NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
(1) General
This Quarterly Report on Form 10-Q is for the quarter ended September 30, 2021. In this Quarterly Report, “we,” “us,” “our” and the “Trust” refer to Universal Health Realty Income Trust and its subsidiaries.
In this Quarterly Report on Form 10-Q, the term “revenues” does not include the revenues of the unconsolidated LLCs in which we have various non-controlling equity interests ranging from 33% to 95%. As of September 30, 2021, we had investments in five jointly-owned LLCs/LPs (subsequent to September 30, 2021, we purchased the 5% third-party minority ownership interest in one of the jointly-owned LPs, as discussed in Note 5). We currently account for our share of the income/loss from these investments by the equity method (see Note 5). These LLCs are included in our consolidated financial statements for all periods presented on an unconsolidated basis since they are not variable interest entities for which we are the primary beneficiary, nor do we hold a controlling voting interest.
The condensed consolidated financial statements included herein have been prepared by us, without audit, pursuant to the rules and regulations of the SEC and reflect all normal and recurring adjustments which, in our opinion, are necessary to fairly present results for the interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP) have been condensed or omitted pursuant to such rules and regulations, although we believe that the accompanying disclosures are adequate to make the information presented not misleading. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements, the notes thereto and accounting policies included in our Annual Report on Form 10-K for the year ended December 31, 2020.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes.
(2) Relationship with Universal Health Services, Inc. (“UHS”) and Related Party Transactions
Leases: We commenced operations in 1986 by purchasing properties from certain subsidiaries of UHS and immediately leasing the properties back to the respective subsidiaries. Most of the leases were entered into at the time we commenced operations and provided for initial terms of 13 to 15 years with up to six additional 5-year renewal terms. The current base rentals and lease and renewal terms for each of the three hospital facilities leased to wholly-owned subsidiaries of UHS are provided below. The base rents are paid monthly and each lease also provides for additional or bonus rents which are computed and paid on a quarterly basis based upon a computation that compares current quarter revenue to a corresponding quarter in the base year. The three hospital leases with wholly-owned subsidiaries of UHS are unconditionally guaranteed by UHS and are cross-defaulted with one another.
The combined revenues generated from the leases on the three hospital facilities leased to wholly-owned subsidiaries of UHS accounted for approximately 22% and 23% of our consolidated revenues for the three months ended September 30, 2021 and 2020, respectively, and approximately 22% of our consolidated revenues for each of the nine months ended September 30, 2021 and 2020. In addition to these three UHS hospital facilities, one of our hospital facilities is leased to a joint venture between a subsidiary of UHS and a third party, and we have nineteen medical office buildings (“MOBs”), general office buildings or free-standing emergency departments (“FEDs”), that are either wholly or jointly-owned by us that include tenants which are subsidiaries or joint ventures of UHS. The aggregate revenues generated from UHS-related tenants comprised approximately 37% and 34% of our consolidated revenues during the three-month periods ended September 30, 2021 and 2020, respectively, and approximately 36% and 33% of our consolidated revenues during the nine-month periods ended September 30, 2021 and 2020, respectively.
Pursuant to the Master Lease Document by and among us and certain subsidiaries of UHS, dated December 24, 1986 (the “Master Lease”), which governs the leases of the three hospitals with wholly-owned subsidiaries of UHS, as reflected below, UHS has the option, among other things, to renew the leases at the lease terms described below by providing notice to us at least 90 days prior to the termination of the then current term. UHS also has the right to purchase the respective leased facilities from us at their appraised fair market value upon any of the following: (i) at the end of the lease terms or any renewal terms; (ii) upon one month’s notice should a change of control of the Trust occur, or; (iii) within the time period as specified in the lease in the event that UHS provides notice to us of their intent to offer a substitution property/properties in exchange for one (or more) of the three hospital facilities leased from us, should we be unable to reach an agreement with UHS on the properties to be substituted. Additionally, UHS has rights of first refusal to: (i) purchase the respective leased facilities during and for 180 days after the lease terms at the same price, terms and
10
conditions of any third-party offer, or; (ii) renew the lease on the respective leased facility at the end of, and for 180 days after, the lease term at the same terms and conditions pursuant to any third-party offer.
The table below details the existing lease terms and renewal options for our three hospitals operated by wholly-owned subsidiaries of UHS:
Hospital Name
|
|
Annual
Minimum
Rent
|
|
|
End of
Lease Term
|
|
Renewal
Term
(years)
|
|
|
McAllen Medical Center
|
|
$
|
5,485,000
|
|
|
December, 2026
|
|
|
5
|
|
(a.)
|
Wellington Regional Medical Center
|
|
$
|
3,030,000
|
|
|
December, 2021
|
|
|
10
|
|
(b.)
|
Southwest Healthcare System, Inland Valley Campus
|
|
$
|
2,648,000
|
|
|
December, 2021
|
|
|
10
|
|
(c.)
|
(a.)
|
UHS has one 5-year renewal option at the existing lease rate (through 2031).
|
(b.)
|
UHS has two 5-year renewal options at fair market value lease rates (2022 through 2031). Since UHS’s lease renewal option for Wellington Regional Medical Center is fair market value (effective January 1, 2022), the lease rate valuation process is currently in progress and expected to be completed during the fourth quarter of 2021. Subject to completion of a lease agreement at acceptable rates and terms, UHS has indicated its intent to renew the lease on this facility.
|
(c.)
|
UHS has notified us of their intent to terminate the existing lease on Southwest Healthcare System, Inland Valley Campus, upon the scheduled termination of the current lease term on December 31, 2021. UHS has agreed to exchange, and lease back from us, substitution properties with an aggregate fair market value substantially equal to that of Southwest Healthcare System, Inland Valley Campus, in return for the real estate assets of the Inland Valley Campus. See below for additional disclosure.
|
UHS has two 5-year renewal options at fair market value lease rates (2022 through 2031) related to the Southwest Healthcare System, Inland Valley Campus property. As previously disclosed, a wholly-owned subsidiary of UHS has notified us that it is planning to terminate the existing lease on Southwest Healthcare System, Inland Valley Campus, upon the scheduled expiration of the current lease term on December 31, 2021. As permitted pursuant to the terms of the lease, UHS has the right to purchase the leased property at its appraised fair market value at the end of the existing lease term. However, UHS has agreed to exchange, and lease back from us, substitution properties with an aggregate fair market value substantially equal to that of Southwest Healthcare System, Inland Valley Campus, in return for the real estate assets of the Inland Valley Campus. The substitution properties consist of one acute care hospital (including a behavioral health pavilion) and a newly constructed behavioral health hospital. The Independent Trustees of our Board, as well as the UHS Board of Directors, have approved these transactions subject to satisfactory completion of definitive agreements, which are in progress. The effective date of the transactions is expected to coincide with the scheduled lease maturity date of December 31, 2021. Pursuant to the terms of the lease on the Inland Valley Campus, we earned $3.4 million of lease revenue during the nine-month period ended September 30, 2021 ($2.0 million in base rental and $1.4 million in bonus rental) and $4.4 million of lease revenue during the year ended December 31, 2020 ($2.6 million in base rental and $1.8 million in bonus rental).
Subsequent to September 30, 2021, we purchased the 5% minority ownership interest held by a third-party member in Grayson Properties, LP which owns the Texoma Medical Plaza, an MOB located in Denison, Texas for approximately $3.1 million. The MOB is located on the campus of Texoma Medical Center, a hospital that is owned and operated by a wholly-owned subsidiary of UHS. A third-party appraisal was completed to determine the fair value of the property. As a result of this minority ownership purchase during the fourth quarter of 2021, we subsequently own 100% of the LP and we will therefore begin consolidating this LP effective with the purchase date. We do not expect a material impact on our net income as a result of the consolidation of this LP subsequent to the transaction. Please see Note 5 for additional disclosure surrounding this transaction.
In May, 2021, we acquired the Fire Mesa office building located in Las Vegas, Nevada for a purchase price of approximately $12.9 million. The building is 100% leased under the terms of a triple net lease by a wholly-owned subsidiary of UHS. The initial lease is scheduled to expire on August 31, 2027 and has two five-year renewal options. As discussed in Note 4, the acquisition of this office building is part of an anticipated series of planned tax deferred like-kind exchange transactions pursuant to Section 1031 of the Internal Revenue Code.
In September 2019, we entered into an agreement whereby we own a 95% non-controlling ownership interest in Grayson Properties II L.P., which developed, constructed, owns and operates the Texoma Medical Plaza II, an MOB located in Denison, Texas. This MOB, which was substantially completed in December 2020, is located on the campus of Texoma Medical Center, a hospital that is owned and operated by a wholly-owned subsidiary of UHS. A 10-year master flex lease was executed with the wholly-owned subsidiary of UHS for over 50% of the rentable square feet of the MOB and commenced in December 2020 upon the issuance of the certificate of occupancy. We account for this LP on an unconsolidated basis pursuant to the equity method since it is not a variable interest entity and we do not have a controlling voting interest.
11
In late July 2019, Des Moines Medical Properties, LLC, a wholly-owned subsidiary of ours, entered into an agreement to build and lease a newly constructed UHS-related behavioral health care hospital located in Clive, Iowa. The lease on this facility, which is triple net and has an initial term of 20 years with five 10-year renewal options, was executed with Clive Behavioral Health, LLC, a joint venture between a wholly-owned subsidiary of UHS and Catholic Health Initiatives - Iowa, Corp (“JV”). Construction of this hospital, for which we engaged a wholly-owned subsidiary of UHS to act as project manager for an aggregate fee of approximately $750,000, was substantially completed in December 2020 and the property received a temporary certificate of occupancy on December 31, 2020, at which time the hospital lease commenced. Pursuant to the lease on this facility, the JV has the option to, among other things, renew the lease at the terms specified in the lease agreement by providing notice to us at least 270 days prior to the termination of the then current term. The JV also has the right to purchase the leased facility from us at its appraised fair market value upon either of the following: (i) by providing notice at least 270 days prior to the end of the lease terms or any renewal terms, or; (ii) upon 30 days’ notice anytime within 12 months of a change of control of the Trust (UHS also has this right should the JV decline to exercise its purchase right). Additionally, the JV has rights of first offer to purchase the facility prior to any third-party sale.
Management cannot predict whether the leases with subsidiaries of UHS, which have renewal options at existing lease rates or fair market value lease rates, or any of our other leases, will be renewed at the end of their lease term. If the leases are not renewed at their current rates or the fair market value lease rates, we would be required to find other operators for those facilities and/or enter into leases on terms potentially less favorable to us than the current leases. In addition, if subsidiaries of UHS exercise their options to purchase the respective leased hospital or FED facilities upon expiration of the lease terms, our future revenues could decrease if we were unable to earn a favorable rate of return on the sale proceeds received, as compared to the lease revenue currently earned pursuant to these leases.
We are the lessee on twelve ground leases with subsidiaries of UHS (for consolidated and unconsolidated investments). The remaining lease terms on the ground leases with subsidiaries of UHS range from approximately 28 years to approximately 78 years. The annual aggregate lease payments on these properties are estimated to be approximately $508,000 during each of the years ended 2021 through 2025, and an aggregate of $29.0 million thereafter. See Note 7 for additional lease accounting disclosure.
Officers and Employees: Our officers are all employees of a wholly-owned subsidiary of UHS and although as of September 30, 2021 we had no salaried employees, our officers do typically receive annual stock-based compensation awards in the form of restricted stock. In special circumstances, if warranted and deemed appropriate by the Compensation Committee of the Board of Trustees, our officers may also receive one-time special compensation awards in the form of restricted stock and/or cash bonuses.
Advisory Agreement: UHS of Delaware, Inc. (the “Advisor”), a wholly-owned subsidiary of UHS, serves as Advisor to us under an advisory agreement dated December 24, 1986, and as amended and restated as of January 1, 2019 (the “Advisory Agreement”). Pursuant to the Advisory Agreement, the Advisor is obligated to present an investment program to us, to use its best efforts to obtain investments suitable for such program (although it is not obligated to present any particular investment opportunity to us), to provide administrative services to us and to conduct our day-to-day affairs. All transactions between us and UHS must be approved by the Trustees who are unaffiliated with UHS (the “Independent Trustees”). In performing its services under the Advisory Agreement, the Advisor may utilize independent professional services, including accounting, legal, tax and other services, for which the Advisor is reimbursed directly by us. The Advisory Agreement may be terminated for any reason upon sixty days written notice by us or the Advisor. The Advisory Agreement expires on December 31 of each year; however, it is renewable by us, subject to a determination by the Independent Trustees, that the Advisor’s performance has been satisfactory.
Our advisory fee for the three and nine months ended September 30, 2021 and 2020, was computed at 0.70% of our average invested real estate assets, as derived from our condensed consolidated balance sheets. Based upon a review of our advisory fee and other general and administrative expenses, as compared to an industry peer group, the advisory fee computation remained unchanged for 2021, as compared to the last three years. The average real estate assets for advisory fee calculation purposes exclude certain items from our condensed consolidated balance sheet such as, among other things, accumulated depreciation, cash and cash equivalents, lease receivables, deferred charges and other assets. The advisory fee is payable quarterly, subject to adjustment at year-end based upon our audited financial statements. Advisory fees incurred and paid (or payable) to UHS amounted to approximately $1.1 million and $1.0 million for the three months ended September 30, 2021 and 2020, respectively, and were based upon average invested real estate assets of $641 million and $594 million, respectively. Advisory fees incurred and paid (or payable) to UHS were approximately $3.3 million and $3.1 million for the nine months ended September 30, 2021 and 2020, and were based upon average invested real estate assets of $623 million and $587 million, respectively.
Share Ownership: As of September 30, 2021 and December 31, 2020, UHS owned 5.7% of our outstanding shares of beneficial interest.
SEC reporting requirements of UHS: UHS is subject to the reporting requirements of the SEC and is required to file annual reports containing audited financial information and quarterly reports containing unaudited financial information. Since the aggregate revenues generated from the UHS-related tenants comprised 37% and 34% of our consolidated revenues during the three-month periods ended September 30, 2021 and 2020, respectively, and 36% and 33% of our consolidated revenues during the nine-month periods ended September 30, 2021 and 2020, respectively, and since a subsidiary of UHS is our Advisor, you are encouraged to obtain the publicly available filings for Universal Health Services, Inc. from the SEC’s website. These filings are the sole responsibility of UHS and are not incorporated by reference herein.
12
(3) Dividends and Equity Issuance Program
Dividends and dividend equivalents:
During the third quarter of 2021, we declared and paid dividends of approximately $9.6 million, or $.70 per share. We declared and paid dividends of approximately $9.5 million, or $.69 per share, during the third quarter of 2020. During the nine-month period ended September 30, 2021 we declared and paid dividends of approximately $28.8 million, or $2.095 per share. During the nine-month period ended September 30, 2020, we declared and paid dividends of approximately $28.4 million, or $2.065 per share. Dividend equivalents, which are applicable to shares of unvested restricted stock, were accrued during the first nine months of 2021 and will be paid upon vesting of the restricted stock.
Equity Issuance Program:
During the second quarter of 2020, we commenced an at-the-market (“ATM”) equity issuance program, pursuant to the terms of which we may sell, from time-to-time, common shares of our beneficial interest up to an aggregate sales price of $100 million to or through our agent banks. The common shares will be offered pursuant to the Registration Statement filed with the Securities and Exchange Commission, which became effective in June 2020.
No shares were issued pursuant to this ATM equity program during the first nine months of 2021. Pursuant to this ATM program, since the program commenced in the second quarter of 2020, we have issued 2,704 shares at an average price of $101.30 per share, which generated approximately $270,000 of net proceeds (net of approximately $4,000, consisting of compensation to BofA Securities, Inc.). Additionally, as of September 30, 2021, we have paid or incurred approximately $508,000 in various fees and expenses related to the commencement of our ATM program.
(4) Acquisitions and Divestitures
During the second quarter of 2021 and during the fourth quarter of 2021, we completed three transactions as described below utilizing qualified third-party intermediaries, as part of a series of anticipated tax-deferred like-kind exchange transactions pursuant to Section 1031 of the Internal Revenue Code.
Subsequent to September 30, 2021:
In July, 2021, as a part of the series of tax-deferred like-kind exchange transactions mentioned above, we entered into an agreement to sell the Auburn Medical Office Building II. On November 1, 2021 we settled on the sale of the Auburn Medical Office Building II, a multi-tenant MOB located in Auburn, Washington to a non-related party for a sale price of approximately $25.1 million. The gain on this divestiture will be included in our consolidated statement of income for the three and twelve-month periods ended December 31, 2021. The assets and liabilities related to this property are included in “Assets of property held for sale” or “Liabilities of property held for sale” on our consolidated balance sheet as of September 30, 2021.
Nine Months Ended September 30, 2021:
Acquisition:
In May, 2021, as a part of the series of tax-deferred like-kind exchange transactions mentioned above, we acquired the Fire Mesa office building located in Las Vegas, Nevada for a purchase price of approximately $12.9 million. The building, which has approximately 44,000 rentable square feet, is 100% leased under the terms of a triple net lease with a wholly-owned subsidiary of UHS. The lease on this building is scheduled to expire on August 31, 2027 and has two five-year renewal options.
Divestiture:
In June, 2021, as a part of the series of tax-deferred like-kind exchange transactions mentioned above, we sold the Children’s Clinic at Springdale, a medical office building located in Springdale, AR for a sale price of approximately $3.2 million, net of closing costs. This divestiture resulted in a gain of approximately $1.3 million which is included in our consolidated statement of income for the nine-month period ended September 30, 2021.
13
Nine Months Ended September 30, 2020:
Acquisitions:
There were no acquisitions during the first nine months of 2020.
Divestitures:
There were no dispositions during the first nine months of 2020.
(5) Summarized Financial Information of Equity Affiliates
In accordance with U.S. GAAP and guidance relating to accounting for investments and real estate ventures, we account for our unconsolidated investments in LLCs/LPs which we do not control using the equity method of accounting. The third-party members in these investments have equal voting rights with regards to issues such as, but not limited to: (i) divestiture of property; (ii) annual budget approval, and; (iii) financing commitments. These investments, which represent 33% to 95% non-controlling ownership interests, are recorded initially at our cost and subsequently adjusted for our net equity in the net income, cash contributions to, and distributions from, the investments. Pursuant to certain agreements, allocations of sales proceeds and profits and losses of some of the LLC investments may be allocated disproportionately as compared to ownership interests after specified preferred return rate thresholds have been satisfied.
Distributions received from equity method investees in the consolidated statements of cash flows are classified based upon the nature of the distribution. Returns on investments are presented net of equity in income from unconsolidated investments as cash flows from operating activities. Returns of investments are classified as cash flows from investing activities.
At September 30, 2021, we have non-controlling equity investments or commitments in five jointly-owned LLCs/LPs which own MOBs. We account for these LLCs/LPs on an unconsolidated basis pursuant to the equity method since they are not variable interest entities which we are the primary beneficiary nor do we have a controlling voting interest. The majority of these entities are joint-ventures between us and non-related parties that hold minority ownership interests in the entities. Each entity is generally self-sustained from a cash flow perspective and generates sufficient cash flow to meet its operating cash flow requirements and service the third-party debt (if applicable) that is non-recourse to us. Although there is typically no ongoing financial support required from us to these entities since they are cash-flow sufficient, we may, from time to time, provide funding for certain purposes such as, but not limited to, significant capital expenditures, leasehold improvements and debt financing. Although we are not obligated to do so, if approved by us at our sole discretion, additional cash funding is typically advanced as equity or member loans. These entities maintain property insurance on the properties.
Subsequent to September 30, 2021, we purchased the third-party 5% ownership interest in Grayson Properties, LP which owns the Texoma Medical Plaza, an MOB located in Denison, Texas for a purchase price of approximately $3.1 million. We formerly held a non-controlling majority ownership interest in this LP. As a result of our purchase of the minority ownership interest, we now hold 100% of the ownership interest in this LP and we will begin accounting for this LP on a consolidated basis effective with the minority ownership interest purchase date. The property’s assets and liabilities will be recorded at the carrying amount of its previously held interest, plus the incremental cost which will be allocated based upon relative fair values. A third-party appraisal was completed to determine the fair value of the property. We do not expect a material impact on our net income as a result of the consolidation of this LP subsequent to the transaction.
The following property table represents the five LLCs/LPs in which we owned a non-controlling interest and were accounted for under the equity method as of September 30, 2021:
|
|
|
|
|
|
|
Name of LLC/LP
|
|
Ownership
|
|
|
Property Owned by LLC/LP
|
Suburban Properties
|
|
|
33
|
%
|
|
St. Matthews Medical Plaza II
|
Brunswick Associates (a.)(e.)
|
|
|
74
|
%
|
|
Mid Coast Hospital MOB
|
Grayson Properties (b.)(f.)
|
|
|
95
|
%
|
|
Texoma Medical Plaza
|
FTX MOB Phase II (c.)
|
|
|
95
|
%
|
|
Forney Medical Plaza II
|
Grayson Properties II (d.)(f.)
|
|
|
95
|
%
|
|
Texoma Medical Plaza II
|
(a.)
|
This LLC has a third-party term loan of $9.1 million, which is non-recourse to us, outstanding as of September 30, 2021.
|
(b.)
|
This building is on the campus of a UHS hospital and has tenants that include subsidiaries of UHS. During the third quarter of 2021, this LP paid off its $13.2 million mortgage loan upon maturity utilizing an equity contribution from us which was funded utilizing borrowings from our revolving credit agreement. Subsequent to the third quarter of 2021, we purchased the 5% minority ownership interest in this LP from the third-party minority ownership partner for approximately $3.1 million and subsequently own 100% of this LP.
|
14
(c.)
|
During the first quarter of 2021, this LP paid off its $4.7 million mortgage loan, upon maturity, utilizing pro rata equity contributions from the limited partners as well as a $3.5 million member loan from us to the LP which was funded utilizing borrowings from our revolving credit agreement.
|
(d.)
|
Construction of this MOB, which is located in Denison, Texas on the campus of a hospital owned and operated by a wholly-owned subsidiary of UHS, was substantially completed in December 2020. We have committed to invest up to $4.8 million in equity and debt financing, $1.4 million of which has been funded as of September 30, 2021. This LP entered into a $13.1 million third-party construction loan commitment, which is non-recourse to us, which has an outstanding balance of $13.1 million as of September 30, 2021.
|
(e.)
|
The LLC is the lessee with a third-party lessor under a ground lease for land.
|
(f.)
|
These LPs are the lessees with UHS-related parties for the land related to these properties.
|
Below are the condensed combined statements of income (unaudited) for the five LLCs/LPs accounted for under the equity method at September 30, 2021 and the four LLCs/LPs accounted for under the equity method as September 30, 2020 (the 2020 periods do not include the newly constructed Texoma Medical Plaza II that was substantially completed in December, 2020).
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
(amounts in thousands)
|
(amounts in thousands)
|
|
Revenues
|
|
$
|
2,736
|
|
|
$
|
2,624
|
|
|
$
|
8,373
|
|
|
$
|
7,637
|
|
Operating expenses
|
|
|
1,184
|
|
|
|
1,047
|
|
|
|
3,356
|
|
|
|
3,094
|
|
Depreciation and amortization
|
|
|
627
|
|
|
|
444
|
|
|
|
1,684
|
|
|
|
1,333
|
|
Interest, net
|
|
|
388
|
|
|
|
315
|
|
|
|
1,260
|
|
|
|
949
|
|
Net income
|
|
$
|
537
|
|
|
$
|
818
|
|
|
$
|
2,073
|
|
|
$
|
2,261
|
|
Our share of net income
|
|
$
|
303
|
|
|
$
|
517
|
|
|
$
|
1,341
|
|
|
$
|
1,371
|
|
Below are the condensed combined balance sheets (unaudited) for the five above-mentioned LLCs/LPs that were accounted for under the equity method as of September 30, 2021 and December 31, 2020:
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
|
|
(amounts in thousands)
|
|
Net property, including construction in progress
|
|
$
|
42,789
|
|
|
$
|
42,374
|
|
Other assets (a.)
|
|
|
9,484
|
|
|
|
8,818
|
|
Total assets
|
|
$
|
52,273
|
|
|
$
|
51,192
|
|
|
|
|
|
|
|
|
|
|
Other liabilities (a.)
|
|
$
|
6,966
|
|
|
$
|
9,402
|
|
Mortgage notes payable, non-recourse to us
|
|
|
22,133
|
|
|
|
39,735
|
|
Advances payable to us (b.)
|
|
|
3,500
|
|
|
|
-
|
|
Equity
|
|
|
19,674
|
|
|
|
2,055
|
|
Total liabilities and equity
|
|
$
|
52,273
|
|
|
$
|
51,192
|
|
|
|
|
|
|
|
|
|
|
Investments in and advances to LLCs before amounts included in
|
|
|
|
|
|
|
|
|
accrued expenses and other liabilities
|
|
$
|
23,123
|
|
|
$
|
4,278
|
|
Amounts included in accrued expenses and other liabilities
|
|
|
(1,896
|
)
|
|
|
(3,020
|
)
|
Our share of equity in LLCs, net
|
|
$
|
21,227
|
|
|
$
|
1,258
|
|
|
(a.)
|
Other assets and other liabilities as of both September 30, 2021 and December 31, 2020 include approximately $4.3 million of right-of-use land assets and right-of-use land liabilities related to ground leases whereby the LLC/LP is the lessee, with third party lessors, including subsidiaries of UHS.
|
|
(b.)
|
Consists of a 7.25% member loan to FTX MOB Phase II, LP with a maturity date of March 1, 2023.
|
15
As of September 30, 2021, and December 31, 2020, aggregate principal amounts due on mortgage notes payable by unconsolidated LLCs/LPs, which are accounted for under the equity method and are non-recourse to us, are as follows (amounts in thousands):
|
|
Mortgage Loan Balance (a.)
|
|
|
|
Name of LLC/LP
|
|
9/30/2021
|
|
|
12/31/2020
|
|
|
Maturity Date
|
FTX MOB Phase II (5.00% fixed rate mortgage loan) (b.)
|
|
$
|
-
|
|
|
$
|
4,777
|
|
|
February, 2021
|
Grayson Properties (5.034% fixed rate mortgage loan) (c.)
|
|
|
-
|
|
|
|
13,372
|
|
|
September, 2021
|
Grayson Properties II (3.70% fixed rate construction loan) (d.)
|
|
|
13,075
|
|
|
|
12,336
|
|
|
June, 2025
|
Brunswick Associates (2.80% fixed rate mortgage loan)
|
|
|
9,058
|
|
|
|
9,250
|
|
|
December, 2030
|
|
|
$
|
22,133
|
|
|
$
|
39,735
|
|
|
|
|
(a.)
|
All mortgage loans require monthly principal payments through maturity and include a balloon principal payment upon maturity.
|
|
(b.)
|
Upon maturity in February 2021 this LP paid off this mortgage loan utilizing pro rata equity contributions from the limited partners as well as a $3.5 million member loan from us to the LP which was funded utilizing borrowings from our revolving credit agreement.
|
|
(c.)
|
Upon maturity in September, 2021 this LP paid off this mortgage utilizing an equity contribution from us, which was funded utilizing borrowings from our revolving credit agreement.
|
|
(d.)
|
This construction loan has a maximum commitment of $13.1 million and requires interest on the outstanding principal balance to be paid on a monthly basis through December 1, 2022. Monthly principal and interest payments are scheduled to commence on January 1, 2023.
|
Pursuant to the operating and/or partnership agreements of the five LLCs/LPs in which we continue to hold non-controlling ownership interests, the third-party member and/or 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.
The minority partner in Grayson Properties, LP, as the Offering Member, made an offer to sell its entire 5% ownership interest to us at a stipulated price, and we agreed to purchase the ownership interest at the stipulated price of approximately $3.1 million. The transaction was completed during the fourth quarter of 2021, as discussed above.
(6) Recent Accounting Pronouncements
Accounting for Lease Concessions Granted in Connection with COVID-19
On April 8, 2020, the Financial Accounting Standards Board ("FASB") held a public meeting and shortly afterwards issued a question-and-answer ("Q&A") document which was intended to provide accounting relief for lease concessions related to the COVID-19 pandemic. The accounting relief permits an entity to choose to forgo the evaluation of the enforceable rights and obligations of a lease contract, which is a requirement of Accounting Standards Codification Topic 842, Leases, which we adopted on January 1, 2019, as long as the total rent payments after the lease concessions are substantially the same, or less than, the total payments previously required by the lease. An entity may account for COVID-19 related lease concessions either (i) as if they were part of the enforceable rights and obligations of the parties under the existing lease contract; or (ii) as a lease modification. To the extent that a rent concession is granted as a deferral of payments, but the total lease payments are substantially the same, lessors are allowed to account for the concession as if no change had been made to the original lease contract.
Based on the Q&A, an entity is not required to account for all lease concessions related to the effects of the COVID-19 pandemic under one elected option, however, the entity is required to apply the elected option consistently to leases with similar characteristics and in similar circumstances. The COVID-19 pandemic did not start to adversely impact the economic conditions in the United States until late March 2020 and did not have a material effect on our operations or financial results during the three and nine months ended September 30, 2021 or the year ended December 31, 2020.
Reference Rate Reform
In March 2020, the FASB issued an accounting standard classified under FASB ASC Topic 848, “Reference Rate Reform.” The amendments in this update contain practical expedients for reference rate reform related activities that impact debt, leases, derivatives
16
and other contracts. The guidance in ASC 848 is optional and may be elected over time as reference rate reform activities occur. We will evaluate the impact of the guidance and may apply elections as applicable as additional changes in the market occur.
(7) Lease Accounting
We adopted the new lease standard on January 1, 2019 and applied it to leases that were in place on the effective date as both a lessor and lessee. We adopted ASC 842 effective January 1, 2019 under the modified retrospective approach and elected the optional transition method to apply the provisions of ASC 842 as of the adoption date, rather than the earliest period presented. We elected to apply certain adoption related practical expedients for all leases that commenced prior to the election date. This practical expedient allowed us to not separate expenses reimbursed by our customers (“tenant reimbursements”) from the associated rental revenue if certain criteria were met.
As Lessor:
We lease our operating properties to customers under agreements that are classified as operating leases. We recognize the total minimum lease payments provided for under the leases on a straight-line basis over the lease term. Generally, under the terms of our leases, the majority of our rental expenses, including common area maintenance, real estate taxes and insurance, are recovered from our customers. We record amounts reimbursed by customers in the period that the applicable expenses are incurred, which is generally ratably throughout the term of the lease. We have elected the package of practical expedients that allows lessors to not separate lease and non-lease components by class of underlying asset. This practical expedient allowed us to not separate expenses reimbursed by our customers (“tenant reimbursements”) from the associated rental revenue if certain criteria were met. We assessed these criteria and concluded that the timing and pattern of transfer for rental revenue and the associated tenant reimbursements are the same, and as our leases qualify as operating leases, we accounted for and presented rental revenue and tenant reimbursements as a single component under Lease revenue in our consolidated statements of income for the three and nine months ended September 30, 2021 and 2020.
The components of the “Lease revenue – UHS facilities” and “Lease revenue – Non-related parties” captions for the three and nine month periods ended September 30, 2021 and 2020 are disaggregated below (in thousands). Base rents are primarily stated rent amounts provided for under the leases that are recognized on a straight-line basis over the lease term. Bonus rents and tenant reimbursements represent amounts where tenants are contractually obligated to pay an amount that is variable in nature.
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
September 30,
|
|
|
September 30,
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
UHS facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base rents
|
$
|
5,392
|
|
|
$
|
4,402
|
|
|
$
|
15,820
|
|
|
$
|
12,940
|
|
Bonus rents
|
|
1,828
|
|
|
|
1,680
|
|
|
|
5,171
|
|
|
|
4,477
|
|
Tenant reimbursements
|
|
354
|
|
|
|
299
|
|
|
|
980
|
|
|
|
826
|
|
Lease revenue - UHS facilities
|
$
|
7,574
|
|
|
$
|
6,381
|
|
|
$
|
21,971
|
|
|
$
|
18,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-related parties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base rents
|
|
10,421
|
|
|
|
10,390
|
|
|
|
31,425
|
|
|
|
31,155
|
|
Tenant reimbursements
|
|
2,694
|
|
|
|
2,451
|
|
|
|
7,899
|
|
|
|
7,371
|
|
Lease revenue - Non-related parties
|
$
|
13,115
|
|
|
$
|
12,841
|
|
|
$
|
39,324
|
|
|
$
|
38,526
|
|
Disclosures Related to Certain Facilities:
Wellington Regional Medical Center:
UHS has two 5-year renewal options at fair market value lease rates (2022 through 2031) related to Wellington Regional Medical Center. The current lease on this facility is scheduled to expire on December 31, 2021. Since UHS’s lease renewal option for Wellington Regional Medical Center is fair market value (effective January 1, 2022), the lease rate valuation process is currently in progress and expected to be completed during the fourth quarter of 2021. Subject to completion of a lease agreement at acceptable rates and terms, UHS has indicated its intent to renew the lease on this facility.
17
Southwest Healthcare System, Inland Valley Campus:
UHS has two 5-year renewal options at fair market value lease rates (2022 through 2031) related to the Southwest Healthcare System, Inland Valley Campus property. As previously disclosed, a wholly-owned subsidiary of UHS has notified us that it is planning to terminate the existing lease on Southwest Healthcare System, Inland Valley Campus, upon the scheduled expiration of the current lease term on December 31, 2021. As permitted pursuant to the terms of the lease, UHS has the right to purchase the leased property at its appraised fair market value at the end of the existing lease term. However, UHS has agreed to exchange, and lease back from us, substitution properties with an aggregate fair market value substantially equal to that of Southwest Healthcare System, Inland Valley Campus, in return for the real estate assets of the Inland Valley Campus. The substitution properties consist of one acute care hospital (including a behavioral health pavilion) and a newly constructed behavioral health hospital. The Independent Trustees of our Board, as well as the UHS Board of Directors, have approved these transactions subject to satisfactory completion of definitive agreements, which are in progress. The effective date of the transactions is expected to coincide with the scheduled lease maturity date of December 31, 2021. Pursuant to the terms of the lease on the Inland Valley Campus, we earned $3.4 million of lease revenue during the nine-month period ended September 30, 2021 ($2.0 million in base rental and $1.4 million in bonus rental) and $4.4 million of lease revenue during the year ended December 31, 2020 ($2.6 million in base rental and $1.8 million in bonus rental).
PeaceHealth Medical Clinic:
The existing lease on the PeaceHealth Medical Clinic, an MOB located in Bellingham, Washington was scheduled to expire on December 31, 2021. In July, 2021, the lease was renewed for an additional seven year term, extending the scheduled expiration date to January 31, 2029. The tenant also has two additional five-year renewal terms. Additionally, the tenant has the right of first offer to purchase the property if the property is marketed by us; and the tenant has an option to purchase the property at the end of the lease term at the then fair market value. Pursuant to the terms of the lease on the PeaceHealth Medical Clinic, we earned $2.1 million of lease revenue during the nine-month period ended September 30, 2021 and $2.8 million of lease revenue during the year ended December 31, 2020.
Kindred Hospital Chicago Central:
As previously disclosed, the existing lease on Kindred Hospital Chicago Central, a 95-bed specialty hospital located in Chicago, Illinois, is scheduled to expire on December 31, 2021. The tenant of the facility notified us that they do not intend to renew the lease upon its scheduled expiration. We are marketing this property to potential new tenants. However, should this property be vacant for an extended period of time, or should we experience a decrease in the lease rate on a future lease as compared to the current lease, or incur substantial renovation costs to make the property suitable for another operator/tenant, our future results of operations could be unfavorably impacted. Pursuant to the terms of the lease, we earned approximately $1.2 million of lease revenue during the nine-month period ended September 30, 2021 and $1.6 million of lease revenue during the twelve-month period ended December 31, 2020.
Vacancies - Evansville, Indiana and Corpus Christi, Texas:
The leases on two hospital facilities, located in Evansville, Indiana, and Corpus Christi, Texas, expired on May 31, 2019 and June 1, 2019, respectively. The hospital located in Evansville, Indiana, has remained vacant since September 30, 2019 and the hospital located in Corpus Christi, Texas, has remained vacant since June 1, 2019.
We continue to market each property for lease to new tenants. However, should these properties continue to remain owned and vacant for an extended period of time, or should we experience decreased lease rates on future leases, as compared to prior/expired lease rates, or incur substantial renovation costs to make the properties suitable for other operators/tenants, our future results of operations could be materially unfavorably impacted.
As Lessee:
We are the lessee with various third parties, including subsidiaries of UHS, in connection with ground leases for land at fourteen of our consolidated properties. Our right-of-use land assets represent our right to use the land for the lease term and our lease liabilities represent our obligation to make lease payments arising from the leases. Right-of-use assets and lease liabilities were recognized upon adoption of Topic 842 based on the present value of lease payments over the lease term. We utilized our estimated incremental borrowing rate, which was derived from information available as of January 1, 2019, in determining the present value of lease payments. A right-of-use asset and lease liability are not recognized for leases with an initial term of 12 months or less, as these short-term leases are accounted for similarly to previous guidance for operating leases. We do not currently have any ground leases with an initial term of 12 months or less. As of September 30, 2021, our condensed consolidated balance sheet includes right-of-use land assets of approximately $8.9 million and ground lease liabilities of approximately $8.9 million. There were no newly leased assets for which a right-of-use asset was recorded in exchange for a new lease liability during the nine months ended September 30, 2021.
18
(8) Debt and Financial Instruments
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.
On July 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 dated June 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 on July 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. At September 30, 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%.
At September 30, 2021, we had $276.8 million of outstanding borrowings and $3.6 million of letters of credit outstanding under our Credit Agreement. We had $94.6 million of available borrowing capacity, net of the outstanding borrowings and letters of credit outstanding as of September 30, 2021. There are no compensating balance requirements. At December 31, 2020, we had $236.2 million of outstanding borrowings outstanding against our Prior Credit 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 at September 30, 2021 and were in compliance with all of the covenants in the Prior Credit Agreement at December 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.
19
The following table includes a summary of the required compliance ratios, giving effect to the covenants contained in the Credit Agreement in place at September 30, 2021 as well as the Prior Credit Agreement that was in place at December 31, 2020 (dollar amounts in thousands):
|
|
Covenant
|
|
September 30,
2021
|
|
December 31,
2020
|
|
Tangible net worth
|
|
> =$125,000
|
|
$
|
141,419
|
|
$
|
147,263
|
|
Total leverage
|
|
< 60%
|
|
|
45.6
|
%
|
|
44.8
|
%
|
Secured leverage
|
|
< 30%
|
|
|
8.1
|
%
|
|
8.6
|
%
|
Unencumbered leverage
|
|
< 60%
|
|
|
47.2
|
%
|
|
41.4
|
%
|
Fixed charge coverage
|
|
> 1.50x
|
|
4.8x
|
|
4.7x
|
|
As indicated on the following table, we have various mortgages, all of which are non-recourse to us, included on our condensed consolidated balance sheet as of September 30, 2021 (amounts in thousands):
Facility Name
|
|
Outstanding
Balance
(in thousands) (a.)
|
|
|
Interest
Rate
|
|
|
Maturity
Date
|
700 Shadow Lane and Goldring MOBs fixed rate
mortgage loan (b.)
|
|
$
|
5,268
|
|
|
|
4.54
|
%
|
|
June, 2022
|
BRB Medical Office Building fixed rate mortgage loan
|
|
|
5,337
|
|
|
|
4.27
|
%
|
|
December, 2022
|
Desert Valley Medical Center fixed rate mortgage loan
|
|
|
4,395
|
|
|
|
3.62
|
%
|
|
January, 2023
|
2704 North Tenaya Way fixed rate mortgage loan
|
|
|
6,458
|
|
|
|
4.95
|
%
|
|
November, 2023
|
Summerlin Hospital Medical Office Building III fixed
rate mortgage loan
|
|
|
12,866
|
|
|
|
4.03
|
%
|
|
April, 2024
|
Tuscan Professional Building fixed rate mortgage loan
|
|
|
2,494
|
|
|
|
5.56
|
%
|
|
June, 2025
|
Phoenix Children’s East Valley Care Center fixed rate
mortgage loan
|
|
|
8,530
|
|
|
|
3.95
|
%
|
|
January, 2030
|
Rosenberg Children's Medical Plaza fixed rate mortgage loan
|
|
|
12,333
|
|
|
|
4.42
|
%
|
|
September, 2033
|
Total, excluding net debt premium and net financing fees
|
|
|
57,681
|
|
|
|
|
|
|
|
Less net financing fees
|
|
|
(387
|
)
|
|
|
|
|
|
|
Plus net debt premium
|
|
|
103
|
|
|
|
|
|
|
|
Total mortgages notes payable, non-recourse to us, net
|
|
$
|
57,397
|
|
|
|
|
|
|
|
|
(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 September 30, 2021 had a combined fair value of approximately $60.3 million. At December 31, 2020, we had various mortgages, all of which were non-recourse to us, included in our condensed consolidated balance sheet. The combined outstanding balance of these various mortgages at December 31, 2020 was $59.2 million and 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.
Financial Instruments:
In March 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 on March 25, 2020 and is scheduled to mature on March 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.
In January 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 on January 15, 2020 and is scheduled to mature on September 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.
20
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 1.144% that we designated as a cash flow hedge. The interest rate swap became effective on September 16, 2019 and is scheduled to mature on September 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. At September 30, 2021, the fair value of our interest rate swaps was a net liability of $556,000 which is included in accrued expenses and other liabilities on the accompanying condensed consolidated balance sheet. During the third quarter of 2021, we paid or accrued approximately $324,000 to the counterparty by us, adjusted for the previous quarter accrual, pursuant to the terms of the swaps. During the first nine months of 2021, we paid or accrued approximately $945,000 to the counterparty by us, adjusted for the previous quarter accrual, pursuant to the terms of the swaps. From inception of the swap agreements through September 30, 2021 we paid or accrued approximately $1.6 million in net payments made to the counterparty by us pursuant to the terms of the swap (consisting of approximately $199,000 in payments or accruals made to us by the counterparty, offset by approximately $1.8 million of payments due to the counterparty from us). 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. We do not expect any gains or losses on our interest rate swaps to be reclassified to earnings in the next twelve months.
(9) Segment Reporting
Our primary business is investing in and leasing healthcare and human service facilities through direct ownership or through joint ventures, which aggregate into a single reportable segment. We actively manage our portfolio of healthcare and human service facilities and may from time to time make decisions to sell lower performing properties not meeting our long-term investment objectives. The proceeds of sales are typically reinvested in new developments or acquisitions, which we believe will meet our planned rate of return. It is our intent that all healthcare and human service facilities will be owned or developed for investment purposes. Our revenue and net income are generated from the operation of our investment portfolio.
Our portfolio is located throughout the United States, however, we do not distinguish or group our operations on a geographical basis for purposes of allocating resources or measuring performance. We review operating and financial data for each property on an individual basis; therefore, we define an operating segment as our individual properties. Individual properties have been aggregated into one reportable segment based upon their similarities with regard to both the nature and economics of the facilities, tenants and operational processes, as well as long-term average financial performance. No individual property meets the requirements necessary to be considered its own segment.
21