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

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

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https://www.businesswire.com/news/home/20180829005785/en/

Carter Validus Mission Critical REIT, Inc. Second Quarter Update. (Photo: Business Wire)

Carter Validus Mission Critical REIT, Inc. Second Quarter Update. (Photo: Business Wire)

2018 Second Quarter Highlights

  • Net income attributable to common stockholders totaled $5.6 million.
  • Net operating income from continuing operations, or NOI, totaled $14.2
    million.
  • Funds from operations, or FFO, as defined by the National Association
    of Real Estate Investment Trusts, or NAREIT, attributable to common
    stockholders equaled $7.8 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
    $6.6 million.
  • The Company sold four real estate properties for an aggregate sale
    price of $88.2 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 $5.6 million
    for the quarter ended June 30, 2018, compared to $12.2 million for the
    quarter ended June 30, 2017, or a 54% decrease.
  • FFO attributable to common stockholders equaled $7.8 million for the
    quarter ended June 30, 2018, representing a decrease of 74% compared
    to FFO attributed to common stockholders of $29.5 million for the
    quarter ended June 30, 2017.
  • MFFO attributable to common stockholders equaled $6.6 million for the
    second quarter of 2018, representing a decrease of 74% compared to
    MFFO attributable to common stockholders of $25.3 million for the
    quarter ended June 30, 2017.
  • During the second quarter of 2018, the Company paid aggregate
    distributions of $19.3 million ($10.1 million in cash and $9.2 million
    reinvested in shares of common stock pursuant to the DRIP). The
    Company declared distributions per share of common stock in the amount
    of $0.10 for such period.

The reductions in net income, FFO and MFFO compared to the same period
in the prior year are primarily the result of the Company selling
substantially all of the data center properties during the fourth
quarter of 2017 and the first half of 2018, and no longer having the
related rental revenue of those properties, as well as a significant
tenant of the Company, Bay Area Regional Medical Center, LLC, or Bay
Area, experiencing financial difficulty. During the second quarter of
2018, Bay Area, which occupied the Bay Area Regional Medical Center
property, defaulted on its lease and loan obligations and ceased paying
rent and loan interest. On August 10, 2018, the Company announced that
an affiliate of the University of Texas System entered into a
non-binding letter of intent to lease the Bay Area Regional Medical
Center property. On August 13, 2018, the Company, through its
wholly-owned subsidiary, terminated its lease with Bay Area, as more
fully described under "Portfolio Overview and Leasing Activity" below.

The Company successfully completed its strategy to monetize its data
center properties, inclusive of a sale of one property in July 2018.

Michael Seton, the Company's Chief Executive Officer and President,
stated, "We are pleased with the successful conclusion of our liquidity
strategy for our data center properties and will continue to focus on
actively managing our remaining healthcare properties. We remain
committed to positioning the Company for the best outcome for our
stockholders."

Operating Results

The Company generates almost all of its 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 revenue $ 16,441 $ 21,705 $ (5,264 )
Same store tenant reimbursement revenue 527 1,385 (858 )
Non-same store rental and tenant reimbursement revenue 15 2,728 (2,713 )
Other operating income 199   59   140  
Total revenue 17,182 25,877 (8,695 )
Expenses:
Same store rental expenses 2,929 2,166 763
Non-same store rental expenses 31   319   (288 )
Net operating income 14,222 23,392 (9,170 )
 

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 of 2018 revenue from continuing operations of
    $17.2 million was a 34% decrease from total revenue from continuing
    operations of $25.9 million for the same period in the prior year.
  • Second quarter of 2018 same store rental revenue and tenant
    reimbursement revenue of $17.0 million was a 26% decrease from same
    store rental revenue and tenant reimbursement revenue of $23.1 million
    for the same period in the prior year.
  • Non-same store rental revenue and tenant reimbursement revenue totaled
    $15,000 for the quarter ended June 30, 2018, as compared to $2.7
    million for the quarter ended June 30, 2017.
  • NOI from continuing operations totaled $14.2 million for the quarter
    ended June 30, 2018, representing a decrease of approximately 39%
    compared to NOI from continuing operations of $23.4 million for the
    quarter ended June 30, 2017.

The reductions in revenue and NOI are primarily attributable to Bay Area
defaulting on its lease and loan obligations, and the loss of rental
income as a result of the sale of the Miami International Medical Center
property, which the Company sold in December 2017.

Portfolio Overview and Leasing Activity

  • As of June 30, 2018, the Company owned 30 real estate investments
    (excluding one real estate investment classified as discontinued
    operations), consisting of 61 properties, comprising approximately
    2,357,000 of leased rentable square feet. The Company's real estate
    investments are located in 33 metropolitan statistical areas, or MSAs.
  • The Company's operating real estate properties had a weighted average
    occupancy rate of 91% as of June 30, 2018. At June 30, 2018, two of
    the Company's operating real estate properties were vacant.
  • During the second quarter of 2018, the Company had 217,000 square feet
    of vacant rentable space and had no leasing activity.
  • As of June 30, 2018, the weighted average remaining lease term of the
    Company's real estate properties was 12.25 years.
  • During the second quarter of 2018, the Company sold four real estate
    properties, consisting of two data centers for an aggregate sale price
    of $85.0 million, which generated net proceeds of $83.3 million, and
    two healthcare properties for an aggregate sale price of $3.2 million,
    which generated net proceeds of $3.0 million.
  • Year-to-date, the Company sold six real estate properties, consisting
    of four data centers for an aggregate sale price of $227.5 million,
    which generated net proceeds of $223.4 million, and two healthcare
    properties for an aggregate sale price of $3.2 million, which
    generated net proceeds of $3.0 million.
  • On July 25, 2018, the Company sold its remaining data center, the
    Andover Data Center, for $15.0 million, which generated net proceeds
    of $14.6 million. As a result of the sale, the Company completed the
    monetization of all its data center assets and fulfilled its strategy
    to seek liquidity for the data center portfolio. The Company realized
    $1.3 billion in net proceeds and achieved an approximately 10.5%
    unleveraged internal rate of return on the sale of its data center
    portfolio.
  • In August 2018, the Company, through its wholly-owned subsidiary,
    entered into a Lease Termination and License Agreement with Bay Area,
    which terminated the lease and granted Bay Area a non-assignable
    license (the "License") to access the property for the sole purpose of
    winding down its administrative operations. The License may be
    terminated by either party with 30 days' notice to the other party and
    Bay Area's lender. Excluding Bay Area, the Company's weighted average
    occupancy rate was 77% and the weighted average remaining lease term
    was 11.5 years at June 30, 2018.
  • On August 10, 2018, the Company entered into a non-binding letter of
    intent with an affiliate of the University of Texas System to lease
    the Bay Area Regional Medical Center property.

Balance Sheet and Liquidity

  • On February 1, 2018, as a result of the sale of the majority of the
    Company's data center assets during December 2017 and January 2018,
    the Company entered into an amended and restated credit agreement
    related to the unsecured credit facility to remove one lender and to
    change the maximum commitment available under the unsecured credit
    facility to $400.0 million, consisting of a revolving line of credit,
    with a maturity date of May 28, 2019 (with one 12-month extension
    option). Subject to certain conditions, the unsecured credit facility
    can be increased to $750.0 million. All other material terms of the
    unsecured credit facility remained unchanged.
  • On May 4, 2018, the Company repaid its outstanding mortgage note
    payable related to the Bay Area property, which had an outstanding
    principal balance of approximately $84.7 million at the time of
    repayment.
  • As of June 30, 2018, the Company had total principal debt outstanding
    of $252.3 million, consisting of $42.3 million in notes payable and
    $210.0 million on the unsecured 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 and notes receivable, of 18%. The
    Company's outstanding debt was comprised of 25% fixed rate debt
    (including debt fixed through the use of interest rate swaps) and 75%
    variable rate debt.
  • At June 30, 2018, the Company had liquidity of $76.1 million,
    consisting of $37.8 million in cash and cash equivalents and $38.3
    million in borrowing base availability on the unsecured credit
    facility.
  • On August 13, 2018, the Company entered into the first amendment to
    the amended and restated credit agreement to amend certain financial
    covenants as a result of Bay Area experiencing financial
    difficulty. As of the date of this release, the Company is in
    compliance with the covenants of the first amendment to the amended
    and restated credit agreement.
  • On August 23, 2018, the Company increased the borrowing base
    availability under the unsecured credit facility by approximately
    $61.2 million by adding one healthcare property and a portfolio of 17
    healthcare properties to the aggregate pool availability.

Second Quarter Portfolio Update

Included in this earnings release is the Second Quarter Portfolio
Update, which includes certain supplemental information about the
Company's real estate portfolio and financial results as of and for the
three and six months ended June 30, 2018. The Second Quarter Portfolio
Update contains certain non-GAAP supplemental metrics that are not
defined by GAAP, including FFO and MFFO, which are described in "Use of
Non-GAAP Information." Reconciliations to their most directly comparable
GAAP measures are provided in the Second Quarter Portfolio Update.

Use of Non-GAAP Information

Net operating income, a non-GAAP financial measure, is defined as total
revenues, less rental 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, which is the most
directly comparable GAAP financial measure, to net operating income from
continuing operations for the three months ended June 30, 2018 and 2017
(amounts in thousands):

  Three Months Ended
June 30,
2018   2017
Revenue:
Rental and tenant reimbursement revenue, net $ 17,182 $ 25,877
Expenses:
Rental expenses 2,960   2,485  
Net operating income from continuing operations 14,222 23,392
 
Expenses:
General and administrative expenses 1,268 1,968
Asset management fees 2,479 2,657
Depreciation and amortization 7,245   7,948  
Income from operations 3,230 10,819
Other income (expense):
Other interest and dividend income 1,066 491
Interest expense, net (4,050 ) (5,300 )
Provision for loan losses (989 ) (1,688 )
Impairment loss on real estate (5,831 )
Gain on real estate dispositions 218    
(Loss) income from continuing operations (6,356 ) 4,322
Income from discontinued operations 11,950   8,886  
Net income $ 5,594   $ 13,208  
 

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's board of directors will determine to pursue a liquidity event
when it believes that the then-current market conditions are favorable.
Thus, the Company will not 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), the
adjustments related to contingent purchase price obligations,
ineffectiveness of interest rate swaps and the adjustments of such items
related to the Company's noncontrolling interests. The other adjustments
included in the IPA's Practice Guideline are not applicable to the
Company.

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

  Three Months Ended June 30,
2018   2017
Net income attributable to common stockholders $ 5,642 $ 12,169
Adjustments:
Depreciation and amortization 7,245 18,088
Impairment loss on real estate 5,831
Gain on real estate dispositions from discontinued operations (10,666 )
Gain on real estate dispositions from continuing operations (218 )

Noncontrolling interests' share of the above adjustments related
to the consolidated

partnerships

  (726 )
FFO attributable to common stockholders $ 7,834   $ 29,531  
Adjustments:
Amortization of intangible assets and liabilities (1) (223 ) (777 )
Change in fair value of contingent consideration 100
Straight-line rent (2) (1,175 ) (3,938 )
Loss on debt extinguishment 207

Noncontrolling interests' share of the above adjustments related
to the consolidated

partnerships

  423   (3)
MFFO attributable to common stockholders $ 6,643   $ 25,339  
Weighted average common shares outstanding - basic 181,128,292   185,897,525  
Weighted average common shares outstanding - diluted 181,128,292   185,911,968  
Weighted average common shares outstanding - diluted for FFO 181,146,292   185,911,968  
Net income per common share - basic $ 0.03   $ 0.07  
Net income per common share - diluted $ 0.03   $ 0.07  
FFO per common share - basic $ 0.04   $ 0.16  
FFO per common share - diluted $ 0.04   $ 0.16  
 

(1) Under GAAP, certain intangibles are accounted for at cost and
reviewed at least annually for impairment, and certain intangibles are
assumed to diminish predictably in value over time and are amortized,
similar to depreciation and amortization of real estate-related assets
that are excluded from FFO. However, because real estate values and
market lease rates historically rise or fall with market conditions,
management believes that by excluding charges related to amortization of
these intangibles, MFFO provides useful supplemental information on the
performance of the real estate.

(2) Under GAAP, rental revenue is recognized on a straight-line basis
over the terms of the related lease (including rent holidays, if
applicable). This may result in income recognition that is significantly
different than the underlying contract terms. By adjusting for the
change in deferred rent receivables, MFFO may provide useful
supplemental information on the realized economic impact of lease terms,
providing insight on the expected contractual cash flows of such lease
terms, and aligns with our analysis of operating performance.

(3) Of this amount, $231,000 related to straight-line rents and $192,000
related to above- and below-market leases.

About Carter Validus Mission Critical REIT, Inc.

Carter Validus Mission Critical REIT, Inc. currently qualifies as a real
estate investment trust and invests in mission critical real estate
assets located throughout the United States. Mission critical real
estate assets are purpose-built facilities designed to support the most
essential operations of tenants. As of June 30, 2018, the Company owned
31 real estate investments, consisting of 62 properties located in 33
MSAs across the United States. As of June 30, 2018, the Company's data
center portfolio consisted of one property and its healthcare portfolio
consisted of 61 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, Inc.'s
annual report on Form 10-K, quarterly reports filed 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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