Carter Validus Mission Critical REIT II, Inc. First Quarter 2019 Results

TAMPA, Fla.–(BUSINESS WIRE)–Carter Validus Mission Critical REIT II, Inc., or the Company, a public,
non-traded real estate investment trust focused on net-leased data
center and healthcare properties, announced operating results for the
first quarter ended March 31, 2019.

Quarter Ended March 31, 2019 and Subsequent
Highlights

  • Net income attributable to common stockholders totaled $4.4 million.
  • Net operating income, or NOI, totaled $37.3 million.
  • Funds from operations, or FFO, attributable to common stockholders
    equaled $22.6 million.
  • Modified funds from operations, or MFFO, attributable to common
    stockholders equaled $19.0 million.
  • During the three months ended March 31, 2019, the Company repurchased
    approximately 1.2 million shares of common stock for approximately
    $10.7 million, or an average of $9.25 per share.
  • On April 11, 2019, the Company announced it had entered into a
    definitive agreement to merge with Carter Validus Mission Critical
    REIT, Inc., or REIT I. See further discussion in “Agreement and Plan
    of Merger” section below.

Michael Seton, the Company’s Chief Executive Officer and President,
stated, “On April 11th, we announced the most significant potential
expansion of our portfolio to date, with the entry into a merger
agreement with Carter Validus Mission Critical REIT, Inc. The merger, if
consummated, would add 61 healthcare properties to our portfolio and
create a combined company with total a enterprise value of approximately
$3.2 billion. The combined company would have a more diverse tenant
base, by industry and geographic location, and is expected to realize
the synergies of operating a combined enterprise that remains focused on
driving stockholder value with increased optionality for potential
liquidity in the future.”

An explanation of FFO, MFFO, NOI and Tenant Reimbursements 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

Quarter Ended March 31, 2019, Compared to Quarter Ended March 31,
2018

  • Net income attributable to common stockholders was $4.4 million for
    the quarter ended March 31, 2019, compared to $7.5 million for the
    quarter ended March 31, 2018, or a 41% decrease. The decrease was
    attributable to write-offs of straight-line rent and an in-place lease
    intangible asset related to a tenant of the Company experiencing
    financial difficulties.
  • FFO attributable to common stockholders was $22.6 million for the
    quarter ended March 31, 2019, an increase of 7%, compared to $21.2
    million for the quarter ended March 31, 2018.
  • MFFO attributable to common stockholders was $19.0 million for the
    quarter ended March 31, 2019, an increase of 12%, compared to $16.9
    million for the quarter ended March 31, 2018.

Operating Results

Quarter Ended March 31, 2019, Compared to Quarter Ended March 31,
2018

  • NOI was $37.3 million for the quarter ended March 31, 2019, an
    increase of 13%, compared to $33.0 million for the quarter ended March
    31, 2018.
  • Total revenue was $46.5 million for the quarter ended March 31, 2019,
    an increase of 13%, compared to $41.3 million for the quarter ended
    March 31, 2018.

The increases in Financial and Operating Results during the periods
presented above are primarily the result of property acquisitions.

Portfolio Overview and Leasing Activity

As of March 31, 2019, the Company owned 85 properties, located in 43
markets, comprising approximately 5.8 million of rentable square feet
with an aggregate purchase price of approximately $1.8 billion. The
Company’s properties had a weighted average occupancy of 97.6% and
weighted average remaining lease term of 9.7 years.

Balance Sheet and Liquidity

As of March 31, 2019, the Company had total principal debt outstanding
of $832.5 million, consisting of $467.5 million in notes payable and
$365.0 million on the credit facility and a net debt leverage ratio,
which is the ratio of principal debt outstanding less cash to fair
market value plus total aggregate purchase price of properties acquired
after that date of 38.0%. The Company’s outstanding debt was comprised
of 68% fixed rate debt (including debt fixed through the use of interest
rate swaps) and 32% variable rate debt.

As of March 31, 2019, the Company had liquidity of $258.5 million,
consisting of $73.7 million in cash and cash equivalents and $184.8
million in borrowing base availability on the credit facility.

Distributions

During the first quarter of 2019, the Company paid aggregate
distributions of $21.2 million ($10.8 million in cash and $10.4 million
reinvested in shares of common stock pursuant to its Distribution
Reinvestment Plan, or DRIP).

The Company declared weighted average distributions per share of common
stock in the amount of $0.16 and $0.15 in the quarters ended March 31,
2019, and 2018, respectively.

The Company paid aggregate distributions and declared distributions per
share of each class of common stock as follows:

Class A Shares:

  • paid distributions of $13.4 million for the quarter ended March 31,
    2019 ($7.1 million in cash and $6.3 million reinvested in shares of
    common stock pursuant to the Company’s DRIP); and
  • declared distributions per share of $0.16 for the quarter ended March
    31, 2019.

Class I Shares:

  • paid distributions of $2.0 million for the quarter ended March 31,
    2019 ($1.2 million in cash and $0.8 million reinvested in shares of
    common stock pursuant to the DRIP); and
  • declared distributions per share of $0.16 for the quarter ended March
    31, 2019.

Class T Shares:

  • paid distributions of $5.3 million for the quarter ended March 31,
    2019 ($2.3 million in cash and $3.0 million reinvested in shares of
    common stock pursuant to the DRIP); and
  • declared distributions per share of $0.14 for the quarter ended March
    31, 2019.

Class T2 Shares:

  • paid distributions of $0.5 million for the quarter ended March 31,
    2019 ($0.2 million in cash and $0.3 million reinvested in shares of
    common stock pursuant to the DRIP); and
  • declared distributions per share of $0.14 for the quarter ended March
    31, 2019.

Agreement and Plan of Merger

On April 11, 2019, the Company, along with REIT I, Carter Validus
Operating Partnership II, LP, the Company’s operating partnership, or
REIT II OP, Carter/Validus Operating Partnership, LP , or REIT I OP, and
Lightning Merger Sub, LLC, a wholly owned subsidiary of the Company, or
the Merger Subsidiary, entered into an Agreement and Plan of Merger, or
the Merger Agreement.

Pursuant to the terms and conditions of the Merger Agreement, REIT I
will merge with and into the Merger Subsidiary where the Merger
Subsidiary is the surviving entity of the transaction. Post-merger, the
Merger Subsidiary will continue to operate as a wholly owned subsidiary
of the Company.

At the time of the merger, and subject to the terms and conditions of
the Merger Agreement, each issued and outstanding share of REIT I’s
common stock (or a fraction thereof), $0.01 par value per share, or the
REIT I common stock, will be converted into the right to receive:

(i) $1.00 in cash; and

(ii) 0.4681 shares of REIT II Class A common stock, par value $0.01 per
share

In order for the merger to be completed, among other conditions, REIT
I’s stockholders must approve the merger and the other transactions
contemplated by the Merger Agreement, which requires the affirmative
vote of holders of a majority of the outstanding shares of REIT I’s
common stock.

This is a summary of the terms and conditions of the Merger Agreement.
For a full description, see the Form 8-K filed with the Securities and
Exchange Commission on April 11, 2019, and the exhibits thereto.

Sixth Amended and Restated Share Repurchase
Program

In connection with entering into the Merger Agreement, on April 10,
2019, the Company’s board of directors approved the Sixth Amended and
Restated Share Repurchase Program, or the Sixth Amended & Restated SRP,
which became effective on May 11, 2019, and will apply beginning with
repurchases made on the 2019 third quarter repurchase date. Pursuant to
the Sixth Amended & Restated SRP, the Company will only repurchase
shares of common stock (Class A shares, Class I shares, Class T Shares
and Class T2 shares) in connection with the death, qualifying
disability, or involuntary exigent circumstance (as determined by the
Company’s board of directors in its sole discretion) of a stockholder,
subject to certain terms and conditions specified in the Sixth Amended &
Restated SRP.

Supplemental Information

The Company routinely announces material information to investors and
the marketplace using press releases, SEC filings and the Company’s
website at www.cvmissioncriticalreit2.com.
The information that the Company posts to its website may be deemed
material. Accordingly, the Company encourages investors and others
interested in the Company to routinely monitor and review the
information that the Company posts on its website, in addition to
following the Company’s press releases and SEC filings. A glossary of
definitions and other supplemental information may be found attached to
the Current Report on Form 8-K filed on May 17, 2019. A comprehensive
listing of the Company’s properties is available at www.cvmissioncriticalreit2.com.

About Carter Validus Mission Critical REIT II,
Inc.

Carter Validus Mission Critical REIT II, Inc. is a public, non-traded
corporation headquartered in Tampa, Florida, that currently qualifies
and is taxed as a 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. As of March 31, 2019,
the Company owned 85 real estate properties, consisting of 29 data
centers and 56 healthcare properties located in 43 markets across the
United States.

This communication shall not constitute an offer to sell or the
solicitation of an offer to buy any securities, nor shall there be any
sale of securities in any jurisdiction in which such offer, solicitation
or sale would be unlawful prior to registration or qualification under
the securities laws of any such jurisdiction. No offering of securities
shall be made except by means of a prospectus meeting the requirements
of the federal securities laws. REIT I and the Company expect to prepare
and file with the SEC a Registration Statement on Form S-4 containing a
proxy statement/prospectus. WE URGE INVESTORS TO READ THE PROXY
STATEMENT/PROSPECTUS AND ANY OTHER RELEVANT DOCUMENTS FILED BY REIT I
AND THE COMPANY IN CONNECTION WITH THE PROPOSED MERGER WHEN THEY BECOME
AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT REIT I,
THE COMPANY AND THE PROPOSED MERGER. INVESTORS ARE URGED TO READ THESE
DOCUMENTS CAREFULLY AND IN THEIR ENTIRETY. Investors will be able to
obtain these materials and other documents filed with the SEC free of
charge at the SEC’s website (www.sec.gov).
In addition, these materials will also be available free of charge by
accessing REIT I’s website (www.cvmissioncriticalreit.com)
or by accessing the Company’s website (www.cvmissioncriticalreitii.com).

Participants in the Proxy Solicitation

Information regarding REIT I’s directors and executive officers is
available in its Annual Report on Form 10-K filed with the SEC on March
22, 2019, and information regarding the Company’s directors and
executive officers is available in its Annual Report on Form 10-K filed
with the SEC on March 22, 2019. Certain directors and executive officers
of REIT I and/or the Company and other persons may have direct or
indirect interests in the merger due to securities holdings,
pre-existing or future indemnification arrangements and rights to
severance payments and retention bonuses if their employment is
terminated prior to or following the merger. If and to the extent that
any of the participants will receive any additional benefits in
connection with the merger, the details of those benefits will be
described in the proxy statement/prospectus relating to the merger.
Investors and security holders may obtain additional information
regarding the direct and indirect interests of REIT I and the Company
and their respective executive officers and directors in the merger by
reading the proxy statement/prospectus regarding the merger when it
becomes available.

Forward-Looking Statements

Certain statements contained herein, other than historical fact, may be
considered “forward-looking statements” within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, and are intended to be
covered by the safe harbor provided by the same. These statements are
based on management’s current expectations and beliefs regarding
operational strategies, anticipated events and trends, the economy, and
other future conditions and are subject to a number of trends and
uncertainties. No forward-looking statement is intended to, nor shall
it, serve as a guarantee of future performance. You can identify the
forward-looking statements by the use of words such as “anticipate,”
“believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,”
“outlook,” “plan,” “potential,” “predict,” “project,” “seek,” “should,”
“will” and other similar terms and phrases, including references to
assumptions and forecasts of future results. Forward-looking statements
are subject to various risks and uncertainties, and factors that could
cause actual results to differ materially from the Company’s
expectations include, but are not limited to, the risk that the merger
will not be consummated within the expected time period or at all; the
occurrence of any event, change or other circumstances that could give
rise to the termination of the Merger Agreement; the inability of REIT I
to obtain stockholder approval of the merger or the failure to satisfy
the other conditions to completion of the merger; risks related to
disruption of management’s attention from the ongoing business
operations due to the merger; availability of suitable investment
opportunities; changes in interest rates, the availability and terms of
financing; general economic conditions; market conditions; legislative
and regulatory changes that could adversely impact the business of the
Company; and other factors, including those described under the section
entitled “Risk Factors” in the Company’s Annual Report on Form 10-K for
the year ended 2018, and subsequent quarterly reports filed on Form 10-Q
with the SEC, copies of which are available at www.sec.gov.
The Company undertakes no obligation to publicly update or revise any
forward-looking statement, whether as a result of new information,
future events, or otherwise, except as required by law.

 

Balance Sheet (amounts in thousands,
except share data)

     

(Unaudited)
March 31, 2019

    December 31, 2018
ASSETS
Real estate:
Land $ 246,790 $ 246,790
Buildings and improvements, less accumulated depreciation of $95,173
and $84,594, respectively
1,418,345   1,426,942  
Total real estate, net 1,665,135 1,673,732
Cash and cash equivalents 73,727 68,360
Acquired intangible assets, less accumulated amortization of $46,578
and $42,081, respectively
145,050 154,204
Right-of-use assets – operating leases 9,996
Other assets, net 67,121   67,533  
Total assets $ 1,961,029   $ 1,963,829  
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Notes payable, net of deferred financing costs of $3,208 and $3,441,
respectively
$ 464,273 $ 464,345
Credit facility, net of deferred financing costs of $2,396 and
$2,489, respectively
362,604 352,511
Accounts payable due to affiliates 11,356 12,427
Accounts payable and other liabilities 31,011 29,555
Intangible lease liabilities, less accumulated amortization of
$8,824 and $7,592, respectively
56,374 57,606
Operating lease liabilities 8,750    
Total liabilities 934,368 916,444
Stockholders’ equity:
Preferred stock, $0.01 par value per share, 100,000,000 shares
authorized; none issued and outstanding
Common stock, $0.01 par value per share, 500,000,000 shares
authorized; 144,534,765 and 143,412,353 shares issued, respectively;
136,428,375 and 136,466,242 shares outstanding, respectively
1,364 1,364
Additional paid-in capital 1,192,062 1,192,340
Accumulated distributions in excess of earnings (169,359 ) (152,421 )
Accumulated other comprehensive income 2,592   6,100  
Total stockholders’ equity 1,026,659 1,047,383
Noncontrolling interests 2   2  
Total equity 1,026,661   1,047,385  
Total liabilities and stockholders’ equity $ 1,961,029   $ 1,963,829  
 
 

Quarterly Income Statement (amounts in
thousands, except share data)

     

Three Months Ended
March 31,

2019     2018
Revenue:
Rental revenue $ 46,467 $ 41,294
Expenses:
Rental expenses 9,128 8,290
General and administrative expenses 1,403 943
Asset management fees 3,494 3,099
Depreciation and amortization 18,246   13,717
Total expenses 32,271   26,049
Income from operations 14,196 15,245
Interest and other expense, net 9,835   7,741
Net income attributable to common stockholders $ 4,361   $ 7,504
Other comprehensive (loss) income:
Unrealized (loss) income on interest rate swaps, net $ (3,611 ) $ 4,575
Other comprehensive (loss) income (3,611 ) 4,575
Comprehensive income attributable to common stockholders $ 750   $ 12,079
Weighted average number of common shares outstanding:
Basic 136,179,343   126,384,346
Diluted 136,204,843   126,401,940
Net income per common share attributable to common stockholders:
Basic $ 0.03   $ 0.06
Diluted $ 0.03   $ 0.06
Distributions declared per common share $ 0.16   $ 0.15
 

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 May 15, 2019.

The following are reconciliations 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 March 31,
2019 and 2018 (amounts in thousands):

     

Three Months Ended
March 31,

2019     2018
Revenue:
Rental revenue $ 46,467 $ 41,294
Expenses:
Rental expenses 9,128 8,290
Net operating income 37,339 33,004
 
Expenses:
General and administrative expenses 1,403 943
Asset management fees 3,494 3,099
Depreciation and amortization 18,246 13,717
Income from operations 14,196 15,245
Interest and other expense, net 9,835 7,741
Net income attributable to common stockholders $ 4,361 $ 7,504
 

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.

The following table presents same store and non-same store components of
net operating income for the three months ended March 31, 2019 and 2018
(amounts in thousands):

     
Three Months Ended March 31,
2019     2018
Revenue:
Same store rental revenue $ 34,826 $ 35,348
Same store tenant reimbursements 4,828 5,585
Non-same store rental revenue and tenant reimbursements 6,712 350
Other operating income 101 11
Total revenue 46,467 41,294
Expenses:
Same store rental expenses 7,683 8,289
Non-same store rental expenses 1,445 1
Net operating income $ 37,339 $ 33,004
 

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.

Contacts

Investor Relations:
Miranda
Davidson
[email protected]

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