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Carter Validus Mission Critical REIT II, Inc. Reports Second Quarter 2018 Results

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Carter Validus Mission Critical REIT II, Inc. (the "Company") announced
today its financial and operating results for the quarter ended June 30,
2018.

2018 Second Quarter Highlights

  • Net income attributable to common stockholders totaled $7.2 million.
  • Net operating income, or NOI, totaled $34.2 million.
  • Funds from operations, or FFO, as defined by the National Association
    of Real Estate Investment Trusts, or NAREIT, attributable to common
    stockholders equaled $21.5 million.
  • Modified funds from operations, or MFFO, as defined by the Institute
    for Portfolio Alternatives (formerly known as the Investment Program
    Association), or the IPA, attributable to common stockholders equaled
    $17.0 million.
  • The Company acquired three real estate properties for an aggregate
    purchase price of $74.8 million.

An explanation of Funds from Operations, Modified Funds from Operations
and net operating income as well as reconciliations of such non-GAAP
Financial measures to the most directly comparable U.S. GAAP measures,
is included at the end of this release.

Financial Results

  • Net income attributable to common stockholders totaled $7.2 million
    for the quarter ended June 30, 2018, compared to $4.6 million for the
    quarter ended June 30, 2017, or a 57% increase.
  • FFO attributable to common stockholders equaled $21.5 million for the
    quarter ended June 30, 2018, representing year-over-year growth of 57%
    compared to FFO attributed to common stockholders of $13.7 million for
    the quarter ended June 30, 2017.
  • MFFO attributable to common stockholders equaled $17.0 million for the
    second quarter of 2018, representing year-over-year growth of 57%
    compared to MFFO attributable to common stockholders of $10.8 million
    for the same period in the prior year.
  • During the second quarter of 2018, the Company paid aggregate
    distributions of $20,255,000 ($9,976,000 in cash and $10,279,000
    reinvested in shares of common stock pursuant to the distribution
    reinvestment plan, or DRIP) and declared distributions per share of
    $0.16. During the second quarter of 2018, the Company paid aggregate
    distributions and declared distributions per share of each class of
    common stock as follows:

Class A Shares:

- paid distributions of $13,544,000 ($6,962,000 in cash and
$6,582,000 reinvested in shares of common stock pursuant to the
Company's DRIP);

- declared distributions per share of $0.16.

Class I Shares:

- paid distributions of $1,413,000 ($779,000 in cash and $634,000
reinvested in shares of common stock pursuant to the DRIP);

- declared distributions per share of $0.16.

Class T Shares:

- paid distributions of $5,241,000 ($2,217,000 in cash and
$3,024,000 reinvested in shares of common stock pursuant to the DRIP);

- declared distributions per share of $0.14.

Class T2 Shares:

- paid distributions of $57,000 ($18,000 in cash and $39,000
reinvested in shares of common stock pursuant to the DRIP);

- declared distributions per share of $0.14.

Operating Results

The Company generates almost all of the net operating income from
property operations. In order to evaluate the overall portfolio,
management analyzes the net operating income of same store properties.
The Company defines "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. By evaluating the
property net operating income of the same store properties, management
is able to monitor the operations of the Company's existing properties
for comparable periods to measure the performance of the current
portfolio and determine the effects of new acquisitions on net income.

  Three Months Ended
June 30,
   
(in thousands) 2018   2017 Change
Revenue:
Same store rental and parking revenue $ 22,439 $ 22,442 $ (3 )
Same store tenant reimbursement revenue 4,067 3,809 258
Non-same store rental, parking and tenant reimbursement revenue 17,037 1,350 15,687
Other operating income 407   1   406  
Total revenue 43,950 27,602 16,348
Expenses:
Same store rental and parking expenses 5,020 4,817 203
Non-same store rental and parking expenses 4,682   483   4,199  
Net operating income 34,248 22,302 11,946

See the reconciliation of net income, which is the most directly
comparable GAAP financial measure, to net operating income for the three
months ended June 30, 2018 and 2017, included at the end of this release.

  • Total second quarter 2018 revenue of $44.0 million was a 59% increase
    over total revenue of $27.6 million for the same period in the prior
    year.
  • NOI totaled $34.2 million for the quarter ended June 30, 2018,
    representing an increase of approximately 53% compared to NOI of $22.3
    million for the quarter ended June 30, 2017.
  • There was an increase in contractual rental revenue resulting from
    average annual rent escalations of 1.46% at the Company's same store
    properties, before the impact of straight-line rental revenue.
  • Second quarter 2018 non-same store rental and parking revenue and
    tenant reimbursement revenue increased from the same period in the
    prior year due to property acquisitions.

Portfolio Overview and Leasing Activity

  • As of June 30, 2018, the Company owned 57 real estate investments,
    consisting of 75 properties, comprising approximately 5,455,000 of
    rental square feet, which had an aggregate purchase price of
    approximately $1.7 billion.
  • The Company's real estate investments are located in 38 metropolitan
    statistical areas, or MSAs.
  • As of June 30, 2018, the Company had 134,000 square feet of vacant
    rentable space. The Company leased 31,000 square feet during the
    second quarter of 2018 at the 250 Williams Atlanta Data Center, which
    included a renewal of the existing leased space and an expansion into
    vacant space.
  • The Company's operating real estate investments have a weighted
    average occupancy rate of 97.5% as of June 30, 2018.
  • During the second quarter of 2018, the Company acquired three real
    estate properties, consisting of two healthcare properties and one
    data center, for an aggregate purchase price of $74.8 million. The
    properties total approximately 133,000 rentable square feet, are 100%
    leased and have remaining lease terms ranging from seven to twelve
    years at June 30, 2018.
  • Year-to-date, the Company has acquired five real estate properties,
    consisting of two healthcare properties and three data centers, for an
    aggregate purchase price of approximately $126.9 million. The
    properties total approximately 266,000 rentable square feet, have a
    weighted average occupancy of 91% and have a weighted average
    remaining lease term of 7.6 years.
  • As of June 30, 2018, the weighted average remaining lease term of the
    Company's real estate properties was 9.75 years.

Michael Seton, Chief Executive Officer, President and Director, stated,
"We believe we remain on pace for achieving our targeted acquisition
volume for 2018 and are confident that we are building a diversified,
well-positioned portfolio of data center and healthcare properties. We
will continue to diligently manage our portfolio to continually find
ways to maximize value for our stockholders."

Balance Sheet and Liquidity

  • On April 27, 2018, the Company amended and restated its credit
    agreement to add seven new lenders and to increase the maximum
    commitments available under the secured credit facility from
    $425,000,000 to an aggregate of up to $700,000,000, consisting of a
    $450,000,000 revolving line of credit, with a maturity date of
    April 27, 2022 (with one, 12-month extension option), and a
    $250,000,000 term loan, with a maturity date of April 27, 2023. In
    connection with the amendment and restatement, the annual interest
    rate payable under the secured credit facility was decreased to, at
    the Company's option, either (a) the London Interbank Offered Rate,
    plus an applicable margin ranging from 1.75% to 2.25%, which is
    determined based on the overall leverage of the Company; 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 Company.
  • As of June 30, 2018, the Company had total principal debt outstanding
    of $778.0 million, consisting of $468.0 million in notes payable and
    $310.0 million on the credit facility and a net debt leverage ratio,
    which is the ratio of principal debt outstanding less cash to total
    aggregate purchase price and additional capital expenditures of real
    estate assets, of 39.9%. The Company's outstanding debt was comprised
    of 73.0% fixed rate debt (including debt fixed through the use of
    interest rate swaps) and 27.0% variable rate debt.
  • At June 30, 2018, the Company had liquidity of $261.8 million,
    consisting of $73.2 million in cash and cash equivalents and $188.6
    million in borrowing base availability on the credit facility.

Use of Non-GAAP Information

Net operating income, a non-GAAP financial measure, is defined as total
revenues, less rental and parking expenses, which excludes depreciation
and amortization, general and administrative expenses, acquisition
related expenses, asset management fees and interest expense, net. The
Company believes that net operating income serves as a useful supplement
to net income because it allows investors and management to measure
unlevered property-level operating results and to compare operating
results to the operating results of other real estate companies between
periods on a consistent basis. Net operating income should not be
considered as an alternative to net income determined in accordance with
GAAP as an indicator of financial performance, and accordingly, the
Company believes that in order to facilitate a clear understanding of
the consolidated historical operating results, net operating income
should be examined in conjunction with net income as presented in the
condensed consolidated financial statements and data included on the
Company's Quarterly Report on Form 10-Q filed with the SEC on August 14,
2018.

The following is a reconciliation of net income attributable to common
stockholders, which is the most directly comparable GAAP financial
measure, to net operating income for the three months ended June 30,
2018 and 2017 (amounts in thousands):

  Three Months Ended
June 30,
2018   2017
 
Revenue:
Rental, parking and tenant reimbursement revenue $ 43,950 $ 27,602
Expenses:
Rental and parking expenses 9,702   5,300
Net operating income 34,248 22,302
 
Expenses:
General and administrative expenses 1,339 1,212
Asset management fees 3,233 2,351
Depreciation and amortization 14,282   9,025
Income from operations 15,394 9,714
Interest expense, net 8,208   5,073
Net income attributable to common stockholders $ 7,186   $ 4,641

One of the Company's objectives is to provide cash distributions to its
stockholders from cash generated by the Company's 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 the Company's 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 FFO which the Company believes 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 the Company's net income
as determined under GAAP.

The Company defines 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 partnerships and joint ventures.
Adjustments for unconsolidated partnerships and joint ventures will be
calculated to reflect FFO on the same basis.

The Company, 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 the Company
believes provides a more complete understanding of its performance to
investors and to its management, and when compared year over year,
reflects the impact on the Company's operations from trends in occupancy.

Publicly registered, non-listed REITs, such as the Company, 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, the Company believes
that publicly registered, non-listed REITs, like the Company, are unique
in that they have a limited life with targeted exit strategies within a
relatively limited time frame after the acquisition activity ceases. The
Company will use cash flows from operations and debt financings to
acquire real estate assets and real estate-related investments, and the
Company's board of directors will determine to pursue a liquidity event
when it believes that the then-current market conditions are favorable;
however, the Company's board of directors does not anticipate evaluating
a liquidity event (i.e., listing of its shares of common stock on a
national securities exchange, a merger or sale, the sale of all or
substantially all of its assets, or another similar transaction) until
five to seven years after the termination of the primary offering of the
Company's initial public offering, which is generally comparable to
other publicly registered, non-listed REITs. Thus, the Company does not
intend to continuously purchase real estate assets and intends to have a
limited life. Due to these factors and other unique features of publicly
registered, non-listed REITs, the IPA has standardized a measure known
as modified funds from operations, or MFFO, which the Company believes
to be another appropriate supplemental measure to reflect the operating
performance of a publicly registered, non-listed REIT. MFFO is a metric
used by management to evaluate sustainable performance and dividend
policy. MFFO is not equivalent to the Company's net income as determined
under GAAP.

The Company defines MFFO, a non-GAAP measure, consistent with the IPA's
definition in its Practice Guideline: 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. The Company's MFFO calculation complies with the IPA's
Practice Guideline, described above. In calculating MFFO, the Company
excludes amortization of above and below-market leases, 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 payment) and
ineffectiveness of interest rate swaps. The other adjustments included
in the IPA's Practice Guideline are not applicable to the Company.

  Three Months Ended
June 30,
2018   2017
Net income attributable to common stockholders $ 7,186 $ 4,641
Adjustments:
Depreciation and amortization 14,282   9,025  
FFO attributable to common stockholders $ 21,468   $ 13,666  
Adjustments:
Amortization of intangible assets and liabilities (1) (1,085 ) (222 )
Straight-line rents (2) (3,372 ) (2,610 )
Ineffectiveness of interest rate swaps 38   $ (10 )
MFFO attributable to common stockholders $ 17,049   $ 10,824  
Weighted average common shares outstanding - basic 129,926,130   94,910,818  
Weighted average common shares outstanding - diluted 129,948,432   94,925,665  
Net income per common share - basic $ 0.06   $ 0.05  
Net income per common share - diluted $ 0.06   $ 0.05  
FFO per common share - basic $ 0.17   $ 0.14  
FFO per common share - diluted $ 0.17   $ 0.14  

(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.

About Carter Validus Mission Critical REIT II, Inc.

Carter Validus Mission Critical REIT II, Inc. is a non-traded, publicly
registered real estate investment trust that engages in the acquisition
of quality income-producing commercial real estate with a focus on data
centers and healthcare facilities, preferably with long-term net leases
to creditworthy tenants. As of June 30, 2018, the Company owned 57 real
estate investments, consisting of 75 properties located in 38 MSAs
across the United States. As of June 30, 2018, the Company's data center
portfolio consisted of 28 properties and its healthcare portfolio
consisted of 47 properties with a diversified focus, including medical
office buildings, specialty surgical centers, and hospital properties.

Forward-Looking Statements

This release contains certain forward-looking statements within the
meaning of federal securities laws and regulations. Because such
statements include risks, uncertainties and contingencies, actual
results may differ materially from those expressed or implied by such
forward-looking statements and you should not place undue reliance on
any such statements. A number of important factors could cause actual
results to differ materially from the forward-looking statements
contained in this release. Such factors include those described in the
Risk Factors sections of Carter Validus Mission Critical REIT II, Inc.'s
annual report on Form 10-K, quarterly reports on Form 10-Q and other
reports filed with the Securities and Exchange Commission.
Forward-looking statements in this document speak only as of the date on
which such statements were made, and the Company undertakes no
obligation to update any such statements that may become untrue because
of subsequent events. Such forward-looking statements are subject to the
safe harbor protection for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995.

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