of these no-action positions were issued more than twenty years ago. Accordingly, no assurance can be given that the SEC staff will concur with our classification of our assets. In addition, the SEC staff may, in the future, issue further guidance that may require us to re-classify our assets for purposes of qualifying for an exclusion from regulation under the Investment Company Act. If we are required to re-classify our assets, we may no longer be in compliance with the exclusion from the definition of an “investment company” provided by Section 3(c)(5)(C) of the Investment Company Act.
A change in the value of any of our assets could cause us or one or more of our wholly or majority-owned subsidiaries to fall within the definition of an “investment company” and negatively affect our ability to maintain our exemption from regulation under the Investment Company Act. To avoid being required to register the Company or any of our subsidiaries as an investment company under the Investment Company Act, we may be unable to sell assets we would otherwise want to sell and may need to sell assets we would otherwise wish to retain. In addition, we may have to acquire additional income- or loss-generating assets that we might not otherwise have acquired or may have to forgo opportunities to acquire interests in companies that we would otherwise want to acquire and would be important to our investment strategy. Accordingly, our board of directors may not be able to change our investment policies as they deem appropriate if such change would cause us to meet the definition of an investment company.
To the extent that the SEC staff provides more specific guidance regarding any of the matters bearing upon the definition of an investment company and the exceptions to that definition, we may be required to adjust our investment strategy accordingly. For example, on August 31, 2011, the SEC issued a concept release requesting comments regarding a number of matters relating to the exemption provided by Section 3(c)(5)(C) of the Investment Company Act, including the nature of assets that qualify for purposes of the exemption and whether mortgage REITs should be regulated in a manner similar to investment companies. Additional guidance from the SEC staff could provide additional flexibility to us, or it could further inhibit our ability to pursue the investment strategy we have chosen.
If we are required to register as an investment company but fail to do so, we would be prohibited from engaging in our business, and criminal and civil actions could be brought against us. In addition, our contracts would be unenforceable unless a court required enforcement, and a court could appoint a receiver to take control of us and liquidate our business.
If our stockholders do not agree with the decisions of our board of directors, our stockholders only have limited control over changes in our policies and operations and may not be able to change such policies and operations.
Our board of directors determines our major policies, including our policies regarding investments, financing, growth, debt capitalization, REIT qualification and distributions. Our board of directors may amend or revise these and other policies without a vote of the stockholders except as otherwise set forth in our charter. Under the Maryland General Corporation Law and our charter, our stockholders generally have a right to vote only on the following:
the election or removal of directors;
any amendment of our charter (including a change in our investment objectives), except that our board of directors may amend our charter without stockholder approval to (a) increase or decrease the aggregate number of our shares or the number of shares of any class or series that we have the authority to issue, (b) effect certain reverse stock splits, and (c) change our name or the name or other designation or the par value of any class or series of our stock and the aggregate par value of our stock;
our liquidation or dissolution; and
certain mergers, reorganizations of our company, consolidations or sales or other dispositions of all or substantially all our assets, as provided in our charter and under Maryland law.
All other matters are subject to the discretion of our board of directors.

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Our board of directors may change our investment policies without stockholder approval, which could alter the nature of our stockholders’ investments.
Our charter requires that our independent directors review our investment policies at least annually to determine that the policies we are following are in the best interest of our stockholders. These policies may change over time. The methods of implementing our investment policies also may vary as new real estate development trends emerge and new investment techniques are developed. Except to the extent that policies and investment limitations are included in our charter, our investment policies, the methods for their implementation, and our other objectives, policies and procedures may be altered by our board of directors without the approval of our stockholders. As a result, the nature of stockholders’ investment could change without their consent.
Because of our holding company structure, we depend on our Operating Partnership and its subsidiaries for cash flow and we will be structurally subordinated in right of payment to the obligations of such operating subsidiary and its subsidiaries.
We are a holding company with no business operations of our own. Our only significant asset is and will be the general partnership interests of our Operating Partnership. We conduct substantially all of our business operations through our Operating Partnership. Accordingly, our only source of cash to pay our obligations is distributions from our Operating Partnership and its subsidiaries of their net earnings and cash flows. We cannot assure our stockholders that our Operating Partnership or its subsidiaries will be able to, or be permitted to, make distributions to us that will enable us to make distributions to our stockholders from cash flows from operations. Each of our Operating Partnership’s subsidiaries is a distinct legal entity and under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from such entities. In addition, because we are a holding company, stockholders’ claims will be structurally subordinated to all existing and future liabilities and obligations of our Operating Partnership and its subsidiaries. Therefore, in the event of our bankruptcy, liquidation or reorganization, our assets and those of our Operating Partnership and its subsidiaries will be able to satisfy stockholders’ claims only after all of our and our Operating Partnership’s and its subsidiaries’ liabilities and obligations have been paid in full.
Our stockholders are limited in their ability to sell their shares pursuant to our share repurchase program and may have to hold their shares for an indefinite period of time.
Our board of directors may reject any request for repurchase of shares, suspend (in whole or in part) the share repurchase program at any time and from time to time upon notice to our stockholders and amend, suspend, reduce, terminate or otherwise change our share repurchase program at any time upon 30 days’ notice to our stockholders for any reason it deems appropriate. Because we only repurchase shares on a monthly basis, depending upon when during the month our board of directors makes this determination, it is possible that our stockholders would not have any additional opportunities to have their shares repurchased under the prior terms of the program, or at all, upon receipt of the notice. In addition, the share repurchase program includes numerous restrictions that would limit stockholders’ ability to sell their shares. Generally, stockholders must have held their shares for at least one year in order to participate in our share repurchase program, subject to the right of our board of directors to waive such holding requirement in the event of the death or qualifying disability of a stockholder, or other involuntary exigent circumstances. Unless the shares of our common stock are being repurchased in connection with a stockholder’s death or qualifying disability, the purchase price for shares repurchased under our share repurchase program will be as set forth below. We do not currently anticipate obtaining appraisals for our investments (other than investments in transactions with affiliates), and, accordingly, the estimated value of our investments should not be viewed as an accurate reflection of the fair market value of our investments nor will they represent the amount of net proceeds that would result from an immediate sale of our assets. The price per share that we will pay to repurchase shares of our common stock will be as follows (in each case, as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to our common stock): (a) for stockholders who have continuously held their shares of our common stock for at least one year, the price will be 92.5% of the most recent Estimated Per Share NAV, (b) for stockholders who have continuously held their shares of our common stock for at least two years, the price will be 95.0% of the most recent Estimated Per Share NAV, (c) for stockholders who have continuously held their shares of our common stock for at least three years, the price will be 97.5% of the most recent Estimated Per Share NAV, and (d) for stockholders who have held their shares of our common stock for at least four years, the price will be 100.0% of the most recent Estimated Per Share NAV (in each case, as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to our common stock). These limits might prevent us from accommodating all repurchase requests made in any year. These restrictions severely limit our stockholders’ ability to sell their shares should they require liquidity, and limit their ability to recover the value such stockholders invested or the fair market value of their shares. As a result, stockholders should not rely on our share repurchase program to provide them with liquidity. On December 21, 2017, our board of directors, at the recommendation of the Audit Committee, established an updated Estimated Per Share NAV of $9.26 based on the estimated value of our assets less the estimated value of our liabilities divided by the number of shares outstanding on a diluted basis, calculated as of September 30, 2017.

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On January 22, 2018, our board of directors declared a special cash distribution of $3.00 per share of common stock. The special cash distribution was funded from 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 connection with the special cash distribution, our board of directors approved an updated 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. 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.
Your interest in us may be diluted if the price we pay in respect of shares repurchased under our share repurchase program exceeds the net asset value of our shares.
The prices we may pay for shares repurchased under our share repurchase program may exceed the net asset value of such shares at the time of repurchase, which may reduce the NAV of the remaining shares. If this were to be the case, investors who do not elect or are unable to have some or all of their shares repurchased under our share repurchase program would suffer dilution in the value of their shares as a result of repurchases.
Our stockholders’ interest in us will be diluted if we issue additional shares.
Existing stockholders do not have preemptive rights to any shares issued by us in the future. Our charter currently has authorized 350,000,000 shares of stock, of which 300,000,000 shares are designated as common stock and 50,000,000 are designated as preferred stock. Subject to any limitations set forth under Maryland law, our board of directors may increase or decrease the aggregate number of authorized shares of stock, increase or decrease the number of shares of any class or series of stock designated, or reclassify any unissued shares without the necessity of obtaining stockholder approval. All such shares may be issued in the discretion of our board of directors except that issuance of preferred stock must also be approved by a majority of our independent directors not otherwise interested in the transaction, who will have access, at our expense, to our legal counsel or to independent legal counsel. Further, we have adopted the Carter Validus Mission Critical REIT, Inc. 2010 Restricted Share Plan, or the 2010 Plan, pursuant to which we have the power and authority to grant restricted or deferred stock awards to persons eligible under the 2010 Plan. We have authorized and reserved 300,000 shares of our common stock for issuance under the 2010 Plan and have granted 3,000 restricted shares of common stock to each of our independent directors in connection with such director’s initial election to our board of directors, and 3,000 shares in connection with such director’s subsequent election or re-election, as applicable. Existing stockholders likely will suffer dilution of their equity investment in us, if we:
sell additional shares in the future, including those issued pursuant to the Third DRIP Offering;
sell securities that are convertible into shares of our common stock;
issue shares of our common stock in a private offering of securities to institutional investors;
issue additional restricted share awards to our directors;
issue shares to our Advisor or its successors or assigns, in payment of an outstanding fee obligation as set forth under the Advisory Agreement; or
issue shares of our common stock to sellers of properties acquired by us in connection with an exchange of limited partnership interests of our Operating Partnership.
In addition, the partnership agreement for our Operating Partnership contains provisions that would allow, under certain circumstances, other entities, including other programs affiliated with our Advisor and its affiliates, to merge into or cause the exchange or conversion of their interest for interests of our Operating Partnership. Because the limited partnership interests of our Operating Partnership may, in the discretion of our board of directors, be exchanged for shares of our common stock, any merger, exchange or conversion between our Operating Partnership and another entity ultimately could result in the issuance of a substantial number of shares of our common stock, thereby diluting the percentage ownership interest of other stockholders.

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If we internalize our management functions, the percentage of our outstanding common stock owned by our stockholders could be reduced, and we could incur other significant costs associated with being self-administered.
In the future, our board of directors may consider internalizing the functions performed for us by our Advisor. The method by which we could internalize these functions could take many forms, including without limitation, acquiring our Advisor. There is no assurance that internalizing our management functions would be beneficial to us and our stockholders. Any internalization transaction could result in significant payments to the owners of our Advisor, including in the form of our stock, which could reduce the percentage ownership of our then existing stockholders and concentrate ownership in the owner of our Advisor. Additionally, we may not realize the perceived benefits, we may not be able to properly integrate a new staff of managers and employees or we may not be able to effectively replicate the services provided previously by our Advisor, Property Manager or their affiliates. Internalization transactions involving the acquisition of advisors or property managers affiliated with entity sponsors have also, in some cases, been the subject of litigation. Even if these claims are without merit, we could be forced to spend significant amounts of money defending claims, which would reduce the amount of funds available for us to invest in properties or other investments and to pay distributions. All of these factors could have a material adverse effect on our results of operations, financial condition and ability to pay distributions.
We may be unable to maintain cash distributions or increase distributions over time.
There are many factors that can affect the availability and timing of cash distributions to our stockholders. The amount of cash available for distributions is affected by many factors, such as our ability to buy properties, rental income from such properties and our operating expense levels, as well as many other variables. Actual cash available for distributions may vary substantially from estimates. We cannot assure our stockholders that we will be able to maintain our current level of distributions or that distributions will increase over time. We also cannot give any assurance that rents from our properties will increase, that securities we may buy will increase in value or provide constant or increased distributions over time, or that future acquisitions of real properties, mortgage, bridge or mezzanine loans or any investments in securities will increase our cash available for distributions to stockholders. Our actual results may differ significantly from the assumptions used by our board of directors in establishing the distribution rate to stockholders. We may not have sufficient cash from operations to make a distribution required to maintain our REIT status. We may make distributions from borrowings in anticipation of future cash flow. Any such distributions will constitute a return of capital and may reduce the amount of capital we ultimately invest in properties and negatively impact the value of our stockholders’ investment.
General Risks Related to Investments in Real Estate
Our operating results will be affected by economic and regulatory changes that have an adverse impact on the real estate market in general, which may prevent us from being profitable or from realizing growth in the value of our real estate properties.
Our operating results are subject to risks generally incident to the ownership of real estate, including:
changes in general economic or local conditions;
changes in supply of or demand for similar or competing properties in an area;
changes in interest rates and availability of permanent mortgage funds that may render the sale of a property difficult or unattractive;
changes in tax, real estate, environmental and zoning laws; and
periods of high interest rates and tight money supply.
These and other reasons may prevent us from being profitable or from realizing growth or maintaining the value of our real estate properties.

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Our investments in properties where the underlying tenant has below investment grade credit rating, as determined by major credit rating agencies, or unrated tenants may have a greater risk of default.
As of December 31, 2017, approximately 88.2% of our tenants were not rated or did not have an investment grade credit rating from a major ratings agency or were not affiliates of companies having an investment grade credit rating. Our investments with such tenants may have a greater risk of default and bankruptcy than investments in properties leased exclusively to investment grade tenants. When we invest in properties where the tenant does not have a publicly available credit rating, we use certain credit assessment tools as well as rely on our own estimates of the tenant’s credit rating which includes but not limited to reviewing the tenant’s financial information (i.e., financial ratios, net worth, revenue, cash flows, leverage and liquidity) and monitoring local market conditions. If our lender or a credit rating agency disagrees with our ratings estimates, or our ratings estimates are otherwise inaccurate, we may not be able to obtain our desired level of leverage or our financing costs may exceed those that we projected. This outcome could have an adverse impact on our returns on that asset and hence our operating results.
If a tenant declares bankruptcy, we may be unable to collect balances due under relevant leases, which would reduce our cash flow from operations and the amount available for distributions to our stockholders.
Any of our tenants, or any guarantor of a tenant’s lease obligations, could be subject to a bankruptcy proceeding pursuant to Title 11 of the bankruptcy laws of the United States. Such a bankruptcy filing would bar all efforts by us to collect pre-bankruptcy debts from these entities or their properties, unless we receive an enabling order from a bankruptcy court. Post-bankruptcy debts would be paid currently. If a lease is assumed, all pre-bankruptcy balances owing under it must be paid in full. If a lease is rejected by a tenant in bankruptcy, we would have a general unsecured claim for damages. If a lease is rejected, it is unlikely we would receive any payments from the tenant because our claim is capped at the rent reserved under the lease, without acceleration, for the greater of one year or 15% of the remaining term of the lease, but not greater than three years, plus rent already due but unpaid. This claim could be paid only if funds were available, and then only in the same percentage as that realized on other unsecured claims.
A tenant or a lease guarantor in bankruptcy could delay efforts to collect past due balances under the relevant leases, and could ultimately preclude full collection of these sums. Such an event could cause a decrease or cessation of rental payments that would mean a reduction in our cash flow and the amount available for distributions to our stockholders. In the event of a bankruptcy, we cannot assure our stockholders that the tenant or its trustee will assume our lease. If a given lease, or guaranty of a lease, is not assumed, our cash flow and the amounts available for distributions to our stockholders may be adversely affected.
If a sale-leaseback transaction is re-characterized in a tenant’s bankruptcy proceeding, our financial condition could be adversely affected.
We have and may continue to enter into sale-leaseback transactions, whereby we would purchase a property and then lease the same property back to the person from whom we purchased it. In the event of the bankruptcy of a tenant, a transaction structured as a sale-leaseback may be re-characterized as either a financing or a joint venture, either of which outcomes could adversely affect our business. If the sale-leaseback were re-characterized as a financing, we might not be considered the owner of the property, and as a result would have the status of a creditor in relation to the tenant. In that event, we would no longer have the right to sell or encumber our ownership interest in the property. Instead, we would have a claim against the tenant for the amounts owed under the lease, with the claim arguably secured by the property. The tenant/debtor might have the ability to propose a plan restructuring the term, interest rate and amortization schedule of its outstanding balance. If confirmed by the bankruptcy court, we could be bound by the new terms, and prevented from foreclosing our lien on the property. If the sale-leaseback were re-characterized as a joint venture, our lessee and we could be treated as co-venturers with regard to the property. As a result, we could be held liable, under some circumstances, for debts incurred by the lessee relating to the property. Either of these outcomes could adversely affect our cash flow and the amount available for distributions to our stockholders.
Properties that have vacancies for a significant period of time could be difficult to sell, which could diminish the return on our stockholders’ investment.
A property has or may incur vacancies either by the continued default of tenants under their leases or the expiration of tenant leases. If vacancies continue for a long period of time, we have and may suffer reduced revenues, resulting in less cash to be distributed to stockholders. In addition, because properties’ market values depend principally upon the value of the properties’ leases, the resale value of properties with prolonged vacancies could suffer, which could further reduce our stockholders’ return.

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We may obtain only limited warranties when we purchase a property and would have only limited recourse if our due diligence did not identify any issues that lower the value of our property.
The seller of a property often sells such property in its “as is” condition on a “where is” basis and “with all faults,” without any warranties of merchantability or fitness for a particular use or purpose. In addition, purchase agreements may contain only limited warranties, representations and indemnifications that will only survive for a limited period after the closing. The purchase of properties with limited warranties increases the risk that we may lose some or all of our invested capital in the property as well as the loss of rental income from that property.
We may be unable to secure funds for future tenant improvements or capital needs, which could adversely impact our ability to pay cash distributions to our stockholders.
When tenants do not renew their leases or otherwise vacate their space, in order to attract replacement tenants, we expect that we will be required to expend substantial funds for tenant improvements and tenant refurbishments to the vacated space. In addition, although we expect that our leases with tenants will require tenants to pay routine property maintenance costs, we will likely be responsible for any major structural repairs, such as repairs to the foundation, exterior walls and rooftops. If we need additional capital in the future to improve or maintain our properties or for any other reason, we will have to obtain financing from other sources, such as cash flows from operations, borrowings, property sales or future equity offerings. These sources of funding may not be available on attractive terms or at all. If we cannot procure additional funding for capital improvements, our investments may generate lower cash flows or decline in value, or both.
Our inability to sell a property when we desire to do so could adversely impact our ability to pay cash distributions to our stockholders.
The real estate market is affected by many factors, such as general economic conditions, availability of financing, interest rates and other factors, including supply and demand, that are beyond our control. We cannot predict whether we will be able to sell any property for the price or on the terms set by us, or at all, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We cannot predict the length of time needed to find a willing purchaser and to close the sale of a property.
We may be required to expend funds to correct defects or to make improvements before a property can be sold. We cannot assure our stockholders that we will have funds available to correct such defects or to make such improvements. Moreover, in acquiring a property, we may agree to restrictions that prohibit the sale of that property for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that property. These provisions would restrict our ability to sell a property.
We may not be able to sell a property at a price equal to, or greater than, the price for which we purchased such property, which may lead to a decrease in the value of our assets and a reduction in the value of our stockholders’ shares.
Some of our leases will not contain rental increases over time, or the rental increases may be less than fair market rate at a future point in time. Therefore, the value of the property to a potential purchaser may not increase over time, which may restrict our ability to sell a property, or if we are able to sell such property, may lead to a sale price less than the price that we paid to purchase the property.
We may acquire or finance properties with lock-out provisions, which may prohibit us from selling a property, or may require us to maintain specified debt levels for a period of years on some properties.
A lock-out provision is a provision that prohibits the prepayment of a loan during a specified period of time. Lock-out provisions could materially restrict us from selling or otherwise disposing of or refinancing properties. These provisions would affect our ability to turn our investments into cash and thus affect cash available for distributions to our stockholders. Lock-out provisions may prohibit us from reducing the outstanding indebtedness with respect to any properties, refinancing such indebtedness on a non-recourse basis at maturity, or increasing the amount of indebtedness with respect to such properties. Lock-out provisions could impair our ability to take other actions during the lock-out period that could be in the best interests of our stockholders and, therefore, may have an adverse impact on the value of the shares, relative to the value that would result if the lock-out provisions did not exist. In particular, lock-out provisions could preclude us from participating in major transactions that could result in a disposition of our assets or a change in control even though that disposition or change in control might be in the best interests of our stockholders.

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Rising expenses could reduce cash flows and funds available for future acquisitions or distributions to our stockholders.
Our properties and any other properties that we buy in the future will be subject to operating risks common to real estate in general, any or all of which may negatively affect us. If any property is not fully occupied or if rents are being paid in an amount that is insufficient to cover operating expenses, we could be required to expend funds with respect to that property for operating expenses. The properties will be subject to increases in tax rates, utility costs, operating expenses, insurance costs, repairs and maintenance and administrative expenses. While we expect that many of our properties will continue to be leased on a triple net-lease basis or will require the tenants to pay all or a portion of such expenses, renewals of leases or future leases may not be negotiated on that basis, in which event we may have to pay those costs. If we are unable to lease properties on a triple net-lease basis or on a basis requiring the tenants to pay all or some of such expenses, or if tenants fail to pay required taxes, utilities and other impositions, we could be required to pay those costs, which could adversely affect funds available for future acquisitions or cash available for distributions.
If we suffer losses that are not covered by insurance or that are in excess of insurance coverage, we could lose invested capital and anticipated profits.
We carry comprehensive general liability coverage and umbrella liability coverage on all our properties with limits of liability which we deem adequate to insure against liability claims and provide for the costs of defense. Similarly, we are insured against the risk of direct physical damage in amounts we estimate to be adequate to reimburse us on a replacement cost basis for costs incurred to repair or rebuild each property, including loss of rental income during the rehabilitation period. Material losses may occur in excess of insurance proceeds with respect to any property, as insurance may not be sufficient to fund the losses. However, there are types of losses, generally of a catastrophic nature, such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution or environmental matters, which are either uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments. Insurance risks associated with potential terrorist acts could sharply increase the premiums we pay for coverage against property and casualty claims. Additionally, mortgage lenders in some cases have begun to insist that commercial property owners purchase specific coverage against terrorism as a condition for providing mortgage loans. It is uncertain whether such insurance policies will be available, or available at reasonable cost, which could inhibit our ability to finance or refinance our potential properties. In these instances, we may be required to provide other financial support, either through financial assurances or self-insurance, to cover potential losses. We may not have adequate, or any, coverage for such losses. The Terrorism Risk Insurance Act of 2002 is designed for a sharing of terrorism losses between insurance companies and the federal government, and extends the federal terrorism insurance backstop through December 31, 2020 pursuant to the Terrorism Risk Insurance Reauthorization Act of 2015. We cannot be certain how this act will impact us or what additional cost to us, if any, could result. If such an event damaged or destroyed one or more of our properties, we could lose both our invested capital and anticipated profits from such property.
Real estate-related taxes may increase and if these increases are not passed on to tenants, our income will be reduced.
Local real property tax assessors may seek to reassess some of our properties as a result of our acquisition of such properties. From time to time our property taxes may increase as property values or assessment rates change or for other reasons deemed relevant by the assessors. An increase in the assessed valuation of a property for real estate tax purposes will result in an increase in the related real estate taxes on that property. Although some tenant leases may permit us to pass through such tax increases to the tenants for payment, there is no assurance that renewal leases or future leases will be negotiated on the same basis. Increases not passed through to tenants will adversely affect our income, cash available for distributions, and the amount of distributions to our stockholders.
Covenants, conditions and restrictions may restrict our ability to operate our properties.
Some of our properties are, and we expect certain additional properties may be, contiguous to other parcels of real property, comprising part of the same commercial center. In connection with such properties, there are significant covenants, conditions and restrictions, or CC&Rs, restricting the operation of such properties and any improvements on such properties, and related to granting easements on such properties. Moreover, the operation and management of the contiguous properties may impact such properties. Compliance with CC&Rs may adversely affect our operating costs and reduce the amount of funds that we have available to pay distributions.

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Our operating results may be negatively affected by potential development and construction delays and result in increased costs and risks.
We may use borrowings or cash flows from operations to acquire and develop properties upon which we will construct improvements. In such event, we will be subject to uncertainties associated with re-zoning for development, environmental concerns of governmental entities and/or community groups, and our builder’s ability to build in conformity with plans, specifications, budgeted costs, and timetables. If a builder fails to perform, we may resort to legal action to rescind the purchase or the construction contract or to compel performance. A builder’s performance also may be affected or delayed by conditions beyond the builder’s control. Delays in completion of construction could also give tenants the right to terminate preconstruction leases. We may incur additional risks when we make periodic progress payments or other advances to builders before they complete construction. These and other such factors can result in increased costs of a project or loss of our investment. In addition, we will be subject to normal lease-up risks relating to newly constructed projects. We also must rely on rental income and expense projections and estimates of the fair market value of property upon completion of construction when agreeing upon a price at the time we acquire the property. If our projections are inaccurate, we may pay too much for a property, and our return on our investment could suffer.
While we do not currently intend to do so, we may invest in unimproved real property, subject to the limitations on investments in unimproved real property contained in our charter. For purposes of this paragraph, “unimproved real property” is real property which has not been acquired for the purpose of producing rental or other operating income, has no development or construction in process and on which no construction or development is planned in good faith to commence within one year. Returns from development of unimproved properties are also subject to risks associated with re-zoning the land for development and environmental concerns of governmental entities and/or community groups. Although we intend to limit any investment in unimproved property to property we intend to develop, our stockholders’ investment nevertheless is subject to the risks associated with investments in unimproved real property.
Competition with third parties in acquiring properties and other investments may impede our ability to make future acquisitions or may increase the cost of these acquisitions and reduce our profitability and the return on our stockholders’ investment.
We compete with many other entities engaged in real estate investment activities, including individuals, corporations, bank and insurance company investment accounts, other REITs, real estate limited partnerships, other entities engaged in real estate investment activities and private equity firms, many of which have greater resources than we do. Competition for properties may significantly increase the price we must pay for properties or other assets we seek to acquire and our competitors may succeed in acquiring those properties or assets themselves. In addition, our potential acquisition targets may find our competitors to be more attractive because they may have greater resources, may be willing to pay more for the properties or may have a more compatible operating philosophy. Larger entities may enjoy significant competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies. Further, the number of entities and the amount of funds competing for suitable investments may increase. This competition will result in increased demand for these assets and therefore increased prices paid for them. Because of an increased interest in single-property acquisitions among tax-motivated individual purchasers, we may pay higher prices if we purchase single properties in comparison with portfolio acquisitions. If we pay higher prices for properties and other investments, our profitability will be reduced and our stockholders may experience a lower return on their investment.
We will be subject to additional risks of our joint venture partner or partners when we enter into a joint venture, which could reduce the value of our investment.
We have entered into, and may continue to enter into, additional joint ventures with other real estate groups. The success of a particular joint venture may be limited if our joint venture partner becomes bankrupt or otherwise is unable to perform its obligations in accordance with the terms of the particular joint venture arrangement. The joint venture partner may have economic or business interests or goals that are or may become inconsistent with our business interests or goals. In addition, if we have a dispute with our joint venture partner, we could incur additional expenses and require additional time and resources from our Advisor, each of which could adversely affect our operating results and the value of our stockholders’ investment. In addition, we may assume liabilities related to the joint venture that exceed the percentage of our investment in the joint venture.
Our properties face competition that may affect tenants’ willingness to pay the amount of rent requested by us and the amount of rent paid to us may affect the cash available for distributions and the amount of distributions.
There will be numerous other properties within the market area of each of our properties that will compete with us for tenants. The number of competitive properties could have a material effect on our ability to rent space at our properties and the amount of rents charged. We could be adversely affected if additional competitive properties are built in close proximity with our properties, causing increased competition for customer traffic and creditworthy tenants. This could result in decreased cash flow from tenants and may require us to make capital improvements to properties that we would not have otherwise made, thus affecting cash available for distributions and the amount available for distributions to our stockholders.

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Costs of complying with governmental laws and regulations, including those relating to environmental matters, may adversely affect our income and the cash available for any distributions.
All real properties and the operations conducted on real properties are subject to federal, state and local laws and regulations relating to environmental protection and human health and safety. These laws and regulations generally govern wastewater discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of solid and hazardous materials, and the remediation of contamination associated with disposals. Environmental laws and regulations may impose joint and several liability on tenants, owners or operators for the costs to investigate or remediate contaminated properties, regardless of fault or whether the acts causing the contamination were legal. This liability could be substantial. In addition, the presence of hazardous substances, or the failure to properly remediate these substances, may adversely affect our ability to sell, rent or pledge such property as collateral for future borrowings.
Some of these laws and regulations have been amended so as to require compliance with new or more stringent standards as of future dates. Compliance with new or more stringent laws or regulations or stricter interpretation of existing laws may require material expenditures by us. Future laws, ordinances or regulations may impose material environmental liability. Additionally, our tenants’ operations, the existing condition of land when we buy it, operations in the vicinity of our properties, such as the presence of underground storage tanks, or activities of unrelated third parties, may affect our properties. In addition, there are various local, state and federal fire, health, life-safety and similar regulations with which we may be required to comply, and that may subject us to liability in the form of fines or damages for noncompliance. Any material expenditures, fines, or damages we must pay will reduce our ability to make distributions and may reduce the value of our stockholders’ investment.
State and federal laws in this area are constantly evolving, and we intend to monitor these laws and take commercially reasonable steps to protect ourselves from the impact of these laws, including obtaining environmental assessments of most properties that we acquire; however, we will not obtain an independent third-party environmental assessment for every property we acquire. In addition, any such assessment that we do obtain may not reveal all environmental liabilities or that a prior owner of a property did not create a material environmental condition not known to us. The cost of defending against claims of liability, of compliance with environmental regulatory requirements, of remediating any contaminated property, or of paying personal injury claims would materially adversely affect our business, assets or results of operations and, consequently, amounts available for distribution to our stockholders.
If we sell properties by providing financing to purchasers, defaults by the purchasers would adversely affect our cash flows.
If we decide to sell any of our properties, we intend to use our best efforts to sell them for cash. However, in some instances we may sell our properties by providing financing to purchasers. When we provide financing to purchasers, we will bear the risk that the purchaser may default, which could negatively impact our cash distributions to stockholders. Even in the absence of a purchaser default, the distribution of the proceeds of sales to our stockholders, or their reinvestment in other assets, will be delayed until the promissory notes or other property we may accept upon the sale are actually paid, sold, refinanced or otherwise disposed of. In some cases, we may receive initial down payments in cash and other property in the year of sale in an amount less than the selling price, and subsequent payments will be spread over a number of years. If any purchaser defaults under a financing arrangement with us, it could negatively impact our ability to pay cash distributions to our stockholders.
Our recovery of an investment in a mortgage, bridge or mezzanine loan that has defaulted may be limited.
There is no guarantee that the mortgage, loan or deed of trust securing an investment will, following a default, permit us to recover the original investment and interest that would have been received absent a default. The security provided by a mortgage, deed of trust or loan is directly related to the difference between the amount owed and the appraised market value of the property. Although we intend to rely on a current real estate appraisal when we make the investment, the value of the property is affected by factors outside our control, including general fluctuations in the real estate market, rezoning, neighborhood changes, highway relocations and failure by the borrower to maintain the property. In addition, we may incur the costs of litigation in our efforts to enforce our rights under defaulted loans.

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Our costs associated with complying with the Americans with Disabilities Act of 1990 may affect cash available for distributions.
Our properties are subject to the Americans with Disabilities Act of 1990, or the Disabilities Act. Under the Disabilities Act, all places of public accommodation are required to comply with federal requirements related to access and use by disabled persons. The Disabilities Act has separate compliance requirements for “public accommodations” and “commercial facilities” that generally require that buildings and services, including restaurants and retail stores, be made accessible and available to people with disabilities. The Disabilities Act’s requirements could require removal of access barriers and could result in the imposition of injunctive relief, monetary penalties, or, in some cases, an award of damages. We will attempt to acquire properties that comply with the Disabilities Act or place the burden on the seller or other third party, such as a tenant, to ensure compliance with the Disabilities Act. However, we cannot assure our stockholders that we will be able to acquire properties or allocate responsibilities in this manner. If we cannot, our funds used for Disabilities Act compliance may affect cash available for distributions and the amount of distributions to our stockholders.
Risks Associated with Investments in the Healthcare Property Sector
Our real estate investments may be concentrated in healthcare properties, making us more vulnerable economically than if our investments were diversified.
We are subject to risks inherent in concentrating investments in real estate. The risks resulting from a lack of diversification may become even greater as a result of our business strategy to invest to a substantial degree in healthcare properties. A downturn in the commercial real estate industry generally could significantly adversely affect the value of our properties. A downturn in the healthcare industry could negatively affect our lessees’ ability to make lease payments to us and our ability to make distributions to our stockholders. These adverse effects could be more pronounced than if we diversified our investments outside of real estate or if our portfolio did not include a concentration in healthcare properties. Our investments in healthcare properties accounted for 100.0% of our contractual rental revenue from continuing operations for the year ended December 31, 2017.
Certain of our properties may not have efficient alternative uses, so the loss of a tenant may cause us to not be able to find a replacement or cause us to spend considerable capital to adapt the property to an alternative use.
Some of the properties we have acquired or seek to acquire are healthcare properties that may only be suitable for similar healthcare-related tenants. If we or our tenants terminate the leases for these properties or our tenants lose their regulatory authority to operate such properties, we may not be able to locate suitable replacement tenants to lease the properties for their specialized uses. Alternatively, we may be required to spend substantial amounts to adapt the properties to other uses. Any loss of revenues or additional capital expenditures required as a result may have a material adverse effect on our business, financial condition and results of operations and our ability to make distributions to our stockholders.
Our healthcare properties and tenants may be unable to compete successfully, which could result in lower rent payments, reduce our cash flows from operations and the amounts available for distributions to our stockholders.
The healthcare properties we have acquired or seek to acquire may face competition from nearby hospitals and other healthcare properties that provide comparable services. Some of those competing facilities are owned by governmental agencies and supported by tax revenues, and others are owned by nonprofit corporations and may be supported to a large extent by endowments and charitable contributions. These types of support are not available to our properties. Similarly, our tenants face competition from other healthcare practices in nearby hospitals and other healthcare properties. Our tenants’ failure to compete successfully with these other practices could adversely affect their ability to make rental payments, which have and could continue to adversely affect our rental revenues. Further, from time to time and for reasons beyond our control, referral sources, including physicians and managed care organizations, may change their lists of hospitals or physicians that are permitted to participate in the payer program. This could adversely affect our tenants’ ability to make rental payments, which could adversely affect our rental revenues. Any reduction in rental revenues resulting from the inability of our healthcare properties and our tenants to compete successfully may have a material adverse effect on our business, financial condition and results of operations and our ability to make distributions to our stockholders.

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Reductions in reimbursement from third-party payors, including Medicare and Medicaid, could adversely affect the profitability of our tenants and hinder their ability to make rental payments to us.
Sources of revenue for our tenants may include the federal Medicare program, state Medicaid programs, private insurance carriers and health maintenance organizations, among others. Efforts by such payors to reduce healthcare costs will likely continue, which may result in reductions or slower growth in reimbursement for certain services provided by some of our tenants. In addition, the healthcare billing rules and regulations are complex, and the failure of any of our tenants to comply with various laws and regulations could jeopardize their ability to continue participating in Medicare, Medicaid and other government sponsored payment programs. Moreover, the state and federal governmental healthcare programs are subject to reductions by state and federal legislative actions. The Medicare Access & CHIP Reauthorization Act of 2015 (MACRA) introduced two new payment methodologies. The first model is the Merit-Based Incentive Payment System, or MIPS, which combines the Physician Quality Reporting System, or PQRS, and Meaningful Use program with the Value Based Modifier program to provide for one payment model based upon (i) quality, (ii) resource use, (iii) clinical practice improvement and (iv) advancing care information through the use of certified Electronic Health Record, or EHR, technology. The second model is the Advanced Alternative Payment Models, or APM, which requires the physician to participate in a risk share arrangement for reimbursement related to his or her patients while utilizing a certified health record and reporting on specific quality metrics. There are a number of physicians that will not qualify for the APM payment method. Therefore, this change in reimbursement models may impact our tenants’ payments and create uncertainty in the tenants’ financial condition.
The healthcare industry continues to face various challenges, including increased government and private payor pressure on healthcare providers to control or reduce costs. It is possible that our tenants will continue to experience a shift in payor mix away from fee-for-service payors, resulting in an increase in the percentage of revenues attributable to reimbursement based upon value based principles and quality driven managed care programs, and general industry trends that include pressures to control healthcare costs. The federal government's goal is to move approximately ninety percent (90%) of its reimbursement for providers to be based upon quality outcome models. Pressures to control healthcare costs and a shift away from traditional health insurance reimbursement to payment based upon quality outcomes have increased the uncertainty of payments.
In 2014, state insurance exchanges were implemented, which provide a new mechanism for individuals to obtain insurance. At this time, the number of payers that are participating in the state insurance exchanges varies, and in some regions there are very limited insurance plans available for individuals to choose from when purchasing insurance. In addition, not all healthcare providers will maintain participation agreements with the payers that are participating in the state health insurance exchange. Therefore, it is possible that our tenants may incur a change in their reimbursement if the tenant does not have a participation agreement with the state insurance exchange payers and a large number of individuals elect to purchase insurance from the state insurance exchange. Further, the rates of reimbursement from the state insurance exchange payers to healthcare providers will vary greatly. The rates of reimbursement will be subject to negotiation between the healthcare provider and the payer, which may vary based upon the market, the healthcare provider’s quality metrics, the number of providers participating in the area and the patient population, among other factors. Therefore, it is uncertain whether healthcare providers will incur a decrease in reimbursement from the state insurance exchange, which may impact a tenant’s ability to pay rent.
The insurance plans that participated on the health insurance exchanges created by the Patient Protection and Affordable Care Act of 2010 (“Healthcare Reform Act”) were expecting to receive risk corridor payments to address the high risk claims that it paid through the exchange product. However, the federal government currently owes the insurance companies approximately $8.3 billion under the risk corridor payment program that is currently disputed by the federal government. The federal government is currently defending several lawsuits from the insurance plans that participate on the health insurance exchange. If the insurance companies do not receive the payments, the insurance companies may cease to participate on the insurance exchange which limits insurance options for patients. If patients do not have access to insurance coverage it may adversely impact the tenant’s revenues and the tenant’s ability to pay rent.
In addition, the healthcare legislation passed in 2010 included new payment models with new shared savings programs and demonstration programs that include bundled payment models and payments contingent upon reporting on satisfaction of quality benchmarks. The new payment models will likely change how physicians are paid for services. These changes could have a material adverse effect on the financial condition of some or all of our tenants. The financial impact on our tenants could restrict their ability to make rent payments to us, which would have a material adverse effect on our business, financial condition and results of operations and our ability to pay distributions to stockholders.

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Furthermore, beginning in 2016, the Centers for Medicare and Medicaid Services has applied a negative payment adjustment to individual eligible professionals, Comprehensive Primary Care practice sites, and group practices participating in the Physician Quality Reporting System, or PQRS, group practice reporting option (including Accountable Care Organizations) that do not satisfactorily report PQRS in 2014. Program participation during a calendar year will affect payments after two years, such that individuals and groups that receive the 2016 negative payment adjustment will not receive a 2014 PQRS incentive payment. Providers can appeal the determination, but if the provider is not successful, the provider’s reimbursement may be adversely impacted, which could adversely impact a tenant’s ability to make rent payments to us.
Moreover, President Trump signed an Executive Order on January 20, 2017 to “ease the burden of Obamacare”.
On October 12, 2017, President Trump signed an Executive Order the purpose of which was to, among other things, (i) cut healthcare cost-sharing reduction subsidies, (ii) allow more small businesses to join together to purchase insurance coverage, (iii) extend short-term coverage policies, and (iv) expand employers’ ability to provide workers cash to buy coverage elsewhere. The Executive Order required the government agencies to draft regulations for consideration related to Associated Health Plans ("AHP"), short term limited duration insurance ("STLDI") and health reimbursement arrangements ("HRA"). At this time the proposed legislation has not been drafted. The Trump Administration also ceased to provide the cost-share subsidies to the insurance companies that offered the silver plan benefits on the Health Information Exchange. The termination of the cost-share subsidies would impact the subsidy payments due in 2017 and will likely adversely impact the insurance companies, causing an increase in the premium payments for the individual beneficiaries in 2018. Nineteen State Attorney Generals filed suit to force the Trump Administration to reinstate the cost shares subsidy payments. On October 25, 2017, a California Judge ruled in favor of the Trump Administration and found that the federal government was not required to immediately reinstate payment for the cost shares subsidy. The injunction sought by the Attorney Generals’ lawsuit was denied. Subsequently, Maine Community Health Options filed suit against The United States of America in the United States Court of Federal Claims, Case No. 17-2057C (December 28, 2017) seeking damages and payment for the cost-sharing reduction payment. This claim is currently pending. Therefore, our tenants will likely see an increase in individuals who are self-pay or have a lower health benefit plan due to the increase in the premium payments. Our tenants’ collections and revenues may be adversely impacted by the change in the payor mix of their patients and it may adversely impact the tenants’ ability to make rent payments.
There are multiple lawsuits in several judicial districts brought by qualified health plans to recover the prior risk corridor payments that were anticipated to be paid as part of the health insurance exchange program.  The multiple lawsuits are moving through the judicial process. If the Administration or the court system determines that risk corridor or risk share payments are not required to be paid to the qualified health plans offering insurance coverage on the health insurance exchange program, the insurance companies may cease offering the Health Insurance Exchange product to the current beneficiaries. Therefore, our tenants may have an increase of self-pay patients and collections may decline, adversely impacting the tenants’ ability to pay rent.
On January 11, 2018, the Centers for Medicare and Medicaid Services (“CMS”) issued guidance to support state efforts to improve Medicaid enrollee health outcomes by incentivizing community engagement among able-bodied, working-age Medicaid beneficiaries. The policy excludes individuals eligible for Medicaid due to a disability, elderly beneficiaries, children and pregnant women. CMS received proposals from 10 states seeking requirements for able bodied Medicaid beneficiaries to engage in employment and community engagement initiatives. Kentucky is the first state to obtain a waiver for its program and require Medicaid beneficiaries to work or get ready for employment. If the “work requirement” expands to the states, Medicaid programs it may decrease the number of patients eligible for Medicaid. The patients that are no longer eligible for Medicaid may become self-pay patients which may adversely impact our tenant’s ability to receive reimbursement. If our tenants’ patient payor mix becomes more self-pay patients, it may impact our tenants’ ability to collect revenues and pay rent.

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The healthcare industry is heavily regulated, and new laws or regulations, changes to existing laws or regulations, loss of licensure or failure to obtain licensure could result in the inability of our tenants to make rent payments to us.
The healthcare industry is heavily regulated by federal, state and local governmental bodies. The tenants in our healthcare properties generally are subject to laws and regulations covering, among other things, licensure, certification for participation in government programs, and relationships with physicians and other referral sources. Changes in these laws and regulations could negatively affect the ability of our tenants to make lease payments to us and our ability to make distributions to our stockholders. Many of our healthcare properties and their tenants may require a license or certificate of need, or CON, to operate. Failure to obtain a license or CON, or loss of a required license or CON, would prevent a facility from operating in the manner intended by the tenant. These events could also materially adversely affect our tenants’ ability to make rent payments to us. State and local laws also may regulate expansion, including the addition of new beds or services or acquisition of medical equipment, and the construction of healthcare properties, by requiring a CON or other similar approval. State CON laws are not uniform throughout the United States and are subject to change; therefore, this may adversely impact our tenants’ ability to provide services in different states. We cannot predict the impact of state CON laws on our development of facilities or the operations of our tenants. In addition, state CON laws often materially impact the ability of competitors to enter into the marketplace of our facilities. The repeal of CON laws could allow competitors to freely operate in previously closed markets. This could negatively affect our tenants’ abilities to make current payments to us. In limited circumstances, loss of state licensure or certification or closure of a facility could ultimately result in loss of authority to operate the facility and require new CON authorization to re-institute operations. As a result, a portion of the value of the facility may be reduced, which would adversely impact our business, financial condition and results of operations and our ability to make distributions to our stockholders.
Tenants of our healthcare properties are subject to anti-fraud and abuse laws, the violation of which by a tenant may jeopardize the tenant’s ability to make rent payments to us.
There are various federal and state laws prohibiting fraudulent and abusive business practices by healthcare providers who participate in, receive payments from or are in a position to make referrals in connection with government-sponsored healthcare programs, including the Medicare and Medicaid programs. Our lease arrangements with certain tenants may also be subject to these anti-fraud and abuse laws. These laws include the Federal Anti-Kickback Statute, which prohibits, among other things, the offer, payment, solicitation or receipt of any form of remuneration in return for, or to induce, the referral of any item or service reimbursed by Medicare or Medicaid; the Federal Physician Self-Referral Prohibition, which, subject to specific exceptions, restricts physicians from making referrals for specifically designated health services for which payment may be made under Medicare or Medicaid programs to an entity with which the physician, or an immediate family member, has a financial relationship; the False Claims Act, which prohibits any person from knowingly presenting false or fraudulent claims for payment to the federal government, including claims paid by the Medicare and Medicaid programs; the Civil Monetary Penalties Law which authorizes the U.S. Department of Health and Human Services to impose monetary penalties or exclusion from participation in state or federal healthcare programs for certain fraudulent acts; the Health Insurance Portability and Accountability Act, or HIPAA, Fraud Statute which makes it a federal crime to defraud any health benefit plan, including private payers; and Exclusions Law which authorizes U.S. Department of Health and Human Services to exclude someone from participation in state or federal healthcare programs for certain fraudulent acts.
Each of these laws includes criminal and/or civil penalties for violations that range from punitive sanctions, damage assessments, penalties, imprisonment, denial of Medicare and Medicaid payments and/or exclusion from the Medicare and Medicaid programs. Certain laws, such as the False Claims Act, allow for individuals to bring whistleblower actions on behalf of the government for violations thereof. Additionally, states in which our healthcare properties are located may have similar anti-fraud and abuse laws. Investigation by a federal or state governmental body for violation of anti-fraud and abuse laws or imposition of any of these penalties upon one of our tenants could jeopardize that tenant’s ability to operate or to make rent payments, which may have a material adverse effect on our business, financial condition and results of operations and our ability to make distributions to our stockholders.

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Adverse trends in healthcare provider operations may negatively affect our lease revenues and our ability to make distributions to our stockholders.
The healthcare industry is currently experiencing changes in the demand for and methods of delivering healthcare services; changes in third-party reimbursement policies; significant unused capacity in certain areas, which has created substantial competition for patients among healthcare providers in those areas; continuing pressure by private and governmental payors to reduce payments to providers of services; increased scrutiny of billing, referral and other practices by federal and state authorities; changes in federal and state healthcare program payment models; increase and expansion of government audits related to compliance with the HIPAA privacy and security rules; continued consolidation of providers; and increased emphasis on compliance with privacy and security requirements related to personal health information. In addition, the fines and penalties for a breach of the HIPAA privacy and security rules increased in 2013. If a tenant breaches a patient’s protected health information and is fined by the federal government, the tenant’s ability to operate and pay rent may be adversely impacted. These factors may adversely affect the economic performance of some or all of our tenants and, in turn, our lease revenues and our ability to make distributions to our stockholders.
Tenants of our healthcare properties may be subject to significant legal actions that could subject them to increased operating costs and substantial uninsured liabilities, which may affect their ability to pay their rent payments to us.
As is typical in the healthcare industry, certain types of tenants of our healthcare properties may often become subject to claims that their services have resulted in patient injury or other adverse effects. Many of these tenants may have experienced an increasing trend in the frequency and severity of professional liability and general liability insurance claims and litigation asserted against them. The insurance coverage maintained by these tenants may not cover all claims made against them nor continue to be available at a reasonable cost, if at all. In some states, insurance coverage for the risk of punitive damages arising from professional liability and general liability claims and/or litigation may not, in certain cases, be available to these tenants due to state law prohibitions or limitations of availability. As a result, these types of tenants of our healthcare properties operating in these states may be liable for punitive damage awards that are either not covered or are in excess of their insurance policy limits. We also believe that there has been, and will continue to be, an increase in governmental investigations of certain healthcare providers, particularly in the area of Medicare/Medicaid false claims, as well as an increase in enforcement actions resulting from these investigations. Insurance may not be available to cover such losses. Any adverse determination in a legal proceeding or governmental investigation, whether currently asserted or arising in the future, could have a material adverse effect on a tenant’s financial condition. If a tenant is unable to obtain or maintain insurance coverage, if judgments are obtained in excess of the insurance coverage, if a tenant is required to pay uninsured punitive damages, or if a tenant is subject to an uninsurable government enforcement action, the tenant could be exposed to substantial additional liabilities, which may affect the tenant’s ability to pay rent, which in turn could have a material adverse effect on our business, financial condition and results of operations and our ability to make distributions to our stockholders.
Comprehensive healthcare reform legislation could materially and adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders.
The Healthcare Reform Act is intended to reduce the number of individuals in the U.S. without health insurance and effect significant other changes to the ways in which healthcare is organized, delivered and reimbursed. Included with the legislation is a limitation on physician-owned hospitals from expanding, unless the facility satisfies very narrow federal exceptions to this limitation. Therefore, if our tenants are physicians that own and refer to a hospital, the hospital would be limited in its operations and expansion potential, which may limit the hospital’s services and resulting revenues and may impact the owner’s ability to make rental payments. The Healthcare Reform Act changes continue to impact reimbursement models from the state and federal healthcare programs and the changes in reimbursement may adversely impact our tenants. December 22, 2017, the Tax Cuts and Jobs Act (the "Tax Act") was signed into law. The Tax Act repeals the individual mandate beginning in 2019. See the risk factor above entitled "Reductions in reimbursement from third-party payors, including Medicare and Medicaid, could adversely affect the profitability of our tenants and hinder their ability to make rental payments to us" for more information.
At this time, the effects of healthcare reform and its impact on our properties are not yet fully known but could materially and adversely affect our business, financial condition, results of operations and ability to pay distributions to our stockholders.

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Risks Associated with Debt Financing and Investments
We have incurred, and expect to continue to incur, mortgage indebtedness and other borrowings, which could adversely impact the value of our stockholders’ investment if the value of the property securing the debt falls or if we are forced to refinance the debt during adverse economic conditions.
We expect that in most instances, we will continue to acquire real properties by using either existing financing or borrowing new funds. In addition, we have incurred and may continue to incur mortgage debt and pledge all or some of our real properties as security for that debt to obtain funds to acquire additional real properties. We may borrow if we need funds to satisfy the REIT tax qualification requirement that we distribute at least 90% of our annual REIT taxable income to our stockholders. We also may borrow if we otherwise deem it necessary or advisable to assure that we maintain our qualification as a REIT.
We believe that utilizing borrowing is consistent with our objective of maximizing returns to stockholders. There is no limitation on the amount we may borrow against any single improved property. Our charter provides that, until such time as shares of our common stock are listed on a national securities exchange or traded in the over-the-counter market, our borrowings may not exceed 300% of our total “net assets” as of the date of any borrowing (which is the maximum level of indebtedness permitted under the Statement of Policy Regarding Real Estate Investment Trusts published by the North American Securities Administrators Association, or the NASAA REIT Guidelines, absent a satisfactory showing that a higher level is appropriate), which is generally expected to be approximately 75% of the cost of our investments; however, we may exceed that limit if approved by a majority of our independent directors and disclosed to stockholders in our next quarterly report following such borrowing along with justification for exceeding such limit. This charter limitation, however, does not apply to individual real estate assets or investments. In addition, our board of directors has adopted investment policies that prohibit us from borrowing in excess of 50% of the greater of cost (before deducting depreciation or other non-cash reserves) or fair market value of our assets, unless borrowing a greater amount is approved by a majority of our independent directors and disclosed to stockholders in our next quarterly report following such borrowing along with justification for the excess; provided, however, that this policy limitation does not apply to individual real estate assets or investments. At the date of acquisition of each asset, we anticipate that the cost of investment for such asset will be substantially similar to its fair market value, which will enable us to comply with the limitations set forth in our charter. However, subsequent events, including changes in the fair market value of our assets, could result in our exceeding these limitations. As a result, we expect that our debt levels will be higher until we have invested most of our capital, which may cause us to incur higher interest charges, make higher debt service payments or be subject to restrictive covenants.
If there is a shortfall between the cash flow from a property and the cash flow needed to service mortgage debt on a property, then the amount available for distributions to stockholders may be reduced. In addition, incurring mortgage debt increases the risk of loss since defaults on indebtedness secured by a property may result in lenders initiating foreclosure actions. In that case, we could lose the property securing the loan that is in default, thus reducing the value of our stockholders’ investment. For U.S. federal income tax purposes, a foreclosure of any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but would not receive any cash proceeds. In such event, we may be unable to pay the amount of distributions required in order to maintain our REIT status. We may give full or partial guarantees to lenders of mortgage debt to the entities that own our properties. When we provide a guaranty on behalf of an entity that owns one of our properties, we will be responsible to the lender for satisfaction of the debt if it is not paid by such entity. If any mortgages contain cross-collateralization or cross-default provisions, a default on a single property could affect multiple properties. If any of our properties are foreclosed upon due to a default, our ability to pay cash distributions to our stockholders will be adversely affected which could result in our losing our REIT status and would result in a decrease in the value of our stockholders’ investment.
Changes in the debt markets could have a material adverse impact on our earnings and financial condition.
The domestic and international commercial real estate debt markets are subject to volatility resulting in, from time to time, in the tightening of underwriting standards by lenders and credit rating agencies, which result in lenders increasing the cost for debt financing. Should the overall cost of borrowings increase, either by increases in the index rates or by increases in lender spreads, we will need to factor such increases into the economics of future acquisitions. This may result in future acquisitions generating lower overall economic returns and potentially reducing future cash flow available for distribution. If these disruptions in the debt markets persist, our ability to borrow monies to finance the purchase of, or other activities related to, real estate assets will be negatively impacted. If we are unable to borrow monies on terms and conditions that we find acceptable, we likely will have to reduce the number of properties we can purchase, and the return on the properties we do purchase may be lower. In addition, we may find it difficult, costly or impossible to refinance indebtedness which is maturing.

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In addition, the state of the debt markets could have an impact on the overall amount of capital invested in real estate, which may result in price or value decreases of real estate assets. Although this may benefit us for future acquisitions, it could negatively impact the current value of our existing assets.
High mortgage rates may make it difficult for us to finance or refinance properties, which could reduce the number of properties we can acquire and the amount of cash distributions we can make.
By placing mortgage debt on properties, we run the risk of being unable to refinance the properties when the loans come due, or of being unable to refinance on favorable terms. If interest rates are higher when the properties are refinanced, we may not be able to finance the properties and our income could be reduced. If any of these events occur, our cash flow would be reduced. This, in turn, would reduce cash available for distribution to our stockholders and may hinder our ability to raise more capital by issuing more stock or by borrowing more money.
Lenders have required us to enter into restrictive covenants relating to our operations, which could limit our ability to make distributions to our stockholders.
In connection with providing us financing, certain of our lenders have imposed restrictions on us that affect our distribution, investment and operating policies, or our ability to incur additional debt. Loan documents we have entered or may enter into may contain covenants that limit our ability to further mortgage the property, discontinue insurance coverage or replace Carter/Validus Advisors, LLC as our Advisor. These or other limitations may adversely affect our flexibility and our ability to achieve our investment and operating objectives. Additionally, such restrictions could make it difficult for us to satisfy the requirements necessary to maintain our qualification as a REIT for U.S. federal income tax purposes.
Increases in interest rates could increase the amount of our debt payments and adversely affect our ability to pay distributions to our stockholders.
As of December 31, 2017, we had $101,278,000 of fixed interest rate debt outstanding, of which $83,066,000 was fixed through the use of interest rate swaps. As of December 31, 2017, we had $40,199,000 of variable rate debt outstanding. As of December 31, 2017, our weighted average interest rate was 5.6%. Increases in interest rates may increase our interest costs if we obtain variable rate debt, which could reduce our cash flows and our ability to pay distributions to our stockholders. In addition, if we need to repay existing debt during periods of rising interest rates, we could be required to liquidate one or more of our investments in properties at times that may not permit realization of the maximum return on such investments.
We may invest in collateralized mortgage-backed securities, or CMBS, which may increase our exposure to credit and interest rate risk.
We may invest in CMBS, which may increase our exposure to credit and interest rate risk. We have not adopted, and do not expect to adopt, any formal policies or procedures designed to manage risks associated with our investments in CMBS. In this context, credit risk is the risk that borrowers will default on the mortgages underlying the CMBS. We intend to manage this risk by investing in CMBS guaranteed by U.S. government agencies, such as the Government National Mortgage Association (GNMA), or U.S. government sponsored enterprises, such as the Federal National Mortgage Association (FNMA) or the Federal Home Loan Mortgage Corporation (FHLMC). Interest rate risk occurs as prevailing market interest rates change relative to the current yield on the CMBS. For example, when interest rates fall, borrowers are more likely to prepay their existing mortgages to take advantage of the lower cost of financing. As prepayments occur, principal is returned to the holders of the CMBS sooner than expected, thereby lowering the effective yield on the investment. On the other hand, when interest rates rise, borrowers are more likely to maintain their existing mortgages. As a result, prepayments decrease, thereby extending the average maturity of the mortgages underlying the CMBS. We intend to manage interest rate risk by purchasing CMBS offered in tranches, or with sinking fund features, that are designed to match our investment objectives. If we are unable to manage these risks effectively, our results of operations, financial condition and ability to pay distributions to our stockholders will be adversely affected.
Any real estate debt security that we originate or purchase is subject to the risks of delinquency and foreclosure.
We may originate and purchase real estate debt securities, which are subject to risks of delinquency and foreclosure and risks of loss. Typically, we will not have recourse to the personal assets of our borrowers. The ability of a borrower to repay a real estate debt security secured by an income-producing property depends primarily upon the successful operation of the property, rather than upon the existence of independent income or assets of the borrower. If the net operating income of the property is reduced, the borrower’s ability to repay the real estate debt security may be impaired. A property’s net operating income can be affected by, among other things:
increased costs, added costs imposed by franchisors for improvements or operating changes required, from time to time, under the franchise agreements;
property management decisions;

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property location and condition;
competition from comparable types of properties;
changes in specific industry segments;
declines in regional or local real estate values, or occupancy rates; and
increases in interest rates, real estate tax rates and other operating expenses.
We bear the risks of loss of principal to the extent of any deficiency between the value of the collateral and the principal and accrued interest of the real estate debt security, which could have a material adverse effect on our cash flow from operations and limit amounts available for distribution to our stockholders. In the event of the bankruptcy of a real estate debt security borrower, the real estate debt security to that borrower will be deemed to be collateralized only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by the bankruptcy court), and the lien securing the real estate debt security will be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under state law. Foreclosure of a real estate debt security can be an expensive and lengthy process that could have a substantial negative effect on our anticipated return on the foreclosed real estate debt security. We also may be forced to foreclose on certain properties, be unable to sell these properties and be forced to incur substantial expenses to improve operations at the property.
U.S. Federal Income Tax Risks
Failure to maintain our qualification as a REIT would adversely affect our operations and our ability to make distributions.
We qualified and elected to be taxed as a REIT for federal income tax purposes. In order for us to maintain our qualification as a REIT, we must satisfy certain requirements set forth in the Code and Treasury Regulations and various factual matters and circumstances that are not entirely within our control. We intend to structure our activities in a manner designed to satisfy all of these requirements. However, if certain of our operations were to be recharacterized by the IRS, such recharacterization could jeopardize our ability to satisfy all of the requirements for qualification as a REIT.
If we fail to maintain our qualification as a REIT for any taxable year, we will be subject to U.S. federal income tax on our taxable income at corporate rates. In addition, we would generally be disqualified from treatment as a REIT for the four taxable years following the year of losing our REIT status. Losing our REIT status would reduce our net earnings available for investment or distribution to stockholders because of the additional tax liability. Further, distributions to stockholders would no longer qualify for the dividends paid deduction, and we would no longer be required to make distributions. If this occurs, we might be required to borrow funds or liquidate some investments in order to pay the applicable tax. Our failure to continue to qualify as a REIT would adversely affect the return on your investment.
To maintain our qualification as a REIT, we must meet annual distribution requirements, which may result in us distributing amounts that may otherwise be used for our operations and could result in our inability to acquire appropriate assets.
To maintain the favorable tax treatment afforded to REITs under the Code, we are required each year to distribute to our stockholders at least 90% of our REIT taxable income (excluding net capital gain), determined without regard to the deduction for distributions paid. We will be subject to U.S. federal income tax on our undistributed taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which distributions we pay with respect to any calendar year are less than the sum of (i) 85% of our ordinary income, (ii) 95% of our capital gain net income and (iii) 100% of our undistributed income from prior years. These requirements could cause us to distribute amounts that otherwise would be spent on investments in real estate assets and it is possible that we might be required to borrow funds, possibly at unfavorable rates, or sell assets to fund these distributions. In addition, we could pay part of these required distributions in shares of our common stock, which would result in shareholders having tax liabilities from such distributions in excess of the cash they receive. The treatment of such taxable share distributions is not clear, and it is possible the taxable share distribution will not count towards our distribution requirement, in which case adverse consequences could apply. Although we intend to make distributions sufficient to meet the annual distribution requirements and to avoid U.S. federal income and excise taxes on our earnings, it is possible that we might not always be able to do so.

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Our stockholders may have current tax liability on distributions they elect to reinvest in our common stock but would not receive cash from such distributions and therefore our stockholders would need to use funds from another source to pay such tax liability.
If stockholders participate in our distribution reinvestment plan, they will be deemed to have received, and for U.S. federal income tax purposes will be taxed on, the amount reinvested in common stock to the extent the amount reinvested was not a tax-free return of capital. As a result, unless stockholders are a tax-exempt entity, they may have to use funds from other sources to pay their respective tax liability on the distributions reinvested in our shares.
Certain of our business activities are potentially subject to the prohibited transaction tax, which could reduce the return on our stockholders’ investment.
Our ability to dispose of property during the first few years following acquisition is restricted to a substantial extent as a result of our REIT status. Whether property is inventory or otherwise held primarily for sale to customers in the ordinary course of a trade or business depends on the particular facts and circumstances surrounding each property. Properties we own, directly or through any subsidiary entity, including our Operating Partnership, but generally excluding our taxable REIT subsidiaries, may, depending on how we conduct our operations, be treated as inventory or property held primarily for sale to customers in the ordinary course of a trade or business. Under applicable provisions of the Code regarding prohibited transactions by REITs, we would be subject to a 100% excise tax on any gain recognized on the sale or other disposition of any property (other than foreclosure property) that we own, directly or through any subsidiary entity, including our Operating Partnership, but generally excluding our taxable REIT subsidiaries, that is deemed to be inventory or property held primarily for sale to customers in the ordinary course of trade or business. Any taxes we pay would reduce our cash available for distribution to our stockholders.
In certain circumstances, we may be subject to U.S. federal, state and local income taxes as a REIT, which would reduce our cash available for distribution to our stockholders.
Even as a REIT, we may be subject to U.S. federal, state and local income taxes. For example, net income from the sale of properties that are “dealer” properties sold by a REIT (a “prohibited transaction” under the Code) will be subject to a 100% excise tax. We may not be able to make sufficient distributions to avoid excise taxes applicable to REITs. We also may decide to retain net capital gain we earn from the sale or other disposition of our property and pay income tax directly on such income. In that event, our stockholders would be treated as if they earned that income and paid the tax on it directly. However, stockholders that are tax-exempt, such as charities or qualified pension plans, would have no benefit from their deemed payment of such tax liability. Further, a 100% excise tax would be imposed on certain transactions between us and any potential taxable REIT subsidiaries that are not conducted on an arm’s-length basis. We also may be subject to state and local taxes on our income or property, either directly or at the level of our Operating Partnership or at the level of the other companies through which we indirectly own our assets. Any taxes we pay would reduce our cash available for distribution to our stockholders.
The use of taxable REIT subsidiaries, which may be required for REIT qualification purposes, would increase our overall tax liability and thereby reduce our cash available for distribution to our stockholders.
Some of our assets (e.g., qualified healthcare properties) may need to be owned by, or operations may need to be conducted through, one or more taxable REIT subsidiaries. Any of our taxable REIT subsidiaries would be subject to U.S. federal, state and local income tax on its taxable income. The after-tax net income of our taxable REIT subsidiaries would be available for distribution to us. Further, we would incur a 100% excise tax on transactions with our taxable REIT subsidiaries that are not conducted on an arm’s-length basis. For example, to the extent that the rent paid by one of our taxable REIT subsidiaries exceeds an arm’s length rental amount, such amount would be potentially subject to a 100% excise tax. While we intend that all transactions between us and our taxable REIT subsidiaries would be conducted on an arm’s-length basis, and therefore, any amounts paid by our taxable REIT subsidiaries to us would not be subject to the excise tax, no assurance can be given that no excise tax would arise from such transactions.

39


Complying with REIT requirements may force us to forgo and/or liquidate otherwise attractive investment opportunities.
To maintain our qualification as a REIT, we must ensure that we meet the REIT gross income tests annually and that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified REIT real estate assets, including certain mortgage loans and certain kinds of mortgage-related securities. The remainder of our investment in securities (other than government securities and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities and qualified real estate assets) can consist of the securities of any one issuer.For taxable years beginning after December 31, 2017, no more than 20% of the value of our total assets can be represented by securities of one or more taxable REIT subsidiaries. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate from our portfolio or not make otherwise attractive investments in order to maintain our qualification as a REIT. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.
Recharacterization of sale-leaseback transactions may cause us to lose our REIT status, which would subject us to U.S. federal income tax at corporate rates, which would reduce the amounts available for distribution to our stockholders.
We have and may continue to enter into sale-leaseback transactions, pursuant to which we will purchase properties and lease them back to the sellers of such properties. While we will use our best efforts to structure any such sale-leaseback transaction such that the lease will be characterized as a “true lease,” thereby allowing us to be treated as the owner of the property for U.S. federal income tax purposes, the IRS could challenge such characterization. In the event that any such sale-leaseback is challenged and recharacterized as a financing transaction or loan for U.S. federal income tax purposes, deductions for depreciation and cost recovery relating to such property would be disallowed. If a sale-leaseback transaction were so recharacterized, we might fail to satisfy the REIT qualification asset tests or income tests and, consequently, lose our REIT status effective with the year of recharacterization. Alternatively, the amount of our REIT taxable income could be recalculated, which also might cause us to fail to meet the annual distribution requirement for a taxable year.
If our leases are not considered as true leases for U.S. federal income tax purposes, we would fail to qualify as a REIT.
To qualify as a REIT, we must satisfy two gross income tests, under which specified percentages of our gross income must be derived from certain sources, such as “rents from real property.” In order for rent paid to us to qualify as “rents from real property” for purposes of the REIT gross income tests, the leases must be respected as true leases for U.S. federal income tax purposes and not be treated as service contracts, joint ventures, or some other type of arrangement. If our leases are not respected as true leases for U.S. federal income tax purposes, we would fail to qualify as a REIT, which would materially adversely impact the value of an investment in our securities and in our ability to pay dividends to our stockholders.
The lease of our properties to a TRS is subject to special requirements.
Under the provisions of the REIT Investment Diversification and Empowerment Act of 2007 (“RIDEA”), we may lease certain “qualified health care properties” to a TRS (or a limited liability company of which a TRS is a member). The TRS in turn would contract with a third party operator to manage the health care operations at these properties. The rents paid by a TRS in this structure would be treated as qualifying rents from real property for purposes of the REIT requirements only if (i) they are paid pursuant to an arm’s-length lease of a qualified health care property and (ii) the operator qualifies as an “eligible independent contractor” with respect to the property. An operator will qualify as an eligible independent contractor if it meets certain ownership tests with respect to us, and if, at the time the operator enters into the property management agreement, the operator is actively engaged in the trade or business of operating qualified health care properties for any person who is not a related person to us or the TRS. If any of the above conditions were not satisfied, then the rents would not be considered income from a qualifying source for purposes of the REIT rules, which could cause us to incur penalty taxes or to fail to qualify as a REIT.
Legislative or regulatory action could adversely affect the returns to our investors.
In recent years, numerous legislative, judicial and administrative changes have been made in the provisions of U.S. federal income tax laws applicable to investments similar to an investment in shares of our common stock. Additional changes to the tax laws are likely to continue to occur, and we cannot assure you that any such changes will not adversely affect our taxation and our ability to continue to qualify as a REIT or the taxation of a stockholder. Any such changes could have an adverse effect on an investment in our shares or on the market value or the resale potential of our assets. Our stockholders are urged to consult with their tax advisor with respect to the impact of recent legislation on their investment in our shares and the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our shares.

40


Although REITs generally receive better tax treatment than entities taxed as regular corporations, it is possible that future legislation would result in a REIT having fewer tax advantages, and it could become more advantageous for a company that invests in real estate to elect to be treated for U.S. federal income tax purposes as a regular corporation. As a result, our charter provides our board of directors with the power, under certain circumstances, to revoke or otherwise terminate our REIT election and cause us to be taxed as a regular corporation, without the vote of our stockholders. Our board of directors has fiduciary duties to us and our stockholders and could only cause such changes in our tax treatment if it determines in good faith that such changes are in the best interests of our stockholders.
In addition, on December 22, 2017, the Tax Cuts and Jobs Act was signed into law. The Tax Cuts and Jobs Act makes significant changes to the U.S. federal income tax rules for taxation of individuals and businesses, generally effective for taxable years beginning after December 31, 2017. In addition to reducing corporate and individual tax rates, the Tax Cuts and Jobs Act eliminates or restricts various deductions. Most of the changes applicable to individuals are temporary and apply only to taxable years beginning after December 31, 2017 and before January 1, 2026. The Tax Cuts and Jobs Act makes numerous changes to the tax rules that do not affect the REIT qualification rules directly, but may otherwise affect us or our stockholders.
While the changes in the Tax Cuts and Jobs Act generally appear to be favorable with respect to REITs, the extensive changes to non-REIT provisions in the Internal Revenue Code may have unanticipated effects on us or our stockholders. Moreover, Congressional leaders have recognized that the process of adopting extensive tax legislation in a short amount of time without hearings and substantial time for review is likely to have led to drafting errors, issues needing clarification and unintended consequences that will have to be revisited in subsequent tax legislation. At this point, it is not clear if or when Congress will address these issues or when the IRS will issue administrative guidance on the changes made in the Tax Cuts and Jobs Act.
We urge you to consult with your own tax advisor with respect to the status of the Tax Cuts and Jobs Act and other legislative, regulatory or administrative developments and proposals and their potential effect on an investment in shares of our common stock.
Dividends payable by REITs generally do not qualify for reduced tax rates under current law.
The maximum U.S. federal income tax rate for certain qualified dividends payable to U.S. stockholders that are individuals, trusts and estates generally is 20%. Dividends payable by REITs, however, are generally not eligible for the reduced rates and therefore may be subject to a higher maximum U.S. federal income tax rate on ordinary income when paid to such stockholders. The more favorable rates applicable to regular corporate dividends under current law could cause investors who are individuals, trusts and estates or are otherwise sensitive to these lower rates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the stock of REITs, including our common stock.
If our Operating Partnership fails to maintain its status as a partnership, its income may be subject to taxation, which would reduce the cash available to us for distribution to our stockholders, and threaten our ability to remain qualified as a REIT.
We intend to maintain the status of our Operating Partnership as a partnership for U.S. federal income tax purposes. However, if the IRS were to successfully challenge the status of our Operating Partnership as a partnership for such purposes, it would be taxable as a corporation. In such event, this would reduce the amount of distributions that our Operating Partnership could make to us. This would also result in our losing REIT status, and becoming subject to a corporate level tax on our own income. This would substantially reduce our cash available to pay distributions and the yield on our stockholders’ investment. In addition, if any of the partnerships or limited liability companies through which our Operating Partnership owns its properties, in whole or in part, loses its characterization as a partnership for U.S. federal income tax purposes, it would be subject to taxation as a corporation, thereby reducing distributions to our Operating Partnership. Such a recharacterization of an underlying property owner could also threaten our ability to maintain REIT status.

41


Foreign purchasers of our common stock may be subject to FIRPTA tax upon the sale of their shares or upon the payment of a capital gain dividend, which would reduce any gains they would otherwise have on their investment in our shares.
A foreign person disposing of a U.S. real property interest, including shares of a U.S. corporation whose assets consist principally of U.S. real property interests, is generally subject to the Foreign Investment in Real Property Tax Act of 1980, as amended, or FIRPTA, on the gain recognized on the disposition. However, certain foreign pension plans and certain foreign publicly traded entities are exempt from FIRPTA withholding. Further, such FIRPTA tax does not apply to the disposition of stock in a REIT if the REIT is “domestically controlled.” A REIT is “domestically controlled” if less than 50% of the REIT’s stock, by value, has been owned directly or indirectly by persons who are not qualifying U.S. persons during a continuous five-year period ending on the date of disposition or, if shorter, during the entire period of the REIT’s existence. We cannot assure our stockholders that we will qualify as a “domestically controlled” REIT. If we were to fail to so qualify, any gain realized by foreign investors on a sale of our shares would be subject to FIRPTA tax, unless our shares were traded on an established securities market and the foreign investor did not at any time during a specified testing period directly or indirectly own more than 10% of the value of our outstanding common stock.
A foreign investor also may be subject to FIRPTA tax upon the payment of any capital gain dividend by us, which dividend is attributable to gain from sales or exchanges of U.S. real property interests.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our principal executive offices are located at 4890 West Kennedy Blvd., Suite 650, Tampa, Florida 33609. We do not have an address separate from our Advisor or our Sponsor.
As of December 31, 2017, we owned a portfolio of 34 real estate investments, consisting of 68 properties, located in 38 MSAs, comprising 3.6 million gross rentable square feet of commercial space, including the square footage of buildings which are situated on land subject to a ground lease. As of December 31, 2017, 32 of the real estate investments with leases in-place were single-tenant commercial properties, one of the real estate investments with a lease in-place was a multi-tenant commercial property and one real estate investment was vacant. As of December 31, 2017, 94% of our rental square feet was leased with a weighted average remaining lease term of 9.5 years. As of December 31, 2017, we had $141,477,000 outstanding principal in notes payable secured by certain of our properties and the related tenant leases. As of December 31, 2017, we had a total unencumbered pool availability under the unsecured credit facility of $353,606,000, which was limited to $236,667,000 due to one covenant restriction, an aggregate outstanding principal balance of $0 and $236,667,000 was available to be drawn. See Part IV, Item 15. "Exhibits, Financial Statement Schedules—Schedule III—Real Estate Assets and Accumulated Depreciation," of this Annual Report on Form 10-K for a detailed listing of our properties.

42


Property Statistics
The following table shows the property statistics of our real estate portfolio as of December 31, 2017:
Real Estate Investments
 
MSA
 
Type of Property
 
Number
of
Properties
 
Date
Acquired
 
Year
Built
 
Physical
Occupancy
 
Gross Leased Area
(Sq Ft)
 
Encumbrances,$
(in thousands)
 
St. Louis Surgical Center
 
St. Louis, MO-IL
 
Healthcare
 
1
 
02/09/2012
 
2005
 
100.0%
 
21,823

 

(12)
Stonegate Medical Center
 
Austin-Round Rock, TX
 
Healthcare
 
1
 
03/30/2012
 
2008
 
100.0%
 
27,375

 

(12)
HPI Integrated Medical Facility
 
Oklahoma City, OK
 
Healthcare
 
1
 
06/28/2012
 
2007
 
100.0%
 
34,970

 

(12)
Baylor Medical Center
 
Dallas-Ft. Worth-Arlington, TX
 
Healthcare
 
1
 
08/29/2012
 
2010
 
100.0%
 
62,390

 
18,316

 
Vibra Denver Hospital
 
Denver-Aurora-Lakewood, CO
 
Healthcare
 
1
 
09/28/2012
 
1962
(1)
100.0%
 
131,210

 

(12)
Vibra New Bedford Hospital
 
Providence-Warwick, RI-MA
 
Healthcare
 
1
 
10/22/2012
 
1942
 
100.0%
 
70,657

 

(12)
Houston Surgery Center
 
Houston-The Woodlands-Sugar Land, TX
 
Healthcare
 
1
 
11/28/2012
 
1998
(2)
100.0%
 
14,000

 

(12)
Akron General Medical Center
 
Akron, OH
 
Healthcare
 
1
 
12/28/2012
 
2012
 
100.0%
 
98,705

 

(12)
Grapevine Hospital
 
Dallas-Ft. Worth-Arlington, TX
 
Healthcare
 
1
 
02/25/2013
 
2007
 
100.0%
 
61,400

 
12,371

 
Andover Data Center
 
Boston-Cambridge-Newton, MA-NH
 
Data Center
 
1
 
03/28/2013
 
1984
(3)
100.0%
 
92,700

 

(12)
Wilkes-Barre Healthcare Facility
 
Scranton-Wilkes-Barre-Hazleton, PA
 
Healthcare
 
1
 
05/31/2013
 
2012
 
100.0%
 
15,996

 

(12)
Fresenius Healthcare Facility
 
Elkhart-Goshen, IN
 
Healthcare
 
1
 
06/11/2013
 
2010
 
100.0%
 
15,462

 

(12)
Physicians' Specialty Hospital
 
Fayetteville-Springdale-Rogers, AR-MO
 
Healthcare
 
1
 
06/28/2013
 
1994
(4)
100.0%
 
55,740

 

(12)
Christus Cabrini Surgery Center
 
Alexandria, LA
 
Healthcare
 
1
 
07/31/2013
 
2007
 
100.0%
 
15,600

 

(12)
Valley Baptist Wellness Center
 
Brownsville-Harlingen, TX
 
Healthcare
 
1
 
08/16/2013
 
2007
 
100.0%
 
38,111

 
5,842

 
Akron General Integrated Medical Facility
 
Akron, OH
 
Healthcare
 
1
 
08/23/2013
 
2013
 
100.0%
 
38,564

 

(12)
Cumberland Surgical Hospital (13)
 
San Antonio-New Braunfels, TX
 
Healthcare
 
1
 
08/29/2013
 
2013
 
100.0%
 
82,316

 

 
Post Acute/Warm Springs Rehab Hospital of Westover Hills
 
San Antonio-New Braunfels, TX
 
Healthcare
 
1
 
09/06/2013
 
2012
 
100.0%
 
50,000

 

(12)
Warm Springs Rehabilitation Hospital
 
San Antonio-New Braunfels, TX
 
Healthcare
 
1
 
11/27/2013
 
1987
 
100.0%
 
113,136

 

(12)
Lubbock Heart Hospital
 
Lubbock, TX
 
Healthcare
 
1
 
12/20/2013
 
2003
 
100.0%
 
102,143

 
18,615

 
Walnut Hill Medical Center
 
Dallas-Ft. Worth-Arlington, TX
 
Healthcare
 
1
 
02/25/2014
 
1983
(5)
—%
 

 

 
Cypress Pointe Surgical Hospital
 
Hammond, LA
 
Healthcare
 
1
 
03/14/2014
 
2006
 
100.0%
 
63,000

 

(12)
Milwaukee Data Center
 
Milwaukee-Waukesha-West Allis, WI
 
Data Center
 
1
 
03/28/2014
 
2004
 
100.0%
 
59,516

 

(12)
Bay Area Regional Medical Center
 
Houston-The Woodlands-Sugar Land, TX
 
Healthcare
 
1
 
07/11/2014
 
2014
 
100.0%
 
373,070

 
86,333

 
Arizona Data Center Portfolio (6)
 
Phoenix-Mesa-Scottsdale, AZ
 
Data Center
 
2
 
08/27/2014
 
(6)
 
100.0%
 
658,215

 

(12)
Rhode Island Rehabilitation Healthcare Facility
 
Providence-Warwick, RI-MA
 
Healthcare
 
1
 
08/28/2014
 
1965
(7)
100.0%
 
92,944

 

(12)
Select Medical Portfolio
 
(8)
 
Healthcare
 
3
 
08/29/2014
 
(8)
 
100.0%
 
166,414

 

(12)

43


Real Estate Investments
 
MSA
 
Type of Property
 
Number
of
Properties
 
Date
Acquired
 
Year
Built
 
Physical
Occupancy
 
Gross Leased Area
(Sq Ft)
 
Encumbrances,$
(in thousands)
 
San Antonio Healthcare Facility (14)
 
San Antonio-New Braunfels, TX
 
Healthcare
 
1
 
09/12/2014
 
(9)
 
58.7%
 
34,000

 

 
Dermatology Associates of Wisconsin Portfolio
 
(10)
 
Healthcare
 
9
 
09/15/2014
 
(10)
 
100.0%
 
88,114

 

(12)
Lafayette Surgical Hospital
 
Lafayette, LA
 
Healthcare
 
1
 
09/19/2014
 
2004
 
100.0%
 
73,824

 

(12)
Alpharetta Data Center II
 
Atlanta-Sandy Springs-Roswell, GA
 
Data Center
 
1
 
10/31/2014
 
1999
 
100.0%
 
165,000

 

(12)
Landmark Hospital of Savannah
 
Savannah, GA
 
Healthcare
 
1
 
01/15/2015
 
2014
 
100.0%
 
48,184

 

(12)
21st Century Oncology Portfolio
 
(11)
 
Healthcare
 
20
 
(11)
 
(11)
 
100.0%
 
220,163

 

 
Post Acute Medical Portfolio
 
(15)
 
Healthcare
 
5
 
05/23/2016
 
(15)
 
100.0%
 
158,105

 

(12)
 
 
 
 
 
 
68
 
 
 
 
 
 
 
3,342,847

 
$
141,477

 
 
(1)
The Vibra Denver Hospital was renovated in 1985.
(2)
The Houston Surgery Center was renovated in 2012.
(3)
The Andover Data Center was renovated in 2010.
(4)
The Physicians’ Specialty Hospital was renovated in 2009.
(5)
The Walnut Hill Medical Center was renovated in 2013.
(6)
The Arizona Data Center Portfolio was sold on January 10, 2018. For additional information, see Note 20—"Subsequent Events" to the consolidated financial statements that are a part of this Annual Report on Form 10-K.
(7)
The Rhode Island Rehabilitation Healthcare Facility was renovated in 1999.
(8)
The Select Medical Portfolio consists of the following three properties:
Property Description
 
MSA
 
Year Built
Select Medical—Akron
 
Akron, OH
 
2008
Select Medical—Frisco
 
Dallas-Ft. Worth-Arlington, TX
 
2010
Select Medical—Bridgeton
 
St. Louis, MO-IL
 
2012
(9)
The San Antonio Healthcare Facility was redeveloped in 2017.
(10)
The Dermatology Associates of Wisconsin Portfolio consists of the following nine properties:
Property Description
 
MSA
 
Year Built
Dermatology Assoc-Randolph Ct
 
Green Bay, WI
 
2003
Dermatology Assoc-Murray St
 
Green Bay, WI
 
2008
Dermatology Assoc-N Lightning Dr
 
Appleton, WI
 
2011
Dermatology Assoc-Development Dr
 
Green Bay, WI
 
2010
Dermatology Assoc-York St
 
Green Bay, WI
 
1964
Dermatology Assoc-Scheuring Rd
 
Green Bay, WI
 
2005
Dermatology Assoc-Riverview Dr
 
Green Bay, WI
 
2011
Dermatology Assoc-State Rd 44
 
Oshkosh-Neenah, WI
 
2010
Dermatology Assoc-Green Bay Rd
 
Green Bay, WI
 
2007

44


(11)
The 21st Century Oncology Portfolio consists of the following 20 properties:
Property Description
 
MSA
 
Date Acquired
 
Year Built
21st Century Oncology-Yucca Valley
 
Riverside-San Bernardino-Ontario, CA
 
3/31/2015
 
2009
21st Century Oncology-Rancho Mirage
 
Riverside-San Bernardino-Ontario, CA
 
3/31/2015
 
2008
21st Century Oncology-Palm Desert
 
Riverside-San Bernardino-Ontario, CA
 
3/31/2015
 
2005
21st Century Oncology-Santa Rosa Beach
 
Crestview-Fort Walton Beach-Destin, FL
 
3/31/2015
 
2003
21st Century Oncology-Crestview
 
Crestview-Fort Walton Beach-Destin, FL
 
3/31/2015
 
2004
21st Century Oncology-Fort Walton Beach
 
Crestview-Fort Walton Beach-Destin, FL
 
3/31/2015
 
2005
21st Century Oncology-Bradenton
 
North Port-Sarasota-Bradenton, FL
 
3/31/2015
 
2002
21st Century Oncology-Tamarac
 
Miami-Ft. Lauderdale-West Palm Beach, FL
 
3/31/2015
 
1997
21st Century Oncology-Fort Myers I
 
Cape Coral-Fort Myers, FL
 
3/31/2015
 
1999
21st Century Oncology-Fort Myers II
 
Cape Coral-Fort Myers, FL
 
3/31/2015
 
2010
21st Century Oncology-Bonita Springs
 
Cape Coral-Fort Myers, FL
 
3/31/2015
 
2002
21st Century Oncology-Lehigh Acres
 
Cape Coral-Fort Myers, FL
 
3/31/2015
 
2002
21st Century Oncology-East Naples
 
Naples-Immokalee-Marco Island, FL
 
3/31/2015
 
2007
21st Century Oncology-Jacksonville
 
Jacksonville, FL
 
3/31/2015
 
2009
21st Century Oncology-Frankfort
 
Lexington-Fayette, KY
 
3/31/2015
 
1993
21st Century Oncology-Las Vegas
 
Las Vegas-Henderson-Paradise, NV
 
3/31/2015
 
2007
21st Century Oncology-Henderson
 
Las Vegas-Henderson-Paradise, NV
 
3/31/2015
 
2000
21st Century Oncology-Fairlea
 
Hagerstown-Martinsburg, MD-WV
 
3/31/2015
 
1999
21st Century Oncology-El Segundo
 
Los Angeles-Long Beach-Anaheim, CA
 
4/20/2015
 
2009
21st Century Oncology-Lakewood Ranch
 
North Port-Sarasota-Bradenton, FL
 
4/20/2015
 
2008
(12)
Property is under the unsecured credit facility’s unencumbered pool availability. As of December 31, 2017, 40 commercial properties were under the unsecured credit facility’s unencumbered pool availability and we had no principal amount outstanding thereunder.
(13)
Formerly known as the Victory Medical Center Landmark.
(14)
Formerly known as the Victory IMF.
(15)
The Post Acute Medical Portfolio consists of the following five properties:
Property Description
 
MSA
 
Date Acquired
 
Year Built
Post Acute Medical - Victoria I
 
Victoria, TX
 
5/23/2016
 
2013
Post Acute Medical - Victoria II
 
Victoria, TX
 
5/23/2016
 
1998
Post Acute Medical - New Braunfels
 
San Antonio-New Braunfels, TX
 
5/23/2016
 
2007
Post Acute Medical - Covington
 
New Orleans-Metairie, LA
 
5/23/2016
 
1984
Post Acute Medical - Hammond
 
Hammond, LA
 
5/23/2016
 
2004
We believe the properties are adequately covered by insurance and are suitable for their respective intended purpose. Real estate assets, other than land, are depreciated on a straight-line basis over each asset's useful life.
Leases
Although there are variations in the specific terms of the leases of our portfolio, the following is a summary of the general structure of our leases. Generally, the leases of our properties provide for initial terms ranging from 10 to 20 years. As of December 31, 2017, the weighted average remaining lease term of our properties was 9.5 years. The properties generally are leased under net leases pursuant to which the tenant bears responsibility for substantially all property costs and expenses associated with ongoing maintenance and operation, including utilities, property taxes and insurance. The leases at each individual property provide for annual rental payments (payable in monthly installments) with an average of $1,509,000 per year. Certain leases provide for fixed increases in rent. Generally, the property leases provide the tenant with one or more multi-year renewal options, subject to generally the same terms and conditions as the initial lease term.

45


The following table shows lease expirations of our real properties based on annualized contractual base rent as of December 31, 2017 and for each of the next ten years ending December 31 and thereafter, as follows:
Year of Lease Expiration
 
Total Number of Leases
 
Gross Leased Area
(Sq Ft)
 
Annualized Contractual Base Rent
(in thousands)
(1)
 
Percentage of Annualized Contractual Base Rent
2018
 
2

 
658,215

 
$
9,803

 
9.3
%
2019
 
1

 
59,516

 
1,767

 
1.7
%
2020
 

 

 

 
%
2021
 

 

 

 
%
2022
 
1

 
92,700

 
1,059

 
1.0
%
2023
 
1

 
54,000

 
1,936

 
1.8
%
2024
 
11

 
269,110

 
7,447

 
7.1
%
2025
 
4

 
168,331

 
4,796

 
4.5
%
2026
 
4

 
41,375

 
1,309

 
1.2
%
2027
 
7

 
367,435

 
9,564

 
9.1
%
Thereafter
 
20

 
1,632,165

 
67,940

 
64.3
%
 
 
51

 
3,342,847

 
$
105,621

 
100.0
%
 
(1)
Annualized base rent is based on contractual base rent from leases in effect as of December 31, 2017.
Indebtedness
For a discussion of our indebtedness, see Note 8—"Notes Payable," Note 9—"Unsecured Credit Facility," and Note 13—"Derivative Instruments and Hedging Activities" to the consolidated financial statements that are a part of this Annual Report on Form 10-K.
Item 3. Legal Proceedings.
We are not aware of any material pending legal proceedings to which we are a party or to which our properties are the subject. See Note 17—"Commitments and Contingencies" to the consolidated financial statements that are a part of this Annual Report on Form 10-K.
Item 4. Mine Safety Disclosures.
Not applicable.

46


PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
As of March 28, 2018, we had approximately 183.6 million shares of common stock outstanding, held by a total of 39,836 stockholders of record. The number of stockholders is based on the records of DST Systems, Inc., who serves as our registrar and transfer agent. There is no established trading market for our common stock. Therefore, there is a risk that a stockholder may not be able to sell our stock at a time or price acceptable to the stockholder, or at all. Unless and until our shares are listed on a national securities exchange, we do not expect that a public market for the shares will develop. Pursuant to the Third DRIP Offering, effective February 15, 2018, we are selling shares of our common stock to our stockholders at a price of $6.26 per share.
Pursuant to the terms of our charter, certain restrictions are imposed on the ownership and transfer of shares.
To assist the FINRA members and their associated persons that participated in our public offering of common stock, pursuant to NASD Conduct Rule 2340, we disclose in each annual report distributed to stockholders a per share estimated value of the shares, the method by which it was developed, and the date of the data used to develop the estimated value. In addition, our Advisor will prepare annual statements of estimated share values to assist fiduciaries of retirement plans subject to the annual reporting requirements of ERISA in the preparation of their reports relating to an investment in our shares. For these purposes, the Estimated Per Share NAV of our common shares was $9.26. per share. The Estimated Per Share NAV was approved by our board of directors, at the recommendation of the Audit Committee, on December 21, 2017. The Estimated Per Share NAV of common stock is based on the estimated value of our assets less the estimated value of our liabilities divided by the number of shares outstanding on a diluted basis, calculated as of September 30, 2017.
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. The new Estimated Per Share NAV of $6.26 was effective on February 15, 2018, which was the record date of the special cash distribution.
The Estimated Per Share NAV was determined after consultation with the Advisor and Robert A. Stanger & Co, Inc., an independent third-party valuation firm, the engagement of which was approved by the Audit Committee. The Audit Committee, pursuant to authority delegated by our board of directors, was responsible for the oversight of the valuation process, including the review and approval of the valuation process and methodology used to determine the Estimated Per Share NAV, the consistency of the valuation and appraisal methodologies with real estate industry standards and practices and the reasonableness of the assumptions used in the valuations and appraisals. The valuation was performed in accordance with the provisions of Practice Guideline 2013-01, Valuations of Publicly Registered Non-Listed REITs, issued by the Investment Program Association, or the IPA, in April 2013, in addition to SEC guidance. FINRA rules provide no guidance on the methodology an issuer must use to determine its estimated value per share. As with any valuation methodology, our independent valuation firm's methodology is based upon a number of estimates and assumptions that may not be accurate or complete. Different parties with different assumptions and estimates could derive a different estimated value per share, and these differences could be significant. The Estimated Per Share NAV is not audited and does not represent the fair value of our assets or liabilities according to GAAP. Accordingly, with respect to the Estimated Per Share NAV, we can give no assurance that:
a stockholder would be able to resell his or her shares at the Estimated Per Share NAV;
stockholder would ultimately realize distributions per share equal to the Estimated Per Share NAV upon liquidation of our assets and settlement of our liabilities or a sale of the company;
our shares of common stock would trade at the Estimated Per Share NAV on a national securities exchange;
an independent third-party appraiser or other third-party valuation firm would agree with the Estimated Per Share NAV; or
the methodology used to estimate the Estimated Per Share NAV would be acceptable to FINRA or for compliance with ERISA reporting requirements.
Further, the value of our shares will fluctuate over time in response to developments related to individual assets in the portfolio and the management of those assets and in response to the real estate and finance markets. We expect to engage an independent valuation firm to update the Estimated Per Share NAV at least annually.

47


For a full description of the methodologies used to value our assets and liabilities in connection with the calculation of the Estimated Per Share NAV, see our Current Report on Form 8-K filed with the SEC on December 29, 2017.
Share Repurchase Program
Our board of directors has adopted a share repurchase program that enables our stockholders to sell their shares to us in limited circumstances. Our share repurchase program permits stockholders to sell their shares back to us after they have held them for at least one year, subject to the significant conditions and limitations described below. Repurchase of shares of our common stock is at the sole discretion of our board of directors. In addition, our board of directors has the right, in its sole discretion, to waive such holding requirement in the event of the death or qualifying disability of a stockholder, other involuntary exigent circumstances, such as bankruptcy, or a mandatory requirement under a stockholder’s IRA.
Our common stock currently is not listed on a national securities exchange and we will not seek to list our stock unless our independent directors believe that the listing of our stock would be in the best interest of our stockholders. In order to provide stockholders with limited, interim liquidity, stockholders who have beneficially held their shares for at least one year may present all or a portion of the holder’s shares to us for repurchase at any time in accordance with the procedures outlined below. At that time, we may, subject to the conditions and limitations described below, purchase the shares presented for repurchase for cash to the extent that we have sufficient funds available to us to fund such repurchase. Prior to the time, if any, that our shares are listed on a national securities exchange, our share repurchase program, as described below, may provide eligible stockholders with limited, interim liquidity by enabling them to sell shares back to us, subject to restrictions and applicable law. The estimated value of our shares should not be viewed as an accurate reflection of the fair market value of our investments nor will they represent the amount of net proceeds that would result from an immediate sale of our assets. On December 21, 2017, our board of directors, at the recommendation of the Audit Committee, established an updated Estimated Per Share NAV of our common stock of $9.26 based on the estimated value of our assets less the estimated value of our liabilities divided by the number of shares outstanding on a diluted basis, calculated as of September 30, 2017. Therefore, effective commencing with share repurchases in February 2018, the repurchase price for all stockholders was $9.26 per share. In connection with a special cash distribution paid on March 16, 2018, our board of directors approved an updated 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. 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. Therefore, effective commencing with share repurchases in March 2018, the repurchase price for all stockholders is $6.26 per share.
We currently expect to update the Estimated Per Share NAV at least annually. Unless the shares are being repurchased in connection with a stockholder’s death or qualifying disability, the price per share that we will pay to repurchase shares of our common stock will be as follows (in each case, as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to our common stock):
for stockholders who have continuously held their shares of our common stock for at least one year, the price will be 92.5% of the Estimated Per Share NAV;
for stockholders who have continuously held their shares of our common stock for at least two years, the price will be 95.0% of the Estimated Per Share NAV;
for stockholders who have continuously held their shares of our common stock for at least three years, the price will be 97.5% of the Estimated Per Share NAV; and
for stockholders who have continuously held their shares of our common stock for at least four years, the price will be 100.0% of the Estimated Per Share NAV.
Shares repurchased in connection with a stockholder’s death or qualifying disability will be repurchased at a price per share equal to 100% of the Estimated Per Share NAV as determined by our board of directors, subject to any special distribution previously made to the stockholders. Shares repurchased in connection with a stockholder’s other exigent circumstances, such as bankruptcy, within one year from the purchase date, will be repurchased at a price per share equal to the price per share we would pay had the stockholder held the shares for one year from the purchase date, and at all other times in accordance with the table above.
At any time the repurchase price is determined by any method other than the NAV of the shares, if we have sold property and have made one or more special distributions to our stockholders of all or a portion of the net proceeds from sales, such as the special distribution made on March 16, 2018, the per share repurchase price will be reduced by the net sale proceeds per share distributed to investors prior to the repurchase date. Our board of directors will, in its sole discretion, determine which distributions, if any, constitute a special distribution. While our board of directors does not have specific criteria for determining a special distribution, we expect that future special distributions will only occur upon the sale of property and the subsequent distribution of the net sale proceeds.

48


We generally redeem shares on a monthly basis. Requests for repurchase must be received at least five business days prior to the end of the month in which the stockholder is requesting a repurchase of the holder's shares. Each stockholder whose repurchase request is granted will receive the repurchase amount within ten days after the end of the month in which we grant the repurchase request. Subject to certain limitations, we will also repurchase shares upon the request of the estate, heir or beneficiary of a deceased stockholder. We will not repurchase in excess of 5.0% of number of shares of common stock outstanding as of December 31st of the previous calendar year.
A stockholder or his or her estate, heir or beneficiary may present to us fewer than all of the shares then-owned for repurchase. Repurchase requests made (i) on behalf of a deceased stockholder or a stockholder with a qualifying disability; (ii) by a stockholder due to another involuntary exigent circumstance, such as bankruptcy; or (iii) by a stockholder due to a mandatory distribution under such stockholder’s IRA must be made within 360 days of such event.
A stockholder who wishes to have shares repurchased must mail or deliver to us a written request on a form provided by us and executed by the stockholder, its trustee or authorized agent, which we must receive at least five business days prior to the end of the month in which the stockholder is requesting a repurchase of his or her shares. An estate, heir or beneficiary that wishes to have shares repurchased following the death of a stockholder must mail or deliver to us a written request on a form provided by us, including evidence acceptable to our board of directors of the death of the stockholder, and executed by the executor or executrix of the estate, the heir or beneficiary, or their trustee or authorized agent.
Unrepurchased shares may be passed to an estate, heir or beneficiary following the death of a stockholder. If the shares are to be repurchased under any conditions outlined herein, we will forward the documents necessary to effect the repurchase, including any signature guaranty we may require. Our share repurchase program provides stockholders only a limited ability to redeem shares for cash until a secondary market develops for our shares, at which time the program would terminate. No such market presently exists, and we cannot assure you that any market for your shares will ever develop.
In order for a disability to entitle a stockholder to the special repurchase terms described above, and therefore, be deemed a "qualifying disability" (1) the stockholder would have to receive a determination of disability based upon a physical or mental condition or impairment arising after the date the stockholder acquired the shares to be repurchased, and (2) such determination of disability would have to be made by the governmental agency responsible for reviewing the disability retirement benefits that the stockholder could be eligible to receive (the "Applicable Governmental Agency"). For purposes of this repurchase right, the Applicable Governmental Agencies are limited to the following: (i) if the stockholder paid Social Security taxes and, therefore, could be eligible to receive Social Security disability benefits, then the applicable governmental agency would be the Social Security Administration or the agency charged with responsibility for administering Social Security disability benefits at that time if other than the Social Security Administration; (ii) if the stockholder did not pay Social Security benefits and, therefore, could not be eligible to receive Social Security disability benefits, but the stockholder could be eligible to receive disability benefits under the Civil Service Retirement System, or CSRS, then the applicable governmental agency would be the U.S. Office of Personnel Management or the agency charged with responsibility for administering CSRS benefits at that time if other than the Office of Personnel Management; or (iii) if the stockholder did not pay Social Security taxes and, therefore, could not be eligible to receive Social Security benefits but suffered a disability that resulted in the stockholder’s discharge from military service under conditions that were other than dishonorable and, therefore, could be eligible to receive military disability benefits, then the applicable governmental agency would be the Department of Veterans Affairs or the agency charged with the responsibility for administering military disability benefits at that time if other than the Department of Veterans Affairs. Disability determinations by governmental agencies for purposes other than those listed above, including but not limited to worker’s compensation insurance, administration or enforcement of the Rehabilitation Act or Americans with Disabilities Act, or waiver of insurance premiums would not entitle a stockholder to the special repurchase terms described above. Repurchase requests following an award by the applicable governmental agency of disability benefits would have to be accompanied by: (1) the investor’s initial application for disability benefits and (2) a Social Security Administration Notice of Award, a U.S. Office of Personnel Management determination of disability under CSRS, a Department of Veterans Affairs record of disability-related discharge or such other documentation issued by the applicable governmental agency that we would deem acceptable and would demonstrate an award of the disability benefits.
We understand that the following disabilities do not entitle a worker to Social Security disability benefits:
disabilities occurring after the legal retirement age; and
disabilities that do not render a worker incapable of performing substantial gainful activity.
Therefore, such disabilities would not qualify for the special repurchase terms, except in the limited circumstances when the investor would be awarded disability benefits by the other applicable governmental agencies described above.
Shares we purchase under our share repurchase program will have the status of authorized but unissued shares. Shares we acquire through the share repurchase program will not be reissued unless they are first registered with the SEC under the Securities Act and under appropriate state securities laws or otherwise issued in compliance with such laws.

49


Our Advisor, directors and their respective affiliates are prohibited from receiving a fee in connection with the share repurchase program.
Funding for the share repurchase program will come exclusively from proceeds from the sale of shares under our DRIP Offerings during the prior calendar year and other operating funds, if any. If funds available for our share repurchase program are not sufficient to accommodate all requests, shares will be repurchased as follows: (i) first, pro rata as to repurchases upon the death or qualifying disability of a stockholder; (ii) next, pro rata as to repurchases to stockholders who demonstrate, in the discretion of our 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 IRA; and (iv) finally, pro rata as to all other repurchase requests.
Our board of directors, in its sole discretion, may choose to amend, suspend, reduce, terminate or otherwise change our share repurchase program at any time upon 30 days' prior notice to our stockholders for any reason it deems appropriate. Additionally, we will be required to discontinue sales of shares under the Third DRIP Offering on the date we sell all of the shares registered for sale under the Third DRIP Offering, unless we file a new registration statement with the SEC and applicable states, or the Third DRIP Offering is terminated by our board of directors. Because the repurchase of shares will be funded with the net proceeds we receive from the sale of shares under the Third DRIP Offering, the discontinuance or termination of the Third DRIP Offering will adversely affect our ability to redeem shares under the share repurchase program. We will notify our stockholders of such development in our next annual or quarterly reports or by means of a separate mailing to stockholders, accompanied by disclosure in a current or periodic report under the Exchange Act.
Our share repurchase program is only intended to provide our stockholders with limited, interim liquidity for their shares until a liquidity event occurs, such as listing of the shares on a national securities exchange or a merger with a listed company. The share repurchase program will be terminated if the shares become listed on a national securities exchange. We cannot guarantee that a liquidity event will occur.
During the year ended December 31, 2017, we received valid repurchase requests relating to approximately 5,773,000 shares, which were repurchased in full for an aggregate purchase price of $57,049,000 (an average of $9.88 per share) under our share repurchase program. During the year ended December 31, 2016, we received valid repurchase requests relating to approximately 3,432,000 shares, which were repurchased in full for an aggregate purchase price of $33,335,000 (an average of $9.71 per share) under our share repurchase program.
During the three months ended December 31, 2017, we fulfilled the following repurchase requests pursuant to our share repurchase program:
Period
 
Total Number of
Shares Repurchased
 
Average
Price Paid per
Share
 
Total Numbers of Shares
Purchased as Part of Publicly
Announced Plans and Programs
 
Approximate Dollar Value
of Shares Available that may yet
be Repurchased under the
Program
10/01/2017 - 10/31/2017
 
922,018

 
$
9.91

 
922,018

 
$

11/01/2017 - 11/30/2017
 
540,654

 
$
9.91

 
540,654

 
$

12/01/2017 - 12/31/2017
 
337,109

 
$
9.94

 
337,109

 
$

Total
 
1,799,781

 
 
 
1,799,781

 
 
During the three months ended December 31, 2017, we repurchased approximately $17,851,000 of common stock, which represented all repurchase requests received in good order and eligible for repurchase during the three months ended December 31, 2017.
Stockholders
As of March 28, 2018, we had approximately 183,643,000 shares of common stock outstanding held by 39,836 stockholders of record.
Distributions
We are taxed and qualify as a REIT for federal income tax purposes. As a REIT, we make distributions each taxable year equal to at least 90% of our REIT taxable income (computed without regard to the dividends paid deduction and excluding capital gains). One of our primary goals is to continue to pay monthly distributions to our stockholders. For the year ended December 31, 2017, we paid aggregate distributions of $130,075,000 ($63,082,000 in cash and $66,993,000 reinvested in shares of our common stock pursuant to the DRIP Offerings). For the year ended December 31, 2016, we paid aggregate distributions of $128,124,000 ($60,038,000 in cash and $68,086,000 reinvested in shares of our common stock pursuant to the DRIP Offerings).

50


Use of Public Offering Proceeds
As of December 31, 2017, we had issued approximately 196.8 million shares of common stock in our Offerings for gross proceeds of $1,946.8 million, out of which we paid $156.5 million in selling commissions and dealer manager fees, $18.3 million in organization and offering costs and $54.6 million in acquisition related expenses to our Advisor or its affiliates. With the net offering proceeds and associated borrowings, we had acquired $2,189.1 million in real estate investments, $117.2 million in real estate-related notes receivable, $39.4 million in notes receivable and $127.1 million in a preferred equity investment as of December 31, 2017. As of December 31, 2017, we had invested $182.1 million in capital improvements related to certain real estate investments. During the year ended December 31, 2017, we disposed 16 properties (15 data center properties and one healthcare property) for an aggregate sale price of $1,153.0 million and generated net proceeds from the sale of those assets of $1,131.6 million.  In connection with the dispositions, we repaid mortgage loans associated with these properties for approximately $308.2 million, including accrued interest, and $479.0 million of our unsecured credit facility.
On January 10, 2018, we sold a data center portfolio, consisting of two properties, for approximately $142.5 million and generated net proceeds from the sale of this portfolio of $140.2 million, after transaction costs and disposition fees, subject to additional transaction costs paid subsequent to the closing date.
In addition, on January 22, 2018, we declared a special cash distribution of $3.00 per share of common stock. The special cash distribution was funded from 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 amount of $556.2 million.


51


Item 6. Selected Financial Data.
The following should be read in conjunction with our consolidated financial statements and the notes thereto and Item 1A. “Risk Factors” and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of results for any future period.

52


The selected financial data presented below was derived from our consolidated financial statements (amounts in thousands, except shares and per share data):
  
 
As of and for the Year Ended December 31,
Selected Financial Data
 
2017
 
2016
 
2015
 
2014
 
2013
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
Total real estate, net
 
$
908,188

 
$
1,039,330

 
$
964,052

 
$
800,723

 
$
311,563

Acquired intangible assets, net
 
$
86,938

 
$
94,675

 
$
103,185

 
$
96,232

 
$
40,014

Cash and cash equivalents
 
$
336,500

 
$
42,613

 
$
28,527

 
$
113,093

 
$
7,511

Preferred equity investment
 
$

 
$

 
$
127,147

 
$

 
$

Assets of discontinued operations, net
 
$
213,833

 
$
1,093,465

 
$
1,093,821

 
$
1,118,439

 
$
636,859

Total assets
 
$
1,624,599

 
$
2,337,654

 
$
2,382,440

 
$
2,182,961

 
$
1,060,485

Notes payable, net
 
$
140,602

 
$
172,042

 
$
209,027

 
$
215,777

 
$
68,008

Credit facility, net
 
$

 
$
356,211

 
$
290,456

 
$
73,034

 
$
150,016

Intangible lease liabilities, net
 
$
17,555

 
$
18,667

 
$
19,745

 
$
19,961

 
$
10,808

Liabilities of discontinued operations, net
 
$
5,058

 
$
361,405

 
$
379,375

 
$
324,338

 
$
181,824

Total liabilities
 
$
193,782

 
$
932,710

 
$
920,264

 
$
652,368

 
$
419,202

Total equity
 
$
1,430,817

 
$
1,404,944

 
$
1,462,176

 
$
1,530,593

 
$
641,283

Operating Data:
 
 
 
 
 
 
 
 
 
 
Total revenue
 
$
94,414

 
$
90,237

 
$
96,818

 
$
65,701

 
$
27,581

Rental expenses
 
$
13,071

 
$
8,972

 
$
7,363

 
$
3,667

 
$
1,457

Acquisition related expenses
 
$

 
$
1,667

 
$
3,693

 
$
4,081

 
$
4,023

Depreciation and amortization
 
$
33,540

 
$
47,591

 
$
30,429

 
$
17,104

 
$
6,365

Income from operations
 
$
30,007

 
$
14,800

 
$
39,371

 
$
29,562

 
$
12,145

(Loss) Income from continuing operations
 
$
(37,038
)
 
$
478

 
$
32,071

 
$
18,997

 
$
5,460

Income from discontinued operations
 
$
261,675

 
$
34,679

 
$
36,305

 
$
18,634

 
$
9,219

Net income
 
$
224,637

 
$
35,157

 
$
68,376

 
$
37,631

 
$
14,679

Net income attributable to noncontrolling interests in consolidated partnerships
 
$
(47,326
)
 
$
(3,921
)
 
$
(4,938
)
 
$
(4,133
)
 
$
(2,021
)
Net income attributable to common stockholders
 
$
177,311

 
$
31,236

 
$
63,438

 
$
33,498

 
$
12,658

Funds from operations attributable to common stockholders (1)
 
$
103,955

 
$
114,634

 
$
127,914

 
$
75,882

 
$
28,108

Modified funds from operations attributable to common stockholders (1)
 
$
84,373

 
$
111,196

 
$
105,214

 
$
67,957

 
$
26,608

Per Share Data:
 
 
 
 
 
 
 
 
 
 
Net income per common share attributable to common stockholders:
 
 
 
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
 
 
 
Continuing operations
 
$
(0.20
)
 
$

 
$
0.17

 
$
0.12

 
$
0.13

Discontinued operations
 
1.15

 
0.17

 
0.19

 
0.11

 
0.17

Net income attributable to common stockholders
 
$
0.95

 
$
0.17

 
$
0.36

 
$
0.23

 
$
0.30

Diluted:
 
 
 
 
 
 
 
 
 
 
Continuing operations
 
$
(0.20
)
 
$

 
$
0.17

 
$
0.12

 
$
0.13

Discontinued operations
 
1.15

 
0.17

 
0.19

 
0.11

 
0.17

Net income attributable to common stockholders
 
$
0.95

 
$
0.17

 
$
0.36

 
$
0.23

 
$
0.30

Distributions declared
 
$
130,183

 
$
128,316

 
$
124,963

 
$
100,617

 
$
29,419

Distributions declared per common share
 
$
0.70

 
$
0.70

 
$
0.70

 
$
0.70

 
$
0.70

Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
 
 
 
Basic
 
185,922,468

 
183,279,872

 
178,521,807

 
143,682,692

 
42,207,714

Diluted
 
185,922,468

 
183,297,662

 
178,539,609

 
143,700,672

 
42,224,944

Cash Flow Data:
 
 
 
 
 
 
 
 
 
 
Net cash provided by operating activities
 
$
105,278

 
$
122,821

 
$
107,659

 
$
69,723

 
$
26,022

Net cash provided by (used in) investing activities
 
$
1,092,831

 
$
(18,818
)
 
$
(324,316
)
 
$
(1,021,697
)
 
$
(578,816
)
Net cash (used in) provided by financing activities
 
$
(903,800
)
 
$
(89,468
)
 
$
132,518

 
$
1,065,284

 
$
558,712


53


(1)
Refer to Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations—Funds from Operations and Modified Funds from Operations" for a discussion of our funds from operations and modified funds from operations and for a reconciliation on these non-GAAP financial measures to net income (loss) attributable to common stockholders.
Item 7. 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 Item 6. “Selected Consolidated Financial Data” and our consolidated financial statements and the notes thereto and the other financial information appearing elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of various factors, including those discussed below and elsewhere in this report, particularly under “Risk Factors” and “Forward-Looking Statements.” All forward-looking statements in this document are based on information available to us as of the date hereof, and we assume no obligation to update any such forward-looking statements.
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 Third DRIP Offering, defined below, until such time as we sell all of the shares registered for sale under the Third DRIP Offering, unless we file a new registration statement with the SEC or the Third DRIP Offering is terminated by our board of directors.
On April 14, 2014, we registered 10,526,315 shares of common stock in the First DRIP Offering for a price per share of $9.50 for a proposed maximum offering price of $100,000,000 in shares of common stock under the DRIP pursuant to a registration statement on Form S-3. On November 25, 2015, we ceased offering shares of common stock pursuant to the First DRIP Offering and registered an additional 10,473,946 shares of common stock in the Second DRIP Offering for a price per share of $9.5475, which was the greater of (i) 95% of the fair market value per share as determined by our board of directors as of September 30, 2015 and (ii) $9.50 per share, for a proposed maximum offering price of $100,000,000 in shares of common stock under the DRIP pursuant to a registration statement on Form S-3. On May 22, 2017, we ceased offering shares of common stock pursuant to the Second DRIP Offering and registered an additional 11,387,512 shares of common stock in the Third DRIP Offering for a price per share of $9.519, which was the greater of (i) 95% of the fair market value per share as determined by our board of directors as of September 30, 2016 and (ii) $9.50 per share, 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.
On December 21, 2017, our board 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 defined below), as determined by the board. As a result, effective February 1, 2018, shares were offered pursuant to the Third DRIP Offering for a price per share of $9.26. In connection with a 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 are offered pursuant to the Third DRIP Offering for a price per share of $6.26.
We refer to the First DRIP Offering, the Second DRIP Offering and the Third DRIP Offering as the DRIP Offerings, and collectively with our Offering, our Offerings. As of December 31, 2017, we had issued approximately 196,826,000 shares of common stock in our Offerings for gross proceeds of $1,946,761,000, before share repurchases of $104,911,000 and offering costs, selling commissions and dealer manager fees of $174,845,000.
On November 16, 2015, our board of directors, at the recommendation of the audit committee of the board, or the Audit Committee, which is comprised solely of independent directors, established an estimated net asset value, "NAV", per share of our common stock, or the "Estimated Per Share NAV", calculated as of September 30, 2015, of $10.05 for purposes of assisting broker-dealers that participated in our Offering in meeting their customer account statement reporting obligations under the National Association of Securities Dealers Conduct, or NASD, Rule 2340. On November 28, 2016, our board of directors, at the recommendation of the Audit Committee, established an updated Estimated Per Share NAV, calculated as of September 30, 2016, of $10.02 for purposes of assisting broker-dealers that participated in our Offering in meeting their customer account statement reporting obligations under NASD Rule 2340. On December 21, 2017, our board of directors, at the recommendation

54


of the Audit Committee, established an updated Estimated Per Share NAV, calculated as of September 30, 2017, of $9.26 for purposes of assisting broker-dealers that participated in our Offering in meeting their customer account statement reporting obligations under NASD Rule 2340. 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. 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. We intend to publish an updated Estimated Per Share NAV on at least an annual basis. Each Estimated Per Share NAV was determined by our board of directors after consultation with our Advisor and an independent third-party valuation firm.
Substantially all of our operations are conducted through our Operating Partnership. We are externally advised by our Advisor, pursuant to the 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, our Sponsor. We have no paid employees and rely upon our Advisor to provide substantially all of our services.
Our Property Manager, a wholly-owned subsidiary of our Sponsor, serves as our property manager. Our Advisor and our Property Manager received, and will continue to receive, fees during the acquisition and operational stages and our Advisor may be eligible to receive fees during the liquidation stage of the Company.
As of December 31, 2017, 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.
During the year ended December 31, 2017, our board of directors made a determination to sell data center assets. Consistent with the decision, during the fourth quarter of 2017, we sold 15 data center properties (including one real estate property owned through a consolidated partnership). This decision represents a strategic shift that has a major effect on the Company's results and operations and assets and liabilities for the years presented. As a result, the Company has its data centers segment as a part of discontinued operations.
Subsequent to December 31, 2017, we completed the sale of two data center assets, which consisted of approximately 658,000 rentable square feet, for an aggregate sale price of $142,500,000 with net proceeds of approximately $140,221,000, after transaction costs and disposition fees, subject to additional transaction costs paid subsequent to the closing date.
On January 22, 2018, our board of directors declared a special cash distribution of $3.00 per share of common stock. The special cash distribution was funded from 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.
On January 22, 2018, our board of directors declared a new distribution rate, which will be calculated based on 365 days in the calendar year and will be equal to $0.001150685 per share of common stock or 6.7% per annum on the most recent NAV of $9.26 per share, less the special distribution of $3.00 per share, to stockholders of record as of each date during the period beginning on March 1, 2018, through May 31, 2018. The March distributions will be paid in April 2018, the April distributions will be paid in May 2018 and the May distributions will be paid in June 2018.
Critical Accounting Policies
Our critical accounting policies are more fully described in Note 2—"Summary of Significant Accounting Policies," or Note 2, of the consolidated financial statements that are part of this Annual Report on Form 10-K. As disclosed in Note 2, the preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ significantly from those estimates. We believe that the following discussion addresses the most critical accounting policies, which are those that are most important to the portrayal of the Company’s financial condition and results of operations and require management’s most difficult, subjective and complex judgments.

55


Investment in Real Estate
Real estate costs related to the acquisition, development, construction and improvement of properties are capitalized. Repair and maintenance costs are expensed as incurred and significant replacements and betterments are capitalized. Repair and maintenance costs include all costs that do not extend the useful life of the real estate asset. We consider the period of future benefit of an asset in determining the appropriate useful life. Real estate assets, other than land, are depreciated or amortized on a straight-line basis over each asset’s useful life. We estimated the useful lives of our assets by class as follows:
Buildings and improvements
 
15 – 40 years
Tenant improvements
 
Shorter of lease term or expected useful life
Furniture, fixtures, and equipment
 
3 – 10 years
We continually monitor events and changes in circumstances that could indicate that the carrying amounts of our 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, we assess the recoverability of the assets by estimating whether we will recover the carrying value of the asset through its undiscounted future cash flows and its eventual disposition. If, based on this analysis, we do not believe that we will be able to recover the carrying value of the asset, we will record an impairment loss to the extent that the carrying value exceeds the estimated fair value of the asset. During the year ended December 31, 2017, we recorded impairment losses on five real estate properties in the amount of $39,147,000.
Impairment of Long Lived Assets
We continually monitor 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, we assess the recoverability of the assets by estimating whether we will recover the carrying value of the asset through its undiscounted future cash flows and its eventual disposition. If based on this analysis we do not believe that it will be able to recover the carrying value of the asset, we will record an impairment loss to the extent that the carrying value exceeds the estimated fair value of the asset.
During the year ended December 31, 2017, real estate assets related to four properties with an aggregate carrying amount of $85,768,000 were deemed to be impaired and their carrying values were reduced to their estimated fair value of $52,557,000, resulting in an impairment charge of $33,211,000, which is included in impairment loss on real estate in the consolidated statements of comprehensive income. We review each property based on the highest and best use and market participant assumptions. We used a discounted cash flow analysis and a market approach to estimate the fair value of real estate assets relating to the property. See Note 12—"Fair Value" for more details.
In addition, during the year ended December 31, 2017, we recorded an impairment loss of $5,936,000 related to one real estate property, which was sold on December 28, 2017 for $88,000,000. The impairment loss is included in impairment loss on real estate in the consolidated statements of comprehensive income. No impairment losses were recorded during the years ended December 31, 2016 and 2015.
When developing estimates of expected future cash flows, we make 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. Additionally, for certain of our properties we use a market approach, using comparable properties' sale approach. 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.
For the year ended December 31, 2017, we recognized an impairment of three in-place lease intangible assets in the amount of approximately $1,151,000 and one below-market lease in the amount of approximately $86,000 by accelerating the amortization of the intangibles as a result of a lease amendment. For the year ended December 31, 2016, we recognized an impairment of one in-place lease intangible asset and one capitalized lease commission by accelerating the amortization in the amount of $16,400,000 as a result of two tenants experiencing financial difficulties.

56


Purchase Price Allocation
Upon the acquisition of real properties, we evaluate whether the acquisition is a business combination or an asset acquisition. For both business combinations and asset acquisitions we allocate the purchase price of properties to acquired tangible assets, consisting of land, buildings and improvements, and acquired intangible assets and liabilities, consisting of the value of above-market and below-market leases and the value of in-place leases. For asset acquisitions, we capitalize transaction costs and allocate the purchase price using a relative fair value method allocating all accumulated costs. For business combinations, we expense transaction costs associated as incurred and allocates the purchase price based on the estimated fair value of each separately identifiable asset and liability.
The fair values of the tangible assets of an acquired property (which includes the land and buildings and improvements) are determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land and buildings and improvements based on management’s determination of the relative fair value of these assets. Management determines the as-if-vacant fair value of a property using methods similar to those used by independent appraisers. Factors considered by management in performing these analyses include an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases, including leasing commissions and other related costs. In estimating carrying costs, management includes real estate taxes, insurance, and other operating expenses during the expected lease-up periods based on current market conditions.
The fair values of above-market and below-market in-place lease values are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts paid pursuant to the in-place leases and (ii) an estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease including any fixed rate bargain renewal periods, with respect to a below-market lease. The above-market and below-market lease values are capitalized as intangible assets or intangible liabilities. Above-market lease values are amortized as an adjustment of rental income over the remaining terms of the respective leases. Below-market leases are amortized as an adjustment of rental income over the remaining terms of the respective leases, including any bargain renewal periods. If a lease were to be terminated prior to its stated expiration, all unamortized amounts of above-market and below-market in-place lease values related to that lease would be recorded as an adjustment to rental income.
The fair values of in-place leases include an estimate of direct costs associated with obtaining a new tenant and opportunity costs associated with lost rentals that are avoided by acquiring an in-place lease. Direct costs associated with obtaining a new tenant include commissions, tenant improvements, and other direct costs and are estimated based on management’s consideration of current market costs to execute a similar lease. The value of opportunity costs is calculated using the contractual amounts to be paid pursuant to the in-place leases over a market absorption period for a similar lease. The in-place lease intangibles are amortized to expense over the remaining terms of the respective leases. If a lease were to be terminated prior to its stated expiration, all unamortized amounts of in-place lease assets relating to that lease would be expensed.
Held for Sale and Discontinued Operations
We classify 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 sale of the property is probable and transfer of the asset is expected to be completed within one year, (v) the property is being actively marketed for sale, 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, we cease recognizing depreciation and amortization on the real estate properties held for sale, 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 consolidated balance sheets. Such properties are recorded at the lesser of the carrying value or estimated fair value less estimated cost to sell.
Additionally, we classified real estate properties held for sale as discontinued operations for all periods presented if the disposal represents a strategic shift that has (or will have) a major effect on our results and operations, the assets, liabilities and operations for the periods presented are classified on the consolidated balance sheets and consolidated statements of comprehensive income as discontinued operations for all periods presented.

57


Revenue Recognition, Tenant Receivables and Allowance for Uncollectible Accounts
We recognize revenue in accordance with Accounting Standards Codification, or ASC, 605, Revenue Recognition, or ASC 605. ASC 605 requires that all four of the following basic criteria be met before revenue is realized or realizable and earned: (1) there is persuasive evidence that an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the seller’s price to the buyer is fixed and determinable; and (4) collectability is reasonably assured.
In accordance with ASC 840, Leases, we recognize minimum annual rental revenue on a straight-line basis over the term of the related lease (including rent holidays). Differences between rental income recognized and amounts contractually due under the lease agreements are credited or charged, as applicable, to rent receivable. Tenant reimbursement revenue, which is comprised of additional amounts recoverable from tenants for common area maintenance expenses and certain other recoverable expenses, is recognized as revenue in the period in which the related expenses are incurred. Tenant reimbursements are recognized and presented in accordance with ASC Subtopic 605-45, Revenue Recognition—Principal Agent Consideration, or ASC Subtopic 605-45. ASC Subtopic 605-45 requires that these reimbursements be recorded on a gross basis, as we generally are the primary obligor with respect to purchasing goods and services from third-party suppliers, and therefore, we have discretion in selecting the supplier and have credit risk.
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. We also maintain an allowance for deferred rent receivables arising from the straight-lining of rents. Our 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 and current economic conditions and other relevant factors. For the years ended December 31, 2017 and 2016, we recorded $20,755,000 and $26,177,000, respectively, in provision for doubtful accounts for rental revenue, tenant reimbursement revenue and straight-line rent receivable, which is recognized in the accompanying consolidated statements of comprehensive income as a deduction from rental revenue and tenant reimbursement revenue. For the year ended December 31, 2015, we recorded $3,376,000 in provision for doubtful accounts.
Income Taxes
We qualified and elected to be taxed as a REIT for federal income tax purposes under Sections 856 through 860 of the Code beginning with the taxable year ended December 31, 2011. As a REIT, we are required, among other things, to distribute at least 90% of our REIT taxable income (computed without regard to the dividends paid deduction and excluding capital gains) to our stockholders. In addition, we generally will not be subject to federal corporate income tax to the extent we distribute our taxable income to our stockholders. REITs are subject to a number of other organizational and operational requirements. Even if we maintain our qualification for taxation as a REIT, we, or our subsidiaries, may be subject to certain state and local taxes on our income and property, and federal income and excise taxes on our undistributed income.
Disposition of Real Estate Properties During 2017 and Subsequent
During the year ended December 31, 2017, we sold an aggregate of 16 properties, 15 data center properties (including one real estate property owned through a consolidated partnership) and one healthcare property, which consisted of 2,656,000 rentable square feet, for an aggregate sale price of $1,153,000,000.
On January 10, 2018, we completed the sale of two data center assets, which consisted of 658,000 rentable square feet, for an aggregate sale price of $142,500,000.
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 and those risks listed in Part I. Item 1A. "Risk Factors," of this Annual Report on Form 10-K, 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.
Rental Income
The amount of rental income generated by our properties depends principally on our ability to maintain the occupancy rates of leased space and to lease available space at the then-existing rental rates. Negative trends in one or more of these factors could adversely affect our rental income in future periods. As of December 31, 2017, our operating properties were 91% leased.

58


Results of Operations
During the year ended December 31, 2017, our board of directors made a determination to sell data center assets. Consistent with the decision, during the fourth quarter of 2017, we sold 15 data center properties, (including one real estate property owned through a consolidated partnership) for aggregate consideration of $1,065,000,000. This decision represents a strategic shift that has a major effect on the Company's results and operations and assets and liabilities for the years presented and qualified as discontinued operations. As of December 31, 2017, we had five data centers remaining, two of which were sold on January 10, 2018. The results of operations discussed below reflect the data center segment presented as discontinued operations.
Our results of operations are influenced by the timing of acquisitions and the operating performance of our operating real estate properties. The following table shows the property statistics of our operating real estate properties as of December 31, 2017, 2016 and 2015:
 
December 31,
 
2017
 
2016
 
2015
Number of commercial operating properties (1)
63

 
63

 
58

Leased rentable square feet
2,367,000

 
2,709,000

 
2,545,000

Weighted average percentage of rentable square feet leased
91
%
 
100
%
 
100
%
 
(1)
As of December 31, 2017, we owned 63 operating real estate properties, one of which was vacated by the tenant on June 2, 2017 and remains unoccupied. As of December 31, 2016, we owned 64 operating real estate properties, one of which was under construction. As of December 31, 2015, we owned 59 operating real estate properties, one of which was under construction.
The following table summarizes our operating real estate properties' activity for the years ended December 31, 2017, 2016 and 2015:
 
For the Year Ended December 31,
 
2017
 
2016
 
2015
Commercial operating properties acquired

 
5

 
21

Commercial operating properties placed in service
1

 

 
1

Commercial operating properties disposed
1

 

 

Approximate aggregate purchase price of operating properties acquired
$

 
$
71,000,000

 
$
137,427,000

Approximate aggregate cost of properties placed in service
$
19,466,000

 
$

 
$
48,735,000

Approximate net book value of properties at disposal
$
93,435,000

 
$

 
$

Leased rentable square feet additions
34,000

 
158,000

 
438,000

Leased rentable square feet disposed
177,000

 

 

The following discussion is based on our consolidated financial statements for the years ended December 31, 2017, 2016 and 2015.
These sections describe and compare our results of operations for the years ended December 31, 2017, 2016 and 2015. 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 new acquisitions and dispositions on net income.

59


Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Changes in our revenues are summarized in the following table (amounts in thousands):
 
For the Year Ended
December 31,
 
 
 
2017
 
2016
 
Change
Same store rental revenue
$
79,418

 
$
81,559

 
$
(2,141
)
Non-same store rental revenue
9,091

 
4,733

 
4,358

Same store tenant reimbursement revenue
5,027

 
3,454

 
1,573

Non-same store tenant reimbursement revenue
427

 
11

 
416

Other operating income
451

 
480

 
(29
)
Total revenue
$
94,414

 
$
90,237

 
$
4,177

Same store rental revenue decreased primarily due to an increase in bad debt expenses related to delinquent accounts receivable during the year ended December 31, 2017.
Non-same store rental revenue and tenant reimbursement revenue increased primarily as a result of the acquisition of five properties and one property placed in service since January 1, 2016.
Same store tenant reimbursement revenue increased primarily due to an increase in real estate taxes recognized during the year ended December 31, 2017, due to assumption of unpaid taxes by one of our tenants, offset by an increase in bad debt expenses related to tenant reimbursement revenues.
Changes in our expenses are summarized in the following table (amounts in thousands):
 
For the Year Ended
December 31,
 
 
 
2017
 
2016
 
Change
Same store rental expenses
$
12,078

 
$
8,547

 
$
3,531

Non-same store rental expenses
993

 
425

 
568

General and administrative expenses
7,185

 
6,251

 
934

Acquisition related expenses

 
1,667

 
(1,667
)
Asset management fees
10,611

 
10,956

 
(345
)
Depreciation and amortization
33,540

 
47,591

 
(14,051
)
Total expenses
$
64,407

 
$
75,437

 
$
(11,030
)
Same store rental expenses increased primarily due to an increase in real estate taxes recognized during the year ended December 31, 2017 due to assumption of unpaid taxes by one of our tenants.
Non-same store rental expenses increased primarily due to the acquisition of five operating properties and one property placed in service since January 1, 2016.
General and administrative expenses increased primarily due to federal excise tax incurred during the year ended December 31, 2017 in the amount of $0.6 million, coupled with an increase in professional fees related to strategic advice in connection with dispositions of our data center properties.
Acquisition related expenses decreased because during the year ended December 31, 2016, we acquired five property portfolio that we accounted for as a business combination for an aggregate purchase price of $71.0 million. We did not acquire any properties during the year ended December 31, 2017.
Asset management fees decreased primarily due to the redemption of the preferred equity investment on October 4, 2016.
Depreciation and amortization decreased primarily due to the acceleration of amortization of an in-place lease intangible in the amount of $14.6 million during the year ended December 31, 2016, which was the result of one tenant experiencing financial difficulties.

60


Changes in other income (expense) are summarized in the following table (amounts in thousands):
 
For the Year Ended
December 31,
 
 
 
2017
 
2016
 
Change
Other interest and dividend income:
 
 
 
 
 
Cash deposits interest
$
68

 
$
52

 
$
16

Dividends on preferred equity investment

 
11,595

 
(11,595
)
Notes receivable interest and other income
3,079

 
1,648

 
1,431

Total other interest and dividend income
3,147

 
13,295

 
(10,148
)
 
 
 
 
 
 
Interest expense, net:
 
 
 
 
 
Interest on notes payable
(8,847
)
 
(10,127
)
 
1,280

Interest on unsecured credit facility
(12,896
)
 
(10,884
)
 
(2,012
)
Amortization of deferred financing costs
(3,005
)
 
(3,603
)
 
598

Capitalized interest
2,865

 
2,424

 
441

Gain (loss) on debt extinguishment
2,774

 
(1,133
)
 
3,907

Total interest expense, net
(19,109
)
 
(23,323
)
 
4,214

Provision for loan losses
(11,936
)
 
(4,294
)
 
(7,642
)
Impairment loss on real estate
(39,147
)
 

 
(39,147
)
Total other expense
(67,045
)
 
(14,322
)
 
(52,723
)
Income from discontinued operations
$
261,675

 
$
34,679

 
$
226,996

Dividends on preferred equity investment decreased due to the redemption of the preferred equity investment on October 4, 2016.
Notes receivable interest and other income increased primarily due to an increase in the weighted average outstanding principal balance of our notes receivable, net of reserves.
Interest on notes payable decreased due to the payoff of three notes payable during 2017 in the amount of $26.1 million and the payoff of one note payable during the year ended December 31, 2016 in the amount of $31.2 million. The outstanding principal balance on notes payable was $141.5 million as of December 31, 2017, as compared to $173.4 million as of December 31, 2016.
Interest on unsecured credit facility increased due to an increase in the weighted average outstanding principal balance on our unsecured credit facility. The weighted average outstanding principal balance of our unsecured credit facility was $396.3 million as of December 31, 2017, as compared to $376.5 million as of December 31, 2016.
Capitalized interest increased due to an increase in the average accumulated expenditures on development properties to $43.2 million for the year ended December 31, 2017, as compared to $37.2 million for the year ended December 31, 2016.
Gain on debt extinguishment increased due to associated early extinguishment of debt obligations.
Provision for loan losses increased due to $11.9 million recorded in bad debt expense on notes receivable and accrued interest related to two tenants during the year ended December 31, 2017, as compared to $4.3 million recorded in bad debt expense on notes receivable and accrued interest related to two tenants during the year ended December 31, 2016.
Impairment loss on real estate increased due to the carrying amount of five real estate properties exceeding their fair value by $39.1 million.
Income from discontinued operations, which includes revenue, operating expenses and interest expense of the data center segment, increased primarily due to a gain of $224.1 million on the sale of 15 data center properties.

61


Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Changes in our revenues are summarized in the following table (amounts in thousands):
 
For the Year Ended
December 31,
 
 
 
2016
 
2015
 
Change
Same store rental revenue
$
60,872

 
$
81,672

 
$
(20,800
)
Non-same store rental revenue
25,421

 
10,484

 
14,937

Same store tenant reimbursement revenue
2,646

 
4,024

 
(1,378
)
Non-same store tenant reimbursement revenue
819

 
97

 
722

Other operating income
479

 
215

 
264

Real estate-related notes receivable interest income

 
326

 
(326
)
Total revenue
$
90,237

 
$
96,818

 
$
(6,581
)
Same store rental revenue decreased primarily due to bad debt expense related to delinquent accounts receivable recorded in the amount of $24.6 million during the year ended December 31, 2016, as compared to $3.4 million during the year ended December 31, 2015, partially offset by an increase in contractual rental revenue due to lease amendments during the year ended December 31, 2016.
Non-same store rental revenue, and tenant reimbursement revenue increased primarily as a result of the acquisition of 26 properties since January 1, 2015.
Same store tenant reimbursement revenue decreased primarily due to bad debt expense recorded for tenant reimbursement revenue in the amount of $1.5 million during the year ended December 31, 2016, which was a result of two tenants experiencing financial difficulties.
Real estate-related notes receivable interest income decreased due to principal repayments of certain real estate-related notes receivable during 2015.
Changes in our expenses are summarized in the following table (amounts in thousands):
 
For the Year Ended
December 31,
 
 
 
2016
 
2015
 
Change
Same store rental expenses
$
6,884

 
$
6,755

 
$
129

Non-same store rental expenses
2,088

 
608

 
1,480

General and administrative expenses
6,251

 
6,340

 
(89
)
Acquisition related expenses
1,667

 
3,693

 
(2,026
)
Asset management fees
10,956

 
9,622

 
1,334

Depreciation and amortization
47,591

 
30,429

 
17,162

Total expenses
$
75,437

 
$
57,447

 
$
17,990

Non-same store rental expenses increased primarily due to the acquisition of 26 operating properties since January 1, 2015.
Acquisition related expenses decreased because during the year ended December 31, 2016, we acquired a five property portfolio that we accounted for as a business combination for an aggregate purchase price of $71.0 million, as compared to 21 properties accounted for as business combinations for an aggregate purchase price of $137.4 million during the year ended December 31, 2015.
Asset management fees increased primarily due to an increase in the weighted average assets as of December 31, 2016, as compared to December 31, 2015.
Depreciation and amortization increased primarily due to the acceleration of amortization of an in-place lease intangible in the amount of $14.6 million during the year ended December 31, 2016, which was the result of one tenant experiencing financial difficulties, as compared to the acceleration of amortization of an in-place lease intangible in the amount of $3.1 million during the year ended December 31, 2015, associated with a lease termination at one of our properties, coupled with an increase in the weighted average depreciable basis of real estate investments.

62


Changes in other income (expense) are summarized in the following table (amounts in thousands):
 
For the Year Ended
December 31,
 
 
 
2016
 
2015
 
Change
Other interest and dividend income:
 
 
 
 
 
Cash deposits interest
$
52

 
$
123

 
$
(71
)
Dividends on preferred equity investment
11,595

 
7,820

 
3,775

Notes receivable interest and other income
1,648

 
726

 
922

Total other interest and dividend income
13,295

 
8,669

 
4,626

 
 
 
 
 
 
Interest expense, net:
 
 
 
 
 
Interest on notes payable
(10,127
)
 
(11,948
)
 
1,821

Interest on unsecured credit facility
(10,884
)
 
(5,266
)
 
(5,618
)
Amortization of deferred financing costs
(3,603
)
 
(3,008
)
 
(595
)
Capitalized interest
2,424

 
4,253

 
(1,829
)
Loss on debt extinguishment
(1,133
)
 

 
(1,133
)
Total interest expense, net
(23,323
)
 
(15,969
)
 
(7,354
)
Provision for loan losses
(4,294
)
 

 
(4,294
)
Total other expense
(14,322
)
 
(7,300
)
 
(7,022
)
Income from discontinued operations
$
34,679

 
$
36,305

 
$
(1,626
)
Dividends on preferred equity investment increased primarily due to the redemption of the preferred equity investment on October 4, 2016, which resulted in dividends in the amount of $4.1 million.
Notes receivable interest and other income increased primarily due to an increase in the weighted average outstanding principal balance of our notes receivable, net of reserves.
Interest on notes payable decreased due to the payoff of one note payable in the amount of $31.2 million during the year ended December 31, 2016. The outstanding principal balance on notes payable was $173.4 million as of December 31, 2016, as compared to $211.2 million as of December 31, 2015.
Interest on unsecured credit facility increased due to an increase in the weighted average outstanding principal balance on our unsecured credit facility.
Capitalized interest decreased due to a decrease in the average accumulated expenditures on development properties to $37.2 million for the year ended December 31, 2016, as compared to $75.8 million for the year ended December 31, 2015.
Provision for loan losses increased due to $4.3 million recorded in bad debt expense on notes receivable and accrued interest related to two tenants during the year ended December 31, 2016.
Income from discontinued operations, which includes revenue, operating expenses and interest expense of the data center segment, decreased primarily due to an increase in the fair value of a contingent consideration liability related to management's assessment of a higher probability of incurring a higher payout under the contingent consideration arrangement.
Organization and Offering Costs
Prior to the termination of our Offering on June 6, 2014, we reimbursed our Advisor or its affiliates for organization and offering costs it incurred on our behalf, but only to the extent the reimbursement did not cause the selling commissions, dealer manager fees and the other organization and offering costs incurred by us to exceed 15% of gross offering proceeds as of the date of the reimbursement. Since inception and through the termination of our Offering on June 6, 2014, we paid approximately $156,519,000 in selling commissions and dealer manager fees to SC Distributors, LLC, or our Dealer Manager, which is an affiliate of our Advisor, and we reimbursed our Advisor or its affiliates approximately $14,207,000 in offering expenses, and incurred approximately $3,900,000 of other organization and offering costs, which totaled approximately $174,626,000, or 10.2% of total gross offering proceeds, which were approximately $1,716,046,000.

63


Subsequent to the termination of our Offering and as of December 31, 2017, we had incurred approximately $219,000 in other offering costs related to the DRIP Offerings.
Other organization costs were expensed as incurred and selling commissions and dealer manager fees were charged to stockholders’ equity as the amounts related to raising capital. For a further discussion of other organization and offering costs, see Note 10—"Related-Party Transactions and Arrangements" to the consolidated financial statements that are a part of this Annual Report on Form 10-K.
Distributions to Stockholders
We have paid, and may continue to pay, distributions from sources other than from our cash flows from operations. For the year ended December 31, 2017, our cash flows provided by operations of approximately $105.3 million was a shortfall of $24.8 million, or 19.1%, of our distributions (total distributions were approximately $130.1 million, of which $63.1 million was cash and $67.0 million was reinvested in shares of our common stock pursuant to the DRIP Offerings) during such period and such shortfall was paid from proceeds from our DRIP Offerings. For the year ended December 31, 2016, our cash flows provided by operations of approximately $122.8 million was a shortfall of $5.3 million, or 4.1%, of our distributions (total distributions were approximately $128.1 million, of which $60.0 million was cash and $68.1 million was reinvested in shares of our common stock pursuant to the DRIP Offerings) during such period and such shortfall was paid from proceeds from our DRIP Offerings.
We may pay, and have no limits on the amounts we may pay, distributions from any source, such as from borrowings, the sale of assets, the sale of additional securities, advances from our Advisor, our Advisor’s deferral, suspension and/or waiver of its fees and expense reimbursements. Funding distributions from borrowings could restrict the amount we can borrow for investments, which may affect our profitability. Funding distributions with the sale of assets may affect our ability to generate cash flows. Funding distributions from the sale of additional securities could dilute your interest in us if we sell shares of our common stock to third party investors. Our inability to acquire additional properties or real estate-related investments may have a negative effect on our ability to generate sufficient cash flow from operations to pay distributions. As a result, the return investors may realize on their investment may be reduced and investors who invest in us before we generate significant cash flow may realize a lower rate of return than later investors. Payment of distributions from any of the aforementioned sources could restrict our ability to generate sufficient cash flow from operations, affect our profitability and/or affect the distributions payable upon a liquidity event, any or all of which may have an adverse effect on an investment in us.
On January 22, 2018, our board of directors declared a special cash distribution of $3.00 per share of common stock. The special cash distribution was funded from 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 amount of approximately $556,227,000.
On January 22, 2018, our board of directors declared a new distribution rate, which will be calculated based on 365 days in the calendar year and will be equal to $0.001150685 per share of common stock or 6.7% per annum on the most recent NAV of $9.26 per share, less the special distribution of $3.00 per share, to stockholders of record as of each date during the period beginning on March 1, 2018, through May 31, 2018. The March distributions will be paid in April 2018, the April distributions will be paid in May 2018 and the May distributions will be paid in June 2018.
For federal income tax purposes, distributions to common stockholders are characterized as either ordinary dividends, capital gain distributions, or nontaxable distributions. To the extent that we make a distribution in excess of our current or accumulated earnings and profits, the distribution will be a nontaxable return of capital, reducing the tax basis in each U.S. stockholder’s shares. Further, the amount of distributions in excess of a U.S. stockholder’s tax basis in such shares will be taxable as a gain realized from the sale of those shares.
The following table shows the character of distributions we paid on a percentage basis during the years ended December 31, 2017, 2016 and 2015:
 
 
For the Year Ended December 31,
Character of Distributions:
 
2017
 
2016
 
2015
Ordinary dividends
 
%
 
45.45
%
 
46.69
%
Capital gain distributions
 
100.00
%
 
3.20
%
 
%
Nontaxable distributions
 
%
 
51.35
%
 
53.31
%
Total
 
100.00
%
 
100.00
%
 
100.00
%

64


Share Repurchase Program
We have implemented a share repurchase program that allows for repurchases of shares of our common stock when certain criteria are met. The share repurchase program provides that all repurchases during any calendar year, including those upon death or a qualifying disability of a stockholder, are limited to those that can be funded with equivalent reinvestments pursuant to the DRIP Offerings during the prior calendar year and to 5.0% of the number of shares of our common stock outstanding on December 31st of the previous calendar year.
Repurchases of shares of our common stock are at the sole discretion of our board of directors. In addition, our board of directors, in its sole discretion, may amend, suspend, reduce, terminate or otherwise change the share repurchase program upon 30 days’ prior notice to our stockholders for any reason it deems appropriate. During the year ended December 31, 2017, we received valid repurchase requests relating to approximately 5,773,000 shares, which were repurchased in full for an aggregate purchase price of $57,049,000 (an average of $9.88 per share) under our share repurchase program. During the year ended December 31, 2016, we received valid repurchase requests relating to approximately 3,432,000 shares, which were repurchased in full for an aggregate purchase price of $33,335,000 (an average of $9.71 per share) under our share repurchase program.
The price at which we repurchase our shares of common stock is based on the most recent estimated value of our shares, which was $10.02 during 2017, and the period of time each stockholder has held his/her shares. On December 21, 2017, our board of directors established an updated Estimated Per Share NAV, calculated as of September 30, 2017, of $9.26, effective February 1, 2018. Therefore, commencing with share repurchases in February 2018, the repurchase price for all stockholders was $9.26 per share.
In connection with a special cash distribution paid on March 16, 2018 to stockholders of record as of February 15, 2018, our board of directors approved the new Estimated Per Share NAV of $6.26, effective on February 15, 2018. Therefore, commencing with share repurchases in March 2018, the repurchase price for all stockholders is $6.26 per share.
Our board of directors has the right, in its sole discretion, to waive the holding requirement in the event of the death or qualifying disability of a stockholder, or other involuntary exigent circumstances, such as bankruptcy, or a mandatory requirement under a stockholder's IRA.
Inflation
We are exposed to inflation risk as income from long-term leases is the primary source of our cash flows from operations. There are provisions in certain of our leases with tenants that are intended to protect us from, and mitigate the risk of, the impact of inflation. These provisions include scheduled increases in contractual base rent receipts, reimbursement billings for operating expenses, pass-through charges and real estate tax and insurance reimbursements. However, due to the long-term nature of our leases, among other factors, the leases may not reset frequently enough to adequately offset the effects of inflation.
Liquidity and Capital Resources
Our principal demands for funds are for capital expenditures, operating expenses, distributions to and repurchases from stockholders and principal and interest on any current and future indebtedness. Generally, cash needs for these items are generated from operations of our current and future investments. We may utilize funds equal to amounts reinvested in the DRIP Offerings and future proceeds from secured and unsecured financings to selectively acquire additional real estate properties and real estate-related investments. The sources of our operating cash flows will be primarily provided by the rental income received from current and future tenants of our leased properties.
We are required by the terms of applicable loan documents to meet certain financial covenants, such as coverage ratios and reporting requirements. In addition, certain loan agreements include cross-default provisions to financial covenants in lease agreements with our tenants so that a default in the financial covenant in the lease agreement is a default in our loan. We were in compliance with all financial covenant requirements as of December 31, 2017.
In the event we are not in compliance with these covenants in future periods and are unable to obtain a consent or waiver, the lender may choose to pursue remedies under the respective loan agreements, which could include, at the lender's discretion, declaring the loans to be immediately due and payable and payment of termination fees and costs incurred by the lender, among other potential remedies.

65


Short-term Liquidity and Capital Resources
On a short-term basis, our principal demands for funds will be for the payments of tenant improvements, operating expenses, distributions to and repurchases from stockholders, and interest and principal payments on current and future debt financings. We expect to meet our short-term liquidity requirements through net cash flows provided by operations, borrowings on our unsecured credit facility, and secured and unsecured borrowings from banks and other lenders to finance our unencumbered real estate assets.
During the year ended December 31, 2017, we sold an aggregate of 16 properties, 15 data centers (including one real estate property owned through a consolidated partnership) and one healthcare property, which consisted of 2,656,000 rentable square feet, for an aggregate sale price of $1,153,000,000. In connection with the sold properties, we paid down our unsecured credit facility in the amount of $479,000,000 and repaid our notes payable prior to their maturity for approximately $308,248,000, including accrued interest, using the net proceeds from the dispositions.
On January 22, 2018, our board of directors declared a special cash distribution of $3.00 per share of common stock. The special cash distribution was funded from 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.
On January 22, 2018, our board of directors declared a new distribution rate, which will be calculated based on 365 days in the calendar year and will be equal to $0.001150685 per share of common stock or 6.7% per annum on the most recent NAV of $9.26 per share, less the special distribution of $3.00 per share, to stockholders of record as of each date during the period beginning on March 1, 2018, through May 31, 2018. The March distributions will be paid in April 2018, the April distributions will be paid in May 2018 and the May distributions will be paid in June 2018.
Long-term Liquidity and Capital Resources
On a long-term basis, our principal demands for funds will be for the payments of tenant improvements, operating expenses, distributions to and repurchases from stockholders, and interest and principal payments on current and future indebtedness. We expect to meet our long-term liquidity requirements through proceeds from cash flow from operations, borrowings on our unsecured credit facility and proceeds from secured or unsecured borrowings from banks or other lenders.
We expect that substantially all cash flows from operations will be used to pay distributions to our stockholders after certain capital expenditures; however, we have used, and may continue to use, other sources to fund distributions, as necessary, such as, funds equal to amounts reinvested in the DRIP Offerings, borrowing on our unsecured credit facility and/or future borrowings on unencumbered assets. To the extent cash flows from operations are lower due to lower-than-expected returns on the properties held, our distributions paid to stockholders may be lower. We expect that substantially all net cash flows from our Offerings or debt financings will be used to fund acquisitions, certain capital expenditures identified at acquisition, repayments of outstanding debt or distributions to our stockholders in excess of cash flows from operations.
Capital Expenditures
We will require approximately $4.7 million in expenditures for capital improvements over the next 12 months. We cannot provide assurances, however, that actual expenditures will not exceed these estimated expenditure levels. As of December 31, 2017, we had $2.6 million of restricted cash in lender-controlled escrow reserve accounts for such capital expenditures. In addition, as of December 31, 2017, we had approximately $336.5 million in cash and cash equivalents. For the year ended December 31, 2017, we had capital expenditures of $23.8 million that primarily related to three healthcare real estate investments.
Unsecured Credit Facility
As of December 31, 2017, the maximum commitments available under the unsecured credit facility was $610,000,000, consisting of a $400,000,000 revolving line of credit, with a maturity date of May 28, 2018, subject to our Operating Partnership’s right to two 12-month extensions, a $75,000,000 term loan, with a maturity date of May 28, 2018, subject to our Operating Partnership’s right to a 12-month extension and an additional $135,000,000 term loan, with a maturity date of August 21, 2020. Generally, proceeds of the unsecured credit facility are used to acquire our real estate properties and for general corporate and working capital purposes. See Note 9—"Unsecured Credit Facility" to the consolidated financial statements that are a part of this Annual Report on Form 10-K.

66


The actual amount of credit available under the unsecured credit facility is a function of certain loan-to-cost, loan-to-value, debt yield and debt service coverage ratios contained in the unsecured credit facility agreement. The unencumbered pool availability under the unsecured credit facility is equal to the maximum principal amount of the value of the assets that are included in the unencumbered pool. The unsecured credit facility agreement contains various affirmative and negative covenants that are customary for credit facilities and transactions of this type, including limitations on the incurrence of debt and limitations on distributions by us, our Operating Partnership and its subsidiaries in the event of default. The unsecured credit facility agreement imposes the following financial covenants: (i) maximum ratio of consolidated total indebtedness to gross asset value; (ii) minimum ratio of adjusted consolidated earnings before interest, taxes, depreciation and amortization to consolidated fixed charges; (iii) minimum tangible net worth; (iv) minimum weighted average remaining lease term of unencumbered pool properties in the unencumbered pool; (v) minimum number of unencumbered pool properties in the unencumbered pool; and (vi) minimum unencumbered pool actual debt service coverage ratio. In addition, the unsecured credit facility agreement includes events of default that are customary for credit facilities and transactions of this type. We were in compliance with all financial covenant requirements under the unsecured credit facility at December 31, 2017.
During the year ended December 31, 2017, we removed 29 properties from the unencumbered pool of the unsecured credit facility. Out of 29 properties a portfolio of 20 healthcare properties was removed due to a tenant undergoing a restructuring of its liabilities and nine data center properties were removed due to a sale of a data center portfolio that occurred on December 21, 2017. In addition, during the year ended December 31, 2017, we added three healthcare properties to the unencumbered pool of the credit facility. As a result of these transactions, the unencumbered pool availability under the unsecured credit facility had a net decrease of $162,907,000. As of December 31, 2017, we had a total unencumbered pool availability under the unsecured credit facility of $353,606,000, which was limited to $236,667,000 due to one covenant restriction and an aggregate outstanding principal balance of $0, therefore, $236,667,000 was available to be drawn under the unsecured credit facility.
On February 1, 2018, the Operating Partnership and certain of our subsidiaries entered into an amended and restated credit agreement related to the unsecured credit facility. See Note 20—"Subsequent Events" to the consolidated financial statements that are a part of this Annual Report on Form 10-K for additional details.
Financing
We anticipate that our aggregate borrowings, both secured and unsecured, will not exceed 50.0% of the greater of combined cost or fair market value of our real estate-related investments. For these purposes, the fair market value of each asset is equal to the value reported in the most recent independent appraisal of the asset. Our policies do not limit the amount we may borrow with respect to any individual investment. As of December 31, 2017, our borrowings were 10.4% of the fair market value of our real estate-related investments.
Under our charter, we have a limitation on borrowing that precludes us from borrowing in excess of 300.0% of our net assets, without the approval of a majority of our independent directors. Net assets for purposes of this calculation are defined to be our total assets (other than intangibles) valued at cost prior to deducting depreciation, amortization, bad debt and other non-cash reserves, less total liabilities. Generally, the preceding calculation is expected to approximate 75.0% of the aggregate cost of our real estate-related investments before depreciation, amortization, bad debt and other similar non-cash reserves. In addition, we may incur mortgage debt and pledge some or all of our properties as security for that debt to obtain funds to acquire additional real properties or for working capital. We may also borrow funds to satisfy the REIT tax qualification requirement that we distribute at least 90.0% of our annual REIT taxable income to our stockholders. Furthermore, we may borrow if we otherwise deem it necessary or advisable to ensure that we maintain our qualification as a REIT for federal income tax purposes. As of December 31, 2017, our leverage did not exceed 300.0% of the value of our net assets.
Notes Payable
For a discussion of our notes payable, see Note 8—"Notes Payable" to the consolidated financial statements that are a part of this Annual Report on Form 10-K.

67


Cash Flows
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
 
For the Year Ended
December 31,
 
 
(in thousands)
2017
 
2016
 
Change
Net cash provided by operating activities
$
105,278

 
$
122,821

 
$
(17,543
)
Net cash provided by (used in) investing activities
$
1,092,831

 
$
(18,818
)
 
$
1,111,649

Net cash used in financing activities
$
(903,800
)
 
$
(89,468
)
 
$
(814,332
)
Operating Activities
Net cash provided by operating activities decreased due to an increase in property taxes, interest expense and other operating expenses, coupled with less rent collected from three tenants, who were experiencing financial difficulties during the year ended December 31, 2017.
Investing Activities
Net cash provided by (used in) investing activities increased due to an increase in proceeds from real estate disposals of $1,131.6 million, a decrease in investments in real estate of $71.0 million, a decrease in capital expenditures of $45.7 million and an increase in collections of real estate-related notes receivable of $0.5 million, offset by real estate deposits, net of $0.5 million, a decrease in our redemption of our preferred equity investment of $127.1 million and an increase in notes receivable, net of $9.6 million.
Financing Activities
Net cash used in financing activities increased due to an increase in payments on notes payable of $288.8 million, an increase in payments on credit facility of $359.0 million, a decrease in proceeds from credit facility of $64.0 million, an increase in costs paid on extinguishment of debt of $2.2 million, an increase in payments of deferred financing costs of $1.3 million, an increase in repurchase of common stock of $23.7 million, an increase in distributions to stockholders of $3.0 million, an increase of purchase of noncontrolling interest in consolidated partnerships of $0.5 million and an increase in distributions to noncontrolling interests of $71.8 million.
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
 
For the Year Ended
December 31,
 
 
(in thousands)
2016
 
2015
 
Change
Net cash provided by operating activities
$
122,821

 
$
107,659

 
$
15,162

Net cash used in investing activities
$
(18,818
)
 
$
(324,316
)
 
$
305,498

Net cash (used in) provided by financing activities
$
(89,468
)
 
$
132,518

 
$
(221,986
)
Operating Activities 
Net cash provided by operating activities increased due to annual rental increases at some of our same store properties and the acquisition of 26 operating properties subsequent to December 31, 2014, partially offset by increased operating expenses.
Investing Activities 
Net cash used in investing activities decreased due to a decrease in investments in real estate of $52.8 million, an increase in real estate deposits, net of $0.7 million, a decrease in real estate-related notes receivable advances of $0.2 million, a decrease in notes receivable advances of $7.1 million, and the redemption of our preferred equity investment resulting in a decrease of $254.3 million, offset by a decrease of $9.5 million in collections of real estate-related notes receivable and an increase in capital expenditures of $0.1 million.
Financing Activities 
The net change in net cash (used in) provided by financing activities was due to a net decrease in notes payable of $109.0 million, a net decrease in in our unsecured credit facility of $153.0 million, an increase in repurchases of our common stock of $23.9 million, an increase in cost paid on extinguishment of debt of $0.8 million, an increase in distributions to our stockholders of $3.3 million and an increase in distributions to noncontrolling interests of $0.4

68


million, offset by a decrease in payments of deferred financing costs of $2.0 million, a decrease in purchase of noncontrolling interests of $66.3 million and a decrease in payments of offering costs of $0.1 million.
Distributions
The amount of distributions payable to our stockholders is determined by our board of directors and is dependent on a number of factors, including funds available for distribution, financial condition, capital expenditure requirements and annual distribution requirements needed to maintain our qualification as a REIT under the Code. To the extent that funds are available, we intend to continue to pay monthly distributions to stockholders. Our board of directors must authorize each distribution and may, in the future, authorize lower amounts of distributions or not authorize additional distributions, and therefore distribution payments are not assured. Our Advisor may also defer, suspend and/or waive fees and expense reimbursements if we have not generated sufficient cash flow from our operations and other sources to fund distributions. Additionally, our organizational documents permit us to pay distributions from unlimited amounts of any source, and we may use sources other than operating cash flows to fund distributions, including funds equal to amounts reinvested in the DRIP Offerings, which may reduce the amount of capital we ultimately invest in properties or other permitted investments.
We have funded distributions with operating cash flows from our properties, funds equal to amounts reinvested in the DRIP Offerings and offering proceeds raised in our Offering. To the extent that we do not have taxable income, distributions paid will be considered a return of capital to stockholders. The following table shows the sources of distributions paid during the years ended December 31, 2017 and 2016:
 
For the Year Ended December 31,
 
2017
 
2016
Distributions paid in cash - common stockholders
$
63,082,000

 
 
 
$
60,038,000

 
 
Distributions reinvested (shares issued)
66,993,000

 
 
 
68,086,000

 
 
Total distributions
$
130,075,000

 
 
 
$
128,124,000

 
 
Source of distributions:
 
 
 
 
 
 
 
Cash flows provided by operations (1)
$
63,082,000

 
48
%
 
$
60,038,000

 
47
%
Offering proceeds from issuance of common stock pursuant to the DRIP (1)
66,993,000

 
52
%
 
68,086,000

 
53
%
Total sources
$
130,075,000

 
100
%
 
$
128,124,000

 
100
%
 
(1)
Percentages were calculated by dividing the respective source amount by the total sources of distributions.
Total distributions declared but not paid as of December 31, 2017 were $11.1 million for common stockholders. These distributions were paid on January 2, 2018.
For the year ended December 31, 2017, we declared and paid distributions of approximately $130.1 million to common stockholders including shares issued pursuant to the DRIP Offerings, as compared to FFO (as defined below) for the year ended December 31, 2017 of $104.0 million. The payment of distributions from sources other than FFO may reduce the amount of proceeds available for investment and operations or cause us to incur additional interest expense as a result of borrowed funds.
For a discussion of distributions paid subsequent to December 31, 2017, see Note 20—"Subsequent Events" to the consolidated financial statements included in this Annual Report on Form 10-K.
Commitments and Contingencies
For a discussion of our commitments and contingencies, see Note 17—"Commitments and Contingencies" to the consolidated financial statements that are a part of this Annual Report on Form 10-K.
Debt Service Requirements
One of our principal liquidity needs is the payment of principal and interest on outstanding indebtedness. As of December 31, 2017, we had $141.5 million in notes payable principal outstanding and no principal outstanding under the unsecured credit facility. We are required by the terms of certain loan documents to meet certain covenants, such as financial ratios and reporting requirements. As of December 31, 2017, we were in compliance with all such covenants and requirements on our mortgage loans payable and the unsecured credit facility.

69


As of December 31, 2017, the total aggregate notional amount under derivative instruments was $121.1 million. We have agreements with each derivative counterparty that contain cross-default provisions, whereby if we default on certain of our unsecured indebtedness, then we could also be declared in default on our derivative obligations, resulting in an acceleration of payment thereunder. As of December 31, 2017, we were in compliance with all such cross-default provisions.
Contractual Obligations
As of December 31, 2017, we had approximately $141,477,000 of principal debt outstanding related to notes payable. See Note 8—"Notes Payable" to the consolidated financial statements that are a part of this Annual Report on Form 10-K for certain terms of the debt outstanding.
Our contractual obligations as of December 31, 2017 were as follows (amounts in thousands):
 
Payments due by period
 
 
 
Less than
1 Year
 
1-3 Years
 
3-5 Years
 
More than
5 Years
 
Total
Principal payments — fixed rate debt
$
18,212

(4) 
$

 
$

 
$

 
$
18,212

Interest payments — fixed rate debt
371

 

 

 

 
371

Principal payments — variable rate debt fixed through interest rate swap agreements (1)
3,557


62,917

 
16,592

 

 
83,066

Interest payments — variable rate debt fixed through interest rate swap agreements (2)
4,849

 
4,059

 
1,451

 

 
10,359

Principal payments — variable rate debt
1,378


38,821

 

 

 
40,199

Interest payments — variable rate debt (3)
2,089

 
855

 

 

 
2,944

Capital expenditures
4,732

 

 

 

 
4,732

Ground lease payments
671

 
1,432

 
1,435

 
34,028

 
37,566

Total
$
35,859

 
$
108,084

 
$
19,478

 
$
34,028

 
$
197,449

 
(1)
As of December 31, 2017, we had $83.1 million outstanding principal on notes payable that were fixed through the use of interest rate swap agreements.
(2)
We used the fixed rates under our interest rate swap agreements as of December 31, 2017 to calculate the debt payment obligations in future periods.
(3)
We used the London Interbank Offered Rate, or LIBOR, plus the applicable margin under our variable rate debt agreements as of December 31, 2017 to calculate the debt payment obligations in future periods.
(4)
Of this amount, $12.4 million relates to a loan agreement that was repaid at maturity on February 28, 2018.
Off-Balance Sheet Arrangements
As of December 31, 2017, we had no off-balance sheet arrangements.
Related-Party Transactions and Arrangements
We have entered into agreements with our Advisor and its affiliates, whereby we agree to pay certain fees to, or reimburse certain expenses of, our Advisor or its affiliates for acquisition fees and expenses, disposition fees, organization and offering expenses, asset and property management fees and reimbursement of operating costs. Refer to Note 10—"Related-Party Transactions and Arrangements" to our consolidated financial statements that are a part of this Annual Report on Form 10-K for a detailed discussion of the various related-party transactions and agreements.
Funds from Operations and Modified Funds from Operations
One of our objectives is to provide cash distributions to our stockholders from cash generated by our operations. The purchase of real estate assets and real estate-related investments, and the corresponding expenses associated with that process, is a key operational feature of our business plan in order to generate cash from operations. Due to certain unique operating characteristics of real estate companies, the National Association of Real Estate Investment Trusts, or NAREIT, an industry trade group, has promulgated a measure known as funds from operations, or FFO, which we believe is an appropriate supplemental measure to reflect the operating performance of a REIT. The use of FFO is recommended by the REIT industry as a supplemental performance measure. FFO is not equivalent to our net income as determined under GAAP.

70


We define FFO, consistent with NAREIT’s definition, as net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property and asset impairment write-downs, plus depreciation and amortization of real estate assets, and after adjustments for unconsolidated partnership and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect FFO on the same basis.
We, along with others in the real estate industry, consider FFO to be an appropriate supplemental measure of a REIT’s operating performance because it is based on a net income analysis of property portfolio performance that excludes non-cash items such as depreciation and amortization and asset impairment write-downs, which we believe provides a more complete understanding of our performance to investors and to our management, and when compared year over year, reflects the impact on our operations from trends in occupancy.
Historical accounting convention (in accordance with GAAP) for real estate assets requires companies to report their investment in real estate at its carrying value, which consists of capitalizing the cost of acquisitions, development, construction, improvements and significant replacements, less depreciation and amortization and asset impairment write-downs, if any, which is not necessarily equivalent to the fair market value of their investment in real estate assets.
The historical accounting convention requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time, which could be the case if such assets are not adequately maintained or repaired and renovated as required by relevant circumstances and/or as requested or required by lessees for operational purposes in order to maintain the value disclosed. We believe that, since the fair value of real estate assets historically rises and falls with market conditions including, but not limited to, inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation could be less informative.
In addition, we believe it is appropriate to disregard asset impairment write-downs as they are a non-cash adjustment to recognize losses on prospective sales of real estate assets. Since losses from sales of real estate assets are excluded from FFO, we believe it is appropriate that asset impairment write-downs in advancement of realization of losses should be excluded. Impairment write-downs are based on negative market fluctuations and underlying assessments of general market conditions, which are independent of our operating performance, including, but not limited to, a significant adverse change in the financial condition of our tenants, changes in supply and demand for similar or competing properties, changes in tax, real estate, environmental and zoning law, which can change over time. When indicators of potential impairment suggest that the carrying value of real estate and related assets may not be recoverable, we assess the recoverability by estimating whether we will recover the carrying value of the asset through undiscounted future cash flows and eventual disposition (including, but not limited to, net rental and lease revenues, net proceeds on the sale of property and any other ancillary cash flows at a property or group level under GAAP). If based on this analysis, we do not believe that we will be able to recover the carrying value of the real estate asset, we will record an impairment write-down to the extent that the carrying value exceeds the estimated fair value of the real estate asset. Testing for indicators of impairment is a continuous process and is analyzed on a quarterly basis or when indicators of impairment exist. Investors should note, however, that determinations of whether impairment charges have been incurred are based partly on anticipated operating performance, because estimated undiscounted future cash flows from a property, including estimated future net rental and lease revenues, net proceeds on the sale of the property, and certain other ancillary cash flows, are taken into account in determining whether an impairment charge has been incurred. While impairment charges are excluded from the calculation of FFO as described above, investors are cautioned that due to the fact that impairments are based on estimated future undiscounted cash flows and that we intend to have a relatively limited term of our operations, it could be difficult to recover any impairment charges through the eventual sale of the property.
In developing estimates of expected future cash flow, we make 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 asset impairment, the extent of such loss, if any, as well as the carrying value of the real estate asset.
Publicly registered, non-listed REITs, such as us, typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operations. While other start-up entities may also experience significant acquisition activity during their initial years, we believe that publicly registered, non-listed REITs are unique in that they have a limited life with targeted exit strategies within a relatively limited time frame after the acquisition activity ceases. We will use cash flows from operations and debt financings to acquire real estate assets and real estate-related investments. Thus, we do not intend to continuously purchase real estate assets and intend to have a limited life. Due to these factors and other unique features of publicly registered, non-listed REITs, the Investment Program Association, or the IPA, an industry trade group, has standardized a measure known as modified funds from operations, or MFFO, which we believe to be another appropriate supplemental measure to reflect the operating performance of a publicly registered, non-listed REIT.

71


MFFO is a metric used by management to evaluate sustainable performance and dividend policy. MFFO is not equivalent to our net income as determined under GAAP.
We define MFFO, a non-GAAP measure, consistent with the IPA’s definition: FFO further adjusted for the following items included in the determination of GAAP net income; acquisition fees and expenses; amounts related to straight-line rental income and amortization of above and below intangible lease assets and liabilities; accretion of discounts and amortization of premiums on debt investments; mark-to-market adjustments included in net income; nonrecurring gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, adjustments related to contingent purchase price obligations where such adjustments have been included in the derivation of GAAP net income, and after adjustments for a consolidated and unconsolidated partnership and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. Our MFFO calculation complies with the IPA’s Practice Guideline, described above. In calculating MFFO, we exclude paid and accrued acquisition fees and expenses that are reported in our consolidated statements of comprehensive income, amortization of above and below-market leases, adjustments related to contingent purchase price obligations, gains or losses from the extinguishment of debt and hedges, amounts related to straight-line rents (which are adjusted in order to reflect such payments from a GAAP accrual basis to closer to an expected to be received cash basis of disclosing the rent and lease payments); and the adjustments of such items related to noncontrolling interests in our Operating Partnership. The other adjustments included in the IPA’s guidelines are not applicable to us.
Since MFFO excludes acquisition fees and expenses, it should not be construed as a historic performance measure. Acquisition fees and expenses are paid in cash by us, and we have not set aside or put into escrow any specific amount of proceeds from our offerings to be used to fund acquisition fees and expenses. Acquisition fees and expenses include payments to our Advisor or its affiliates and third parties. Such fees and expenses will not be reimbursed by our Advisor or its affiliates and third parties, and therefore if there are no further proceeds from the sale of shares of our common stock to fund future acquisition fees and expenses, such fees and expenses will need to be paid from either additional debt, operational earnings or cash flows, net proceeds from the sale of properties, or from ancillary cash flows. As a result, the amount of proceeds available for investment and operations would be reduced, or we may incur additional interest expense as a result of borrowed funds. Nevertheless, our Advisor or its affiliates will not accrue any claim on our assets if acquisition fees and expenses are not paid from the proceeds of our offerings. Under GAAP, acquisition fees and expenses related to the acquisition of properties determined to be business combinations are expensed as incurred, including investment transactions that are no longer under consideration, and are included in acquisition related expenses in the accompanying consolidated statements of comprehensive income and acquisition fees and expenses associated with transactions determined to be an asset purchase are capitalized.
All paid and accrued acquisition fees and expenses have negative effects on returns to investors, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of other properties are generated to cover the purchase price of the real estate asset, these fees and expenses and other costs related to such property. In addition, MFFO may not be an indicator of our operating performance, especially during periods in which properties are being acquired.
In addition, certain contemplated non-cash fair value and other non-cash adjustments are considered operating non-cash adjustments to net income in determining cash flows from operations in accordance with GAAP.
We use MFFO and the adjustments used to calculate it in order to evaluate our performance against other publicly registered, non-listed REITs, which intend to have limited lives with short and defined acquisition periods and targeted exit strategies shortly thereafter. As noted above, MFFO may not be a useful measure of the impact of long-term operating performance if we do not continue to operate in this manner. We believe that our use of MFFO and the adjustments used to calculate it allow us to present our performance in a manner that reflects certain characteristics that are unique to publicly registered, non-listed REITs, such as their limited life, limited and defined acquisition period and targeted exit strategy, and hence the use of such measures may be useful to investors. For example, acquisition fees and expenses are intended to be funded from the proceeds of our offering and other financing sources and not from operations. By excluding acquisition fees and expenses, the use of MFFO provides information consistent with management’s analysis of the operating performance of its real estate assets. Additionally, fair value adjustments, which are based on the impact of current market fluctuations and underlying assessments of general market conditions, but can also result from operational factors such as rental and occupancy rates, may not be directly related or attributable to our current operating performance. By excluding such charges that may reflect anticipated and unrealized gains or losses, we believe MFFO provides useful supplemental information.
Presentation of this information is intended to assist management and investors in comparing the operating performance of different REITs, although it should be noted that not all REITs calculate FFO and MFFO the same way, so comparisons with other REITs may not be meaningful. Furthermore, FFO and MFFO are not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income as an indication of our performance, as an indication of our liquidity, or indicative of funds available for our cash needs, including our ability to make distributions to our stockholders.

72


FFO and MFFO should be reviewed in conjunction with other measurements as an indication of our performance. MFFO has limitations as a performance measure. However, MFFO may be useful in assisting management and investors in assessing the sustainability of operating performance in future operating periods, and in particular, after the offering and acquisition stages are complete and net asset value is disclosed. MFFO is not a useful measure in evaluating net asset value since impairment write-downs are taken into account in determining net asset value but not in determining MFFO.
FFO and MFFO, as described above, should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or in its applicability in evaluating our operational performance. The method used to evaluate the value and performance of real estate under GAAP should be construed as a more relevant measure of operating performance and considered more prominently than the non-GAAP FFO and MFFO measures and the adjustments to GAAP in calculating FFO and MFFO. MFFO has not been scrutinized to the level of other similar non-GAAP performance measures by the SEC or any other regulatory body.
The following is a reconciliation of net income attributable to common stockholders, which is the most directly comparable GAAP financial measure, to FFO and MFFO for the years ended December 31, 2017, 2016 and 2015 (amounts in thousands, except share data and per share amounts):
 
For the Year Ended December 31,
 
 
2017
 
2016
 
2015
 
Net income attributable to common stockholders
$
177,311

 
$
31,236

 
$
63,438

 
Adjustments:
 
 
 
 
 
 
Depreciation and amortization
65,750

 
86,335

 
70,711

 
Impairment loss on real estate
39,147

 

 

 
Gain on real estate dispositions
(224,133
)
 

 

 
Noncontrolling interests’ share of the above adjustments related to the consolidated partnerships
45,880

(4) 
(2,937
)
(5) 
(6,235
)
(6) 
FFO attributable to common stockholders
$
103,955

 
$
114,634

 
$
127,914

 
Adjustments:
 
 
 
 
 
 
Acquisition related expenses (1)
$

 
$
1,667

 
$
3,696

 
Amortization of intangible assets and liabilities (2)
(3,118
)
 
(3,297
)
 
(8,029
)
 
Change in fair value of contingent consideration
(2,920
)
 
300

 
(1,230
)
 
Straight-line rent (3)
(13,342
)
 
(3,941
)
 
(21,889
)
 
Loss on debt extinguishment
4,513

 
1,133

 

 
Noncontrolling interests’ share of the above adjustments related to the consolidated partnerships
(4,715
)
(7) 
700

(8) 
4,752

(9) 
MFFO attributable to common stockholders
$
84,373

 
$
111,196

 
$
105,214

 
Weighted average common shares outstanding - basic
185,922,468

 
183,279,872

 
178,521,807

 
Weighted average common shares outstanding - diluted
185,922,468

 
183,297,662

 
178,539,609

 
Weighted average common shares outstanding - diluted for FFO
185,940,379

 
183,297,662

 
178,539,609

 
Net income per common share - basic
$
0.95

 
$
0.17

 
$
0.36

 
Net income per common share - diluted
$
0.95

 
$
0.17

 
$
0.36

 
FFO per common share - basic
$
0.56

 
$
0.63

 
$
0.72

 
FFO per common share - diluted
$
0.56

 
$
0.63

 
$
0.72

 
 
 
(1)
In evaluating investments in real estate assets, management differentiates the costs to acquire the investment from the operations derived from the investment. Such information would be comparable only for publicly registered, non-listed REITs that have completed their acquisitions activities and have other similar operating characteristics. By excluding expensed acquisition related expenses, management believes MFFO provides useful supplemental information that is comparable for each type of real estate investment and is consistent with management’s analysis of the investing and operating performance of our properties. Acquisition fees and expenses include payments in cash to our Advisor and third parties. Acquisition fees and expenses incurred in a business combination, under GAAP, are considered operating expenses and as expenses are included in the determination of net income, which is a performance measure under GAAP. All paid and accrued acquisition fees and expenses will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the

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disposition of properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to the property.
(2)
Under GAAP, certain intangibles are accounted for at cost and reviewed at least annually for impairment, and certain intangibles are assumed to diminish predictably in value over time and are amortized, similar to depreciation and amortization of real estate-related assets that are excluded from FFO. However, because real estate values and market lease rates historically rise or fall with market conditions, management believes that by excluding charges related to amortization of these intangibles, MFFO provides useful supplemental information on the performance of the real estate.
(3)
Under GAAP, rental revenue is recognized on a straight-line basis over the terms of the related lease (including rent holidays, if applicable). This may result in income recognition that is significantly different than the underlying contract terms. By adjusting for the change in deferred rent receivables, MFFO may provide useful supplemental information on the realized economic impact of lease terms, providing insight on the expected contractual cash flows of such lease terms, and aligns with our analysis of operating performance.
(4)
Of this amount, $(2,306,000) related to depreciation and amortization and $48,186,000 related to gain on real estate dispositions.
(5)
Total amount related to depreciation and amortization.
(6)
Total amount related to depreciation and amortization.
(7)
Of this amount, $489,000 related to straight-line rents, $742,000 related to above- and below-market leases and $(5,946,000) related to loss on debt extinguishment.
(8)
Of this amount, $(175,000) related to straight-line rents and $875,000 related to above- and below-market leases.
(9)
Of this amount, $774,000 related to straight-line rents and $3,978,000 related to above- and below-market leases.
The following is a reconciliation of net income attributable to common stockholders, which is the most directly comparable GAAP financial measure, to FFO and MFFO for the following quarterly periods (amounts in thousands, except share data and per share amounts):
 
Quarter Ended
 
 
December 31, 2017
 
September 30, 2017
 
June 30, 2017
 
March 31, 2017
 
Net income attributable to common stockholders
$
150,193

 
$
6,046

 
$
12,169

 
$
8,903

 
Adjustments:
 
 
 
 
 
 
 
 
Depreciation and amortization
11,259

 
18,336

 
18,088

 
18,067

 
Impairment loss on real estate
39,147

 

 

 

 
Gain on real estate dispositions
(224,133
)
 

 

 

 
Noncontrolling interests’ share of the above adjustments related to the consolidated partnerships
48,052

(3) 
(719
)
(4) 
(726
)
(5) 
(727
)
(6) 
FFO attributable to common stockholders
$
24,518

 
$
23,663

 
$
29,531

 
$
26,243

 
Adjustments:
 
 
 
 
 
 
 
 
Amortization of intangible assets and liabilities (1)
(784
)
 
(781
)
 
(777
)
 
(776
)
 
Change in fair value of contingent consideration

 
(1,880
)
 
100

 
(1,140
)
 
Straight-line rent (2)
(3,231
)
 
(2,324
)
 
(3,938
)
 
(3,849
)
 
Loss on debt extinguishment
4,498

 
15

 

 

 
Noncontrolling interests’ share of the above adjustments related to the consolidated partnerships
(5,564
)
(7) 
446

(8) 
423

(9) 
(20
)
(10) 
MFFO attributable to common stockholders
$
19,437

 
$
19,139

 
$
25,339

 
$
20,458

 
Weighted average common shares outstanding - basic
186,182,196

 
186,295,970

 
185,897,525

 
185,300,384

 
Weighted average common shares outstanding - diluted
186,182,196

 
186,295,970

 
185,911,968

 
185,300,384

 
Weighted average common shares outstanding - diluted for FFO
186,196,828

 
186,312,758

 
185,911,968

 
185,317,075

 
Net income per common share - basic
$
0.80

 
$
0.03

 
$
0.07

 
$
0.05

 
Net income per common share - diluted
$
0.80

 
$
0.03

 
$
0.07

 
$
0.05

 
FFO per common share - basic
$
0.13

 
$
0.13

 
$
0.16

 
$
0.14

 
FFO per common share - diluted
$
0.13

 
$
0.13

 
$
0.16

 
$
0.14

 

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(1)
Under GAAP, certain intangibles are accounted for at cost and reviewed at least annually for impairment, and certain intangibles are assumed to diminish predictably in value over time and are amortized, similar to depreciation and amortization of real estate-related assets that are excluded from FFO. However, because real estate values and market lease rates historically rise or fall with market conditions, management believes that by excluding charges related to amortization of these intangibles, MFFO provides useful supplemental information on the performance of the real estate.
(2)
Under GAAP, rental revenue is recognized on a straight-line basis over the terms of the related lease (including rent holidays if applicable). This may result in income recognition that is significantly different than the underlying contract terms. By adjusting for the change in deferred rent receivables, MFFO may provide useful supplemental information on the realized economic impact of lease terms, providing insight on the expected contractual cash flows of such lease terms, and aligns with our analysis of operating performance.
(3)
Of this amount, $(134,000) related to depreciation and amortization and $48,186,000 related to gain on real estate dispositions.
(4)
Total amount related to depreciation and amortization.
(5)
Total amount related to depreciation and amortization.
(6)
Total amount related to depreciation and amortization.
(7)
Of this amount, $216,000 related to straight-line rents, $166,000 related to above- and below-market leases and $(5,946,000) related to loss on debt extinguishment.
(8)
Of this amount, $254,000 related to straight-line rents and $192,000 related to above- and below-market leases.
(9)
Of this amount, $231,000 related to straight-line rents and $192,000 related to above- and below-market leases.
(10)
Of this amount, $(212,000) related to straight-line rents and $192,000 related to above- and below-market leases.
Subsequent Events
For a discussion of subsequent events, see Note 20—"Subsequent Events" to the consolidated financial statements that are a part of this Annual Report on Form 10-K.
Impact of Recent Accounting Pronouncements
Refer to Note 2—"Summary of Significant Accounting Policies" to the consolidated financial statements that are a part of this Annual Report on Form 10-K for further explanation.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. In pursuing our business plan, the primary market risk to which we are exposed is interest rate risk.
We have obtained variable rate debt financing to fund certain property acquisitions, and we are exposed to changes in the one-month LIBOR. Our objectives in managing interest rate risk seek to limit the impact of interest rate changes on operations and cash flows, and to lower overall borrowing costs. To achieve these objectives, we will borrow primarily at interest rates with the lowest margins available and, in some cases, with the ability to convert variable interest rates to fixed rates.
We have entered, and may continue to enter, into derivative financial instruments, such as interest rate swaps, in order to mitigate our interest rate risk on a given variable rate financial instrument. To the extent we do, we are exposed to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us. When the fair value of a derivative contract is negative, we owe the counterparty and, therefore, it does not possess credit risk. Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates. We manage the market risk associated with interest rate contracts by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken. We have not entered, and do not intend to enter, into derivative or interest rate transactions for speculative purposes. We may also enter into rate-lock arrangements to lock interest rates on future borrowings.
In addition to changes in interest rates, the value of our future investments will be subject to fluctuations based on changes in local and regional economic conditions and changes in the creditworthiness of tenants, which may affect our ability to refinance our debt, if necessary.

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The following table summarizes our principal debt outstanding as of December 31, 2017 (amounts in thousands):
 
December 31, 2017
Notes payable:
 
Fixed rate notes payable
$
18,212

Variable rate notes payable fixed through interest rate swaps
83,066

Variable rate notes payable
40,199

Total notes payable (1)
141,477

 
(1)
As of December 31, 2017, the weighted average interest rate on our total debt outstanding was 5.6%.
As of December 31, 2017, $40.2 million of the $141.5 million total debt outstanding was subject to variable interest rates with a weighted average interest rate of 5.2% per annum. As of December 31, 2017, an increase of 50 basis points in the market rates of interest would have resulted in a change in interest expense of $0.2 million per year.
As of December 31, 2017, we had 3 interest rate swap agreements outstanding, which mature on various dates from May 2019 through October 2022, with an aggregate notional amount under the swap agreements of $121.1 million and an aggregate settlement asset value of $0.4 million. The settlement value of these interest rate swap agreements is dependent upon existing market interest rates and swap spreads. As of December 31, 2017, an increase of 50 basis points in the market rates of interest would have resulted in an increase to the settlement asset value of these interest rate swaps to $1.4 million. These interest rate swaps were designated as hedging instruments.
We do not have any foreign operations and thus we are not exposed to foreign currency fluctuations.
Item 8. Financial Statements and Supplementary Data.
See the index at Part IV, Item 15. Exhibits and Financial Statement Schedules.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
(a) Evaluation of disclosure controls and procedures. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports pursuant to the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms, and that such information is accumulated and communicated to us, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and we necessarily were required to apply our judgment in evaluating whether the benefits of the controls and procedures that we adopt outweigh their costs.
As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, an evaluation as of the end of the period covered by this Annual Report on Form 10-K was conducted under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures, as of December 31, 2017, were effective at a reasonable assurance level.
(b) Management’s Report on Internal Control over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Because of its inherent limitations, internal control is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. Under the supervision, and with the participation, of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued in 2013 by the Committee of

76


Sponsoring Organizations of the Treadway Commission, or the Original Framework. Based on our evaluation under the Original Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2017.
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to the permanent deferral adopted by the Securities and Exchange Commission that permits the Company to provide only management’s report in this annual report.
(c) Changes in internal control over financial reporting. There have been no changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the three months ended December 31, 2017, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.

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PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this Item will be presented in our definitive proxy statement for our 2018 annual meeting of stockholders, which is expected to be filed with the SEC within 120 days after December 31, 2017, and is incorporated herein by reference.
Item 11. Executive Compensation.
The information required by this Item will be presented in our definitive proxy statement for our 2018 annual meeting of stockholders, which is expected to be filed with the SEC within 120 days after December 31, 2017, and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item will be presented in our definitive proxy statement for our 2018 annual meeting of stockholders, which is expected to be filed with the SEC within 120 days after December 31, 2017, and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item will be presented in our definitive proxy statement for our 2018 annual meeting of stockholders, which is expected to be filed with the SEC within 120 days after December 31, 2017, and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services.
The information required by this Item will be presented in our definitive proxy statement for our 2018 annual meeting of stockholders, which is expected to be filed with the SEC within 120 days after December 31, 2017, and is incorporated herein by reference.

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PART IV
Item 15. Exhibits and Financial Statement Schedules.
The following documents are filed as part of this Annual Report:
(a)(1) Consolidated Financial Statements:
The index of the consolidated financial statements contained herein is set forth on page F-1 hereof.
(a)(2) Financial Statement Schedules:
The financial statement schedules are listed in the index to consolidated financial statements on page F-1 hereof.
No additional financial statement schedules are presented since the required information is not present or not present in amounts sufficient to require submission of the schedule or because the information required is enclosed in the Consolidated Financial Statements and notes thereto.
(a)(3) Exhibits:
(b) Exhibits:
See Item 15(a)(3) above.
(c) Financial Statement Schedules:
See Item 15(a)(2) above.

79


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF CARTER VALIDUS MISSION CRITICAL REIT, INC.


F-1


Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors
Carter Validus Mission Critical REIT, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Carter Validus Mission Critical REIT, Inc. (and subsidiaries) (the Company) as of December 31, 2017 and 2016, the related consolidated statements of comprehensive income, stockholders’ equity, and cash flows for each of the years in the three‑year period ended December 31, 2017, and the related notes and financial statement schedule III (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

We have served as the Company’s auditor since 2014.
/s/ KPMG LLP
Tampa, Florida
March 30, 2018
Certified Public Accountants


F-2


PART 1. FINANCIAL STATEMENTS
CARTER VALIDUS MISSION CRITICAL REIT, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
December 31, 2017
 
December 31, 2016
ASSETS
Real estate:
 
 
 
Land
$
73,769

 
$
84,849

Buildings and improvements, less accumulated depreciation of $86,092 and $64,895, respectively
834,419

 
938,338

Construction in process

 
16,143

Total real estate, net
908,188

 
1,039,330

Cash and cash equivalents
336,500

 
42,613

Acquired intangible assets, less accumulated amortization of $23,640 and $17,369, respectively
86,938

 
94,675

Other assets, net
79,140

 
67,571

Assets of discontinued operations, net ($6,852 and $106,338, respectively, related to VIE)
213,833

 
1,093,465

Total assets
$
1,624,599

 
$
2,337,654

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
 
 
 
Notes payable, net of deferred financing costs of $875 and $1,385, respectively
$
140,602

 
$
172,042

Credit facility, net of deferred financing costs of $1,789

 
356,211

Accounts payable due to affiliates
2,372

 
2,399

Accounts payable and other liabilities
28,195

 
21,986

Intangible lease liabilities, less accumulated amortization of $4,694 and $3,692, respectively
17,555

 
18,667

Liabilities of discontinued operations, net ($599 and $63,192, respectively, related to VIE)
5,058

 
361,405

Total liabilities
193,782

 
932,710

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; 196,892,945 and 189,848,165 shares issued, respectively; 186,181,545 and 184,909,673 shares outstanding, respectively
1,862

 
1,849

Additional paid-in capital
1,635,329

 
1,625,862

Accumulated distributions in excess of earnings
(211,750
)
 
(258,878
)
Accumulated other comprehensive income
407

 
1,823

Total stockholders’ equity
1,425,848

 
1,370,656

Noncontrolling interests
4,969

 
34,288

Total equity
1,430,817

 
1,404,944

Total liabilities and stockholders’ equity
$
1,624,599

 
$
2,337,654

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

F-3


CARTER VALIDUS MISSION CRITICAL REIT, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands, except share data and per share amounts)
 
For the Year Ended
December 31,
 
2017
 
2016
 
2015
Revenue:
 
 
 
 
 
Rental revenue
$
88,960

 
$
86,772

 
$
92,371

Tenant reimbursement revenue
5,454

 
3,465

 
4,121

Real estate-related notes receivable interest income

 

 
326

Total revenue
94,414

 
90,237

 
96,818

Expenses:
 
 
 
 
 
Rental expenses
13,071

 
8,972

 
7,363

General and administrative expenses
7,185

 
6,251

 
6,340

Acquisition related expenses

 
1,667

 
3,693

Asset management fees
10,611

 
10,956

 
9,622

Depreciation and amortization
33,540

 
47,591

 
30,429

Total expenses
64,407

 
75,437

 
57,447

Income from operations
30,007

 
14,800

 
39,371

Other income (expense):
 
 
 
 
 
Other interest and dividend income
3,147

 
13,295

 
8,669

Interest expense, net
(19,109
)
 
(23,323
)
 
(15,969
)
Provision for loan losses
(11,936
)
 
(4,294
)
 

Impairment loss on real estate
(39,147
)
 

 

Total other expense
(67,045
)
 
(14,322
)
 
(7,300
)
(Loss) income from continuing operations
(37,038
)
 
478

 
32,071

Income from discontinued operations
261,675

 
34,679

 
36,305

Net income
224,637

 
35,157

 
68,376

Net income attributable to noncontrolling interests in consolidated partnerships
(47,326
)
 
(3,921
)
 
(4,938
)
Net income attributable to common stockholders
$
177,311

 
$
31,236

 
$
63,438

Other comprehensive income (loss):
 
 
 
 
 
Unrealized (loss) income on interest rate swaps, net
$
(1,416
)
 
$
4,403

 
$
(1,045
)
Other comprehensive (loss) income
(1,416
)
 
4,403

 
(1,045
)
Other comprehensive loss attributable to noncontrolling interests in consolidated partnerships

 

 
106

Other comprehensive (loss) income attributable to common stockholders
(1,416
)
 
4,403

 
(939
)
Comprehensive income
223,221

 
39,560

 
67,331

Comprehensive income attributable to noncontrolling interests in consolidated partnerships
(47,326
)
 
(3,921
)
 
(4,832
)
Comprehensive income attributable to common stockholders
$
175,895

 
$
35,639

 
$
62,499

Weighted average number of common shares outstanding:
 
 
 
 
 
Basic
185,922,468

 
183,279,872

 
178,521,807

Diluted
185,922,468

 
183,297,662

 
178,539,609

Net income (loss) per common share attributable to common stockholders:
 
 
 
 
 
Basic:
 
 
 
 
 
Continuing operations
$
(0.20
)
 
$

 
$
0.17

Discontinued operations
1.15

 
0.17

 
0.19

Net income attributable to common stockholders
$
0.95

 
$
0.17

 
$
0.36

Diluted:
 
 
 
 
 
Continuing operations
$
(0.20
)
 
$

 
$
0.17

Discontinued operations
1.15

 
0.17

 
0.19

Net income attributable to common stockholders
$
0.95

 
$
0.17

 
$
0.36

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

F-4


CARTER VALIDUS MISSION CRITICAL REIT, INC. 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except for share data) 
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Distributions
in Excess
of Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Stockholders’
Equity
 
Noncontrolling
Interests
 
Total
Equity
 
No. of
Shares
 
Par
Value
 
 
 
 
 
 
Balance, December 31, 2014
175,038,055

 
$
1,750

 
$
1,557,623

 
$
(100,273
)
 
$
(1,161
)
 
$
1,457,939

 
$
72,654

 
$
1,530,593

Vesting of restricted stock
10,500

 

 
90

 

 

 
90

 

 
90

Issuance of common stock under the distribution reinvestment plan
7,135,720

 
72

 
67,749

 

 

 
67,821

 

 
67,821

Purchase of noncontrolling interests

 

 
(24,786
)
 

 
(480
)
 
(25,266
)
 
(40,933
)
 
(66,199
)
Distributions to noncontrolling interests

 

 

 

 

 

 
(2,887
)
 
(2,887
)
Distributions declared to common stockholders

 

 

 
(124,963
)
 

 
(124,963
)
 

 
(124,963
)
Other offering costs

 

 
(149
)
 

 

 
(149
)
 

 
(149
)
Repurchase of common stock
(983,323
)
 
(10
)
 
(9,451
)
 

 

 
(9,461
)
 

 
(9,461
)
Other comprehensive loss

 

 

 

 
(939
)
 
(939
)
 
(106
)
 
(1,045
)
Net income

 

 

 
63,438

 

 
63,438

 
4,938

 
68,376

Balance, December 31, 2015
181,200,952

 
$
1,812

 
$
1,591,076

 
$
(161,798
)
 
$
(2,580
)
 
$
1,428,510

 
$
33,666

 
$
1,462,176

Vesting of restricted stock
9,000

 

 
90

 

 

 
90

 

 
90

Issuance of common stock under the distribution reinvestment plan
7,131,264

 
71

 
68,015

 

 

 
68,086

 

 
68,086

Distributions to noncontrolling interests

 

 

 

 

 

 
(3,299
)
 
(3,299
)
Distributions declared to common stockholders

 

 

 
(128,316
)
 

 
(128,316
)
 

 
(128,316
)
Other offering costs

 

 
(18
)
 

 

 
(18
)
 

 
(18
)
Repurchase of common stock
(3,431,543
)
 
(34
)
 
(33,301
)
 

 

 
(33,335
)
 

 
(33,335
)
Other comprehensive income

 

 

 

 
4,403

 
4,403

 

 
4,403

Net income

 

 

 
31,236

 

 
31,236

 
3,921

 
35,157

Balance, December 31, 2016
184,909,673

 
$
1,849

 
$
1,625,862

 
$
(258,878
)
 
$
1,823

 
$
1,370,656

 
$
34,288

 
$
1,404,944

Vesting of restricted stock
9,000

 

 
88

 

 

 
88

 

 
88

Issuance of common stock under the distribution reinvestment plan
7,035,781

 
71

 
66,922

 

 

 
66,993

 

 
66,993

Purchase of noncontrolling interests

 

 
(500
)
 

 

 
(500
)
 

 
(500
)
Distributions to noncontrolling interests

 

 

 

 

 

 
(76,645
)
 
(76,645
)
Distributions declared to common stockholders

 

 

 
(130,183
)
 

 
(130,183
)
 

 
(130,183
)
Other offering costs

 

 
(52
)
 

 

 
(52
)
 

 
(52
)
Repurchase of common stock
(5,772,909
)
 
(58
)
 
(56,991
)
 

 

 
(57,049
)
 

 
(57,049
)
Other comprehensive loss

 

 

 

 
(1,416
)
 
(1,416
)
 

 
(1,416
)
Net income

 

 

 
177,311

 

 
177,311

 
47,326

 
224,637

Balance, December 31, 2017
186,181,545

 
$
1,862

 
$
1,635,329

 
$
(211,750
)
 
$
407

 
$
1,425,848

 
$
4,969

 
$
1,430,817

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

F-5


CARTER VALIDUS MISSION CRITICAL REIT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) 
 
For the Year Ended
December 31,
 
2017
 
2016
 
2015
Cash flows from operating activities:
 
 
 
 
 
Net income
$
224,637

 
$
35,157

 
$
68,376

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
Depreciation and amortization
65,750

 
86,335

 
70,711

Amortization of deferred financing costs
3,778

 
4,576

 
3,947

Amortization of above-market leases
353

 
421

 
403

Amortization of intangible lease liabilities
(3,471
)
 
(3,718
)
 
(8,432
)
Amortization of real estate-related notes receivable origination costs and commitment fees

 

 
114

Gain on sale of discontinued operations
(224,133
)
 

 

Provision for doubtful accounts
18,733

 
6,007

 
3,376

Provision for loan losses
11,936

 
4,294

 

Impairment loss on real estate
39,147

 

 

Loss on debt extinguishment
4,513

 
1,133

 

Straight-line rent
(13,342
)
 
(3,941
)
 
(21,889
)
Stock-based compensation
88

 
90

 
90

Change in fair value of contingent consideration
(2,920
)
 
300

 
(1,230
)
Changes in operating assets and liabilities:
 
 
 
 
 
Accounts payable and other liabilities
1,503

 
4,087

 
1,979

Accounts payable due to affiliates
(106
)
 
405

 
331

Other assets
(21,188
)
 
(12,325
)
 
(10,117
)
Net cash provided by operating activities
105,278

 
122,821

 
107,659

Cash flows from investing activities:
 
 
 
 
 
Investment in real estate

 
(71,000
)
 
(123,753
)
Proceeds from real estate disposals
1,131,582

 

 

Capital expenditures
(23,765
)
 
(69,496
)
 
(69,391
)
Real estate deposits, net

 
450

 
(258
)
Real estate-related notes receivable advances

 

 
(267
)
Collections of real estate-related notes receivable
514

 

 
9,500

Preferred equity investment

 
127,147

 
(127,147
)
Notes receivable, net
(15,500
)
 
(5,919
)
 
(13,000
)
Net cash provided by (used in) investing activities
1,092,831

 
(18,818
)
 
(324,316
)
Cash flows from financing activities:
 
 
 
 
 
Proceeds from notes payable

 

 
64,305

Payments on notes payable
(345,335
)
 
(56,521
)
 
(11,882
)
Proceeds from credit facility
121,000

 
185,000

 
245,000

Payments on credit facility
(479,000
)
 
(120,000
)
 
(27,000
)
Cost paid on extinguishment of debt
(2,932
)
 
(790
)
 

Payments of deferred financing costs
(1,788
)
 
(467
)
 
(2,434
)
Repurchase of common stock
(57,049
)
 
(33,335
)
 
(9,461
)
Other offering costs
(52
)
 
(18
)
 
(149
)
Distributions to stockholders
(63,082
)
 
(60,038
)
 
(56,775
)
Purchase of noncontrolling interests
(500
)
 

 
(66,199
)
Distributions to noncontrolling interests
(75,062
)
 
(3,299
)
 
(2,887
)
Net cash (used in) provided by financing activities
(903,800
)
 
(89,468
)
 
132,518

Net change in cash, cash equivalents and restricted cash
294,309

 
14,535

 
(84,139
)
Cash, cash equivalents and restricted cash - Beginning of year
57,605

 
43,070

 
127,209

Cash, cash equivalents and restricted cash - End of year
$
351,914

 
$
57,605

 
$
43,070

Supplemental cash flow disclosure:
 
 
 
 
 
Interest paid, net of interest capitalized of $2,771, $2,859 and $4,253, respectively
$
35,432

 
$
34,980

 
$
29,454

Supplemental disclosure of non-cash transactions:
 
 
 
 
 
Common stock issued through distribution reinvestment plan
$
66,993

 
$
68,086

 
$
67,821

Net unrealized (loss) gain on interest rate swaps
$
(1,416
)
 
$
4,403

 
$
(1,045
)
Real estate-related notes receivable converted to investment in real estate
$

 
$

 
$
13,674

Deemed distributions related to taxes withheld
$
1,992

 
$

 
$

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

F-6


CARTER VALIDUS MISSION CRITICAL REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
Note 1Organization and Business Operations
Carter Validus Mission Critical REIT, Inc., or the Company, a Maryland corporation, was incorporated on December 16, 2009 and 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 data center assets. This decision represents a strategic shift that has a major effect on the Company's results and operations and assets and liabilities for the years presented. As a result, the Company has its data centers segment as a part of discontinued operations. During the year ended December 31, 2017, the Company completed the sale of 16 real estate properties, 15 data centers (including one real estate property owned through a consolidated partnership) and one healthcare property, for an aggregate sale price of $1,153,000,000, with net proceeds of approximately $1,131,582,000.
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. 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 raised gross 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 Third DRIP Offering (as defined below) until such time as the Company sells all of the shares registered for sale under the Third DRIP Offering, unless the Company files a new registration statement with the Securities and Exchange Commission, or the SEC, or the Third DRIP Offering is terminated by the Company’s board of directors.
On April 14, 2014, the Company registered 10,526,315 shares of common stock for a price per share of $9.50 for a proposed maximum offering price of $100,000,000 in shares of common stock under the DRIP pursuant to a registration statement on Form S-3, or the First DRIP Offering. On November 25, 2015, the Company ceased offering shares of common stock pursuant to the First DRIP Offering and registered an additional 10,473,946 shares of common stock for a price per share of $9.5475, which was the greater of (i) 95% of the fair market value per share as determined by our board of directors as of September 30, 2015 and (ii) $9.50 per share, for a proposed maximum offering price of $100,000,000 in shares of common stock under the DRIP pursuant to a registration statement on Form S-3, or the Second DRIP Offering. On May 22, 2017, the Company ceased offering shares of common stock pursuant to the Second DRIP Offering and registered an additional 11,387,512 shares of common stock for a price per share of $9.519, which was the greater of (i) 95% of the fair market value per share as determined by our board of directors as of September 30, 2016 and (ii) $9.50 per share, 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 Third DRIP Offering. The Company refers to the First DRIP Offering, the Second DRIP Offering and the Third DRIP Offering as the DRIP Offerings, and collectively with the Offering, the Offerings.
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. As a result, effective February 1, 2018, shares were offered pursuant to the Third 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 are offered pursuant to the Third DRIP Offering for a price per share of $6.26.
As of December 31, 2017, the Company had issued approximately 196,826,000 shares of common stock in the Offerings for gross proceeds of $1,946,761,000, before share repurchases of $104,911,000 and offering costs, selling commissions and dealer manager fees of $174,845,000.
As of December 31, 2017, the Company owned 34 real estate investments (including real estate investments classified as discontinued operations), consisting of 68 properties.
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.

F-7


Note 2Summary of Significant Accounting Policies
The summary of significant accounting policies presented below is designed to assist in understanding the consolidated financial statements. Such consolidated financial statements and the accompanying notes thereto are the representations of management. These accounting policies conform to accounting principles generally accepted in the United States of America, or GAAP, in all material respects, and have been consistently applied in preparing the consolidated financial statements.
Principles of Consolidation and Basis of Presentation
The accompanying 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.
As of December 31, 2017, in addition to the Operating Partnership consolidation, the Company consolidated the accounts of one VIE, the 180 Peachtree Data Center, as the Company has the power to direct the activities that most significantly impact the entity’s economic performance.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the 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.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents may include cash and short-term investments. Short-term investments are stated at cost, which approximates fair value.
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 is reported in other assets, net in the accompanying 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 consolidated balance sheets. See Note 6—"Other Assets, Net."
On April 1, 2017, the Company adopted Accounting Standards Update, or ASU, 2016-18, Restricted Cash, or ASU 2016-18. ASU 2016-18 requires that a statement of cash flows explain the change during a reporting period in the total of cash, cash equivalents, and amounts generally described as restricted cash. This ASU states that transfers between cash, cash equivalents, and restricted cash are not part of the Company’s operating, investing, and financing activities. Therefore, restricted cash should be included with cash and cash equivalents when reconciling the beginning of period and end of period total amounts shown on the statement of cash flows. As required, the Company retrospectively applied the guidance in ASU 2016-18 to the prior period presented, which resulted in a decrease of $221,000 in net cash used in financing activities and an increase of $228,000 in net cash provided by operating activities for the year ended December 31, 2016 and an increase of $279,000 in net cash provided by financing activities and an increase of $148,000 in net cash provided by operating activities for the year ended December 31, 2015 on the consolidated statements of cash flows.

F-8


The following table presents a reconciliation of the beginning of year and end of year cash, cash equivalents and restricted cash reported within the consolidated balance sheets to the totals shown in the consolidated statements of cash flows:
 
 
For the Year Ended
December 31,
Beginning of year:
 
2017
 
2016
 
2015
Cash and cash equivalents
 
$
42,613

 
$
28,527

 
$
113,093

Restricted cash (1)
 
14,992

 
14,543

 
14,116

Cash, cash equivalents and restricted cash
 
$
57,605

 
$
43,070

 
$
127,209

 
 
 
 
 
 
 
End of year:
 
 
 
 
 
 
Cash and cash equivalents
 
$
336,500

 
$
42,613

 
$
28,527

Restricted cash (1)
 
15,414

 
14,992

 
14,543

Cash, cash equivalents and restricted cash
 
$
351,914

 
$
57,605

 
$
43,070

 

(1)
Amount attributable to continuing and discontinued operations.
Deferred Financing Costs
Deferred financing costs are loan fees, legal fees and other third-party costs associated with obtaining financing. These costs are amortized over the terms of the respective financing agreements using the effective interest method. Unamortized deferred financing costs are generally expensed when the associated debt is refinanced or repaid before maturity unless specific rules are met that would allow for the carryover of such costs to the refinanced debt. Costs incurred in seeking financing transactions that do not close are expensed in the period in which it is determined that the financing will not close. Deferred financing costs are recorded as a reduction of the related debt on the accompanying consolidated balance sheets.
Investment in Real Estate
Real estate costs related to the acquisition, development, construction and improvement of properties are capitalized. Repair and maintenance costs are expensed as incurred and significant replacements and betterments are capitalized. Repair and maintenance costs include all costs that do not extend the useful life of the real estate asset. The Company considers the period of future benefit of an asset in determining the appropriate useful life. Real estate assets, other than land, are depreciated or amortized on a straight-line basis over each asset’s useful life. The Company estimated the useful lives of its assets by class as follows:
Buildings and improvements
15 – 40 years
Tenant improvements
Shorter of lease term or expected useful life
Furniture, fixtures, and equipment
3 – 10 years
Allocation of Purchase Price of Real Estate
Upon the acquisition of real properties, the Company evaluates whether the acquisition is a business combination or an asset acquisition. For both business combinations and asset acquisitions the Company allocates the purchase price of properties to acquired tangible assets, consisting of land, buildings and improvements, and acquired intangible assets and liabilities, consisting of the value of above-market and below-market leases and the value of in-place leases. For asset acquisitions, the Company capitalizes transaction costs and allocates the purchase price using a relative fair value method allocating all accumulated costs. For business combinations, the Company expenses transaction costs associated as incurred and allocates the purchase price based on the estimated fair value of each separately identifiable asset and liability.
The fair values of the tangible assets of an acquired property (which includes the land and buildings and improvements) are determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land and buildings and improvements based on management’s determination of the relative fair value of these assets. Management determines the as-if-vacant fair value of a property using methods similar to those used by independent appraisers. Factors considered by management in performing these analyses include an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases, including leasing commissions and other related costs. In estimating carrying costs, management includes real estate taxes, insurance, and other operating expenses during the expected lease-up periods based on current market conditions.

F-9


The fair values of above-market and below-market in-place lease values are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) an estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease including any fixed rate bargain renewal periods, with respect to a below-market lease. The above-market and below-market lease values are capitalized as intangible lease assets or liabilities. Above-market lease values are amortized as an adjustment of rental income over the remaining terms of the respective leases. Below-market leases are amortized as an adjustment of rental income over the remaining terms of the respective leases, including any fixed rate bargain renewal periods. If a lease were to be terminated prior to its stated expiration, all unamortized amounts of above-market and below-market in-place lease values related to that lease would be recorded as an adjustment to rental income.
The fair values of in-place leases include an estimate of direct costs associated with obtaining a new tenant and opportunity costs associated with lost rentals that are avoided by acquiring an in-place lease. Direct costs associated with obtaining a new tenant include commissions, tenant improvements, and other direct costs and are estimated based on management’s consideration of current market costs to execute a similar lease. The value of opportunity costs is calculated using the contractual amounts to be paid pursuant to the in-place leases over a market absorption period for a similar lease. The in-place lease intangibles are amortized to expense over the remaining terms of the respective leases. If a lease were to be terminated prior to its stated expiration, all unamortized amounts of in-place lease assets relating to that lease would be expensed.
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 sale of the property is probable and transfer of the asset is expected to be completed within one year, (v) the property is being actively marketed for sale, 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 held for sale, 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 consolidated balance sheets. Such properties are recorded at the lesser of the carrying value or estimated fair value less estimated cost to sell.
Additionally, the Company classified real estate properties held for sale as discontinued operations for all periods presented if the disposal represents 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 years presented are classified on the consolidated balance sheets and consolidated statements of comprehensive income as discontinued operations for all periods presented.
Acquisition Fees and Expenses
Acquisition fees and expenses associated with the acquisition of properties determined to be business combinations are expensed as incurred, including investment transactions that are no longer under consideration, and are included in acquisition related expenses in the accompanying consolidated statements of comprehensive income.
During the years ended December 31, 2017, 2016 and 2015, the Company expensed acquisition fees and expenses related to business combinations transactions in the amount of $0, $1,667,000 and $3,473,000, respectively.
Acquisition fees and expenses associated with transactions determined to be asset acquisitions are capitalized in real estate, net in the accompanying consolidated balance sheets. We did not capitalize acquisition fees and expenses for the years ended December 31, 2017, 2016 and 2015.
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.

F-10


During the year ended December 31, 2017, real estate assets related to four properties with an aggregate carrying amount of $85,768,000 were determined to be impaired, using Level 3 inputs of the fair value hierarchy (defined below), and their carrying values were reduced to their estimated fair value of $52,557,000, resulting in an impairment charge of $33,211,000, which is included in impairment loss on real estate in the consolidated statements of comprehensive income. The Company reviews each property based on the highest and best use and market participant assumptions. The Company used a discounted cash flow analysis and a market approach analysis to estimate the fair value of real estate assets relating to the properties. See Note 12—"Fair Value" for more details.
In addition, during the year ended December 31, 2017, the Company recorded an impairment loss of $5,936,000 related to one real estate property, which was sold on December 28, 2017 in the amount of $88,000,000. The impairment loss is included in impairment loss on real estate in the consolidated statements of comprehensive income. No impairment losses were recorded during the years ended December 31, 2016 and 2015.
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.
For the year ended December 31, 2017, the Company recognized an impairment of three in-place lease intangible assets in the amount of approximately $1,151,000 and one below-market lease in the amount of approximately $86,000 by accelerating the amortization of the intangibles as a result of a lease amendment. For the year ended December 31, 2016, the Company recognized an impairment of one in-place lease intangible asset and one capitalized lease commission by accelerating the amortization in the amount of $16,400,000 as a result of two tenants experiencing financial difficulties.
Fair Value
Accounting Standards Codification, or ASC, 820, Fair Value Measurements and Disclosures, or ASC 820, defines fair value, establishes a framework for measuring fair value in accordance with GAAP and expands disclosures about fair value measurements. ASC 820 emphasizes that fair value is intended to be a market-based measurement, as opposed to a transaction-specific measurement.
Fair value is defined by ASC 820 as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Depending on the nature of the asset or liability, various techniques and assumptions can be used to estimate the fair value. Assets and liabilities are measured using inputs from three levels of the fair value hierarchy, as follows:
Level 1—Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. An active market is defined as a market in which transactions for the assets or liabilities occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2—Inputs other than quoted prices for similar assets and liabilities in active markets that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data correlation or other means (market corroborated inputs).
Level 3—Unobservable inputs, only used to the extent that observable inputs are not available, reflect the Company’s assumptions about the pricing of an asset or liability.
The following describes the methods the Company used to estimate the fair value of the Company’s financial assets and liabilities:
Cash and cash equivalents, restricted cash, tenant receivables, property escrow deposits, prepaid expenses, accounts payable and accrued liabilities—The Company considered the carrying values of these financial instruments, assets and liabilities, to approximate fair value because of the short period of time between origination of the instruments and their expected realization.
Notes payable—Fixed Rate—The fair value is estimated by discounting the expected cash flows on notes payable at current rates at which management believes similar loans would be made considering the terms and conditions of the loan and prevailing market interest rates.
Notes payable—Variable Rate—The carrying value of variable rate notes payable approximates fair value because the interest rates adjust with current market conditions.

F-11


Unsecured credit facility—Fixed Rate—The fair value is estimated by discounting the expected cash flows on the fixed rate unsecured credit facility at current rates at which management believes similar borrowings would be made considering the terms and conditions of the borrowings and prevailing market interest rates.
Unsecured credit facility—Variable Rate—The carrying value of the variable rate unsecured credit facility approximates fair value as the interest is calculated at the London Interbank Offered Rate, plus an applicable margin. The interest rate resets to market on a monthly basis. 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.
Notes receivable—The fair value is estimated by discounting the expected cash flows on the notes at interest rates at which management believes similar loans would be made.
Derivative instruments—The Company’s derivative instruments consist of interest rate swaps. These swaps are carried at fair value to comply with the provisions of ASC 820. The fair value of these instruments is determined using interest rate market pricing models. The Company incorporated credit valuation adjustments to appropriately reflect the Company’s nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. Considerable judgment is necessary to develop estimated fair values of financial assets and liabilities. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize, or be liable for on disposition of the financial assets and liabilities.
Revenue Recognition, Tenant Receivables and Allowance for Uncollectible Accounts
The Company recognizes revenue in accordance with ASC 605, Revenue Recognition, or ASC 605. ASC 605 requires that all four of the following basic criteria be met before revenue is realized or realizable and earned: (1) there is persuasive evidence that an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the seller’s price to the buyer is fixed and determinable; and (4) collectability is reasonably assured.
In accordance with ASC 840, Leases, minimum rental revenue is recognized on a straight-line basis over the term of the related lease (including rent holidays). Differences between rental income recognized and amounts contractually due under the lease agreements are credited or charged to deferred rent receivable or deferred rent liability, as applicable. Tenant reimbursement revenue, which is comprised of additional amounts recoverable from tenants for common area maintenance expenses and certain other recoverable expenses, is recognized as revenue in the period in which the related expenses are incurred. Tenant reimbursements are recognized and presented in accordance with ASC Subtopic 605-45, Revenue Recognition—Principal Agent Consideration, or ASC 605-45. ASC 605-45 requires that these reimbursements be recorded on a gross basis, when the Company is the primary obligor with respect to purchasing goods and services from third-party suppliers and has discretion in selecting the supplier and has credit risk.
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 and current economic conditions and other relevant factors. For the years ended December 31, 2017 and 2016, the Company recorded $20,755,000 and $26,177,000, respectively, in provision for doubtful accounts for rental revenue, tenant reimbursement revenue and straight-line rent receivable, which are recognized in the accompanying consolidated statements of comprehensive income as a deduction from rental revenue and tenant reimbursement revenue. For the year ended December 31, 2015, the Company recorded $3,376,000 in provision for doubtful accounts.
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 consolidated statements of comprehensive income.
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, 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. As of December 31, 2017 and 2016, the aggregate balance on the Company's notes receivable, including accrued interest receivable, before allowances for loan losses was $36,368,000 and $19,422,000, respectively. For the years ended December 31, 2017 and 2016, the Company recorded $11,936,000 and $4,294,000, 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 consolidated financial statements.

F-12


Income Taxes
The Company currently qualifies and is taxed as a REIT under Sections 856 through 860 of the Code. Accordingly, it will generally not be subject to corporate U.S. federal or state income tax to the extent that it makes qualifying distributions to stockholders, and provided it satisfies, on a continuing basis, through actual investment and operating results, the REIT requirements, including certain asset, income, distribution and stock ownership tests. If the Company fails to qualify as a REIT, and does not qualify for certain statutory relief provisions, it will be subject to U.S. federal, state and local income taxes and may be precluded from qualifying as a REIT for the subsequent four taxable years following the year in which it lost its REIT qualification, unless the Internal Revenue Service grants the Company relief under certain statutory provisions. Accordingly, failure to qualify as a REIT could have a material adverse impact on the results of operations and amounts available for distribution to stockholders.
The dividends paid deduction of a REIT for qualifying dividends paid to its stockholders is computed using the Company’s taxable income as opposed to net income reported in the consolidated financial statements. Taxable income, generally, will differ from net income reported in the consolidated financial statements because the determination of taxable income is based on tax provisions and not financial accounting principles.
The Company has concluded that there was no impact related to uncertain tax provisions from results of operations of the Company for the years ended December 31, 2017, 2016 and 2015. The United States of America is the jurisdiction for the Company, and the earliest tax year subject to examination is 2014.
Concentration of Credit Risk and Significant Leases
As of December 31, 2017, the Company had cash on deposit, including restricted cash, in certain financial institutions that had deposits in excess of current federally insured levels; however, the Company has not experienced any losses in such accounts. 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 December 31, 2017, the Company owned real estate investments in 38 MSAs, three of which accounted for 10.0% or more of contractual rental revenue from continuing operations. Real estate investments located in the Houston-The Woodlands-Sugar Land, Texas MSA, the San Antonio-New Braunfels, Texas MSA and the Dallas-Ft. Worth-Arlington, Texas MSA accounted for an aggregate of 21.3%, 10.2% and 10.2%, respectively, of contractual rental revenue from continuing operations for the year ended December 31, 2017.
For the year ended December 31, 2017, 100.0%, of contractual rental revenue from continuing operations was attributable to the healthcare segment.
As of December 31, 2017, the Company had three exposures to tenant concentration that accounted for 10.0% or more of contractual rental revenue from continuing operations. The leases with Bay Area Regional Medical Center, LLC, Post Acute Medical, LLC and 21st Century Oncology, Inc. accounted for 20.9%, 12.0% and 10.0%, respectively, of contractual rental revenue for the year ended December 31, 2017.
Stock-based Compensation
The Company accounts for stock-based compensation based upon the estimated fair value of the share awards. Accounting for stock-based compensation requires the fair value of the share awards to be amortized as compensation expense over the period for which the services relate and requires any dividend equivalents earned to be treated as dividends for financial reporting purposes. See Note 15—"Stock-based Compensation" for a further discussion of stock-based compensation awards.
Stockholders’ Equity
As of December 31, 2017, the Company was authorized to issue 350,000,000 shares of stock, of which 300,000,000 shares are designated as common stock at $0.01 par value per share and 50,000,000 shares are designated as preferred stock at $0.01 par value per share. As of December 31, 2017, the Company had approximately 196,893,000 shares of common stock issued and 186,182,000 shares of common stock outstanding, and no shares of preferred stock issued and outstanding. As of December 31, 2016, the Company had approximately 189,848,000 shares of common stock issued and 184,910,000 shares of common stock outstanding, and no shares of preferred stock issued and outstanding. The Company’s board of directors may authorize additional shares of capital stock and amend their terms without obtaining stockholder approval.

F-13


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 Offerings 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. In addition, the Company’s board of directors, in its sole discretion, may amend, suspend, 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. The share repurchase program provides 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.
During the year ended December 31, 2017, the Company received valid repurchase requests related to approximately 5,773,000 shares of common stock, or 3.12% of shares outstanding as of December 31, 2016, all of which were repurchased in full for an aggregate purchase price of approximately $57,049,000 (an average of $9.88 per share). During the year ended December 31, 2016, the Company received valid repurchase requests related to approximately 3,432,000 shares of common stock, or 1.89% of shares outstanding as of December 31, 2015, all of which were repurchased in full for an aggregate purchase price of approximately $33,335,000 (an average of $9.71 per share).
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 December 31, 2017, the Company had aggregate distributions, since inception, of approximately $509,989,000 ($241,512,000 in cash and $268,477,000 of which were reinvested in shares of common stock pursuant to the DRIP and the DRIP Offerings). The Company’s distributions declared per common share were $0.70 for the years ended December 31, 2017, 2016 and 2015. As of December 31, 2017, the Company had distributions payable of approximately $11,076,000. Of those payable distributions, $5,468,000 was paid in cash and $5,608,000 was reinvested in shares of common stock pursuant to the Third DRIP Offering on January 2, 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 Code.
Earnings Per Share
Basic earnings per share for all periods presented are computed by dividing net income 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 year ended December 31, 2017, diluted earnings per share was computed the same as basic earnings per share because the Company recorded a loss from continuing operations, which would make potentially dilutive shares related to non-vested shares of restricted common stock antidilutive. For the years ended December 31, 2016 and 2015, diluted earnings per share reflected the effect of approximately 18,000 for each year of non-vested shares of restricted common stock that were outstanding as of such period.
Reportable Segments
ASC 280, Segment Reporting, establishes standards for reporting financial and descriptive information about an enterprise’s reportable segments. As of December 31, 2017, 2016 and 2015, 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 center segment represents a strategic shift that has 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 consolidated balance sheets as of December 31, 2017 and 2016, and the

F-14


operations have been classified as income from discontinued operations on the consolidated statements of comprehensive income for the years ended December 31, 2017, 2016 and 2015.
Derivative Instruments and Hedging Activities
As required by ASC 815, Derivatives and Hedging, or ASC 815, the Company records all derivative instruments as assets and liabilities in the statement of financial position at fair value. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation. For derivative instruments not designated as hedging instruments, the income or loss is recognized in the consolidated statements of comprehensive income during the current period.
The Company is exposed to variability in expected future cash flows that are attributable to interest rate changes in the normal course of business. The Company’s primary strategy in entering into derivative contracts is to add stability to future cash flows by managing its exposure to interest rate movements. The Company utilizes derivative instruments, including interest rate swaps, to effectively convert some its variable rate debt to fixed rate debt. The Company does not enter into derivative instruments for speculative purposes.
In accordance with ASC 815, the Company designates interest rate swap contracts as cash flow hedges of floating-rate borrowings. For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income (loss) in the consolidated statements of comprehensive income and reclassified into earnings in the same line item associated with the forecasted transaction and the same period during which the hedged transaction affects earnings. The ineffective portion of the income or loss on the derivative instrument is recognized in the consolidated statements of comprehensive income during the current period.
In accordance with the fair value measurement guidance ASU 2011-04, Fair Value Measurement, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.
Recently Issued Accounting Pronouncements
On May 28, 2014, the Financial Accounting Standards Board, or the FASB, issued ASU 2014-09, Revenue from Contracts with Customers, or ASU 2014-09. The objective of ASU 2014-09 is to clarify the principles for recognizing revenue and to develop a common revenue standard for GAAP. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle, which may require more judgment and estimates within the revenue recognition process than are required under existing GAAP. The Company has preliminarily determined the revenue stream that could be most significantly impacted by this ASU relates to parking revenue. The Company determined that the revenue recognition from parking revenue will be generally consistent with current recognition methods, and therefore will not have material changes to the consolidated financial statements as a result of adoption. For the year ended December 31, 2017, parking revenue was less than 10% of consolidated revenue. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606) Deferral of the Effective Date, or ASU 2015-14. ASU 2015-14 defers the effective date of ASU 2014-09 by one year to fiscal years and interim periods beginning after December 15, 2017. Early adoption is permitted as of the original effective date, which was annual reporting periods beginning after December 15, 2016, and the interim periods within that year. On March 17, 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers Principal versus Agent Considerations (Reporting Revenue Gross versus Net), or ASU 2016-08, which clarifies the implementation guidance on principal versus agent considerations in the new revenue recognition standard. ASU 2016-08 clarifies that an entity is a principal when it controls the specified good or service before that good or service is transferred to the customer, and is an agent when it does not control the specified good or service before it is transferred to the customer. The effective date and transition of this update is the same as the effective date and transition of ASU 2015-14.
As the majority of the Company's revenue is derived from real estate lease contracts, as discussed in relation to ASU 2016-02, Leases, the Company does not expect that the adoption of ASU 2014-09 or related amendments and modifications will have a material impact on the consolidated financial statements. Recoveries from tenants to be impacted by ASU 2014-09 will not be addressed until the Company's adoption of ASU 2016-02, Leases, considering its revisions to accounting for common area maintenance described below. The Company also continues to evaluate the scope of revenue-related disclosures it expects to provide pursuant to the new requirements. The standard permits the use of either a retrospective or cumulative effect transition method and permits the use of certain practical expedients. The Company currently anticipates using the modified retrospective method, however, this determination is subject to change. The Company will adopt the standard on its effective date beginning with the first quarter of 2018.

F-15


On February 25, 2016, the FASB issued ASU 2016-02, Leases, or 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. 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 a limited number of ground leases, which will result in the recognition of a right of use asset and lease liability upon 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 rather than capitalized. In addition, ASU 2016-02 requires lessors to identify 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 January 2018, the FASB proposed an amendment to ASU 2016-02 to simplify the guidance by allowing lessors to elect a practical expedient to allow lessors 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 will evaluate the impact of this amendment to the ASU when it is final.
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, 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 consolidated financial statements. The Company believes that certain financial statements' accounts will be impacted by the adoption of ASU 2016-13, including allowances for doubtful accounts with respect to accounts receivable, straight-line rents receivable and notes receivable.
On August 26, 2016, the FASB issued ASU 2016-15, Statement of Cash Flows, or ASU 2016-15. ASU 2016-15 is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. ASU 2016-15 addresses eight classification issues related to the statement of cash flows: 1) debt prepayment or debt extinguishment costs; 2) settlement of zero-coupon bonds; 3) contingent consideration payments made after a business combination; 4) proceeds from the settlement of insurance claims; 5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; 6) distributions received from equity method investees; 7) beneficial interests in securitization transactions; and 8) separately identifiable cash flows and application of the predominance principle. ASU 2016-15 is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. Entities should apply this ASU using a retrospective transition method to each period presented. Early adoption is permitted. The Company adopted ASU 2016-15 on October 1, 2017. As required, the Company retrospectively applied the guidance in ASU 2016-15 to the prior period presented, which resulted in an increase of $790,000 in net cash provided by operating activities and an increase of $790,000 in net cash used in financing activities for the year ended December 31, 2016 on the consolidated statements of cash flows.
On January 5, 2017, the FASB issued ASU 2017-01, Business Combinations, or ASU 2017-01. ASU 2017-01 clarifies the definition of a business. The objective of ASU 2017-01 is to add further guidance that assists entities in evaluating whether a transaction will be accounted for as an acquisition of an asset or a business. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If so, the set of transferred asset and activities is not a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs. The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those years. Early adoption is permitted using a prospective transition method. The Company adopted ASU 2017-01 effective October 1, 2016, which had no impact on the Company's consolidated financial statements.

F-16


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 are common in the real estate industry and 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 is effective for fiscal years beginning after December 15, 2017, including interim reporting periods within those fiscal years. Early adoption is permitted. The Company does not expect that the adoption of ASU 2017-05 will have a material impact on the consolidated financial statements.
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, and interim periods therein. Early adoption is permitted. The Company is in process of evaluating the impact of ASU 2017-12 will have on the Company’s 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 consolidated financial position or results of operations. The Company's assets, liabilities and operations related to the data center segment for the years presented in the financial statements are classified on the consolidated balance sheets and consolidated statements of comprehensive income as discontinued operations for all years presented.

F-17


Note 3Discontinued Operations and Dispositions
The Company sold 16 properties (15 data center properties and one healthcare property), or the 2017 Dispositions, during the year ended December 31, 2017, for an aggregate sale price of $1,153,000,000 and generated net proceeds of $1,131,582,000. The Company recognized an aggregate gain on sale of $224,133,000, related to the 15 data center properties sold, as a part of income from discontinued operations on the consolidated statements of comprehensive income for the year ended December 31, 2017. In addition to the 15 data center properties sold during the year ended December 31, 2017, the Company determined that the remaining five data center properties held as of December 31, 2017, were required to be presented as held for sale and ceased depreciation, and were classified as a part of discontinued operations. The Company recognized an impairment loss on real estate in the amount of $5,936,000, related to one healthcare property sold, as part of net income from continuing operations on the consolidated statements of comprehensive income for the year ended December 31, 2017.
Dispositions - Discontinued Operations
Disposals that represent a strategic shift that has a major effect on results and operations qualify as discontinued operations. The following table summarizes the 2017 Dispositions that qualify as discontinued operations. The operations related to these assets have been included in discontinued operations on the consolidated statements of comprehensive income for the years ended December 31, 2017, 2016 and 2015.
Property Description
 
Disposition Date
 
Ownership Percentage
 
Chicago Data Center (1)
 
12/14/2017
 
100%
 
Richardson Data Center (2)
 
12/20/2017
 
100%
 
180 Peachtree Data Center (2)
 
12/20/2017
 
20.53%
(3) 
Northwoods Data Center (2)
 
12/20/2017
 
100%
 
Southfield Data Center (2)
 
12/20/2017
 
100%
 
Plano Data Center (2)
 
12/20/2017
 
100%
 
Arlington Data Center (2)
 
12/20/2017
 
100%
 
Philadelphia Data Center (2)
 
12/20/2017
 
100%
 
Raleigh Data Center (2)
 
12/20/2017
 
100%
 
Leonia Data Center (2)
 
12/20/2017
 
100%
 
AT&T Wisconsin Data Center (2)
 
12/20/2017
 
100%
 
AT&T Tennessee Data Center (2)
 
12/20/2017
 
100%
 
AT&T California Data Center (2)
 
12/20/2017
 
100%
 
Charlotte Data Center (2)
 
12/20/2017
 
100%
 
Alpharetta Data Center (2)
 
12/20/2017
 
100%
 
 
(1)
The Chicago Data Center was sold for aggregate consideration of $315,000,000. The Company generated net proceeds on the sale of the Chicago Data Center of approximately $310,396,000.
(2)
The property was sold as part of a 14-property portfolio, or the Mapletree Portfolio, for aggregate consideration of $750,000,000. The Company generated net proceeds on the sale of the Mapletree Portfolio of approximately $733,687,000.
(3)
On January 3, 2012, an indirect partially-owned subsidiary of the Operating Partnership purchased the 180 Peachtree Data Center through a consolidated partnership with three unaffiliated institutional investors. The Operating Partnership owned approximately 20.53% and the institutional investors owned an aggregate of 79.47% of the consolidated partnership’s interests.

F-18


Discontinued Operations Properties
The following table presents the major classes of assets and liabilities of properties classified as discontinued operations presented separately in the consolidated balance sheets as of December 31, 2017 and 2016 (amounts in thousands):
 
December 31, 2017
 
December 31, 2016
Assets:
 
 
 
Real estate:
 
 
 
Land
$
21,710

 
$
97,111

Buildings and improvements, net
168,557

 
874,431

Total real estate, net
190,267

 
971,542

Acquired intangible assets, net
9,617

 
83,755

Other assets, net
13,949

 
38,168

Assets of discontinued operations, net
$
213,833

 
$
1,093,465

Liabilities:
 
 
 
Notes payable, net
$

 
$
312,228

Accounts payable due to affiliates
175

 
236

Accounts payable and other liabilities
3,847

 
18,210

Intangible lease liabilities, net
1,036

 
30,731

Liabilities of discontinued operations, net
$
5,058

 
$
361,405

The operations reflected in discontinued operations on the consolidated statements of comprehensive income for the years ended December 31, 2017, 2016 and 2015 were as follows (amounts in thousands):
 
 
For the Year Ended
December 31,
 
 
2017
 
2016
 
2015
Revenue:
 
 
 
 
 
 
Rental and parking revenue
 
$
102,274

 
$
102,663

 
$
103,348

Tenant reimbursement revenue
 
14,009

 
14,300

 
14,520

Total revenue
 
116,283

 
116,963

 
117,868

Expenses:
 
 
 
 
 
 
Rental and parking expenses
 
20,754

 
20,159

 
20,046

Change in fair value of contingent consideration
 
(2,920
)
 
300

 
(1,230
)
Acquisition related expenses
 

 

 
3

Asset management fees
 
8,106

 
8,549

 
8,405

Depreciation and amortization
 
32,210

 
38,744

 
40,282

Total expenses
 
58,150

 
67,752

 
67,506

Other income (expense):
 
 
 
 
 
 
Interest expense, net
 
(20,591
)
 
(14,532
)
 
(14,057
)
Total other expense
 
(20,591
)
 
(14,532
)
 
(14,057
)
Income from discontinued operations before real estate dispositions and noncontrolling interest
 
37,542

 
34,679

 
36,305

Gain on real estate dispositions
 
224,133

 

 

Net income from discontinued operations
 
261,675

 
34,679

 
36,305

Net income from discontinued operations attributable to noncontrolling interests in consolidated partnerships
 
(47,326
)
 
(3,921
)
 
(3,029
)
Net income from discontinued operations attributable to common stockholders
 
$
214,349

 
$
30,758

 
$
33,276

Capital expenditures on a cash basis for the years ended December 31, 2017, 2016 and 2015 were $2,264,000, $31,791,000 and $6,621,000, respectively, related to properties classified within discontinued operations.

F-19


Dispositions - Continuing Operations
The following table summarizes one property sold that qualified as continuing operations. The operations related to this asset have been included in continuing operations on the consolidated statements of comprehensive income for the years ended December 31, 2017, 2016 and 2015.
Property Description
 
Disposition Date
 
Ownership Percentage
Miami International Medical Center (1)
 
12/28/2017
 
100%
 
(1)
The Miami International Medical Center was sold for $88,000,000. The Company generated net proceeds on the sale of the Miami International Medical Center of $87,499,000. The net book value of the Miami International Medical Center at disposal was $93,435,000, consisting of land in the amount of $8,694,000 and building and improvements in the amount of $84,741,000. The Company recorded an impairment loss on real estate in continuing operations on the Miami International Medical Center of $5,936,000, based on the contractual sale price (less cost of sale). The Miami International Medical Center was a part of the Company's healthcare segment.
Note 4Acquired Intangible Assets, Net
Acquired intangible assets, net, consisted of the following as of December 31, 2017 and 2016 (amounts in thousands, except weighted average life amounts):
 
December 31, 2017
 
December 31, 2016
In-place leases, net of accumulated amortization of $22,519 and $16,557, respectively (with a weighted average remaining life of 15.1 years and 15.9 years, respectively)
$
83,139

 
$
90,567

Above-market leases, net of accumulated amortization of $1,068 and $772, respectively (with a weighted average remaining life of 9.3 years and 10.3 years, respectively)
2,747

 
3,043

Ground lease interest, net of accumulated amortization of $53 and $40, respectively (with a weighted average remaining life of 87.6 years and 88.6 years, respectively)
1,052

 
1,065

 
$
86,938

 
$
94,675

The aggregate weighted average remaining life of the acquired intangible assets was 15.8 years and 16.6 years as of December 31, 2017 and December 31, 2016, respectively.
Amortization of the acquired intangible assets for the years ended December 31, 2017, 2016 and 2015 was $7,737,000, $21,446,000 and $9,572,000, respectively. Amortization of the above-market leases is recorded as an adjustment to rental income, amortization expense for the in-place leases is included in depreciation and amortization and amortization expense for the ground lease interest is included in rental expenses in the accompanying consolidated statements of comprehensive income.
Estimated amortization expense on the acquired intangible assets as of December 31, 2017 and for each of the next five years ending December 31 and thereafter, are as follows (amounts in thousands):
Year
 
Amount
2018
 
$
6,473

2019
 
6,473

2020
 
6,473

2021
 
6,473

2022
 
6,473

Thereafter
 
54,573

 
 
$
86,938



F-20


Note 5Intangible Lease Liabilities, Net
Intangible lease liabilities, net, consisted of the following as of December 31, 2017 and 2016 (amounts in thousands, except weighted average life amounts):
 
December 31, 2017
 
December 31, 2016
Below-market leases, net of accumulated amortization of $4,269 and $3,391, respectively (with a weighted average remaining life of 17.2 years and 18.0 years, respectively)
$
12,655

 
$
13,643

Ground leasehold liabilities, net of accumulated amortization of $425 and $301, respectively (with a weighted average remaining life of 41.2 years and 42.2 years, respectively)
4,900

 
5,024

 
$
17,555

 
$
18,667

The aggregate weighted average remaining life of intangible lease liabilities was 23.9 years and 24.5 years as of December 31, 2017 and December 31, 2016, respectively.
Amortization of the intangible lease liabilities for the years ended December 31, 2017, 2016 and 2015 was $1,112,000, $1,078,000 and $1,086,000, respectively. Amortization of below-market leases is recorded as an adjustment to rental income and amortization expense of ground leasehold liabilities is included in rental expenses in the accompanying consolidated statements of comprehensive income.
Estimated amortization of the intangible lease liabilities as of December 31, 2017 and for each of the next five years ending December 31 and thereafter, are as follows (amounts in thousands):
Year
 
Amount
2018
 
$
1,017

2019
 
1,017

2020
 
1,014

2021
 
1,014

2022
 
1,014

Thereafter
 
12,479

 
 
$
17,555


F-21


Note 6Other Assets, Net
Other assets, net consisted of the following as of December 31, 2017 and 2016 (amounts in thousands):
 
December 31, 2017
 
December 31, 2016
Deferred financing costs related to the revolver portion of the unsecured credit facility, net of accumulated amortization of $7,428 and $5,833, respectively
$
762

 
$
877

Lease commissions, net of accumulated amortization of $63 and $4, respectively
1,266

 
451

Investments in unconsolidated partnerships
965

 
113

Tenant receivables, net of allowances for doubtful accounts of $9,125 and $6,007, respectively
7,878

 
8,430

Notes receivable, net of allowances for loan losses of $16,230 and $4,294, respectively
20,138

 
15,128

Real estate-related notes receivable

 
514

Straight-line rent receivable
36,348

 
27,611

Restricted cash
10,168

 
10,636

Derivative assets
407

 
2,967

Prepaid and other assets
1,208

 
844

 
$
79,140

 
$
67,571

Amortization of deferred financing costs related to the revolver portion of the unsecured credit facility for the years ended December 31, 2017, 2016 and 2015 was $1,595,000, $2,143,000 and $1,618,000, respectively, which was recorded as interest expense in the accompanying consolidated statements of comprehensive income. Amortization of lease commissions for the years ended December 31, 2017, 2016 and 2015 was $59,000, $99,000 and $34,000, respectively, which was recorded as depreciation and amortization in the accompanying consolidated statements of comprehensive income. In addition, for the year ended December 31, 2016, the Company recognized an impairment of one capitalized lease commission by accelerating the amortization in the amount of $1,766,000, as a result of one tenant experiencing financial difficulties.
Note 7Accounts Payable and Other Liabilities
Accounts payable and other liabilities, as of December 31, 2017 and 2016, were comprised of the following (amounts in thousands):
 
December 31, 2017
 
December 31, 2016
Accounts payable and accrued expenses
$
4,203

 
$
2,980

Accrued interest expense
1,558

 
1,776

Accrued property taxes
4,758

 
3,227

Distributions payable to stockholders
11,076

 
10,968

Tenant deposits
778

 
777

Deferred rental income
5,822

 
1,522

Derivative liabilities

 
736

 
$
28,195

 
$
21,986



F-22


Note 8Notes Payable
The Company had $141,477,000 and $173,427,000 principal outstanding in notes payable collateralized by real estate assets as of December 31, 2017 and 2016, respectively.
The following table summarizes the notes payable balances as of December 31, 2017 and 2016 (amounts in thousands):
 
 
 
 
 
Interest Rates (1)
 
 
 
 
 
December 31, 2017
 
December 31, 2016
 
Range
 
Weighted
Average
 
Maturity Date
Fixed rate notes payable
$
18,212

 
$
29,802

 
4.5%
-
4.8%
 
4.6%
 
02/28/2018
-
10/11/2018
Variable rate notes payable fixed through interest rate swaps
83,066

 
102,021

 
4.8%
-
6.3%
 
6.0%
 
07/11/2019
-
10/11/2022
Variable rate notes payable
40,199

 
41,604

 
4.6%
-
5.7%
 
5.2%
 
01/26/2019
-
07/11/2019
Total notes payable, principal amount outstanding
141,477

 
173,427

 
 
 
 
 
 
 
 
 
 
Unamortized deferred financing costs related to notes payable
(875
)
 
(1,385
)
 
 
 
 
 
 
 
 
 
 
Total notes payable, net of deferred financing costs (2)
$
140,602

 
$
172,042

 
 
 
 
 
 
 
 
 
 
(1)
Range of interest rates and weighted average interest rates are as of December 31, 2017.
(2)
As of December 31, 2017, there were no notes payable related to properties classified as discontinued operations. The balance as of December 31, 2016 excludes $312,228,000 of notes payable, net of deferred financing costs, related to properties classified as discontinued operations, which is included in liabilities of discontinued operations, net on the consolidated balance sheets.
As of December 31, 2017, the notes payable weighted average interest rate was 5.6%.
Significant loan activity during the year ended December 31, 2017, excluding scheduled principal payments, includes:
On February 10, 2017 the Company paid off its debt in connection with one of the Company's notes payable with an outstanding principal balance of $5,645,000 at the time of repayment. The property was subsequently added to the unencumbered pool of the unsecured credit facility.
On June 28, 2017, the Company paid off its debt in connection with one of the Company's notes payable with an outstanding principal balance of $5,337,000 at the time of repayment. The property was subsequently added to the unencumbered pool of the unsecured credit facility.
On August 18, 2017, the Company paid off its debt in connection with one of the Company's notes payable with an outstanding principal balance of $15,162,000 at the time of repayment. The property was subsequently added to the unencumbered pool of the unsecured credit facility.
During the year ended December 31, 2017, the Company paid off its debt in connection with the disposition of six data center properties with an outstanding principal balance of $307,315,000 at the time of repayment, which resulted in a loss on debt extinguishment of $7,287,000 included in income from discontinued operations on the consolidated statements of comprehensive income.
The principal payments due on the notes payable as of December 31, 2017 and for each of the next five years ending December 31 and thereafter, are as follows (amounts in thousands):
Year
 
Amount
 
2018
 
$
23,147

(1) 
2019
 
101,141

 
2020
 
597

 
2021
 
629

 
2022
 
15,963

 
Thereafter
 

 
 
 
$
141,477

 
(1)
Of this amount, $12,371,000 relates to a loan agreement that was repaid at maturity on February 28, 2018.

F-23


Note 9Unsecured Credit Facility
As of December 31, 2017, the maximum commitments available under the unsecured credit facility were $610,000,000, consisting of a $400,000,000 revolving line of credit, with a maturity date of May 28, 2018, subject to the Operating Partnership’s right to two 12-month extensions, a $75,000,000 term loan, with a maturity date of May 28, 2018, subject to the Operating Partnership’s right to a 12-month extension, and an additional $135,000,000 term loan, with a maturity date of August 21, 2020. The lenders agreed to make the loans on an unsecured basis.
The unsecured credit facility, shall bear interest at per annum rates equal to, at the Operating Partnership's option, either (a) the London Interbank Offered Rate, or LIBOR, plus an applicable margin ranging from 1.75% to 2.25%, which is determined by the overall leverage of the Operating Partnership; or (b) a base rate, which means, for any day, a fluctuating rate per annum equal to the prime rate for such day, plus an applicable margin ranging from 0.75% to 1.25%, which is determined based on the overall leverage of the Operating Partnership. Additionally, the requirement to pay a fee on the unused portion of the lenders’ commitments under the unsecured credit facility is 0.25% per annum if the average daily amount outstanding under the unsecured credit facility is less than 50% of the lenders’ commitments, and 0.15% per annum if the average daily amount outstanding under the unsecured credit facility is greater than 50% of the lenders’ commitments. The unused fee is payable quarterly in arrears.
The actual amount of credit available under the unsecured credit facility is a function of certain loan-to-cost, loan-to-value, debt yield and debt service coverage ratios contained in the unsecured credit facility agreements. The unencumbered pool availability under the unsecured credit facility is equal to the maximum principal amount of the value of the assets that are included in the unencumbered pool. The unsecured credit facility agreement contains various affirmative and negative covenants that are customary for credit facilities and transactions of this type, including limitations on the incurrence of debt and limitations on distributions by the Company, the Operating Partnership and its subsidiaries in the event of default. The unsecured credit facility agreement imposes the following financial covenants: (i) maximum ratio of consolidated total indebtedness to gross asset value; (ii) minimum ratio of adjusted consolidated earnings before interest, taxes, depreciation and amortization to consolidated fixed charges; (iii) minimum tangible net worth; (iv) minimum weighted average remaining lease term of unencumbered pool properties in the unencumbered pool; (v) minimum number of unencumbered pool properties in the unencumbered pool; and (vi) minimum unencumbered pool actual debt service coverage ratio. In addition, the unsecured credit facility agreement includes events of default that are customary for credit facilities and transactions of this type. The Company was in compliance with all financial covenant requirements at December 31, 2017. The credit available to the Operating Partnership under the unsecured credit facility will be a maximum principal amount of the value of the assets that are included in the unencumbered pool.
The Company had $0 and $358,000,000 in principal outstanding on its unsecured credit facility as of December 31, 2017 and 2016, respectively.
The following table summarizes the unsecured credit facility balances as of December 31, 2017 and 2016 (amounts in thousands):
 
December 31, 2017
 
December 31, 2016
Revolving line of credit
$

 
$
148,000

Term loan

 
210,000

Total unsecured credit facility, principal amount outstanding

 
358,000

Unamortized deferred financing costs related to the term loan of the unsecured credit facility

 
(1,789
)
Total unsecured credit facility, net of deferred financing costs
$

 
$
356,211

Significant credit facility activities during the year ended December 31, 2017 include:
On January 31, 2017, the Operating Partnership and certain of the Company’s subsidiaries entered into an amendment related to the unsecured credit facility to extend the maturity date and modify the extension options of the revolving line of credit portion of the unsecured credit facility. In connection with the amendment to the unsecured credit facility, the maturity date of the revolving line of credit was changed from May 28, 2017 to May 28, 2018, subject to the Operating Partnership's right to two 12-month extension periods (the Operating Partnership previously had a right to one 12-month extension period).
During the year ended December 31, 2017, the Company added three properties 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 $21,906,000.

F-24


During the year ended December 31, 2017, the Company removed 29 properties from the unencumbered pool of the unsecured credit facility. Out of 29 properties, a portfolio of 20 healthcare properties was removed due to a tenant undergoing a restructuring of its liabilities and nine data center properties were removed due to a sale of a data center portfolio that occurred on December 21, 2017. As a result of removing 29 properties from the unencumbered pool of the unsecured credit facility, the total unencumbered pool availability decreased by approximately $184,813,000.
During the year ended December 31, 2017, the Company made a draw of $121,000,000 and repaid $479,000,000 on its unsecured credit facility with net proceeds from the 2017 Dispositions. In connection with the payoff of the unsecured credit facility, the Company recognized a gain on the debt extinguishment of $2,774,000 included in interest expense, net on the consolidated statements of comprehensive income.
As of December 31, 2017, the Company had a total unencumbered pool availability under the unsecured credit facility of $353,606,000, which was limited to $236,667,000 due to one covenant restriction and an aggregate outstanding principal balance of $0. As of December 31, 2017, $236,667,000 was available to be drawn on the unsecured credit facility.
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. See Note 20—"Subsequent Events" for additional details.
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 years ended December 31, 2017, 2016 and 2015, the Company incurred $18,717,000, $19,505,000 and $18,027,000, respectively, in asset management fees to the Advisor, of which $10,611,000, $10,956,000 and $9,622,000 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 and advisory fee or a disposition fee. For the years ended December 31, 2017, 2016 and 2015, the Advisor allocated $1,598,000, $1,793,000 and $1,338,000, respectively, in operating expenses incurred on the Company’s behalf, which are recorded in general and administrative expenses in the accompanying consolidated statements of comprehensive income.
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, 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 on 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 year ended December 31, 2017, in connection with the 2017 Dispositions, the Company incurred approximately $4,311,000 in disposition fees to the Advisor or its affiliates, which are recorded in income from discontinued operations in the accompanying consolidated statements of comprehensive income. As of December 31, 2017, the Company has not incurred a subordinated participation in net sale proceeds.
Upon the listing of the Company’s common stock on a national securities exchange, the Company will 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 December 31, 2017, the Company has not incurred a subordinated incentive listing fee.
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

F-25


on a national securities exchange or another liquidity event occurs. As of December 31, 2017, the Company has 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 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 years ended December 31, 2017, 2016 and 2015, the Company incurred $5,056,000, $5,425,000 and $4,811,000, respectively, in property management fees to the Property Manager, of which $2,542,000, $2,945,000 and $2,371,000, respectively, are included in continuing operations and recorded in rental expenses in the accompanying consolidated statements of comprehensive income. For the years ended December 31, 2017, 2016 and 2015, the Company incurred $644,000, $1,138,000 and $2,934,000, respectively, in leasing commissions to the Property Manager. Leasing commissions are capitalized in other assets, net in the accompanying 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 years ended December 31, 2017, 2016 and 2015, the Company incurred $524,000, $986,000 and $2,058,000, respectively, in construction management fees to the Property Manager. Construction management fees are capitalized in buildings and improvements in the accompanying consolidated balance sheets.
Accounts Payable Due to Affiliates
The following amounts were due to affiliates as of December 31, 2017 and 2016 (amounts in thousands):
Entity
 
Fee
 
December 31, 2017
 
December 31, 2016
Carter/Validus Advisors, LLC and its affiliates
 
Asset management fees
 
$
980

 
$
1,604

Carter Validus Real Estate Management Services, LLC
 
Property management fees
 
473

 
593

Carter/Validus Advisors, LLC and its affiliates
 
General, administrative and other costs
 
98

 
167

Carter/Validus Advisors, LLC and its affiliates
 
Disposition fees
 
440

 

Carter Validus Real Estate Management Services, LLC
 
Construction management fees
 
17

 
35

Carter Validus Real Estate Management Services, LLC
 
Leasing commissions
 
364

 

 
 
 
 
$
2,372

 
$
2,399


F-26


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 properties qualified as discontinued operations and optional renewal periods for which exercise is reasonably assured, as of December 31, 2017 and for each of the next five years ending December 31 and thereafter, are as follows (amounts in thousands):
Year
 
Amount
2018
 
$
95,549

2019
 
96,768

2020
 
97,245

2021
 
99,164

2022
 
100,854

Thereafter
 
961,507

 
 
$
1,451,087

Rental Expense
The Company has 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 as of December 31, 2017 and for each of the next five years ended December 31 and thereafter, are as follows (amounts in thousands):
Year
 
Amount
2018
 
$
644

2019
 
688

2020
 
688

2021
 
688

2022
 
688

Thereafter
 
33,848

 
 
$
37,244


F-27


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 $18,189,000 and $29,683,000 as of December 31, 2017 and December 31, 2016, respectively, as compared to the outstanding principal of $18,212,000 and $29,802,000 as of December 31, 2017 and December 31, 2016, respectively. The estimated fair value of notes payable – variable rate fixed through interest rate swap agreements (Level 2) was approximately $82,533,000 and $104,006,000 as of December 31, 2017 and December 31, 2016, respectively, as compared to the outstanding principal of $83,066,000 and $102,021,000 as of December 31, 2017 and December 31, 2016, respectively.
Notes payable – Variable—The outstanding principal of the notes payable – variable was $40,199,000 and $41,604,000 as of December 31, 2017 and December 31, 2016, 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 $0 and $148,000,000, which approximated its fair value, as of December 31, 2017 and December 31, 2016, respectively. The estimated fair value of the unsecured credit facility – variable rate fixed through interest rate swap agreements (Level 2) was approximately $0 and $203,055,000 as of December 31, 2017 and December 31, 2016, respectively, as compared to the outstanding principal of $0 and $210,000,000 as of December 31, 2017 and December 31, 2016, respectively.
Notes receivable—The outstanding principal balance of the notes receivable approximated the fair value as of December 31, 2017 and 2016. The fair value of the Company’s notes receivable is estimated using significant unobservable inputs not based on market activity, but rather through particular valuation techniques (Level 3). The fair value was measured based on the income approach valuation methodology, 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 December 31, 2017, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions, and has 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.
Real estate assets— During the year ended December 31, 2017, real estate assets related to four properties with an aggregate carrying amount of $85,768,000 were deemed to be impaired and their carrying values were reduced to their estimated fair values of $52,557,000. The fair value of the Company's impaired real estate assets are estimated using significant unobservable inputs not based on market activity, but rather through particular valuation techniques (Level 3). The Company used a discounted cash flow and market valuation approach, which required certain judgments to be made by management.

F-28


The following table shows the fair value of the Company’s financial assets and liabilities that are required to be measured at fair value on a recurring basis as of December 31, 2017 and 2016 (amounts in thousands):
 
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 (1)
$

 
$
407

 
$

 
$
407

Total assets at fair value
$

 
$
407

 
$

 
$
407

 
 
 
 
 
 
 
 
 
December 31, 2016
 
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 (2)
$

 
$
3,070

 
$

 
$
3,070

Total assets at fair value
$

 
$
3,070

 
$

 
$
3,070

Liabilities:
 
 
 
 
 
 
 
Derivative liabilities (3)
$

 
$
(1,247
)
 
$

 
$
(1,247
)
Contingent consideration obligation (4)

 

 
(5,640
)
 
(5,640
)
Total liabilities at fair value
$

 
$
(1,247
)
 
$
(5,640
)
 
$
(6,887
)
 
(1)
Entire amount attributable to continuing operations.
(2)
Of this amount, $2,967,000 is attributable to continuing operations and $103,000 is attributable to discontinued operations. Derivative assets attributable to continuing operations and discontinued operations are reported in other assets, net and assets of discontinued operations, net, respectively, on the consolidated balance sheets.
(3)
Of this amount, $736,000 is attributable to continuing operations and $511,000 is attributable to discontinued operations. Derivative liabilities attributable to continuing operations and discontinued operations are reported in accounts payable and other liabilities and liabilities of discontinued operations, net, respectively, on the consolidated balance sheets.
(4)
Entire amount attributable to discontinued operations.
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 December 31, 2017 (amounts in thousands):
 
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)
 
Re-Measured Balance
 
Total Losses
Real estate assets (1)
$

 
$

 
$
52,557

(2) 
$
52,557

 
$
(33,211
)
 
(1)
Amount represents the aggregate fair value of real estate assets impacted by impairment charges as of December 31, 2017.
(2)
The fair values relating to impairment assessments were based on a discounted cash flow model and a market approach model to value real properties, using comparable properties adjusted for differences in characteristics to estimate the fair value. Projected cash flows are comprised of projected rental revenues and expenses based upon market conditions and expectations for growth. Terminal capitalization rates, discount rates, market rate per square foot and annual growth rates utilized in these models are based on a reasonable range of current market rates for each property analyzed. Based upon these inputs, the Company determined that its valuations of properties using a discounted cash flow model and a market approach model are classified within Level 3 of the fair value hierarchy.

F-29


The following table sets forth quantitative information about the unobservable inputs of the Company’s Level 3 real estate recorded as of December 31, 2017:
Unobservable Inputs
 
December 31, 2017
Terminal capitalization rate
 
8.5%
Discount rate
 
8.7%
Comparable sale price per square foot (1)
 
$180
-
$247
Market rental rate per square foot
 
$37
Annual growth rate
 
2.0%
(1)
The comparable sale price per square foot is used under the market approach.
The following table provides a rollforward of the fair value of recurring Level 3 fair value measurements for the years ended December 31, 2017, 2016 and 2015 (amounts in thousands):
 
For the Year Ended
December 31,
 
2017
 
2016
 
2015
Liabilities:
 
 
 
 
 
Contingent consideration obligation:
 
 
 
 
 
Beginning balance
$
5,640

 
$
5,340

 
$
6,570

Release of contingent consideration obligation related to property disposition
(2,720
)
 

 

Total changes in fair value included in income from discontinued operations
(2,920
)
 
300

 
(1,230
)
Ending balance
$

 
$
5,640

 
$
5,340

Unrealized (gains) losses still held
$

 
$

 
$


F-30


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 (loss) in the accompanying consolidated statements of stockholders' equity and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the year ended December 31, 2017, 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 year ended December 31, 2017, the Company accelerated the reclassification of amounts in other comprehensive income (loss) to earnings as a result of hedged forecasted transactions becoming probable not to occur due to debt extinguishment related to the disposition of properties. The accelerated amount was a gain of $4,637,000, of which $3,755,000 was recorded in interest expense, net and $882,000 was recorded in income from discontinued operations in the accompanying consolidated statements of comprehensive income. During the year ended December 31, 2016, the Company accelerated the reclassification of amounts in other comprehensive income (loss) to earnings as a result of a hedged forecasted transaction becoming probable not to occur due to a related debt extinguishment. The accelerated amount was a loss of $728,000, which was recorded in interest expense, net in the accompanying consolidated statements of comprehensive income. During the year ended December 31, 2015, no gains or losses were recognized due to ineffectiveness of hedges of interest rate risk.
Amounts reported in accumulated other comprehensive income (loss) 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 $100,000 will be reclassified from accumulated other comprehensive income (loss) 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
 
December 31, 2017
 
December 31, 2016
Outstanding
Notional
Amount
(2)
 
Fair Value of
 
Outstanding
Notional
Amount
(3)
 
Fair Value of
Asset (2)
 
(Liability)
 
Asset (4)
 
(Liability) (5)
 
Interest rate swaps
 
(1)
 
07/11/2014 to
10/11/2017
 
05/28/2019 to
10/11/2022
 
$
121,066

 
$
407

 
$

 
$
540,425

 
$
3,070

 
$
(1,247
)
 
(1)
Derivative assets attributable to continuing operations and discontinued operations are reported in other assets, net and assets of discontinued operations, net, respectively, on the consolidated balance sheets. Derivative liabilities attributable to continuing operations and discontinued operations are reported in accounts payable and other liabilities and liabilities of discontinued operations, net, respectively, on the consolidated balance sheets.
(2)
Entire amount is attributable to continuing operations.
(3)
Of this amount, $312,021,000 is attributable to continuing operations and $228,404,000 is attributable to discontinued operations.
(4)
Of this amount, $2,967,000 is attributable to continuing operations and $103,000 is attributable to discontinued operations.
(5)
Of this amount, $736,000 is attributable to continuing operations and $511,000 is attributable to discontinued operations.
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.

F-31


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 (loss), or OCI, in the accompanying consolidated statements of comprehensive income.
The table below summarizes the amount of income and loss recognized on interest rate derivatives designated as cash flow hedges for the years ended December 31, 2017, 2016 and 2015 (amounts in thousands):
Derivatives in Cash Flow Hedging Relationships
 
Amount of Income (Loss) Recognized
in OCI on Derivatives
(Effective Portion)
 
Location Of Loss (Income)
Reclassified From
Accumulated Other
Comprehensive Loss to
Net Income
(Effective Portion)
 
Amount of Income (Loss)
Reclassified From
Accumulated Other
Comprehensive Loss to
Net Income
(Effective Portion and Accelerated Amounts)
For the Year Ended December 31, 2017
 
 
 
 
 
 
Interest rate swaps - continuing operations
 
$
1,310

 
Interest expense, net
 
$
3,353

Interest rate swaps - discontinued operations
 
752

 
Income from discontinued operations
 
125

Total
 
$
2,062

 
 
 
$
3,478

For the Year Ended December 31, 2016
 
 
 
 
 
 
Interest rate swaps - continuing operations
 
$
1,045

 
Interest expense, net
 
$
(2,764
)
Interest rate swaps - discontinued operations
 
(1,562
)
 
Income from discontinued operations
 
(2,156
)
Total
 
$
(517
)
 
 
 
$
(4,920
)
For the Year Ended December 31, 2015
 
 
 
 
 
 
Interest rate swaps - continuing operations
 
$
(2,905
)
 
Interest expense, net
 
$
(2,408
)
Interest rate swaps - discontinued operations
 
(2,475
)
 
Income from discontinued operations
 
(1,927
)
Total
 
$
(5,380
)
 
 
 
$
(4,335
)
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 December 31, 2017, the fair value of derivatives in a net liability position, including accrued interest but excluding any adjustment for nonperformance risk related to these agreements, was $0.

F-32


Tabular Disclosure Offsetting Derivatives
The Company has elected not to offset derivative positions in its 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 December 31, 2017 and 2016 (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
 
December 31, 2017 (1)
$
407

 
$

 
$
407

 
$

 
$

 
$
407

 
December 31, 2016
$
3,070

(2) 
$

 
$
3,070

(2) 
$
(10
)
(1) 
$

 
$
3,060

(3) 
Offsetting of Derivative Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross Amounts Not Offset
 in the Balance Sheet
 
 
 
 
Gross
Amounts of
Recognized
Liabilities
 
Gross Amounts
Offset in the
Balance Sheet
 
Net Amounts of
Liabilities
Presented in the
Balance Sheet
 
Financial 
Instruments
Collateral
 
Cash 
Collateral
 
Net
Amount
 
December 31, 2017
$

 
$

 
$

 
$

 
$

 
$

 
December 31, 2016
$
1,247

(4) 
$

 
$
1,247

(4) 
$
(10
)
(1) 
$

 
$
1,237

(5) 
 
(1)
Entire amount is attributable to continuing operations.
(2)
Of this amount, $2,967,000 is attributable to continuing operations and $103,000 is attributable to discontinued operations.
(3)
Of this amount, $2,957,000 is attributable to continuing operations and $103,000 is attributable to discontinued operations.
(4)
Of this amount, $736,000 is attributable to continuing operations and $511,000 is attributable to discontinued operations.
(5)
Of this amount, $726,000 is attributable to continuing operations and $511,000 is attributable to discontinued operations.
The Company reports derivative assets attributable to continuing operations and discontinued operations as other assets, net and assets of discontinued operations, net, respectively, on the consolidated balance sheets. The Company reports derivative liabilities attributable to continuing operations and discontinued operations as accounts payable and other liabilities and liabilities of discontinued operations, net, respectively, on the consolidated balance sheets.

F-33


Note 14Accumulated Other Comprehensive Income (Loss)
The following table presents a rollforward of amounts recognized in accumulated other comprehensive income (loss), net of noncontrolling interests, by component for the years ended December 31, 2017, 2016 and 2015 (amounts in thousands):
 
Unrealized Income (Loss) on Derivative
Instruments
 
Accumulated Other
Comprehensive Income (Loss)
Balance as of December 31, 2014
$
(1,161
)
 
$
(1,161
)
Other comprehensive loss before reclassification
(5,042
)
 
(5,042
)
Amount of loss reclassified from accumulated other comprehensive income (loss) to net income (effective portion)
4,103

 
4,103

Other comprehensive loss
(939
)
 
(939
)
Purchase of noncontrolling interests

 
(480
)
Balance as of December 31, 2015
(2,100
)
 
(2,580
)
Other comprehensive loss before reclassification
(517
)
 
(517
)
Amount of loss reclassified from accumulated other comprehensive income (loss) to net income (effective portion and missed forecast)
4,920

 
4,920

Other comprehensive income
4,403

 
4,403

Balance as of December 31, 2016
2,303

 
1,823

Other comprehensive income before reclassification
2,062

 
2,062

Amount of income reclassified from accumulated other comprehensive income (loss) to net income (effective portion and missed forecast)
(3,478
)
 
(3,478
)
Other comprehensive loss
(1,416
)
 
(1,416
)
Balance as of December 31, 2017
$
887

 
$
407

The following table presents reclassifications out of accumulated other comprehensive income (loss) for the years ended December 31, 2017, 2016 and 2015 (amounts in thousands):
Details about Accumulated Other
Comprehensive Income (Loss) Components
 
Amounts Reclassified from
Accumulated Other Comprehensive Income (Loss) to Net
Income
 
Affected Line Items in the Consolidated Statements of Comprehensive
Income
 
 
For the Year Ended
December 31,
 
 
 
 
2017
 
2016
 
2015
 
 
Interest rate swap contracts - continuing operations
 
$
(3,353
)
 
$
2,764

 
$
2,408

 
Interest expense, net
Interest rate swap contracts - discontinued operations
 
(125
)
 
2,156

 
1,927

 
Income from discontinued operations
Interest rate swap contracts
 
$
(3,478
)
 
$
4,920

 
$
4,335

 
 
Note 15Stock-based Compensation
The Company, pursuant to the 2010 Restricted Share Plan, or the 2010 Plan, has the authority to grant restricted and deferred stock awards to persons eligible under the 2010 Plan. The Company authorized and reserved 300,000 shares of its common stock for issuance under the 2010 Plan, subject to certain adjustments. Subject to certain limited exceptions, restricted stock may not be sold, assigned, transferred, pledged, hypothecated or otherwise disposed of and is subject to forfeiture within the vesting period. Restricted stock awards generally vest ratably over four years. The Company uses the straight-line method to recognize expenses for service awards with graded vesting. Restricted stock awards are entitled to receive dividends during the vesting period. In addition to the ratable amortization of fair value over the vesting period, dividends paid on unvested shares of restricted stock, which are not expected to vest, are charged to compensation expense in the period paid.
On August 18, 2017, the Company awarded an aggregate of 9,000 shares of restricted stock to its independent board members in connection with their re-election to the board of directors of the Company. The fair value of each share of restricted

F-34


common stock that has been granted under the 2010 Plan is estimated at the date of grant at $10.02 per share. The restricted stock awards vest over a period of four years. The awards are amortized using the straight-line method over four years.
As of December 31, 2017 and 2016, there was $180,000 and $179,000, respectively, of total unrecognized compensation expense related to nonvested shares of our restricted common stock. This expense is expected to be recognized over a remaining weighted average period of 2.03 years. This expected expense does not include the impact of any future stock-based compensation awards.
As of December 31, 2017 and 2016, the fair value of the nonvested shares of restricted common stock was $208,350 and $225,000, respectively. A summary of the status of the nonvested shares of restricted common stock as of December 31, 2016 and the changes for the year ended December 31, 2017 is presented below:
Restricted Stock
 
Shares
Nonvested at December 31, 2016
 
22,500

Vested
 
(9,000
)
Granted
 
9,000

Nonvested at December 31, 2017
 
22,500

Stock-based compensation expense for the years ended December 31, 2017, 2016 and 2015 was $88,000, $90,000 and $90,000, respectively, which is reported in general and administrative costs in the accompanying consolidated statements of comprehensive income.
Note 16Income Taxes
As a REIT, the Company generally will not be subject to U.S. federal income tax on taxable income that it distributes to the stockholders. For U.S. federal income tax purposes, distributions to stockholders are characterized as either ordinary dividends, capital gain distributions, or nontaxable distributions. Nontaxable distributions will reduce U.S. stockholders’ respective bases in their shares. The following table shows the character of distributions the Company paid on a percentage basis during the years ended December 31, 2017, 2016 and 2015:
 
 
For the Year Ended December 31,
Character of Distributions:
 
2017
 
2016
 
2015
Ordinary dividends
 
%
 
45.45
%
 
46.69
%
Capital gain distributions
 
100.00
%
 
3.20
%
 
%
Nontaxable distributions
 
%
 
51.35
%
 
53.31
%
Total
 
100.00
%
 
100.00
%
 
100.00
%
As a REIT, if the Company fails to distribute in any calendar year (subject to specific timing rules for certain dividends paid in January) at least the sum of (i) 85% of its ordinary income for such year, (ii) 95% of its capital gain net income for such year, and (iii) any undistributed taxable income from the prior year, the Company would be subject to a non-deductible 4% excise tax on the excess of such required distribution over the amounts actually distributed. During the year ended December 31, 2017, the Company incurred approximately $641,000 federal excise tax, which is included in general and administrative expenses in the accompanying consolidated statements of comprehensive income. The Company is subject to certain state and local income taxes on its income, property or net worth in some jurisdictions. Texas, Tennessee, Louisiana and Massachusetts are the major state and local tax jurisdictions for the Company.
The Company applies the rules under ASC 740-10, Accounting for Uncertainty in Income Taxes, for uncertain tax positions using a “more likely than not” recognition threshold for tax positions. Pursuant to these rules, the financial statement effects of a tax position are initially recognized when it is more likely than not, based on the technical merits of the tax position, that such a position will be sustained upon examination by the relevant tax authorities. If the tax benefit meets the “more likely than not” threshold, the measurement of the tax benefit will be based on the Company's estimate of the ultimate tax benefit to be sustained if audited by the taxing authority. The Company concluded there was no impact related to uncertain tax positions from the results of the operations of the Company for the years ended December 31, 2017, 2016 and 2015. The earliest tax year subject to examination is 2014.

F-35


The Company’s policy is to recognize accrued interest related to unrecognized tax benefits as a component of interest expense and penalties related to unrecognized tax benefits as a component of general and administrative expenses. From inception through December 31, 2017, the Company has not recognized any interest expense or penalties related to unrecognized tax benefits.
Note 17Commitments and Contingencies
Litigation
In the ordinary course of business, the Company may become subject to litigation or claims. As of December 31, 2017, 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 our financial results for the period in which it is resolved, we believe 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 our financial position, results of operations or liquidity.
Note 18Economic Dependency
The Company is dependent on the Advisor and its affiliates for certain services that are essential to the Company, including the identification, evaluation, negotiation, purchase and disposition of real estate investments and other investments; the management of the daily operations of the Company’s real estate portfolio; and other general and administrative responsibilities. In the event that the Advisor or its affiliates are unable to provide the respective services, the Company will be required to obtain such services from other sources.

F-36


Note 19Selected Quarterly Financial Data (Unaudited)
Presented in the following table is a summary of the unaudited quarterly financial information for the years ended December 31, 2017 and 2016. The Company believes that all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts stated below to present fairly, and in accordance with GAAP, the selected quarterly information (amounts in thousands, except shares and per share data):
 
2017
 
Fourth
Quarter
 
Third
Quarter
 
Second
Quarter
 
First
Quarter
Total revenue
$
22,984

 
$
23,857

 
$
25,877

 
$
21,696

Total expenses
(19,237
)
 
(15,263
)
 
(15,058
)
 
(14,849
)
Income from operations
3,747

 
8,594

 
10,819

 
6,847

Other expense
(41,210
)
 
(12,286
)
 
(6,497
)
 
(7,052
)
(Loss) income from continuing operations
(37,463
)
 
(3,692
)
 
4,322

 
(205
)
Income from discontinued operations
231,964

 
10,636

 
8,886

 
10,189

Net income
194,501

 
6,944

 
13,208

 
9,984

Less: Net income attributable to noncontrolling interests in consolidated partnerships
(44,308
)
 
(898
)
 
(1,039
)
 
(1,081
)
Net income attributable to common stockholders
$
150,193

 
$
6,046

 
$
12,169

 
$
8,903

Net income (loss) per common share attributable to common stockholders:
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
Continuing operations
$
(0.21
)
 
$
(0.02
)
 
$
0.03

 
$

Discontinued operations
1.01

 
0.05

 
0.04

 
0.05

Net income attributable to common stockholders
$
0.80

 
$
0.03

 
$
0.07

 
$
0.05

Diluted:
 
 
 
 
 
 
 
Continuing operations
$
(0.21
)
 
$
(0.02
)
 
$
0.03

 
$

Discontinued operations
1.01

 
0.05

 
0.04

 
0.05

Net income attributable to common stockholders
$
0.80

 
$
0.03

 
$
0.07

 
$
0.05

Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
186,182,196

 
186,295,970

 
185,897,525

 
185,300,384

Diluted
186,182,196

 
186,295,970

 
185,911,968

 
185,300,384


F-37


 
2016
 
Fourth
Quarter
 
Third
Quarter
 
Second
Quarter
 
First
Quarter
Total revenue
$
18,901

 
$
13,573

 
$
29,915

 
$
27,848

Total expenses
(16,543
)
 
(29,102
)
 
(16,199
)
 
(13,593
)
Income (loss) from operations
2,358

 
(15,529
)
 
13,716

 
14,255

Other expense
(3,110
)
 
(2,983
)
 
(4,249
)
 
(3,980
)
(Loss) income from continuing operations
(752
)
 
(18,512
)
 
9,467

 
10,275

Income from discontinued operations
8,897

 
9,018

 
8,447

 
8,317

Net income (loss)
8,145

 
(9,494
)
 
17,914

 
18,592

Less: Net income attributable to noncontrolling interests in consolidated partnerships
(926
)
 
(1,006
)
 
(1,061
)
 
(928
)
Net income (loss) attributable to common stockholders
$
7,219

 
$
(10,500
)
 
$
16,853

 
$
17,664

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

 
$
(0.10
)
 
$
0.05

 
$
0.06

Discontinued operations
0.04

 
0.04

 
0.04

 
0.04

Net income (loss) attributable to common stockholders
$
0.04

 
$
(0.06
)
 
$
0.09

 
$
0.10

Diluted:
 
 
 
 
 
 
 
Continuing operations
$

 
$
(0.10
)
 
$
0.05

 
$
0.06

Discontinued operations
0.04

 
0.04

 
0.04

 
0.04

Net income (loss) attributable to common stockholders
$
0.04

 
$
(0.06
)
 
$
0.09

 
$
0.10

Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
184,628,066

 
183,726,479

 
182,743,182

 
181,975,405

Diluted
184,628,066

 
183,726,479

 
182,762,094

 
181,992,093


F-38


Note 20Subsequent Events
Distributions Paid
On January 2, 2018, the Company paid aggregate distributions of $11,076,000 ($5,468,000 in cash and $5,608,000 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 December 1, 2017 through December 31, 2017.
On January 22, 2018, the board of directors of the Company declared a special cash distribution of $3.00 per share of common stock. The special cash distribution was funded from 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 amount of approximately $556,227,000.
On February 1, 2018, the Company paid aggregate distributions of $11,088,000 ($5,541,000 in cash and $5,547,000 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 January 1, 2018 through January 31, 2018.
On March 1, 2018, the Company paid aggregate distributions of $9,994,000 ($5,093,000 in cash and $4,901,000 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 February 1, 2018 through February 28, 2018.
Distributions Declared
On January 22, 2018, the board of directors of the Company approved and declared a distribution to the Company’s stockholders of record as of the close of business on each day of the period commencing on March 1, 2018 and ending on May 31, 2018. The distributions will be calculated based on 365 days in the calendar year and will be equal to $0.001150685 per share of common stock, which will be equal to an annualized distribution rate of 6.7%, based on the estimated per share NAV of $6.26. The distributions declared for each record date in March 2018, April 2018 and May 2018 will be paid in April 2018, May 2018 and June 2018, respectively. The distributions will be payable to stockholders from legally available funds therefor.
Disposition of Arizona Data Center Portfolio
On January 10, 2018, the Company sold a data center portfolio, or the Arizona Data Center Portfolio, consisting of two properties, for approximately $142,500,000, which resulted in a gain. In connection with the disposition, the Company removed these properties from the unencumbered pool of the unsecured credit facility. The Company's net proceeds from the disposition of the Arizona Data Center Portfolio were approximately $140,221,000, after transaction costs and disposition fees, subject to additional transaction costs paid subsequent to the closing date.
Amended and Restated Credit Agreement Related to the Unsecured Credit Facility
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 increase 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.

F-39


CARTER VALIDUS MISSION CRITICAL REIT, INC.
SCHEDULE III
REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION
December 31, 2017
(in thousands)
 
 
 
 
 
 
Initial Cost
 
Cost
Capitalized
Subsequent to
Acquisition (b)
 
Gross Amount
Carried at
December 31, 2017 (c)
 
 
 
 
 
 
Property Description
 
Location
 
Encumbrances
 
Land
 
Buildings and
Improvements
 
 
Land
 
Buildings and
Improvements
 
Total
 
Accumulated
Depreciation (d)
 
Year
Constructed
 
Date
Acquired
St. Louis Surgical Center
 
Creve Coeur, MO
 

(a)
808

 
8,206

 

 
808

 
8,206

 
9,014

 
1,663

 
2005
 
02/09/2012
Stonegate Medical Center
 
Austin, TX
 

(a)
1,904

 
5,764

 
90

 
1,904

 
5,854

 
7,758

 
1,201

 
2008
 
03/30/2012
HPI Integrated Medical Facility
 
Oklahoma City, OK
 

(a)
789

 
7,815

 

 
789

 
7,815

 
8,604

 
1,288

 
2007
 
06/28/2012
Baylor Medical Center
 
Dallas, TX
 
18,316

 
4,012

 
23,557

 

 
4,012

 
23,557

 
27,569

 
3,204

 
2010
 
08/29/2012
Vibra Denver Hospital
 
Denver, CO
 

(a)
1,798

 
15,012

 
5,872

 
1,798

 
20,884

 
22,682

 
2,256

 
1962
(e)
09/28/2012
Vibra New Bedford Hospital
 
New Bedford, MA
 

(a)
1,992

 
21,823

 

 
1,992

 
21,823

 
23,815

 
2,938

 
1942
 
10/22/2012
Houston Surgery Center
 
Houston, TX
 

(a)
503

 
4,115

 
510

 
503

 
4,625

 
5,128

 
622

 
1998
(f)
11/28/2012
Akron General Medical Center
 
Green, OH
 

(a)
2,936

 
36,142

 
(199
)
 
2,936

 
35,943

 
38,879

 
4,792

 
2012
 
12/28/2012
Grapevine Hospital
 
Grapevine, TX
 
12,371

 
962

 
20,277

 
105

 
962

 
20,382

 
21,344

 
2,590

 
2007
 
02/25/2013
Andover Data Center (o)
 
Andover, MA
 

(a)
2,279

 
9,391

 

 
2,279

 
9,391

 
11,670

 
1,487

 
1984
(g)
03/28/2013
Wilkes-Barre Healthcare Facility
 
Mountain Top, PA
 

(a)
335

 
3,812

 

 
335

 
3,812

 
4,147

 
553

 
2012
 
05/31/2013
Fresenius Healthcare Facility
 
Goshen, IN
 

(a)
304

 
3,965

 

 
304

 
3,965

 
4,269

 
462

 
2010
 
06/11/2013
Physicians’ Specialty Hospital
 
Fayetteville, AR
 

(a)
322

 
19,974

 

 
322

 
19,974

 
20,296

 
2,296

 
1994
(h)
06/28/2013
Christus Cabrini Surgery Center
 
Alexandria, LA
 

(a)

 
4,235

 

 

 
4,235

 
4,235

 
484

 
2007
 
07/31/2013
Valley Baptist Wellness Center
 
Harlingen, TX
 
5,842

 

 
8,386

 

 

 
8,386

 
8,386

 
955

 
2007
 
08/16/2013
Akron General Integrated Medical Facility
 
Green, OH
 

(a)
904

 
7,933

 
1

 
904

 
7,934

 
8,838

 
1,009

 
2013
 
08/23/2013
Cumberland Surgical Hospital (m)
 
San Antonio, TX
 


3,440

 
25,923

 
4,164

 
3,440

 
30,087

 
33,527

 
3,648

 
2013
 
08/29/2013
Post Acute/Warm Springs Rehab Hospital of Westover Hills
 
San Antonio, TX
 

(a)
1,740

 
18,280

 

 
1,740

 
18,280

 
20,020

 
1,989

 
2012
 
09/06/2013
Warm Springs Rehabilitation Hospital
 
San Antonio, TX
 

(a)

 
23,462

 

 

 
23,462

 
23,462

 
2,435

 
1987
 
11/27/2013
Lubbock Heart Hospital
 
Lubbock, TX
 
18,615

 
3,749

 
32,174

 

 
3,749

 
32,174

 
35,923

 
3,281

 
2003
 
12/20/2013
Walnut Hill Medical Center
 
Dallas, TX
 

 
3,337

 
79,116

 
(26,769
)
 
2,143

 
53,541

 
55,684

 
7,673

 
1983
(i)
02/25/2014
Cypress Pointe Surgical Hospital
 
Hammond, LA
 

(a)
1,379

 
20,549

 
$

 
1,379

 
20,549

 
21,928

 
2,038

 
2006
 
03/14/2014
Milwaukee Data Center (o)
 
Hartland, WI
 

(a)
1,240

 
16,872

 

 
1,240

 
16,872

 
18,112

 
1,628

 
2004
 
03/28/2014
Bay Area Regional Medical Center
 
Webster, TX
 
86,333

 
6,937

 
168,710

 
63,823

 
6,937

 
232,533

 
239,470

 
15,237

 
2014
 
07/11/2014
Phoenix Data Center (j), (o)
 
Phoenix, AZ
 

(a)
11,576

 
78,188

 

 
11,576

 
78,188

 
89,764

 
6,373

 
2005
 
08/27/2014
Scottsdale Data Center (j), (o)
 
Scottsdale, AZ
 

(a)
3,515

 
24,907

 

 
3,515

 
24,907

 
28,422

 
2,026

 
2000
 
08/27/2014
Rhode Island Rehabilitation Healthcare Facility
 
North Smithfield, RI
 

(a)
818

 
11,597

 

 
818

 
11,597

 
12,415

 
1,097

 
1965
(k)
08/28/2014
Select Medical—Akron
 
Akron, OH
 

(a)
2,207

 
23,430

 

 
2,207

 
23,430

 
25,637

 
2,003

 
2008
 
08/29/2014
Select Medical—Frisco
 
Frisco, TX
 

(a)

 
20,679

 

 

 
20,679

 
20,679

 
1,852

 
2010
 
08/29/2014
Select Medical—Bridgeton
 
Bridgeton, MO
 

(a)

 
31,204

 

 

 
31,204

 
31,204

 
2,689

 
2012
 
08/29/2014
San Antonio Healthcare Facility (n)
 
San Antonio, TX
 

 
3,200

 

 
16,366

 
3,200

 
16,366

 
19,566

 
391

 
2017
 
09/12/2014
Dermatology Assoc-Randolph Ct
 
Manitowoc, WI
 

(a)
390

 
2,202

 

 
390

 
2,202

 
2,592

 
214

 
2003
 
09/15/2014

S-1


 
 
 
 
 
 
Initial Cost
 
Cost
Capitalized
Subsequent to
Acquisition (b)
 
Gross Amount
Carried at
December 31, 2017 (c)
 
 
 
 
 
 
Property Description
 
Location
 
Encumbrances
 
Land
 
Buildings and
Improvements
 
 
Land
 
Buildings and
Improvements
 
Total
 
Accumulated
Depreciation (d)
 
Year
Constructed
 
Date
Acquired
Dermatology Assoc-Murray St
 
Marinette, WI
 

(a)
253

 
1,134

 

 
253

 
1,134

 
1,387

 
116

 
2008
 
09/15/2014
Dermatology Assoc-N Lightning Dr
 
Appleton, WI
 

(a)
463

 
2,049

 

 
463

 
2,049

 
2,512

 
212

 
2011
 
09/15/2014
Dermatology Assoc-Development Dr
 
Bellevue, WI
 

(a)
491

 
1,450

 

 
491

 
1,450

 
1,941

 
150

 
2010
 
09/15/2014
Dermatology Assoc-York St
 
Manitowoc, WI
 

(a)
305

 
11,299

 

 
305

 
11,299

 
11,604

 
996

 
1964
(l)
09/15/2014
Dermatology Assoc-Scheuring Rd
 
De Pere, WI
 

(a)
703

 
1,851

 

 
703

 
1,851

 
2,554

 
187

 
2005
 
09/15/2014
Dermatology Assoc-Riverview Dr
 
Howard, WI
 

(a)
552

 
1,960

 

 
552

 
1,960

 
2,512

 
202

 
2011
 
09/15/2014
Dermatology Assoc-State Rd 44
 
Oshkosh, WI
 

(a)
384

 
2,514

 

 
384

 
2,514

 
2,898

 
254

 
2010
 
09/15/2014
Dermatology Assoc-Green Bay Rd
 
Sturgeon Bay, WI
 

(a)
364

 
657

 

 
364

 
657

 
1,021

 
75

 
2007
 
09/15/2014
Lafayette Surgical Hospital
 
Lafayette, LA
 

(a)
3,909

 
33,212

 
262

 
3,909

 
33,474

 
37,383

 
2,829

 
2004
 
09/19/2014
Alpharetta Data Center II (o)
 
Alpharetta, GA
 

(a)
3,100

 
54,880

 
4

 
3,100

 
54,884

 
57,984

 
4,171

 
1999
 
10/31/2014
Landmark Hospital of Savannah
 
Savannah, GA
 

(a)
1,980

 
15,418

 

 
1,980

 
15,418

 
17,398

 
1,165

 
2014
 
01/15/2015
21st Century Oncology-Yucca Valley
 
Yucca Valley, CA
 


663

 
4,004

 

 
663

 
4,004

 
4,667

 
327

 
2009
 
03/31/2015
21st Century Oncology-Rancho Mirage
 
Rancho Mirage, CA
 


156

 
5,934

 

 
156

 
5,934

 
6,090

 
478

 
2008
 
03/31/2015
21st Century Oncology-Palm Desert
 
Palm Desert, CA
 


364

 
5,340

 

 
364

 
5,340

 
5,704

 
403

 
2005
 
03/31/2015
21st Century Oncology-Santa Rosa Beach
 
Santa Rosa Beach, FL
 


646

 
3,211

 

 
646

 
3,211

 
3,857

 
234

 
2003
 
03/31/2015
21st Century Oncology-Crestview
 
Crestview, FL
 


205

 
2,503

 

 
205

 
2,503

 
2,708

 
198

 
2004
 
03/31/2015
21st Century Oncology-Fort Walton Beach
 
Fort Walton Beach, FL
 


747

 
3,012

 

 
747

 
3,012

 
3,759

 
234

 
2005
 
03/31/2015
21st Century Oncology-Bradenton
 
Bradenton, FL
 


835

 
2,699

 
(1,560
)
 
443

 
1,531

 
1,974

 
206

 
2002
 
03/31/2015
21st Century Oncology-Tamarac
 
Tamarac, FL
 


692

 
1,496

 
(844
)
 
409

 
935

 
1,344

 
124

 
1997
 
03/31/2015
21st Century Oncology-Fort Myers I
 
Fort Myers, FL
 


2,301

 
1,180

 

 
2,301

 
1,180

 
3,481

 
152

 
1999
 
03/31/2015
21st Century Oncology-Fort Myers II
 
Fort Myers, FL
 


4,522

 
13,106

 

 
4,522

 
13,106

 
17,628

 
1,021

 
2010
 
03/31/2015
21st Century Oncology-Bonita Springs
 
Bonita Springs, FL
 


1,146

 
3,978

 

 
1,146

 
3,978

 
5,124

 
288

 
2002
 
03/31/2015
21st Century Oncology-Lehigh Acres
 
Lehigh Acres, FL
 


433

 
2,508

 

 
433

 
2,508

 
2,941

 
186

 
2002
 
03/31/2015
21st Century Oncology-East Naples
 
Naples, FL
 


717

 
5,278

 
(4,038
)
 
200

 
1,757

 
1,957

 
399

 
2007
 
03/31/2015
21st Century Oncology-Jacksonville
 
Jacksonville, FL
 

 
802

 
5,879

 

 
802

 
5,879

 
6,681

 
516

 
2009
 
03/31/2015
21st Century Oncology-Frankfort
 
Frankfort, KY
 

 
291

 
817

 

 
291

 
817

 
1,108

 
69

 
1993
 
03/31/2015
21st Century Oncology-Las Vegas
 
Las Vegas, NV
 

 
251

 
4,927

 

 
251

 
4,927

 
5,178

 
371

 
2007
 
03/31/2015
21st Century Oncology-Henderson
 
Henderson, NV
 

 
617

 
2,324

 

 
617

 
2,324

 
2,941

 
187

 
2000
 
03/31/2015
21st Century Oncology-Fairlea
 
Fairlea, WV
 

 
125

 
1,717

 

 
125

 
1,717

 
1,842

 
131

 
1999
 
03/31/2015
21st Century Oncology-El Segundo
 
El Segundo, CA
 

 
1,138

 
8,743

 

 
1,138

 
8,743

 
9,881

 
622

 
2009
 
04/20/2015
21st Century Oncology-Lakewood Ranch
 
Bradenton, FL
 

 
553

 
8,516

 

 
553

 
8,516

 
9,069

 
636

 
2008
 
04/20/2015
Post Acute Medical - Victoria I
 
Victoria, TX
 

(a)
331

 
10,278

 

 
331

 
10,278

 
10,609

 
442

 
2013
 
05/23/2016
Post Acute Medical - Victoria II
 
Victoria, TX
 

(a)
450

 
10,393

 

 
450

 
10,393

 
10,843

 
440

 
1998
 
05/23/2016
Post Acute Medical - New Braunfels
 
New Braunfels, TX
 

(a)
1,619

 
9,295

 

 
1,619

 
9,295

 
10,914

 
394

 
2007
 
05/23/2016
Post Acute Medical - Covington
 
Covington, LA
 

(a)
1,529

 
13,503

 

 
1,529

 
13,503

 
15,032

 
563

 
1984
 
05/23/2016
Post Acute Medical - Hammond
 
Hammond, LA
 

(a)
852

 
9,815

 

 
852

 
9,815

 
10,667

 
425

 
2004
 
05/23/2016
 
 
 
 
$
141,477

 
$
97,865

 
$
1,044,580

 
$
57,787

 
$
95,479

 
$
1,104,753

 
$
1,200,232

 
$
101,777

 
 
 
 
 

S-2


(a)
Property collateralized under the unsecured credit facility. As of December 31, 2017, 40 commercial properties, consisting of 35 commercial properties classified as continuing operations and 5 commercial properties classified as discontinued operations, were collateralized under the unsecured credit facility and the Company had $0 aggregate principal amount outstanding thereunder.
(b)
The cost capitalized subsequent to acquisition is shown net of asset write-offs.
(c)
The aggregated cost for federal income tax purposes is approximately $1,126,769,000 (unaudited).
(d)
The Company’s assets are depreciated using the straight-line method over the useful lives of the assets by class. Generally, buildings and improvements are depreciated over 15-40 years.
(e)
The Vibra Denver Hospital was renovated in 1985.
(f)
The Houston Surgery Center was renovated in 2012.
(g)
The Andover Data Center was renovated in 2010.
(h)
The Physicians Specialty Hospital was renovated in 2009.
(i)
The Walnut Hill Medical Center was renovated in 2013.
(j)
The Phoenix Data Center and Scottsdale Data Center were both sold on January 10, 2018.
(k)
The Rhode Island Rehabilitation Healthcare Facility was renovated in 1999.
(l)
The Dermatology Assoc-York St was renovated in 2010.
(m)
Formerly known as Victory Medical Center Landmark.
(n)
Formerly known as Victory IMF.
(o)
Property classified as a part of discontinued operations.

S-3


CARTER VALIDUS MISSION CRITICAL REIT, INC.
SCHEDULE III
REAL ESTATE ASSETS AND ACCUMULATED DEPRECIATION
(CONTINUED)
December 31, 2017
(in thousands)
 
2017
 
2016
 
2015
Real Estate
 
 
 
 
 
Balance at beginning of year
$
2,163,358

 
$
2,036,330

 
$
1,845,136

Additions:
 
 
 
 
 
Acquisitions

 
58,065

 
121,774

Improvements, net of write-offs
(11,533
)
 
68,963

 
69,420

Dispositions
(951,593
)
 

 

Balance at end of year
$
1,200,232

 
$
2,163,358

 
$
2,036,330

Accumulated Depreciation
 
 
 
 
 
Balance at beginning of year
$
(152,486
)
 
$
(100,142
)
 
$
(52,785
)
Depreciation
(49,483
)
 
(52,344
)
 
(47,357
)
Dispositions
100,192

 

 

Balance at end of year
$
(101,777
)
 
$
(152,486
)
 
$
(100,142
)

S-4


EXHIBIT INDEX
Pursuant to Item 601(a)(2) of Regulation S-K, this Exhibit Index immediately precedes the exhibits.
The following exhibits are included, or incorporated by reference, in this Annual Report on Form 10-K for the year ended December 31, 2017 (and are numbered in accordance with Item 601 of Regulation S-K).
Exhibit
No:
  
 
 
 
 
3.1
 
 
 
 
3.2
 
 
 
 
3.3
 
 
 
 
3.4
 
 
 
 
3.5
 
 
 
 
4.1
 
 
 
 
4.2
 
 
 
 
4.3
 
 
 
 
4.4
 
 
 
 
10.1
 
 
 
 
10.2
 
 
 
 
10.3
 
 
 
 
10.4
 
 
 
 
10.5
 
 
 
 



10.6
 
 
 
 
10.7
 
 
 
 
10.8
 
 
 
 
10.9
 
 
 
 
10.10
 
 
 
 
10.11
 
 
 
 
10.12
 
 
 
 
10.13
 
 
 
 
10.14
 
 
 
 
10.15
 
 
 
 
10.16
 
 
 
 
10.17
 
 
 
 
10.18
 
 
 
 
10.19
 
 
 
 
10.20
 
 
 
 
10.21
 
 
 
 



10.22
 
 
 
 
10.23
 
 
 
 
10.24
 
 
 
 
10.25
 
 
 
 
10.26
 
 
 
 
10.27
 
 
 
 
10.28
 
 
 
 
10.29
 
 
 
 
10.30
 
 
 
 
10.31
 
Term Loan Agreement, dated August 21, 2015, by and among Carter/Validus Operating Partnership, LP, as borrower, KeyBank National Association, the other lenders which are parties to this agreement and other lenders that may become parties to this agreement, KeyBank National Association, as administrative agent, Capital One, National Association, as documentation agent, and Bank of America, N.A., as co-syndication agent, and Suntrust Bank, as co-syndication agent, and Fifth Third Bank, as co-syndication agent, and KeyBanc Capital Markets, Inc., Capital One, National Association, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Suntrust Robinson Humphrey, Inc. as joint lead arrangers and joint book runners (included as Exhibit 10.2 to the Registrant's Current Report on Form 8-K (Commission File No. 000-54675) filed on August 25, 2015, and incorporated herein by reference).
 
 
 
10.32
 
 
 
 
10.33
 
 
 
 
10.34
 
 
 
 
10.35
 
 
 
 



10.36
 
 
 
 
10.37
 
 
 
 
10.38
 
 
 
 
10.39
 
 
 
 
10.40
 
 
 
 
10.41
 
 
 
 
10.42
 
 
 
 
10.43
 
 
 
 
10.44
 
 
 
 
10.45
 
 
 
 
10.46
 
 
 
 
10.47
 
Joinder Agreement, dated August 21, 2015, by DC-1650 UNION HILL ROAD, LLC, HC-800 EAST 68th STREET, LLC, HCP-RTS, LLC, HC-77-840 FLORA ROAD, LLC, HC-40055 BOB HOPE DRIVE, LLC, HC-58295 29 PALMS HIGHWAY, LLC, HC-8991 BRIGHTON LANE, LLC, HC-6555 CORTEZ, LLC, HC-601 REDSTONE AVENUE WEST, LLC, HC-2270 COLONIAL BLVD, LLC, HC-2234 COLONIAL BLVD, LLC, HC-1026 MAR WALT DRIVE NW, LLC, HC-7751 BAYMEADOWS RD. E., LLC, HC-1120 LEE BOULEVARD, LLC, HC-8625 COLLIER BLVD., LLC, HC-6879 US HIGHWAY 98 WEST, LLC, HC-7850 N. UNIVERSITY DRIVE, LLC, HC-#2 PHYSICIANS PARK DR., LLC, HC-52 NORTH PECOS ROAD, LLC, HC-6160 S. FORT APACHE ROAD, LLC, HC-187 SKYLAR DRIVE, LLC, HC-860 PARKVIEW DRIVE NORTH, UNITS A&B, LLC and HC-6310 HEALTH PKWY., UNITS 100 & 200, LLC to KeyBank National Association, as Agent (included as Exhibit 10.18 to the Registrant's Current Report on Form 8-K (Commission File No. 000-54675) filed on August 25, 2015, and incorporated herein by reference).
 
 
 
10.48
 
 
 
 
10.49
 
 
 
 



10.50
 
 
 
 
10.51
 
 
 
 
10.52
 
 
 
 
10.53
 
 
 
 
10.54
 
 
 
 
10.55
 
 
 
 
10.56
 
 
 
 
10.57
 
 
 
 
10.58
 
Third Amended and Restated Credit Agreement, dated February 1, 2018, by and between Carter/Validus Operating Partnership, LP, as borrower, KeyBank National Association, the other lenders which are parties to this agreement and other lenders that may become parties to this agreement, KeyBank National Association, as administrative agent, Capital One, N.A. and SunTrust Bank, as co-documentation agents, Citizens Bank, N.A., Texas Capital Bank, N.A. Cadence Bank, N.A., and Synovus Bank, as co-documentation agents and KeyBanc Capital Markets, Capital One, N.A., and SunTrust Robinson Humphrey, Inc. as joint lead arrangers and book runners (included as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (Commission File No. 000-54675) filed on February 5, 2018, and incorporated herein by reference).
 
 
 
21.1
 
 
 
 
23.1*
 
 
 
 
31.1*
  
 
 
 
31.2*
  
 
 
 
32.1**
  
 
 
 
32.2**
 
 
 
 
99.1*
 
 
 
 
101.INS*
  
XBRL Instance Document
 
 
 
101.SCH*
  
XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL*
  
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 



101.DEF*
  
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
101.LAB*
  
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101.PRE*
  
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
*
Filed herewith.
**
Furnished herewith in accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is not deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.



Item 16. Form 10-K Summary.
The Company has elected not to provide summary information.



SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
 
 
 
 
CARTER VALIDUS MISSION CRITICAL REIT, INC.
 
 
 
(Registrant)
 
 
 
Date: March 30, 2018
 
By:
/s/    JOHN E. CARTER
 
 
 
John E. Carter
 
 
 
Chief Executive Officer
 
 
 
(Principal Executive Officer)
 
 
 
Date: March 30, 2018
 
By:
/s/    TODD M. SAKOW
 
 
 
Todd M. Sakow
 
 
 
Chief Financial Officer
 
 
 
(Principal Financial Officer and Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name
 
Capacity
 
Date
 
 
 
 
 
/s/    JOHN E. CARTER
 
Chief Executive Officer and
 
March 30, 2018
John E. Carter
 
Chairman of Board of Directors
 
 
 
 
(Principal Executive Officer)
 
 
 
 
 
 
 
/s/    TODD M. SAKOW
 
Chief Financial Officer
 
March 30, 2018
Todd M. Sakow
 
(Principal Financial Officer and
 
 
 
 
Principal Accounting Officer)
 
 
 
 
 
 
 
/s/    MARIO GARCIA, JR.
 
Director
 
March 30, 2018
Mario Garcia, Jr.
 
 
 
 
 
 
 
 
 
/s/    JONATHAN KUCHIN
 
Director
 
March 30, 2018
Jonathan Kuchin
 
 
 
 
 
 
 
 
 
/s/    RANDALL GREENE
 
Director
 
March 30, 2018
Randall Greene
 
 
 
 
 
 
 
 
 
/s/    RONALD RAYEVICH
 
Director
 
March 30, 2018
Ronald Rayevich