- By FYH News Team
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The following Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") is intended to promote an understanding of our
operating results and financial condition. The MD&A is provided as a supplement
to, and should be read in conjunction with, our consolidated financial
statements and the accompanying Notes to the Consolidated Financial Statements,
as included in this Annual Report on Form 10-K. The MD&A contains
forward-looking statements that involve risks, uncertainties, and
assumptions. Actual results may differ materially from those anticipated in
these forward-looking statements as a result of various factors, including, but
not limited to, those presented under Item 1A. Risk Factors, and below in
Forward-Looking Statements and Risk Factors and as included elsewhere in this
Annual Report on Form 10-K. This section generally discusses our results of
operations for the year ended December 31, 2021 as compared to the year ended
December 31, 2020 . For discussion of our result of operations and changes in our
financial condition for the year ended December 31, 2020 as compared to the year
ended December 31, 2019 , please refer to Part II, Management's Discussion and
Analysis of Financial Condition and Results of Operations in our Annual Report
on Form 10-K for the year ended December 31, 2020 , as filed with the Securities
and Exchange Commission on February 25, 2021 .
Overview
We are a real estate investment trust ("REIT") that commenced operations in
1986. We invest in healthcare and human service related facilities currently
including acute care hospitals, behavioral health care hospitals, specialty
facilities, free-standing emergency departments, childcare centers and
medical/office buildings. As of February 24, 2022 , we have seventy-five real
estate investments or commitments in twenty-one states consisting of:
• six hospital facilities consisting of three acute care hospitals and three
behavioral health care;
• four free-standing emergency departments ("FEDs");
• fifty-eight medical/office buildings, including four owned by
unconsolidated LLCs/LPs;
• four preschool and childcare centers, and;
• three specialty facilities that are currently vacant.
Forward Looking Statements
This report contains "forward-looking statements" that reflect our current estimates, expectations and projections about our future results, performance, prospects and opportunities. Forward-looking statements include, among other things, information concerning our possible future results of operations, business and growth strategies, financing plans, expectations that regulatory developments or other matters will not have a material adverse effect on our business or financial condition, our competitive position and the effects of competition, the projected growth of the industry in which we operate, and the benefits and synergies to be obtained from our completed and any future acquisitions, and statements of our goals and objectives, and other similar expressions concerning matters that are not historical facts. Words such as "may," "will," "should," "could," "would," "predicts," "potential," "continue," "expects," "anticipates," "future," "intends," "plans," "believes," "estimates," "appears," "projects" and similar expressions, as well as statements in future tense, identify forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by which, such performance or results will be achieved. Forward-looking information is based on information available at the time and/or our good faith belief with respect to future events, and is subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements. Such factors include, among other things, the following:
• Future operations and financial results of our tenants, and in turn ours,
will likely be materially impacted by numerous factors and future
developments related to COVID-19. Such factors and developments include, but
are not limited to, the length of time and severity of the spread of the
pandemic; the volume of cancelled or rescheduled elective procedures and the
volume of COVID-19 patients treated by the operators of our hospitals and
other healthcare facilities; measures our tenants are taking to respond to
the COVID-19 pandemic; the impact of government and administrative
regulation, including travel bans and restrictions, shelter-in-place or
stay-at-home orders, quarantines, the promotion of social distancing,
business shutdowns and limitations on business activity; vaccine
requirements; changes in patient volumes at our tenants’ hospitals and other
healthcare facilities due to patients’ general concerns related to the risk
of contracting COVID-19 from interacting with the healthcare system; the
impact of stimulus on the health care industry and our tenants; changes in
patient volumes and payer mix caused by deteriorating macroeconomic
conditions (including increases in uninsured and underinsured patients as
the result of business closings and layoffs); potential disruptions to
clinical staffing and shortages and disruptions related to supplies required
for our tenants' employees and patients, including equipment,
pharmaceuticals and medical supplies,
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particularly personal protective equipment, or PPE; potential increases to
expenses incurred by our tenants related to staffing, supply chain or other
expenditures; the impact of our indebtedness and the ability to refinance
such indebtedness on acceptable terms; disruptions in the financial markets
and the business of financial institutions as the result of the COVID-19
pandemic which could impact our ability to access capital or increase
associated borrowing costs; and changes in general economic conditions
nationally and regionally in the markets our properties are located
resulting from the COVID-19 pandemic, including higher sustained rates of
unemployment and underemployment levels and reduced consumer spending and
confidence. There may be significant declines in future bonus rental revenue
earned on the hospital property leased to a subsidiary of UHS to the extent
that the hospital continues to experience significant declines in patient
volumes and revenues. These factors may result in the inability or
unwillingness on the part of some of our tenants to make timely payment of
their rent to us at current levels or to seek to amend or terminate their
leases which, in turn, would have an adverse effect on our occupancy levels
and our revenue and cash flow and the value of our properties, and
potentially, our ability to maintain our dividend at current levels.
• Due to COVID-19 restrictions and its impact on the economy, we may
experience a decrease in prospective tenants which could unfavorably impact
the volume of new leases, as well as the renewal rate of existing leases.
The COVID-19 pandemic may delay our construction projects which could result
in increased costs and delay the timing of opening and rental payments from
those projects, although no such delays have yet occurred. The COVID-19
pandemic could also impact our indebtedness and the ability to refinance
such indebtedness on acceptable terms, as well as risks associated with
disruptions in the financial markets and the business of financial
institutions as the result of the COVID-19 pandemic which could impact us
from a financing perspective; and changes in general economic conditions
nationally and regionally in the markets our properties are located
resulting from the COVID-19 pandemic. COVID-19 has not had a material
adverse impact on our financial results during 2021. We are not able to
fully quantify the impact that these factors will have on our financial
results during 2022, but developments related to the COVID-19 pandemic are
likely to have a material adverse impact on our future financial results.
• The
Final Rule (“IFR”) effective
vaccinations for all applicable staff at all Medicare and Medicaid certified
facilities. Under the
establish a policy ensuring all eligible staff have received the first dose
of a two-dose COVID-19 vaccine or a one-dose COVID-19 vaccine prior to
providing any care, treatment, or other services by December 5, 2021 . All
eligible staff must have received the necessary shots to be fully vaccinated
– either two doses of Pfizer or Moderna or one dose of Johnson & Johnson –
by
recognized medical conditions or religious beliefs, observances, or
practices. Under the IFR, facilities must develop a similar process or plan
for permitting exemptions in alignment with federal law. If facilities fail
to comply with the IFR by the deadlines established, they are subject to
potential termination from the Medicare and Medicaid program for
non-compliance. In addition, the Occupational Safety and Health
Administration also issued an Emergency Temporary Standard (“ETS”) requiring
all businesses with 100 or more employees to be vaccinated by
2022. Pursuant to the ETS, those employees not vaccinated by that date will
need to show a negative COVID-19 test weekly and wear a face mask in the
workplace. Legal challenges to these rules ensued, and the
Court has upheld a stay of the ETS requirements but permitted the IFR
vaccination requirements to go into effect pending additional litigation.
CMS has indicated that hospitals in states not involved in the
litigation are expected to be in compliance with IFR vaccination
requirements consistent with the dates referenced above. Hospitals in states
that were involved in the
compliance with first dose requirements by
requirements by
subject to the IFR, pending the resolution of additional litigation
there. We cannot predict at this time the potential viability or impact of
any such additional litigation on us or the operators of our
facilities. Implementation of these rules could have an impact on staffing
at the operators of our facilities for those employees that are not
vaccinated in accordance with IFR and ETS requirements, and associated loss
of revenues and increased costs resulting from staffing issues could have a
material adverse effect on our financial results or those of the operators.
• Recent legislation, including the Coronavirus Aid, Relief, and Economic
Security Act (the “CARES Act”), the Paycheck Protection Program and Health
Care Enhancement Act (“PPPHCE Act”) and the American Rescue Plan Act of 2021
(“ARPA”), has provided grant funding to hospitals and other healthcare
providers to assist them during the COVID-19 pandemic. There is a high
degree of uncertainty surrounding the implementation of the CARES Act, the
PPPHCE Act and ARPA, and the federal government may consider additional
stimulus and relief efforts, but we are unable to predict whether additional
stimulus measures will be enacted or their impact. There can be no assurance
as to the total amount of financial and other types of assistance our
tenants will receive under the CARES Act, the PPPHCE Act and the ARPA, and
it is difficult to predict the impact of such legislation on our tenants’
operations or how they will affect operations of our tenants’
competitors. There can be no assurance as to whether our tenants would be
required to repay any previously granted funding, due to noncompliance with
grant terms or otherwise. Moreover, we are unable to assess the extent to
which anticipated
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negative impacts on our tenants (and, in turn, us) arising from the COVID-19
pandemic will be offset by amounts or benefits received or to be received
under the CARES Act, the PPPHCE Act and the ARPA.
• A substantial portion of our revenues are dependent upon one operator, UHS,
which comprised approximately 37%, 33% and 31% of our consolidated revenues
for the years ended
previously disclosed, on
purchased the real estate assets of Inland Valley Campus of Southwest
Healthcare System from us and in exchange, transferred the real estate
assets of
to us. These transactions were approved by the Independent Trustees of our
Board, as well as the UHS Board of Directors. The aggregate annual rental
revenue during 2022 pursuant to the leases for the two facilities
transferred to us is approximately
component applicable to either of these leases. Pursuant to the terms of
the lease on the Inland Valley Campus, we earned
revenue during year ended
consolidated financial statements – Lease Accounting, for additional
information related to this asset purchase and sale transaction between us
and UHS.
• We cannot assure you that subsidiaries of UHS will renew the leases on the
hospital facilities and free-standing emergency departments, upon the
scheduled expirations of the existing lease terms. In addition, if
subsidiaries of UHS exercise their options to purchase the respective leased
hospital facilities and FEDs, and do not enter into a substitution
arrangement upon expiration of the lease terms or otherwise, our future
revenues and results of operations could decrease if we were unable to earn
a favorable rate of return on the sale proceeds received, as compared to the
rental revenue currently earned pursuant to these leases. Please see Note 4
to the consolidated financial statements – Lease Accounting, for additional
information related to a lease renewal between us and
Medical Center, a wholly-owned subsidiary of UHS. • In certain of our markets, the general real estate market has been
unfavorably impacted by increased competition/capacity and decreases in
occupancy and rental rates which may adversely impact our operating results
and the underlying value of our properties.
• A number of legislative initiatives have recently been passed into law that
may result in major changes in the health care delivery system on a national
or state level to the operators of our facilities, including UHS. No
assurances can be given that the implementation of these new laws will not
have a material adverse effect on the business, financial condition or
results of operations of our operators.
• The potential indirect impact of the Tax Cuts and Jobs Act of 2017, signed
into law on
and individual tax rates and calculation of taxes, which could potentially
impact our tenants and jurisdictions, both positively and negatively, in
which we do business, as well as the overall investment thesis for REITs.
• A subsidiary of UHS is our Advisor and our officers are all employees of a
wholly-owned subsidiary of UHS, which may create the potential for conflicts
of interest.
• Lost revenues resulting from the exercise of purchase options, lease
expirations and renewals and other transactions (see Note 4 to the condensed
consolidated financial statements – Lease Accounting for additional
disclosure related to lease expirations and subsequent vacancies that
occurred during the second and third quarters of 2019 and the fourth quarter
of 2021 on three specialty hospital facilities.
• Potential unfavorable tax consequences and reduced income resulting from an
inability to complete, within the statutory timeframes, anticipated tax
deferred like-kind exchange transactions pursuant to Section 1031 of the
Internal Revenue Code, if, and as, applicable from time-to-time.
• Our ability to continue to obtain capital on acceptable terms, including
borrowed funds, to fund future growth of our business. • The outcome and effects of known and unknown litigation, government
investigations, and liabilities and other claims asserted against us, UHS or
the other operators of our facilities. UHS and its subsidiaries are subject
to legal actions, purported shareholder class actions and shareholder
derivative cases, governmental investigations and regulatory actions and the
effects of adverse publicity relating to such matters. Since UHS comprised
approximately 37% of our consolidated revenues during the year ended
encouraged to obtain and review the disclosures contained in the Legal
Proceedings section of Universal Health Services, Inc.’s Forms 10-Q and
10-K, as publicly filed with the
filings are the sole responsibility of UHS and are not incorporated by
reference herein.
• Failure of UHS or the other operators of our hospital facilities to comply
with governmental regulations related to the Medicare and Medicaid licensing
and certification requirements could have a material adverse impact on our
future revenues and the underlying value of the property.
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• The potential unfavorable impact on our business of the deterioration in
national, regional and local economic and business conditions, including a
worsening of credit and/or capital market conditions, which may adversely
affect our ability to obtain capital which may be required to fund the
future growth of our business and refinance existing debt with near term
maturities.
• A continuation in the deterioration in general economic conditions which has
resulted in increases in the number of people unemployed and/or insured and
likely increase the number of individuals without health insurance. Under
these circumstances, the operators of our facilities may experience declines
in patient volumes which could result in decreased occupancy rates at our
medical office buildings.
• A continuation of the worsening of the economic and employment conditions in
operators, including UHS, which would likely unfavorably impact our future
bonus rental revenue (on one UHS hospital facility) and may potentially have
a negative impact on the future lease renewal terms and the underlying value
of the hospital properties.
• Real estate market factors, including without limitation, the supply and
demand of office space and market rental rates, changes in interest rates as
well as an increase in the development of medical office condominiums in
certain markets.
• The impact of property values and results of operations of severe weather
conditions, including the effects of hurricanes.
• Government regulations, including changes in the reimbursement levels under
the Medicare and Medicaid programs.
• The issues facing the health care industry that affect the operators of our
facilities, including UHS, such as: changes in, or the ability to comply
with, existing laws and government regulations; unfavorable changes in the
levels and terms of reimbursement by third party payors or government
programs, including Medicare (including, but not limited to, the potential
unfavorable impact of future reductions to Medicare reimbursements resulting
from the Budget Control Act of 2011, as discussed in the next bullet point
below) and Medicaid (most states have reported significant budget deficits
that have, in the past, resulted in the reduction of Medicaid funding to the
operators of our facilities, including UHS); demographic changes; the
ability to enter into managed care provider agreements on acceptable terms;
an increase in uninsured and self-pay patients which unfavorably impacts the
collectability of patient accounts; decreasing in-patient admission trends;
technological and pharmaceutical improvements that may increase the cost of
providing, or reduce the demand for, health care, and; the ability to
attract and retain qualified medical personnel, including physicians.
• The Budget Control Act of 2011 imposed annual spending limits for most
federal agencies and programs aimed at reducing budget deficits by $917
billion between 2012 and 2021, according to a report released by the
a bipartisan Congressional committee, known as the
Deficit Reduction (
recommendations aimed at reducing future federal budget deficits by an
additional
reach an agreement by the
across-the-board cuts to discretionary, national defense and Medicare
spending were implemented on
reductions of up to 2% per fiscal year with a uniform percentage reduction
across all Medicare programs. The Bipartisan Budget Act of 2015, enacted on
imposed under the Budget Control Act of 2011. Recent legislation has
suspended payment reductions through
extended cuts through 2030. Subsequent legislation extended the payment
reduction suspension through
from then until
thereafter. We cannot predict whether
implemented Medicare payment reductions or what other federal budget deficit
reduction initiatives may be proposed by
cannot predict the effect these enactments will have on the operators of our
properties (including UHS), and thus, our business.
• An increasing number of legislative initiatives have been passed into law
that may result in major changes in the health care delivery system on a
national or state level. Legislation has already been enacted that has
eliminated the penalty for failing to maintain health coverage that was part
of the original Patient Protection and Affordable Care Act (the “ACA”).
strengthen the ACA and may reverse the policies of the prior administration.
To date, the Biden administration has issued executive orders implementing a
special enrollment period permitting individuals to enroll in health plans
outside of the annual open enrollment period and reexamining policies that
may undermine the ACA or the Medicaid program. The ARPA’s expansion of
subsidies to purchase coverage through an exchange is anticipated to
increase exchange enrollment.
issuance of final rules: (i) enabling the formation of association health
plans that would be exempt from certain ACA requirements such as the
provision of essential health benefits; (ii) expanding the availability of
short-term, limited duration health insurance, (iii) eliminating
cost-sharing reduction payments to insurers that would otherwise offset
deductibles and other out-of-pocket expenses for health plan enrollees at or
below 250 percent of the federal poverty level; (iv) relaxing requirements
for state innovation waivers that could reduce enrollment in the individual
and small group markets and lead to additional enrollment in short-term,
limited duration insurance and association health plans; and (v)
incentivizing the use of health reimbursement
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arrangements by employers to permit employees to purchase health insurance
in the individual market. The uncertainty resulting from these Executive
Branch policies had led to reduced Exchange enrollment in 2018, 2019 and
2020, and is expected to further worsen the individual and small group
market risk pools in future years. It is also anticipated that these
policies, to the extent that they remain as implemented, may create
additional cost and reimbursement pressures on hospitals, including ours. In
addition, while attempts to repeal the entirety of the ACA have not been
successful to date, a key provision of the ACA was eliminated as part of the
Tax Cuts and Jobs Act and on
Court Judge in
was appealed and on
voted 2-1 to strike down the ACA individual mandate as unconstitutional. The
case was ultimately appealed to the
decided in California v. Texas that the plaintiffs in the matter lacked
standing to bring their constitutionality claims. As a result, the
Legislation will continue to remain law, in its entirety, likely for the
foreseeable future.
• There can be no assurance that if any of the announced or proposed changes
described above are implemented there will not be negative financial impact
on the operators of our hospitals, which material effects may include a
potential decrease in the market for health care services or a decrease in
the ability of the operators of our hospitals to receive reimbursement for
health care services provided which could result in a material adverse
effect on the financial condition or results of operations of the operators
of our properties, and, thus, our business.
• Competition for properties include, but are not limited to, other REITs,
private investors and firms, banks and other companies, including UHS. In
addition, we may face competition from other REITs for our tenants.
• The operators of our facilities face competition from other health care
providers, including physician owned facilities and other competing
facilities, including certain facilities operated by UHS but the real
property of which is not owned by us. Such competition is experienced in
markets including, but not limited to, McAllen, Texas , the site of our
McAllen Medical Center , a 370-bed acute care hospital.
• Changes in, or inadvertent violations of, tax laws and regulations and other
factors that can affect REITs and our status as a REIT, including possible
future changes to federal tax laws that could materially impact our ability
to defer gains on divestitures through like-kind property exchanges.
• The individual and collective impact of the changes made by the CARES Act on
REITs and their security holders are uncertain and may not become evident
for some period of time; it is also possible additional legislation could be
enacted in the future as a result of the COVID-19 pandemic which may affect
the holders of our securities. • Should we be unable to comply with the strict income distribution
requirements applicable to REITs, utilizing only cash generated by operating
activities, we would be required to generate cash from other sources which
could adversely affect our financial condition.
• Our ownership interest in four LLCs/LPs in which we hold non-controlling
equity interests. In addition, pursuant to the operating and/or partnership
agreements of the four LLCs/LPs in which we continue to hold non-controlling
ownership interests, the third-party member and the Trust, at any time,
potentially subject to certain conditions, have the right to make an offer
(“Offering Member”) to the other member(s) (“Non-Offering Member”) in which
it either agrees to: (i) sell the entire ownership interest of the Offering
Member to the Non-Offering Member (“Offer to Sell”) at a price as determined
by the Offering Member (“Transfer Price”), or; (ii) purchase the entire
ownership interest of the Non-Offering Member (“Offer to Purchase”) at the
equivalent proportionate Transfer Price. The Non-Offering Member has 60 to
90 days to either: (i) purchase the entire ownership interest of the
Offering Member at the Transfer Price, or; (ii) sell its entire ownership
interest to the Offering Member at the equivalent proportionate Transfer
Price. The closing of the transfer must occur within 60 to 90 days of the
acceptance by the Non-Offering Member. Please see Note 5 to the condensed
consolidated financial statements – Summarized Financial Information of
Equity Affiliates for additional disclosure related to a fourth quarter,
2021 transaction between us and the minority partner in
LP. • Fluctuations in the value of our common stock.
• Other factors referenced herein or in our other filings with the Securities
and
Given these uncertainties, risks and assumptions, you are cautioned not to place undue reliance on such forward-looking statements. Our actual results and financial condition, including the operating results of our lessees and the facilities leased to subsidiaries of UHS, could differ materially from those expressed in, or implied by, the forward-looking statements.
Forward-looking statements speak only as of the date the statements are made. We
assume no obligation to publicly update any forward-looking statements to
reflect actual results, changes in assumptions or changes in other factors
affecting forward-looking
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information, except as may be required by law. All forward-looking statements
attributable to us or persons acting on our behalf are expressly qualified in
their entirety by this cautionary statement.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted inthe United States of America requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. We consider our critical accounting policies to be those that require us to make significant judgments and estimates when we prepare our financial statements, including the following: Purchase Accounting for Acquisition of Investments in Real Estate: Purchase accounting is applied to the assets and liabilities related to most real estate investments acquired from third parties. In accordance with current accounting guidance, we account for most of our property acquisitions as acquisitions of assets, which requires the capitalization of acquisition costs to the underlying assets and prohibits the recognition of goodwill or bargain purchase gains. The fair value of most of the real estate acquired is allocated to the acquired tangible assets, consisting primarily of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, and acquired ground leases, based in each case on their fair values. Loan premiums, in the case of above market rate assumed loans, or loan discounts, in the case of below market assumed loans, are recorded based on the fair value of any loans assumed in connection with acquiring the real estate. Please see additional disclosure below regarding "Financing Assets". The fair values of the tangible assets of an acquired property are determined based on comparable land sales for land and replacement costs adjusted for physical and market obsolescence for the improvements. The fair values of the tangible assets of an acquired property are also determined by valuing the property as if it were vacant, and the "as-if-vacant" value is then allocated to land, building and tenant improvements based on management's determination of the relative fair values of these assets. Management determines the as-if-vacant fair value of a property based on assumptions that a market participant would use, which is similar to methods used by independent appraisers. In addition, there is intangible value related to having tenants leasing space in the purchased property, which is referred to as in-place lease value. Such value results primarily from the buyer of a leased property avoiding the costs associated with leasing the property and also avoiding rent losses and unreimbursed operating expenses during the hypothetical lease-up period. 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. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rental revenue during the expected lease-up periods based on current market demand. Management also estimates costs to execute similar leases including leasing commissions, tenant improvements, legal and other related costs. The value of in-place leases are amortized to expense over the remaining initial terms of the respective leases. In allocating the fair value of the identified intangible assets and liabilities of an acquired property, 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) estimated fair market lease rates from the perspective of a market participant for the corresponding in-place leases, measured, for above-market leases, over a period equal to the remaining non-cancelable term of the lease and, for below-market leases, over a period equal to the initial term plus any below market fixed rate renewal periods. The capitalized above-market lease values are amortized as a reduction of rental income over the remaining non-cancelable terms of the respective leases. The capitalized below-market lease values, also referred to as acquired lease obligations, are amortized as an increase to rental income over the initial terms of the respective leases. 38
-------------------------------------------------------------------------------- Financing Assets: As discussed in Note 2 - Relationship with UHS and Related Party Transactions, onDecember 31, 2021 we entered into an asset purchase and sale agreement with UHS and certain of its affiliates. Pursuant to the agreement, UHS purchased from us the real estate assets of theInland Valley Campus ofSouthwest Healthcare System ("Inland Valley ") and transferred to us the real estate assets ofAiken Regional Medical Center ("Aiken") andCanyon Creek Behavioral Health ("Canyon Creek"). In connection with this transaction, Aiken and Canyon Creek (as lessees), entered into a master lease and individual property leases (with us as lessor) for initial lease terms of approximately twelve years, ending onDecember 31, 2033 . As a result of UHS' purchase option within the lease agreements of Aiken and Canyon Creek, the transaction is accounted for as a failed sale leaseback in accordance withU.S. GAAP and we have accounted for the transaction with UHS as a financing arrangement. A portion of the monthly lease payment to us from UHS will be recorded to interest income based upon an imputed interest rate and the remainder will reduce the outstanding financing receivable. In connection with this transaction, our Consolidated Balance Sheet atDecember 31, 2021 reflects a financing receivable of$82.4 million , which is the aggregate fair value of the real estate assets that we received as part of the transaction (Aiken and Canyon Creek). As ofDecember 31, 2021 there are no indicators of impairment and the financing receivable will be assessed for recoverability in accordance with our asset impairment policy. Asset Impairment: We review each of our properties for indicators that its carrying amount may not be recoverable. Examples of such indicators may include a significant decrease in the market price of the property, a change in the expected holding period for the property, a significant adverse change in how the property is being used or expected to be used based on the underwriting at the time of acquisition, an accumulation of costs significantly in excess of the amount originally expected for the acquisition or development of the property, or a history of operating or cash flow losses of the property. When such impairment indicators exist, we review an estimate of the future undiscounted net cash flows (excluding interest charges) expected to result from the real estate investment's use and eventual disposition and compare that estimate to the carrying value of the property. We consider factors such as future operating income, trends and prospects, as well as the effects of leasing demand, competition and other factors. If our future undiscounted net cash flow evaluation indicates that we are unable to recover the carrying value of a real estate investment, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results in future periods. Since cash flows on properties considered to be long-lived assets to be held and used are considered on an undiscounted basis to determine whether the carrying value of a property is recoverable, our strategy of holding properties over the long-term directly decreases the likelihood of their carrying values not being recoverable and therefore requiring the recording of an impairment loss. If our strategy changes or market conditions otherwise dictate an earlier sale date, an impairment loss may be recognized and such loss could be material. If we determine that the asset fails the recoverability test, the affected assets must be reduced to their fair value. We generally estimate the fair value of rental properties utilizing a discounted cash flow analysis that includes projections of future revenues, expenses and capital improvement costs that a market participant would use based on the highest and best use of the asset, which is similar to the income approach that is commonly utilized by appraisers. In certain cases, we may supplement this analysis by obtaining outside broker opinions of value or third party appraisals. In considering whether to classify a property as held for sale, we consider factors such as whether management has committed to a plan to sell the property, the property is available for immediate sale in its present condition for a price that is reasonable in relation to its current value, the sale of the property is probable, and actions required for management to complete the plan indicate that it is unlikely that any significant changes will made to the plan. If all the criteria are met, we classify the property as held for sale. Upon being classified as held for sale, depreciation and amortization related to the property ceases and it is recorded at the lower of its carrying amount or fair value less cost to sell. The assets and related liabilities of the property are classified separately on the consolidated balance sheets for the most recent reporting period. Only those assets held for sale that constitute a strategic shift or that will have a major effect on our operations are classified as discontinued operations. An other than temporary impairment of an investment in an unconsolidated LLC is recognized when the carrying value of the investment is not considered recoverable based on evaluation of the severity and duration of the decline in value, including projected declines in cash flow. To the extent impairment has occurred, the excess carrying value of the asset over its estimated fair value is charged to income. Federal Income Taxes: No provision has been made for federal income tax purposes since we qualify as a REIT under Sections 856 to 860 of the Internal Revenue Code of 1986, and intend to continue to remain so qualified. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our annual REIT taxable income to shareholders. As a REIT, we generally will not be subject to federal, state or local income tax on income that we distribute as dividends to our shareholders. 39
-------------------------------------------------------------------------------- We are subject to a federal excise tax computed on a calendar year basis. The excise tax equals 4% of the amount by which 85% of our ordinary income plus 95% of any capital gain income for the calendar year exceeds cash distributions during the calendar year, as defined. No provision for excise tax has been reflected in the financial statements as no tax was due. Earnings and profits, which determine the taxability of dividends to shareholders, will differ from net income reported for financial reporting purposes due to the differences for federal tax purposes in the cost basis of assets and in the estimated useful lives used to compute depreciation and the recording of provision for investment losses.
Results of Operations
Year ended
For the year ended
to
attributable to:
•
of real estate assets including the divestiture of two MOBs, as well as the
divestiture of the Inland Valley Campus of
part of an asset purchase and sale transaction with UHS (for additional
disclosure, please see Note 3 to the consolidated financial statements,
Asset Purchase and Sale Transaction, Acquisitions,Divestitures and New Construction );
•
experienced at various properties including the income recorded in
connection with the newly constructed
was substantially completed in December, 2020;
•
leased to wholly-owned subsidiaries of UHS during 2020 and 2021, and; •$546,000 decrease resulting from an increase in interest expense. 40
-------------------------------------------------------------------------------- Total revenues increased by$6.2 million , or 7.9%, during 2021 as compared to 2020. The increase consisted primarily of the rentals earned on theClive Behavioral Health facility, increased bonus rentals earned on certain hospitals leased to wholly-owned subsidiaries of UHS and increases in rentals earned at various other properties including properties acquired during 2021 and late in 2020. Our other operating expenses include expenses related to the consolidated medical office buildings and two specialty facilities that were vacant during 2021 (as discussed herein), which totaled$20.8 million and$19.8 million for the years endedDecember 31, 2021 and 2020, respectively. A large portion of the expenses associated with our medical office buildings is passed on directly to the tenants either directly as tenant reimbursements of common area maintenance expenses or included in base rental amounts. Tenant reimbursements for operating expenses are accrued as revenue in the same period during which the related expenses are incurred. Our operating expenses for 2021 and 2020 include approximately$737,000 and$677,000 for the years endedDecember 31, 2021 and 2020, respectively, of aggregate operating expenses related to two vacant specialty facilities located inCorpus Christi, Texas andEvansville, Indiana . Funds from operations ("FFO") is a widely recognized measure of performance for Real Estate Investment Trusts ("REITs"). We believe that FFO and FFO per diluted share, which are non-GAAP financial measures, are helpful to our investors as measures of our operating performance. We compute FFO in accordance with standards established by theNational Association of Real Estate Investment Trusts ("NAREIT"), which may not be comparable to FFO reported by other REITs that do not compute FFO in accordance with the NAREIT definition, or that interpret the NAREIT definition differently than we interpret the definition. FFO adjusts for the effects of certain items, such as gains on transactions that occurred during the periods presented. To the extent a REIT recognizes a gain or loss with respect to the sale of incidental assets, the REIT has the option to exclude or include such gains and losses in the calculation of FFO. We have opted to exclude gains and losses from sales of incidental assets in our calculation of FFO. FFO does not represent cash generated from operating activities in accordance with GAAP and should not be considered to be an alternative to net income determined in accordance with GAAP. In addition, FFO should not be used as: (i) an indication of our financial performance determined in accordance with GAAP; (ii) an alternative to cash flow from operating activities determined in accordance with GAAP; (iii) a measure of our liquidity, or; (iv) an indicator of funds available for our cash needs, including our ability to make cash distributions to shareholders. Below is a reconciliation of our reported net income to FFO for 2021 and 2020 (in thousands): 2021 2020 Net income$ 109,166 $ 19,447
Depreciation and amortization expense on consolidated
investments
27,478
25,581
Depreciation and amortization expense on unconsolidated affiliates 1,549
1,202
Gains on divestitures of real estate assets (87,314 )
–
Funds From Operations$ 50,879 $
46,230
Weighted average number of shares outstanding - Diluted 13,779
13,765
Funds From Operations per diluted share$ 3.69 $
3.36
Our FFO increased by$4.6 million , or$.33 per diluted share, during 2021 as compared to 2020 due to: (i) the net increase of$2.4 million , or$.17 per diluted share, resulting from the increase in net income of$89.7 million , or$6.51 per diluted share, as discussed above, excluding the gain on divestitures of$87.3 million , or$6.34 per diluted share, recorded during 2021, and; (ii) a favorable impact of$2.2 million , or$.16 per diluted share, resulting from an increase in depreciation and amortization expense on consolidated and unconsolidated affiliates, largely due to the depreciation expense recorded in connection with theClive Behavioral Health facility which was completed in December, 2020. During 2021, we had a total of 56 new or renewed leases related to the medical office buildings as indicated in Item 2. Properties, in which we have significant investments, some of which are accounted for by the equity method. These leases comprised approximately 29% of the aggregate rentable square feet of these properties (26% related to renewed leases and 3% related to new leases). During 2020, we had a total of 39 new or renewed leases related to the medical office buildings, in which we have significant investments, some of which are accounted for by the equity method. These leases comprised approximately 30% of the aggregate rentable square feet of these properties (21% related to renewed leases and 9% related to new leases). Rental rates, tenant improvement costs and rental concessions vary from property to property based upon factors such as, but not limited to, the current occupancy and age of our buildings, local overall economic conditions, proximity to hospital campuses and the vacancy rates, rental rates and capacity of our competitors in the market. In connection with lease renewals executed during each year, the weighted-average rental rates, as compared to rental rates on the expired leases, increased by approximately 1% during 2021 and decreased by approximately 1% during 2020. The weighted-average tenant improvement costs associated with new or renewed leases was approximately$5 and$18 per square foot during 2021 and 2020, respectively. The weighted-average leasing commissions on the new and renewed leases commencing during each year was approximately 2% of base rental revenue over the term of the leases during 2021 and 3% of base rental revenue over the term of the leases during 2020. The average aggregate value of the tenant concessions, generally consisting of rent abatements, provided in connection with new and renewed leases commencing during each 41
-------------------------------------------------------------------------------- year was approximately 0.8% and 0.9% of the future aggregate base rental revenue over the lease terms during 2021 and 2020, respectively. Rent abatements were, or will be, recognized in our results of operations under the straight-line method over the lease term regardless of when payments are due.
Other Operating Results
Interest Expense:
Reflected below are the components of our interest expense during the years
ended
2021 2020
Revolving credit agreement $ 4,282 $ 4,608
Mortgage interest 2,505 2,600
Interest rate swaps expense, net (a.) 1,283 737
Amortization of financing fees
790 765 Amortization of fair value of debt (51 ) (52 )
Capitalized interest on major projects – (395 )
Interest expense, net
$ 8,809 $ 8,263
(a.) Represents net interest paid by us to the counterparties pursuant to
three interest rates SWAPs with a combined notional amount of$140 million . Interest expense increased by$546,000 during 2021 as compared to 2020 due to: (i) a$326,000 decrease in interest expense on our revolving credit agreement resulting from a decrease in our average cost of borrowings (1.69% effective rate during 2021 as compared to 2.10% effective rate during 2020), partially offset by an increase in our average outstanding borrowings ($253.5 million during 2021 as compared to$219.1 million during 2020); (ii) a$546,000 net increase in interest expense related to interest rate swaps; (iii) a$95,000 decrease in mortgage interest expense; (iv) a$395,000 increase in interest expense due to a decrease in capitalized interest on major projects (no capitalized interest recorded during 2021 since both newly constructed facilities were substantially completed in December, 2020), and; (v) a$26,000 increase due to an increase in amortization of financing fees and fair value of debt.
Disclosures Related to Certain Hospital Facilities
Please refer to Note 4 to the consolidated financial statements - Lease Accounting, for additional information regarding certain of our hospital facilities including the lease renewal forWellington Regional Medical Center located inWest Palm Beach, Florida , information related to vacant facilities located inEvansville, Indiana ;Corpus Christi, Texas , andChicago, Illinois , and disclosure regarding the asset purchase and sale agreement with wholly-owned subsidiaries of UHS that was completed onDecember 31, 2021 .
Effects of Inflation
The healthcare industry is very labor intensive and salaries and benefits
related to the employees of our tenants are subject to inflationary pressures,
as are supply costs, construction costs and medical equipment and other costs.
The nationwide shortage of nurses and other clinical staff and support personnel
has been a significant operating issue facing healthcare providers. In
particular, the healthcare industry continues to experience a shortage of nurses
and other clinical staff and support personnel in certain geographic areas,
which has been exacerbated by the COVID19 pandemic. The operators of our
hospital properties are treating patients with COVID19 and, in some areas, the
increased demand for care is putting a strain on their resources and staff,
which has required them to utilize highercost temporary labor and pay premiums
above standard compensation for essential workers. The length and extent of the
disruptions caused by the COVID19 pandemic are currently unknown; however, the
tenants of our facilities expect such disruptions to continue into 2022 and
potentially throughout the duration of the pandemic and beyond. This staffing
shortage may require our tenants to further enhance wages and benefits to
recruit and retain nurses and other clinical staff and support personnel or
require them to hire expensive temporary personnel. Their ability to pass on
increased costs associated with providing healthcare to Medicare and Medicaid
patients is limited due to various federal, state and local laws which have been
enacted that, in certain cases, limit their ability to increase prices.
Therefore, there can be no assurance that these factors will not have a material
adverse effect on the future results of operations of the operators of our
facilities which may affect their ability to make lease payments to us. In
addition, we have experienced cost increases related to the construction of new
facilities and renovations at existing facilities which could have an adverse
effect on our future results of operations.
Most of our leases contain provisions designed to mitigate the adverse impact of
inflation. Our hospital leases require all building operating expenses,
including maintenance, real estate taxes and other costs, to be paid by the
lessee. In addition, most of our MOB leases require the tenant to pay an
allocable share of operating expenses, including common area maintenance costs,
insurance
42
-------------------------------------------------------------------------------- and real estate taxes. These provisions may reduce our exposure to increases in operating costs resulting from inflation. To the extent that some leases do not contain such provisions, our future operating results may be adversely impacted by the effects of inflation.
Liquidity and Capital Resources
Year ended
Net cash provided by operating activities
Net cash provided by operating activities was
compared to
attributable to:
• A favorable change of
plus/minus the adjustments to reconcile net income to net cash provided by
operating activities (depreciation and amortization, amortization related
to above/below market leases, amortization of debt premium, amortization of
deferred financing costs, stock-based compensation expense and gains on
divestitures of real estate assets), as discussed above;
• an unfavorable change of
and prepaid rents; • an unfavorable change of$743,000 in lease receivables, and; 43
--------------------------------------------------------------------------------
• other combined net favorable changes of$652,000 .
Net cash used in investing activities
Net cash used in investing activities was
to
2021:
During 2021,
follows:
• spent
$3.3 million of construction costs related to the newly constructed, 100-bed behavioral health care hospital located inClive, Iowa , that was substantially completed in late December, 2020;$2.9 million of
constructions costs related to the construction of a new MOB, and tenant
improvements at various MOBs;
• spent approximately
LLCs, including
maturity in September, 2021;
• spent approximately
office building in late May, 2021, as discussed in Note 3 to the
consolidated financial statements;
• spent $3.5 million to advance a member loan to an unconsolidated LP;
• spent approximately
majority-owned LP, as discussed in Note 2 to the consolidated financial
statements;
• spent approximately
transaction with UHS, as discussed in Note 2 to the consolidated financial
statements; • spent$200,000 in a deposit on real estate assets;
• received approximately
million of which is held by the qualified third-party intermediary utilized
for the series of anticipated tax-deferred like-kind exchange transactions
pursuant to Section 1031 of the Internal Revenue Code, as amended) for the
divestitures of the
Office
statements; • received$418,000 of cash in excess of income from LLCs, and;
• our cash balance reflects an increase of
on a consolidated basis, an LP in which we acquired the third-party
minority ownership interest, as discussed in Note 2 to the consolidated
financial statements.
2020:
During 2020,
follows:
• spent
health care hospital located in
completed in December, 2020, and tenant improvements at various MOBs;
• spent$3.2 million in equity investments in unconsolidated LLCs;
• spent
building in late December, 2020, as discussed in Note 3 to the consolidated
financial statements, and;
• received
million of cash proceeds generated from a construction loan obtained by
Grayson Properties II during the second quarter of 2020.
Net cash used in financing activities
Net cash used in financing activities was
to
2021:
The
• paid approximately
• received
of credit;
• paid approximately $2.1 million on mortgage notes payable that are
non-recourse to us;
44
--------------------------------------------------------------------------------
• paid approximately
the July, 2021 amended and restated revolving credit agreement, and;
• received
pursuant to our dividend reinvestment plan. 2020:
The
• paid
• received
of credit;
• paid
• paid
including amendment fees, and;
• paid
income tax withholding obligations related to stock-based compensation.
Additional cash flow and dividends paid information for 2021 and 2020:
As indicated on our consolidated statements of cash flows, we generated net cash provided by operating activities of$47.7 million during 2021 and$44.2 million during 2020. As also indicated on our statements of cash flows, non-cash expenses including depreciation and amortization expense, amortization related to above/below market leases, amortization of debt premium, amortization of deferred financing costs and stock-based compensation expense, as well as gains on divestitures of real estate assets (as applicable), are the primary differences between our net income and net cash provided by operating activities for each year. We declared and paid dividends of$38.5 million during 2021 and$38.0 million during 2020. During 2021, the$47.7 million of net cash provided by operating activities was approximately$9.2 million greater than the$38.5 million of dividends paid during 2021. During 2020, the$44.2 million of net cash provided by operating activities was approximately$6.2 million greater than the$38.0 million of dividends paid during 2020. As indicated in the cash flows from investing activities and cash flows from financing activities sections of the statements of cash flows, there were various other sources and uses of cash during each of the last three years. From time to time, various other sources and uses of cash may include items such as investments and advances made to/from LLCs, additions to real estate investments, acquisitions/divestiture of properties, net borrowings/repayments of debt, and proceeds generated from the issuance of equity. Therefore, in any given period, the funding source for our dividend payments is not wholly dependent on the operating cash flow generated by our properties. Rather, our dividends as well as our capital reinvestments into our existing properties, acquisitions of real property and other investments are funded based upon the aggregate net cash inflows or outflows from all sources and uses of cash from the properties we own either in whole or through LLCs, as outlined above. In determining and monitoring our dividend level on a quarterly basis, our management andBoard of Trustees consider many factors in determining the amount of dividends to be paid each period. These considerations primarily include: (i) the minimum required amount of dividends to be paid in order to maintain our REIT status; (ii) the current and projected operating results of our properties, including those owned in LLCs, and; (iii) our future capital commitments and debt repayments, including those of our LLCs. Based upon the information discussed above, as well as consideration of projections and forecasts of our future operating cash flows, management and theBoard of Trustees have determined that our operating cash flows have been sufficient to fund our dividend payments. Future dividend levels will be determined based upon the factors outlined above with consideration given to our projected future results of operations. We expect to finance all capital expenditures and acquisitions and pay dividends utilizing internally generated and additional funds. Additional funds may be obtained through: (i) borrowings under our$375 million revolving credit agreement (which had$99.9 million of available borrowing capacity, net of outstanding borrowings and letters of credit as ofDecember 31, 2021 ); (ii) borrowings under or refinancing of existing third-party debt pursuant to mortgage loan agreements entered into by our consolidated and unconsolidated LLCs/LPs; (iii) the issuance of equity pursuant to our at-the-market ("ATM") equity issuance program, and/or; (iv) the issuance of other long-term debt. We believe that our operating cash flows, cash and cash equivalents, available borrowing capacity under our revolving credit agreement and access to the capital markets provide us with sufficient capital resources to fund our operating, investing and financing requirements for the next twelve months, including providing sufficient capital to allow us to make distributions necessary to enable us to continue to qualify as a REIT under Sections 856 to 860 of the Internal Revenue Code of 1986. In the event we need to access 45 -------------------------------------------------------------------------------- the capital markets or other sources of financing, there can be no assurance that we will be able to obtain financing on acceptable terms or within an acceptable time. Our inability to obtain financing on terms acceptable to us could have a material unfavorable impact on our results of operations, financial condition and liquidity.
Credit facilities and mortgage debt
Management routinely monitors and analyzes the Trust's capital structure in an effort to maintain the targeted balance among capital resources including the level of borrowings pursuant to our revolving credit facility, the level of borrowings pursuant to non-recourse mortgage debt secured by the real property of our properties and our level of equity including consideration of additional equity issuances pursuant to our ATM equity issuance program. This ongoing analysis considers factors such as the current debt market and interest rate environment, the current/projected occupancy and financial performance of our properties, the current loan-to-value ratio of our properties, the Trust's current stock price, the capital resources required for anticipated acquisitions and the expected capital to be generated by anticipated divestitures. This analysis, together with consideration of the Trust's current balance of revolving credit agreement borrowings, non-recourse mortgage borrowings and equity, assists management in deciding which capital resource to utilize when events such as refinancing of specific debt components occur or additional funds are required to finance the Trust's growth. OnJuly 2, 2021 , we entered into an amended and restated revolving credit agreement ("Credit Agreement") to amend and restate the previously existing$350 million credit agreement, as amended and datedJune 5, 2020 ("Prior Credit Agreement"). Among other things, under the Credit Agreement, our aggregate revolving credit commitment was increased to$375 million from$350 million . The Credit Agreement, which is scheduled to mature onJuly 2, 2025 , provides for a revolving credit facility in an aggregate principal amount of$375 million , including a$40 million sublimit for letters of credit and a$30 million sublimit for swingline/short-term loans. Under the terms of the Credit Agreement, we may request that the revolving line of credit be increased by up to an additional$50 million . Borrowings under the new facility are guaranteed by certain subsidiaries of the Trust. In addition, borrowings under the new facility are secured by first priority security interests in and liens on all equity interests in most of the Trust's wholly-owned subsidiaries. Borrowings under the Credit Agreement will bear interest annually at a rate equal to, at our option, at either LIBOR (for one, three, or six months) or the Base Rate, plus in either case, a specified margin depending on our ratio of debt to total capital, as determined by the formula set forth in the Credit Agreement. The applicable margin ranges from 1.10% to 1.35% for LIBOR loans and 0.10% to 0.35% for Base Rate loans. The initial applicable margin is 1.25% for LIBOR loans and 0.25% for Base Rate loans. The Credit Agreement defines "Base Rate" as the greatest of (a) the Administrative Agent's prime rate, (b) the federal funds effective rate plus 1/2 of 1% and (c) one month LIBOR plus 1%. The Trust will also pay a quarterly commitment fee ranging from 0.15% to 0.35% (depending on the Trust's ratio of debt to asset value) of the average daily unused portion of the revolving credit commitments. The Credit Agreement also provides for options to extend the maturity date and borrowing availability for two additional six-month periods. The margins over LIBOR, Base Rate and the facility fee are based upon our total leverage ratio. AtDecember 31, 2021 , the applicable margin over the LIBOR rate was 1.25%, the margin over the Base Rate was 0.25% and the facility fee was 0.25%. AtDecember 31, 2021 , we had$271.9 million of outstanding borrowings and$3.2 million of letters of credit outstanding under our Credit Agreement. We had$99.9 million of available borrowing capacity, net of the outstanding borrowings and letters of credit outstanding as ofDecember 31, 2021 . The carrying amount and fair value of borrowings outstanding pursuant to the Credit Agreement was$271.9 million atDecember 31, 2021 . There are no compensating balance requirements. The average amount outstanding under our Credit Agreement during the years endedDecember 31, 2021 and 2020 was$253.5 million and$219.1 million , respectively, with corresponding effective interest rates of 2.2% and 2.4%, respectively, including commitment fees and interest rate swaps/caps. AtDecember 31, 2020 , we had$236.2 million of outstanding borrowings outstanding against our revolving credit agreement that was in effect at that time,$5.6 million of letters of credit outstanding against the agreement and$108.2 million of available borrowing capacity. The Credit Agreement contains customary affirmative and negative covenants, including limitations on certain indebtedness, liens, acquisitions and other investments, fundamental changes, asset dispositions and dividends and other distributions. The Credit Agreement also contains restrictive covenants regarding the Trust's ratio of total debt to total assets, the fixed charge coverage ratio, the ratio of total secured debt to total asset value, the ratio of total unsecured debt to total unencumbered asset value, and minimum tangible net worth, as well as customary events of default, the occurrence of which may trigger an acceleration of amounts then outstanding under the Credit Agreement. We are in compliance with all of the covenants in the Credit Agreement atDecember 31, 2021 and were in compliance with all of the covenants in the Prior Credit Agreement atDecember 31, 2020 . We also believe that we would remain in compliance if, based on the assumption that the majority of the potential new borrowings will be used to fund investments, the full amount of our commitment was borrowed. 46
--------------------------------------------------------------------------------
The following table includes a summary of the required compliance ratios at
contained in the Credit Agreements in effect on the respective dates (dollar
amounts in thousands):
December 31, 2021 December 31, 2020
Covenant UHT Covenant UHT
Tangible net worth $ 125,000 $ 225,355 $ 125,000 $ 147,263
Total leverage < 60 % 43.1 % < 60 % 44.8 %
Secured leverage < 30 % 7.4 % < 30 % 8.6 %
Unencumbered leverage < 60 % 41.9 % < 60 % 41.4 %
Fixed charge coverage > 1.50x 4.8x > 1.50x 4.7x
As indicated on the following table, we have various mortgages, all of which are
non-recourse to us and are not cross-collateralized, included on our
consolidated balance sheet as of December 31, 2021 and December 31, 2020
(amounts in thousands):
As of 12/31/2021 As of 12/31/2020
Outstanding Outstanding
Interest Maturity Balance Balance
Facility Name Rate Date (in thousands)(a.) (in thousands)
700 Shadow Lane and Goldring MOBs fixed
rate
mortgage loan (b.) 4.54 % June, 2022 $ 5,210 $ 5,437
BRB Medical Office Building fixed rate
mortgage loan (b.) 4.27 % December, 2022 5,280 5,505
Desert Valley Medical Center fixed rate
mortgage loan (b.) 3.62 % January, 2023 4,356 4,511
2704 North Tenaya Way fixed rate
mortgage loan 4.95 % November, 2023 6,418 6,576
Summerlin Hospital Medical Office
Building III fixed
rate mortgage loan 4.03 % April, 2024 12,806 13,043
Tuscan Professional Building fixed rate
mortgage loan 5.56 % June, 2025 2,343 2,933
Phoenix Children's East Valley Care
Center fixed rate
mortgage loan 3.95 % January, 2030 8,466 8,718
Rosenberg Children's Medical Plaza
fixed rate mortgage loan 4.42 % September, 2033 12,273 12,508
Total, excluding net debt premium and
net financing fees 57,152 59,231
Less net financing fees (376 ) (477 )
Plus net debt premium 90 141
Total mortgage notes payable,
non-recourse to us, net $ 56,866 $ 58,895
(a.) All mortgage loans require monthly principal payments through maturity and
either fully amortize or include a balloon principal payment upon
maturity.
(b.) This loan is scheduled to mature within the next twelve months, at which
time we will decide whether to refinance pursuant to a new mortgage loan
or by utilizing borrowings under our Credit Agreement.
The mortgages are secured by the real property of the buildings as well as
property leases and rents. The mortgages outstanding as of December 31, 2021 had
a combined carrying value of approximately $57.2 million and a combined fair
value of approximately $59.4 million . At December 31, 2020 , we had various
mortgages, all of which were non-recourse to us, included in our consolidated
balance sheet. The combined outstanding balance of these various mortgages was
$59.2 million and these mortgages had a combined fair value of approximately
$62.0 million .
The fair value of our debt was computed based upon quotes received from
financial institutions. We consider these to be "level 2" in the fair value
hierarchy as outlined in the authoritative guidance for disclosure in connection
with debt instruments. Changes in market rates on our fixed rate debt impacts
the fair value of debt, but it has no impact on interest incurred or cash flow.
Contractual Obligations and Off Balance Sheet Arrangements
As ofDecember 31, 2021 we are party to certain off balance sheet arrangements consisting of standby letters of credit and equity and debt financing commitments. Our outstanding letters of credit atDecember 31, 2021 totaled$3.2 million related to Grayson Properties II. As ofDecember 31, 2020 , our outstanding letters of credit totaled$5.6 million related toGrayson Properties II. 47
--------------------------------------------------------------------------------
The following table summarizes the schedule of maturities of our outstanding
borrowing under our revolving credit facility ("Credit Agreement"), the
outstanding mortgages applicable to our properties recorded on a consolidated
basis and our other contractual obligations as of December 31, 2021 (amounts in
thousands):
Payments Due by Period (dollars in thousands)
Less than More than
Debt and Contractual Obligation Total 1 Year 1-3 years 3-5 years 5 years
Long-term non-recourse debt-fixed
(a) (b) $ 57,152 $ 12,197 $ 25,442 $ 1,540 $ 17,973
Long-term debt-variable (c) 271,900 - - 271,900 -
Estimated future interest payments
on debt outstanding as
of December 31, 2021 (d) 23,249 5,991 10,115 3,445 3,698
Operating leases (e) 35,580 618 1,235 1,235 32,492
Construction commitments (f) 36,152 36,152 - - -
Equity and debt financing
commitments - - - - -
Total contractual obligations
(a) The mortgages are secured by the real property of the buildings as well as
property leases and rents. Property-specific debt is detailed above.
(b) Consists of non-recourse debt with an aggregate fair value of approximately
rate debt impacts the fair value of debt, but it has no impact on interest
incurred or cash flow. Excludes
outstanding as ofDecember 31, 2021 , that is non-recourse to us, at the unconsolidated LLCs in which we hold various non-controlling ownership interests (see Note 8 to the consolidated financial statements).
(c) Consists of
under the terms of our
2025. The amount outstanding approximates fair value as of
(d) Assumes that all debt outstanding as of
borrowings under the Credit Agreement, and the loans which are non-recourse
to us, remain outstanding until the stated maturity date of the debt
agreements at the same interest rates which were in effect as of
2021. We have the right to repay borrowings under the Credit Agreement at any
time during the term of the agreement, without penalty. Interest payments are
expected to be paid utilizing cash flows from operating activities or
borrowings under our revolving Credit Agreement.
(e) Reflects our future minimum operating lease payment obligations outstanding
as of
statements -Lease Accounting, in connection with ground leases at fourteen of
our consolidated properties.
(f) Consists of the remaining estimated construction costs related to an MOB
located in
well as construction costs for a new 85,000 rentable square foot MOB located
in
required to build these facilities pursuant to agreements.
Acquisition and Divestiture Activity
Please see Note 3 to the consolidated financial statements for completed
transactions.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
Market Risks Associated with Financial Instruments
LIBOR Transition
In 2017, theU.K. Financial Conduct Authority ("FCA") that regulates LIBOR announced it intends to phase out LIBOR and stop compelling banks to submit rates for its calculation. In 2021, theFCA further announced that effectiveJanuary 1, 2022 , the one week and two-month USD LIBOR tenors are no longer being published, and all other USD LIBOR tenors will cease to be published afterJune 30, 2023 . TheFederal Reserve Board and theFederal Reserve Bank of New York organized the Alternative Reference Rates Committee which identified the Secured Overnight Financing Rate ("SOFR") as its preferred alternative to USD-LIBOR in derivatives and other financial contracts. We are not able to predict how the markets will respond to SOFR or any other alternative reference rate as the transition away from LIBOR continues in the coming years. Any changes adopted byFCA or other governing bodies in the method used for determining LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR. If that were to occur, our interest payments could change. In addition, uncertainty about the extent and manner of future changes may result in interest rates and/or payments that are higher or lower than if LIBOR were to remain available in its current form. 48 -------------------------------------------------------------------------------- AtDecember 31, 2021 , we had contracts that are indexed to LIBOR, such as our unsecured revolving credit facility and interest rate derivatives. We are monitoring and evaluating the related risks, which include interest on loans or amounts received and paid on derivative instruments. These risks arise in connection with transitioning contracts to a new alternative rate, including any resulting value transfer that may occur. The value of loans, securities, or derivative instruments tied to LIBOR could also be impacted if LIBOR is limited or discontinued. For some instruments, the method of transitioning to an alternative rate may be challenging, as they may require negotiation with the respective counterparty. Our unsecured revolving credit facility contains provisions specifying alternative interest rate calculations to be employed when LIBOR ceases to be available as a benchmark. We currently expect the LIBOR-indexed rates included in our debt agreements to be available untilJune 30, 2023 . We anticipate managing the transition to a preferred alternative rate using the language set out in our agreements, however, future market conditions may not allow immediate implementation of desired modifications and we may incur significant associated costs in doing so. We will continue to monitor and evaluate the potential impact on our debt payments and value of our related debt, however, we are not able to predict when LIBOR-indexed rates (other than one week and two-month tenors which are not included in our debt agreements and are no longer being published) will cease to be available. Financial Instruments InMarch 2020 , we entered into an interest rate swap agreement on a total notional amount of$55 million with a fixed interest rate of 0.565% that we designated as a cash flow hedge. The interest rate swap became effective onMarch 25, 2020 and is scheduled to mature onMarch 25, 2027 . If the one-month LIBOR is above 0.565%, the counterparty pays us, and if the one-month LIBOR is less than 0.565%, we pay the counterparty, the difference between the fixed rate of 0.565% and one-month LIBOR. InJanuary 2020 , we entered into an interest rate swap agreement on a total notional amount of$35 million with a fixed interest rate of 1.4975% that we designated as a cash flow hedge. The interest rate swap became effective onJanuary 15, 2020 and is scheduled to mature onSeptember 16, 2024 . If the one-month LIBOR is above 1.4975%, the counterparty pays us, and if the one-month LIBOR is less than 1.4975%, we pay the counterparty, the difference between the fixed rate of 1.4975% and one-month LIBOR. During the third quarter of 2019, we entered into an interest rate swap agreement on a total notional amount of$50 million with a fixed interest rate of a 1.144%. that we designated as a cash flow hedge. The interest rate swap became effective onSeptember 16, 2019 and is scheduled to mature onSeptember 16, 2024 . If the one-month LIBOR is above 1.144%, the counterparty pays us, and if the one-month LIBOR is less than 1.144%, we pay the counterparty, the difference between the fixed rate of 1.144% and one-month LIBOR. We measure our interest rate swaps at fair value on a recurring basis. The fair value of our interest rate swaps is based on quotes from third parties. We consider those inputs to be "level 2" in the fair value hierarchy as outlined in the authoritative guidance for disclosures in connection with derivative instruments and hedging activities. AtDecember 31, 2020 , the fair value of our interest rate swaps was a net asset of$1.1 million which is included in deferred charges and other assets on the accompanying consolidated balance sheet. During the twelve months of 2021, we paid or accrued approximately$1.3 million in net payments made to the counterparty by us, adjusted for accruals, pursuant to the terms of the swaps. From inception of the swap agreements throughDecember 31, 2021 we paid or accrued approximately$1.9 million in net payments made to the counterparty by us pursuant to the terms of the swap (consisting of approximately$198,000 in payments or accruals made to us by the counterparty, offset by approximately$2.1 million of payments due to the counterparty from us). During the twelve months of 2020, we paid or accrued approximately$733,000 in net payments made to the counterparty by us, adjusted for accruals, pursuant to the terms of the swaps (consisting of approximately$824,000 in payments, adjusted for accruals, or accruals made to the counterparty by us, offset by approximately$91,000 of payments paid to us by the counterparty). Cash flow hedges are accounted for by recording the fair value of the derivative instrument on the balance sheet as either an asset or a liability, with a corresponding amount recorded in accumulated other comprehensive income ("AOCI") within shareholders' equity. Amounts are classified from AOCI to the income statement in the period or periods the hedged transaction affects earnings. The sensitivity analysis related to our fixed and variable rate debt assumes current market rates with all other variables held constant. As ofDecember 31, 2021 , the fair value and carrying-value of our debt is approximately$331.3 million and$329.1 million , respectively. As of that date, the fair value exceeds the carrying-value by approximately$2.2 million . The table below presents information about our financial instruments that are sensitive to changes in interest rates. The interest rate swaps include the$50 million swap agreement entered into during the third quarter of 2019, the$35 million swap agreement entered into inJanuary 2020 and the$55 million swap agreement entered into in March, 2020. For debt obligations, the amounts of which are as ofDecember 31, 2021 , the table presents principal cash flows and related weighted average interest rates by contractual maturity dates. 49 -------------------------------------------------------------------------------- Maturity Date, Year Ending December 31 (Dollars in thousands) 2022 2023 2024 2025 2026 Thereafter Total Long-term debt: Fixed rate: Debt(a)$ 12,197 $ 11,892 $ 13,550 $ 939 $ 601 $ 17,973 $ 57,152 Average interest rates 4.4 % 4.4 % 4.4 % 4.3 % 4.2 % 4.3 % 4.4 % Variable rate: Debt(b) $ - $ - $ -$ 271,900 $ - $ -$ 271,900 Average interest rates - - - 1.4 % - - 1.4 % Interest rate swaps: Notional amount (c) $ - $ -$ 85,000 $ - $ -$ 55,000 $ 140,000 Interest rates - - 1.320 % - - 0.565 % 1.070 %
(a) Consists of non-recourse mortgage notes payable.
(b) Includes
million revolving credit agreement.
(c) Includes a $50.0 million interest rate swap that became effective on
effective on
2024. Additionally, included is a
effective on
As calculated based upon our variable rate debt outstanding as ofDecember 31, 2021 that is subject to interest rate fluctuations, and giving effect to the above-mentioned interest rate swap, each 1% change in interest rates would impact our net income by approximately$1.3 million . ITEM 8. Financial Statements and Supplementary Data
Our Consolidated Balance Sheets, Consolidated Statements of Income,
Comprehensive Income, Changes in Equity and Cash Flows, together with the
reports of
included elsewhere herein. Reference is made to the “Index to Financial
Statements and Schedule.”
ITEM 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
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