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carter-validus-mission-critical-reit-inc-managements-discussion-and-analysis-of-financial-condition-and-results-of-operations-form-10-q

The following discussion and analysis of our financial condition and results ofoperations should be read in conjunction with our condensed consolidatedfinancial statements and the notes thereto and the other financial informationappearing elsewhere in this Quarterly Report on Form 10-Q. The followingdiscussion should also be read in conjunction with our audited consolidatedfinancial statements, and the notes thereto, and Management's Discussion andAnalysis of Financial Condition and Results of Operations included in our AnnualReport on Form 10-K for the year ended December 31, 2016, as filed with the U.S.Securities and Exchange Commission, or the SEC, on March 30, 2017, or the 2016Annual Report on Form 10-K.The terms "we," "our," "us" and the "Company" refer to Carter Validus MissionCritical REIT, Inc., Carter/Validus Operating Partnership, LP, allmajority-owned subsidiaries and controlled subsidiaries.Forward-Looking StatementsCertain statements contained in this Quarterly Report on Form 10-Q, other thanhistorical facts, include forward-looking statements that reflect ourexpectations and projections about our future results, performance, prospectsand opportunities. Such statements include, in particular, statements about ourplans, strategies, and prospects and are subject to certain risks anduncertainties, as well as known and unknown risks, which could cause actualresults to differ materially from those projected or anticipated. Therefore,such statements are not intended to be a guarantee of our performance in futureperiods. Such forward-looking statements can generally be identified by our useof forward-looking terminology such as "may," "will," "would," "could,""should," "expect," "intend," "anticipate," "estimate," "believe," "continue,"or other similar words. Readers are cautioned not to place undue reliance onthese forward-looking statements, which reflect our management's view only as ofthe date this Quarterly Report on Form 10-Q is filed with the SEC. We make norepresentation or warranty (express or implied) about the accuracy of any suchforward-looking statements contained in this Quarterly Report on Form 10-Q, andwe do not undertake to publicly update or revise any forward-looking statements,whether as a result of new information, future events, or otherwise. SeeItem 1A. "Risk Factors" of our 2016 Annual Report on Form 10-K for a discussionof some, although not all, of the risks and uncertainties that could causeactual results to differ materially from those presented in our forward-lookingstatements.Management's discussion and analysis of financial condition and results ofoperations is based upon our condensed consolidated financial statements, whichhave been prepared in accordance with the accounting principles generallyaccepted in the United States, or GAAP. The preparation of these financialstatements requires our management to make estimates and assumptions that affectthe reported amounts of assets, liabilities, revenues and expenses, and relateddisclosure of contingent assets and liabilities. On a regular basis, we evaluatethese estimates. These estimates are based on management's historical industryexperience and on various other assumptions that are believed to be reasonableunder the circumstances. Actual results may differ from these estimates.OverviewWe were formed on December 16, 2009 under the laws of Maryland to acquire andoperate a diversified portfolio of income-producing commercial real estate inthe data center and healthcare sectors. We may also invest in realestate-related investments that relate to such property types. We qualified andelected to be taxed as a real estate investment trust, or REIT, under theInternal Revenue Code of 1986, as amended, or the Code, for federal income taxpurposes.We ceased offering shares of common stock in our initial public offering of upto $1,746,875,000 in shares of common stock, or our Offering, on June 6, 2014.Upon completion of our Offering, we raised gross proceeds of approximately$1,716,046,000 (including shares of common stock issued pursuant to ourdistribution reinvestment plan, or the DRIP).On April 14, 2014, we registered 10,526,315 shares of common stock in the FirstDRIP Offering for a price per share of $9.50 for a proposed maximum offeringprice of $100,000,000 in shares of common stock under the DRIP pursuant to aregistration statement on Form S-3. On November 25, 2015, we registered anadditional 10,473,946 shares of common stock in the Second DRIP Offering for aprice per share of $9.5475, which was the greater of (i) 95% of the fair marketvalue per share as determined by our board of directors as of September 30, 2015and (ii) $9.50 per share, for a proposed maximum offering price of $100,000,000in shares of common stock under the DRIP pursuant to a new registrationstatement on Form S-3. Effective January 1, 2017, shares are offered pursuant tothe Second DRIP Offering for a price per share of $9.519, which is the greaterof (i) 95% of the fair market value per share as determined by our board ofdirectors as of September 30, 2016 and (ii) $9.50 per share, until such time asour board of directors determines a new estimated share value. We will continueto issue shares of common stock under the Second DRIP Offering until such timeas we sell all of the shares registered for sale under the Second DRIP Offering,unless we file a new registration statement with the SEC or the Second DRIPOffering is terminated by our board of directors. 25

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We refer to the First DRIP Offering and the Second DRIP Offering together as the"DRIP Offerings," and collectively with our Offering, our "Offerings." As ofMarch 31, 2017, we had issued approximately 191,535,000 shares of common stockin our Offerings for gross proceeds of $1,896,389,000, before share repurchasesof $59,963,000 and offering costs, selling commissions and dealer manager feesof $174,798,000.On November 16, 2015, our board of directors, at the recommendation of the auditcommittee of the board, or the Audit Committee, which is comprised solely ofindependent directors, established an estimated net asset value, "NAV", pershare of our common stock, or the "Estimated Per Share NAV", calculated as ofSeptember 30, 2015, of $10.05 for purposes of assisting broker-dealers thatparticipated in our Offering in meeting their customer account statementreporting obligations under the National Association of Securities DealersConduct, or NASD, Rule 2340. On November 28, 2016, our board of directors, atthe recommendation of the Audit Committee, established an updated Estimated PerShare NAV, calculated as of September 30, 2016, of $10.02 for purposes ofassisting broker-dealers that participated in our Offering in meeting theircustomer account statement reporting obligations under NASD Rule 2340. We intendto publish an updated Estimated Per Share NAV on at least an annual basis. EachEstimated Per Share NAV was determined by our board of directors afterconsultation with Carter/Validus Advisors, LLC, or our Advisor, and anindependent third-party valuation firm.Substantially all of our operations are conducted through Carter/ValidusOperating Partnership, LP, or our Operating Partnership. We are externallyadvised by our Advisor pursuant to an advisory agreement between us and ourAdvisor, which is our affiliate. Our Advisor supervises and manages ourday-to-day operations and selects the properties and real estate-relatedinvestments we acquire, subject to the oversight and approval of our board ofdirectors. Our Advisor also provides marketing, sales and client servicesrelated to real estate on our behalf. Our Advisor engages affiliated entities toprovide various services to us. Our Advisor is managed by, and is a subsidiaryof our sponsor, Carter/Validus REIT Investment Management Company, LLC, or ourSponsor. We have no paid employees and rely upon our Advisor to providesubstantially all of our services.Carter Validus Real Estate Management Services, LLC, or our Property Manager, awholly-owned subsidiary of our Sponsor, serves as our property manager. OurAdvisor and our Property Manager received, and will continue to receive, feesduring our acquisition and operational stages and our Advisor may be eligible toreceive fees during the liquidation stage of the Company.We currently operate through two reportable segments - commercial real estateinvestments in data centers and healthcare. As of March 31, 2017, we hadcompleted acquisitions of 49 real estate investments (including one real estateinvestment owned through a consolidated partnership) consisting of 84properties, comprised of 95 buildings and parking facilities and approximately6,218,000 square feet of gross rentable area (excluding parking facilities), foran aggregate purchase price of $2,189,062,000.Critical Accounting PoliciesOur critical accounting policies were disclosed in our 2016 Annual Report onForm 10-K. There have been no material changes to our critical accountingpolicies as disclosed therein.Interim Unaudited Financial DataOur accompanying condensed consolidated financial statements have been preparedby us in accordance with GAAP in conjunction with the rules and regulations ofthe SEC. Certain information and footnote disclosures required for annualfinancial statements have been condensed or excluded pursuant to SEC rules andregulations. Accordingly, our accompanying condensed consolidated financialstatements do not include all of the information and footnotes required by GAAPfor complete financial statements. Our accompanying condensed consolidatedfinancial statements reflect all adjustments, which are, in our view, of anormal recurring nature and necessary for a fair presentation of our financialposition, results of operations and cash flows for the interim period. Interimresults of operations are not necessarily indicative of the results to beexpected for the full year; such full year results may be less favorable. Ouraccompanying condensed consolidated financial statements should be read inconjunction with the audited consolidated financial statements and the notesthereto included in our 2016 Annual Report on Form 10-K.Qualification as a REITWe qualified and elected to be taxed as a REIT for federal income tax purposesand we intend to continue to be taxed as a REIT. To maintain our qualificationas a REIT, we must continue to meet certain organizational and operationalrequirements, including a requirement to currently distribute at least 90.0% ofour REIT taxable income to our stockholders. As a REIT, we generally will not besubject to federal income tax on taxable income that we distribute to ourstockholders. 26

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If we fail to maintain our qualification as a REIT in any taxable year, we wouldthen be subject to federal income taxes on our taxable income at regularcorporate rates and would not be permitted to qualify for treatment as a REITfor federal income tax purposes for four years following the year during whichqualification is lost unless the Internal Revenue Service, or the IRS, grants usrelief under certain statutory provisions. Such an event could have a materialadverse effect on our net income and net cash available for distribution to ourstockholders.Recently Issued Accounting PronouncementsFor a discussion of recently issued accounting pronouncements, seeNote 2-"Summary of Significant Accounting Policies-Recently Issued AccountingPronouncements" to our condensed consolidated financial statements that are apart of this Quarterly Report on Form 10-Q.Segment ReportingWe report our financial performance based on two reporting segments-commercialreal estate investments in data centers and healthcare. See Note 9-"SegmentReporting" to the condensed consolidated financial statements for additionalinformation on our two reporting segments.Factors That May Influence Results of OperationsWe are not aware of any material trends and uncertainties, other than nationaleconomic conditions affecting real estate generally, that may be reasonablyexpected to have a material impact, favorable or unfavorable, on revenues orincomes from the acquisition, management and operation of properties other thanthose set forth in our Annual Report on Form 10-K for the year ended December31, 2016 and in Part II, Item 1A. "Risk Factors" of this Quarterly Report onForm 10-Q.Results of OperationsOur results of operations are influenced by the timing of acquisitions and theoperating performance of our real estate properties. The following table showsthe property statistics of our real estate properties as of March 31, 2017 and2016: March 31, 2017 2016Number of commercial operating properties 84 78 (1)Leased rentable square feet 6,109,000

5,890,000

Weighted average percentage of rentable square feet leased 98 %

98 %

(1) As of March 31, 2016, we owned 79 real estate properties, one of which was

under construction.

The following table summarizes our real estate properties’ activity for thethree months ended March 31, 2017 and 2016:

Three Months

Ended March 31,

2017

2016

Commercial operating properties placed in service 1 -

Approximate aggregate cost of property placed in service $ 19,466,000 $ -Leased rentable square feet of property placed in service 34,000

-The following discussion is based on our condensed consolidated financialstatements for the three months ended March 31, 2017 and 2016.These sections describe and compare our results of operations for the threemonths ended March 31, 2017 and 2016. We generate almost all of our netoperating income from property operations. In order to evaluate our overallportfolio, we analyze the net operating income of same store properties. Wedefine "same store properties" as operating properties that were owned andoperated for the entirety of both calendar periods being compared and excludesproperties under development.By evaluating the property net operating income of our same store properties,management is able to monitor the operations of our existing properties forcomparable periods to measure the performance of our current portfolio anddetermine the effects of our new acquisitions on net income. 27

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Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016Changes in our revenues are summarized in the following table (amounts inthousands): Three Months Ended March 31, 2017 2016 Change

Same store rental and parking revenue $ 45,513$ 52,103$ (6,590 )Non-same store rental and parking revenue 2,212

2,212

Same store tenant reimbursement revenue 3,509 4,321 (812 )Non-same store tenant reimbursement revenue 71 - 71Other operating income 85 86 (1 )Total revenue $ 51,390$ 56,510$ (5,120 )

• Same store rental and parking revenue decreased primarily due to provision

for doubtful accounts totaling $6.5 million during the three months ended

March 31, 2017, which were a result of two tenants experiencing financial

difficulties that we believe will result in material new lease terms. In

addition, there was an increase in contractual rental revenue resulting

from average annual rent escalations of 2.23% at our same store properties,

which was offset by straight-line rental revenue.

• Non-same store rental and parking revenue increased primarily as a result

of the acquisition of 5 properties and one property placed in service since

January 1, 2016.• Same store tenant reimbursement revenue decreased primarily due to

provision for doubtful accounts recorded for tenant reimbursement revenue

in the amount of $1.2 million during the three months ended March 31, 2017,

which was a result of two tenants experiencing financial difficulties that

we believe will result in material new lease terms, offset by an increase

in real estate taxes.

• Non-same store tenant reimbursement revenue increased primarily as a result

of the acquisition of 5 properties since January 1, 2016.

Changes in our expenses are summarized in the following table (amounts inthousands): Three Months Ended March 31, 2017 2016 ChangeSame store rental and parking expenses $ 7,203$ 6,545$ 658Non-same store rental and parking expenses 188 94

General and administrative expenses 1,683 1,581

102

Change in fair value of contingent consideration (1,140 ) 120

(1,260 )Asset management fees 4,819 4,787

Depreciation and amortization 18,067 16,999 1,068Total expenses $ 30,820$ 30,126$ 694

• Same store rental and parking expenses, certain of which are subject to

reimbursement by our tenants, increased primarily due to an increase in

real estate taxes paid directly by two tenants during the three months

ended March 31, 2016, which we now pay and is subject to reimbursement by

our tenants.

• Non-same store rental and parking expenses increased primarily due to the

placing one property in service since January 1, 2016.

• General and administrative expenses increased primarily due to an increase

in professional fees.

• The decrease in fair value of contingent consideration is due to a change

in management’s assessment of incurring a lower payout under the contingent

consideration arrangement.

• Depreciation and amortization increased primarily due to the increase in

the weighted average depreciable basis of real estate investments. 28

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Changes in other income (expense) are summarized in the following table (amountsin thousands): Three Months Ended March 31, 2017 2016 ChangeOther interest and dividend income:Cash deposits interest $ 13$ 13 $ -Dividends on preferred equity investment - 2,461 (2,461 )Notes receivable interest and other income 534 332

202

Real estate-related notes receivable interest income 16 16 -Total other interest and dividend income 563 2,822 (2,259 )Interest expense, net:Interest on notes payable (5,599 ) (6,458 ) 859Interest on unsecured credit facility (2,986 ) (2,123 ) (863 )Amortization of deferred financing costs (941 ) (1,151 ) 210Capitalized interest 861 251 610Loss on debt extinguishment - (1,133 ) 1,133Total interest expense, net (8,665 ) (10,614 ) 1,949Provision for loan losses (2,484 ) - (2,484 )Total other expense (10,586 ) (7,792 ) (2,794 )Net income $ 9,984$ 18,592$ (8,608 )

• Dividends on preferred equity investment decreased due to the redemption of

the preferred equity investment on October 4, 2016.

• Notes receivable interest and other income increased primarily due to an

increase in the weighted average outstanding principal balance on notes

receivable, which resulted in an increase in notes receivable interest

income.

• Interest on notes payable decreased due to the payoff of one note payable

during the three months ended March 31, 2017 in the amount of $5.6 million

and the payoff of two notes payable during the year ended December 31, 2016

in the aggregate amount of $44.7 million. The outstanding principal balance

on notes payable was $478.4 million as of March 31, 2017, as compared to $508.9 million as of March 31, 2016.

• Interest on unsecured credit facility increased due to an increase in the

weighted average outstanding principal balance on our unsecured credit

facility. The weighted average outstanding principal balance of our unsecured credit facility was $371.3 million as of March 31, 2017, and $300.1 million as of March 31, 2016.• Capitalized interest increased due to an increase in the average

accumulated expenditures on development properties to $53.3 million for the

three months ended March 31, 2017, as compared to $15.1 million for the three months ended March 31, 2016.

• Provision for loan losses increased due to a $2.5 million reserve of two

notes receivable and accrued interest as of March 31, 2017.

Organization and Offering CostsPrior to the termination of our Offering on June 6, 2014, we reimbursed ourAdvisor or its affiliates for organization and offering costs it incurred on ourbehalf, but only to the extent the reimbursement did not cause the sellingcommissions, dealer manager fees and the other organization and offering costsincurred by us to exceed 15% of gross offering proceeds as of the date of thereimbursement. Since inception and through the termination of our Offering onJune 6, 2014, we paid approximately $156,519,000 in selling commissions anddealer manager fees to SC Distributors, LLC, or our Dealer Manager, which is anaffiliate of our Advisor, and we reimbursed our Advisor or its affiliatesapproximately $14,207,000 in offering expenses, and incurred approximately$3,900,000 of other organization and offering costs, which totaled approximately$174,626,000, or 10.2% of total gross offering proceeds, which wereapproximately $1,716,046,000.Subsequent to the termination of our Offering and as of March 31, 2017, we hadincurred approximately $172,000 in other offering costs related to the DRIPOfferings. 29

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Other organization costs were expensed as incurred and selling commissions anddealer manager fees were charged to stockholders' equity as the amounts relatedto raising capital. For a further discussion of other organization and offeringcosts, see Note 8-"Related-Party Transactions and Arrangements" to the condensedconsolidated financial statements that are a part of this Quarterly Report onForm 10-Q.InflationWe are exposed to inflation risk as income from long-term leases is the primarysource of our cash flows from operations. There are provisions in certain of ourleases with tenants that are intended to protect us from, and mitigate the riskof, the impact of inflation. These provisions include scheduled increases incontractual base rent receipts, reimbursement billings for operating expenses,pass-through charges and real estate tax and insurance reimbursements. However,due to the long-term nature of our leases, among other factors, the leases maynot reset frequently enough to adequately offset the effects of inflation.Liquidity and Capital ResourcesOur principal demands for funds are for real estate and real estate-relatedinvestments, for the payment of acquisition related costs, capital expenditures,operating expenses, distributions and repurchases to stockholders and principaland interest on any current and any future indebtedness. Generally, cash needsfor items other than acquisitions and acquisition related costs will begenerated from operations of our current and future investments. We expect toutilize funds equal to amounts reinvested in the DRIP Offerings and futureproceeds from secured and unsecured financings to complete future realestate-related investments. We expect to meet future cash needs for realestate-related investments from cash flows from operations, funds equal toamounts reinvested in the DRIP Offerings and debt financings. The sources of ouroperating cash flows will be primarily provided by the rental income receivedfrom current and future tenants of our leased properties.We are required by the terms of applicable loan documents to meet certainfinancial covenants, such as coverage ratios and reporting requirements. Inaddition, certain loan agreements include cross-default provisions to financialcovenants in lease agreements with our tenants so that a default in thefinancial covenant in the lease agreement is a default in our loan. We were incompliance with all financial covenant requirements as of March 31, 2017.In the event we are not in compliance with these covenants in future periods andare unable to obtain a consent or waiver, the lender may choose to pursueremedies under the respective loan agreements, which could include, at thelender's discretion, declaring the loans to be immediately due and payable andpayment of termination fees and costs incurred by the lender, among otherpotential remedies.Short-term Liquidity and Capital ResourcesOn a short-term basis, our principal demands for funds will be for theacquisition of real estate and real estate-related notes and investments andpayments of tenant improvements, acquisition related costs, operating expenses,distributions, and interest and principal payments on current and future debtfinancings. We expect to meet our short-term liquidity requirements through netcash flows provided by operations, borrowings on our unsecured credit facility,and secured and unsecured borrowings from banks and other lenders to finance ourexpected future acquisitions.Long-term Liquidity and Capital ResourcesOn a long-term basis, our principal demands for funds will be for theacquisition of real estate and real estate-related notes and investments andpayments of tenant improvements, acquisition related costs, operating expenses,distributions and repurchases to stockholders, and interest and principalpayments on current and future indebtedness. We expect to meet our long-termliquidity requirements through proceeds from cash flow from operations,borrowings on our unsecured credit facility and proceeds from secured orunsecured borrowings from banks or other lenders.We expect that substantially all cash flows from operations will be used to paydistributions to our stockholders after certain capital expenditures; however,we have used, and may continue to use, other sources to fund distributions, asnecessary, such as, funds equal to amounts reinvested in the DRIP Offerings,borrowing on our unsecured credit facility and/or future borrowings onunencumbered assets. To the extent cash flows from operations are lower due tofewer properties being acquired or lower-than-expected returns on the propertiesheld, distributions paid to stockholders may be lower. We expect thatsubstantially all net cash flows from our Offerings or debt financings will beused to fund acquisitions, certain capital expenditures identified atacquisition, repayments of outstanding debt or distributions to our stockholdersin excess of cash flows from operations.Capital ExpendituresWe will require approximately $19.6 million in expenditures for capitalimprovements over the next 12 months. We cannot provide assurances, however,that actual expenditures will not exceed these estimated expenditure levels. Asof 30

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March 31, 2017, we had $2.3 million of restricted cash in lender-controlledescrow reserve accounts for such capital expenditures. In addition, as ofMarch 31, 2017, we had approximately $48.5 million in cash and cash equivalents.For the three months ended March 31, 2017, we had capital expenditures of $4.5million that primarily related to two healthcare real estate investments.Unsecured Credit FacilityThe proceeds of loans made under the unsecured credit facility may be used tofinance the acquisition of real estate investments, for tenant improvements andleasing commissions with respect to real estate, for repayment of indebtedness,for capital expenditures with respect to real estate and for general corporateand working capital purposes. As of March 31, 2017, we had a total unencumberedpool availability under the unsecured credit facility of $514,575,000 and anaggregate outstanding principal balance of $378,000,000. As of March 31, 2017,$136,575,000 remained available to be drawn under the unsecured credit facility.Cash FlowsThree Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016 Three Months Ended March 31,(in thousands) 2017 2016 ChangeNet cash provided by operating activities $ 29,619$ 29,168$ 451Net cash used in investing activities $ 5,001$ 12,035$ (7,034 )Net cash used in financing activities $ 18,764$ 9,225$ 9,539

Operating Activities• Net cash provided by operating activities increased due to annual rental

increases at our same store properties and the acquisition of five operating properties and placing one property in service subsequent to March 31, 2016, partially offset by increased operating expenses.

Investing Activities• Net cash used in investing activities decreased due to a decrease in

capital expenditures of $5.9 million and a decrease in notes receivable

advances of $1.1 million.

Financing Activities• Net cash used in financing activities increased due to an increase in

payments of deferred financing costs of $1.4 million related to the

extension of the maturity date of the revolving line of credit portion of

the credit facility, an increase in repurchases of our common stock of $3.7 million, an increase in distributions to common stockholders of $0.7 million, an increase in distributions to noncontrolling interests of $0.3

million and a decrease in proceeds from our unsecured credit facility of

$30.0 million, offset by a decrease in payments on notes payable of $26.0 million and a decrease in payments to escrow funds of $0.6 million.

Distributions

The amount of distributions payable to our stockholders is determined by ourboard of directors and is dependent on a number of factors, including fundsavailable for distribution, financial condition, capital expenditurerequirements and annual distribution requirements needed to maintain ourqualification as a REIT under the Code. To the extent that funds are available,we intend to continue to pay monthly distributions to stockholders. Our board ofdirectors must authorize each distribution and may, in the future, authorizelower amounts of distributions or not authorize additional distributions andtherefore distribution payments are not assured. Our Advisor may also defer,suspend and/or waive fees and expense reimbursements if we have not generatedsufficient cash flow from our operations and other sources to funddistributions. Additionally, our organizational documents permit us to paydistributions from unlimited amounts of any source, and we may use sources otherthan operating cash flows to fund distributions, including funds equal toamounts reinvested in the DRIP Offerings, which may reduce the amount of capitalwe ultimately invest in properties or other permitted investments. 31

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We have funded distributions with operating cash flows from our properties,funds equal to amounts reinvested in the DRIP Offerings and offering proceedsraised in our Offering. To the extent that we do not have taxable income,distributions paid will be considered a return of capital to stockholders. Thefollowing table shows the sources of distributions paid during the three monthsended March 31, 2017 and 2016: Three Months Ended March 31, 2017 2016Distributions paid in cash -common stockholders $ 15,309,000$ 14,559,000Distributions reinvested (sharesissued) 16,621,000 17,084,000Total distributions $ 31,930,000$ 31,643,000Source of distributions:Cash flows provided byoperations (1) $ 15,309,000 48 % $ 14,559,000 46 %Offering proceeds from issuanceof common stock pursuant to theDRIP (1) 16,621,000 52 % 17,084,000 54 %Total sources $ 31,930,000 100 % $ 31,643,000 100 %

(1) Percentages were calculated by dividing the respective source amount by the

total sources of distributions.

Total distributions declared but not paid as of March 31, 2017 were $11.0million for common stockholders. These distributions were paid on April 3, 2017.For the three months ended March 31, 2017, we paid and declared distributions ofapproximately $31.9 million to common stockholders including shares issuedpursuant to the DRIP Offerings, as compared to FFO (as defined below) for thethree months ended March 31, 2017 of $26.2 million. The payment of distributionsfrom sources other than FFO may reduce the amount of proceeds available forinvestment and operations or cause us to incur additional interest expense as aresult of borrowed funds.For a discussion of distributions paid subsequent to March 31, 2017, see Note15-"Subsequent Events" to the condensed consolidated financial statementsincluded in this Quarterly Report on Form 10-Q.Contractual ObligationsAs of March 31, 2017, we had approximately $856,352,000 of principal debtoutstanding, of which $478,352,000 related to notes payable and $378,000,000related to the unsecured credit facility. See Note 7-"Notes Payable andUnsecured Credit Facility" to the condensed consolidated financial statementsthat are a part of this Quarterly Report on Form 10-Q for certain terms of thedebt outstanding.Our contractual obligations as of March 31, 2017 were as follows (amounts inthousands): Payments due by period Less than More than 1 Year 1-3 Years 3-5 Years 5 Years TotalPrincipal payments - fixed rate debt $ 49,635$ 7,962$ 48,790$ 2,085$ 108,472Interest payments - fixed rate debt 5,071 6,388 5,495 18 16,972Principal payments - variable ratedebt fixed through interest rateswap agreements (1) 146,064 (5) 257,579 135,000 - 538,643Interest payments - variable ratedebt fixed through interest rateswap agreements (2) 18,195 18,395 1,794 - 38,384Principal payments - variable ratedebt 1,456 207,781 - - 209,237Interest payments - variable ratedebt (3) 6,883 3,018 - - 9,901Contingent consideration (4) - 4,500 - - 4,500Capital expenditures 19,575 2,047 - - 21,622Ground lease payments 665 1,574 1,558 37,098 40,895Total $ 247,544$ 509,244$ 192,637$ 39,201$ 988,626 32

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(1) As of March 31, 2017, we had $538.6 million outstanding principal on notes

payable and borrowings under the unsecured credit facility that were fixed

through the use of interest rate swap agreements.

(2) We used the fixed rates under our interest rate swap agreements as of

March 31, 2017 to calculate the debt payment obligations in future periods.

(3) We used the London Interbank Offered Rate, or LIBOR, plus the applicable

margin under our variable rate debt agreements as of March 31, 2017 to

calculate the debt payment obligations in future periods.

(4) Contingent consideration represents our best estimate of the cash payments we

will be obligated to make under contingent consideration arrangements with a

former owner of a property we acquired if specified objectives are achieved

by the acquired entity. Changes in assumptions could have an impact on the

payout of contingent consideration arrangements with a maximum payout of $8.5

million in cash and a minimum payout of $0 as of March 31, 2017.

(5) Of this amount, $105.9 million relates to one loan agreement, the maturity

date of which is August 21, 2017, subject to our right to a two-year

extension and $18.7 million relates to one loan agreement, the maturity date

of which is October 11, 2017, subject to our right to two one-year

extensions. In addition, $51.2 million relates to three loan agreements of

which the Company may exercise its right to add to the unencumbered pool of

the unsecured credit facility.

Off-Balance Sheet ArrangementsAs of March 31, 2017, we had no off-balance sheet arrangements.Related-Party Transactions and ArrangementsWe have entered into agreements with our Advisor and its affiliates, whereby weagree to pay certain fees to, or reimburse certain expenses of, our Advisor orits affiliates for acquisition fees and expenses, organization and offeringexpenses, asset and property management fees and reimbursement of operatingcosts. Refer to Note 8-"Related-Party Transactions and Arrangements" to ourcondensed consolidated financial statements that are a part of this QuarterlyReport on Form 10-Q for a detailed discussion of the various related-partytransactions and agreements.Funds from Operations and Modified Funds from OperationsOne of our objectives is to provide cash distributions to our stockholders fromcash generated by our operations. The purchase of real estate assets and realestate-related investments, and the corresponding expenses associated with thatprocess, is a key operational feature of our business plan in order to generatecash from operations. Due to certain unique operating characteristics of realestate companies, the National Association of Real Estate Investment Trusts, orNAREIT, an industry trade group, has promulgated a measure known as funds fromoperations, or FFO, which we believe is an appropriate supplemental measure toreflect the operating performance of a REIT. The use of FFO is recommended bythe REIT industry as a supplemental performance measure. FFO is not equivalentto our net income as determined under GAAP.We define FFO, consistent with NAREIT's definition, as net income (computed inaccordance with GAAP), excluding gains (or losses) from sales of property andasset impairment write-downs, plus depreciation and amortization of real estateassets, and after adjustments for unconsolidated partnership and joint ventures.Adjustments for unconsolidated partnerships and joint ventures will becalculated to reflect FFO on the same basis.We, along with others in the real estate industry, consider FFO to be anappropriate supplemental measure of a REIT's operating performance because it isbased on a net income analysis of property portfolio performance that excludesnon-cash items such as depreciation and amortization and asset impairmentwrite-downs, which we believe provides a more complete understanding of ourperformance to investors and to our management, and when compared year overyear, reflects the impact on our operations from trends in occupancy.Historical accounting convention (in accordance with GAAP) for real estateassets requires companies to report their investment in real estate at itscarrying value, which consists of capitalizing the cost of acquisitions,development, construction, improvements and significant replacements, lessdepreciation and amortization and asset impairment write-downs, if any, which isnot necessarily equivalent to the fair market value of its investment in realestate assets.The historical accounting convention requires straight-line depreciation ofbuildings and improvements, which implies that the value of real estate assetsdiminishes predictably over time, which could be the case if such assets are notadequately maintained or repaired and renovated as required by relevantcircumstances and/or as requested or required by lessees for operationalpurposes in order to maintain the value disclosed. We believe that, since thefair value of real estate assets historically rises and falls with marketconditions including, but not limited to, inflation, interest rates, thebusiness cycle, unemployment and consumer spending, presentations of operatingresults for a REIT using historical accounting for depreciation could be lessinformative. 33

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In addition, we believe it is appropriate to disregard asset impairmentwrite-downs as they are a non-cash adjustment to recognize losses on prospectivesales of real estate assets. Since losses from sales of real estate assets areexcluded from FFO, we believe it is appropriate that asset impairmentwrite-downs in advancement of realization of losses should be excluded.Impairment write-downs are based on negative market fluctuations and underlyingassessments of general market conditions, which are independent of our operatingperformance, including, but not limited to, a significant adverse change in thefinancial condition of our tenants, changes in supply and demand for similar orcompeting properties, changes in tax, real estate, environmental and zoning law,which can change over time. When indicators of potential impairment suggest thatthe carrying value of real estate and related assets may not be recoverable, weassess the recoverability by estimating whether we will recover the carryingvalue of the asset through undiscounted future cash flows and eventualdisposition (including, but not limited to, net rental and lease revenues, netproceeds on the sale of property and any other ancillary cash flows at aproperty or group level under GAAP). If based on this analysis, we do notbelieve that we will be able to recover the carrying value of the real estateasset, we will record an impairment write-down to the extent that the carryingvalue exceeds the estimated fair value of the real estate asset. Testing forindicators of impairment is a continuous process and is analyzed on a quarterlybasis. Investors should note, however, that determinations of whether impairmentcharges have been incurred are based partly on anticipated operatingperformance, because estimated undiscounted future cash flows from a property,including estimated future net rental and lease revenues, net proceeds on thesale of the property, and certain other ancillary cash flows, are taken intoaccount in determining whether an impairment charge has been incurred. Whileimpairment charges are excluded from the calculation of FFO as described above,investors are cautioned that due to the fact that impairments are based onestimated future undiscounted cash flows and that we intend to have a relativelylimited term of our operations, it could be difficult to recover any impairmentcharges through the eventual sale of the property. No impairment losses havebeen recorded to date.In developing estimates of expected future cash flow, we make certainassumptions regarding future market rental income amounts subsequent to theexpiration of current lease arrangements, property operating expenses, terminalcapitalization and discount rates, the expected number of months it takes tore-lease the property, required tenant improvements and the number of years theproperty will be held for investment. The use of alternative assumptions in thefuture cash flow analysis could result in a different determination of theproperty's future cash flows and a different conclusion regarding the existenceof an asset impairment, the extent of such loss, if any, as well as the carryingvalue of the real estate asset.Publicly registered, non-listed REITs, such as us, typically have a significantamount of acquisition activity and are substantially more dynamic during theirinitial years of investment and operations. While other start-up entities mayalso experience significant acquisition activity during their initial years, webelieve that publicly registered, non-listed REITs are unique in that they havea limited life with targeted exit strategies within a relatively limited timeframe after the acquisition activity ceases. We will use cash flows fromoperations and debt financings to acquire real estate assets and realestate-related investments, and we intend to begin the process of achieving aliquidity event (i.e., listing of our shares of common stock on a nationalsecurities exchange, a merger or sale, the sale of all or substantially all ofour assets, or another similar transaction) within five years after thecompletion of our offering stage, which is generally comparable to otherpublicly registered, non-listed REITs. Thus, we do not intend to continuouslypurchase real estate assets and intend to have a limited life. Due to thesefactors and other unique features of publicly registered, non-listed REITs, theInvestment Program Association, or the IPA, an industry trade group, hasstandardized a measure known as modified funds from operations, or MFFO, whichwe believe to be another appropriate supplemental measure to reflect theoperating performance of a publicly registered, non-listed REIT. MFFO is ametric used by management to evaluate sustainable performance and dividendpolicy. MFFO is not equivalent to our net income as determined under GAAP.We define MFFO, a non-GAAP measure, consistent with the IPA's definition: FFOfurther adjusted for the following items included in the determination of GAAPnet income; acquisition fees and expenses; amounts related to straight-linerental income and amortization of above and below intangible lease assets andliabilities; accretion of discounts and amortization of premiums on debtinvestments; mark-to-market adjustments included in net income; nonrecurringgains or losses included in net income from the extinguishment or sale of debt,hedges, foreign exchange, derivatives or securities holdings where trading ofsuch holdings is not a fundamental attribute of the business plan, unrealizedgains or losses resulting from consolidation from, or deconsolidation to, equityaccounting, adjustments related to contingent purchase price obligations wheresuch adjustments have been included in the derivation of GAAP net income, andafter adjustments for a consolidated and unconsolidated partnership and jointventures, with such adjustments calculated to reflect MFFO on the same basis.Our MFFO calculation complies with the IPA's Practice Guideline, describedabove. In calculating MFFO, we exclude paid and accrued acquisition fees andexpenses that are reported in our condensed consolidated statements ofcomprehensive income, amortization of above and below-market leases, adjustmentsrelated to contingent purchase price obligations, gains or losses from theextinguishment of debt and hedges, amounts related to straight-line rents (whichare adjusted in order to reflect such payments from a GAAP accrual basis tocloser to an expected to be received cash basis of disclosing the rent and leasepayments); and the adjustments of such items related to noncontrolling interestsin our Operating Partnership. The other adjustments included in the IPA'sguidelines are not applicable to us. 34

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Since MFFO excludes acquisition fees and expenses, it should not be construed asa historic performance measure. Acquisition fees and expenses are paid in cashby us, and we have not set aside or put into escrow any specific amount ofproceeds from our offerings to be used to fund acquisition fees and expenses.Acquisition fees and expenses include payments to our Advisor or its affiliatesand third parties. Such fees and expenses will not be reimbursed by our Advisoror its affiliates and third parties, and therefore if there are no furtherproceeds from the sale of shares of our common stock to fund future acquisitionfees and expenses, such fees and expenses will need to be paid from eitheradditional debt, operational earnings or cash flows, net proceeds from the saleof properties, or from ancillary cash flows. As a result, the amount of proceedsavailable for investment and operations would be reduced, or we may incuradditional interest expense as a result of borrowed funds. Nevertheless, ourAdvisor or its affiliates will not accrue any claim on our assets if acquisitionfees and expenses are not paid from the proceeds of our offerings. Under GAAP,acquisition fees and expenses related to the acquisition of propertiesdetermined to be business combinations are expensed as incurred, includinginvestment transactions that are no longer under consideration, and are includedin acquisition related expenses in the accompanying condensed consolidatedstatements of comprehensive income and acquisition fees and expenses associatedwith transactions determined to be an asset purchase are capitalized.All paid and accrued acquisition fees and expenses have negative effects onreturns to investors, the potential for future distributions, and cash flowsgenerated by us, unless earnings from operations or net sales proceeds from thedisposition of other properties are generated to cover the purchase price of thereal estate asset, these fees and expenses and other costs related to suchproperty. In addition, MFFO may not be an indicator of our operatingperformance, especially during periods in which properties are being acquired.In addition, certain contemplated non-cash fair value and other non-cashadjustments are considered operating non-cash adjustments to net income indetermining cash flows from operations in accordance with GAAP.We use MFFO and the adjustments used to calculate it in order to evaluate ourperformance against other publicly registered, non-listed REITs, which intend tohave limited lives with short and defined acquisition periods and targeted exitstrategies shortly thereafter. As noted above, MFFO may not be a useful measureof the impact of long-term operating performance if we do not continue tooperate in this manner. We believe that our use of MFFO and the adjustments usedto calculate it allow us to present our performance in a manner that reflectscertain characteristics that are unique to publicly registered, non-listedREITs, such as their limited life, limited and defined acquisition period andtargeted exit strategy, and hence the use of such measures may be useful toinvestors. For example, acquisition fees and expenses are intended to be fundedfrom the proceeds of our offering and other financing sources and not fromoperations. By excluding acquisition fees and expenses, the use of MFFO providesinformation consistent with management's analysis of the operating performanceof its real estate assets. Additionally, fair value adjustments, which are basedon the impact of current market fluctuations and underlying assessments ofgeneral market conditions, but can also result from operational factors such asrental and occupancy rates, may not be directly related or attributable to ourcurrent operating performance. By excluding such charges that may reflectanticipated and unrealized gains or losses, we believe MFFO provides usefulsupplemental information.Presentation of this information is intended to assist management and investorsin comparing the operating performance of different REITs, although it should benoted that not all REITs calculate FFO and MFFO the same way, so comparisonswith other REITs may not be meaningful. Furthermore, FFO and MFFO are notnecessarily indicative of cash flow available to fund cash needs and should notbe considered as an alternative to net income as an indication of ourperformance, as an indication of our liquidity, or indicative of funds availablefor our cash needs, including our ability to make distributions to ourstockholders. FFO and MFFO should be reviewed in conjunction with othermeasurements as an indication of our performance. MFFO has limitations as aperformance measure. However, MFFO may be useful in assisting management andinvestors in assessing the sustainability of operating performance in futureoperating periods, and in particular, after the offering and acquisition stagesare complete and net asset value is disclosed. MFFO is not a useful measure inevaluating net asset value since impairment write-downs are taken into accountin determining net asset value but not in determining MFFO.FFO and MFFO, as described above, should not be construed to be more relevant oraccurate than the current GAAP methodology in calculating net income or in itsapplicability in evaluating our operational performance. The method used toevaluate the value and performance of real estate under GAAP should be construedas a more relevant measure of operating performance and considered moreprominently than the non-GAAP FFO and MFFO measures and the adjustments to GAAPin calculating FFO and MFFO. MFFO has not been scrutinized to the level of othersimilar non-GAAP performance measures by the SEC or any other regulatory body. 35

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The following is a reconciliation of net income attributable to commonstockholders, which is the most directly comparable GAAP financial measure, toFFO and MFFO for the three months ended March 31, 2017 and 2016 (amounts inthousands, except share data and per share amounts):

2 notes · View notes