News Column

CARTER VALIDUS MISSION CRITICAL REIT, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

August 13, 2014

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements, the notes thereto, and the other unaudited financial data included elsewhere in this Quarterly Report on Form 10-Q. The following discussion should also be read in conjunction with our audited consolidated financial statements, and the notes thereto, and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the Securities and Exchange Commission, or the SEC, on March 19, 2014, or the 2013 Annual Report on Form 10-K.



The terms "we," "our," "us," and the "Company" refer to Carter Validus Mission Critical REIT, Inc., Carter/Validus Operating Partnership, LP, all majority-owned subsidiaries and controlled subsidiaries.

Forward-Looking Statements

Certain statements contained in this Quarterly Report on Form 10-Q, other than historical facts, include forward-looking statements that reflect our expectations and projections about our future results, performance, prospects and opportunities. Such statements include, in particular, statements about our plans, strategies, and prospects and are subject to certain risks and uncertainties, as well as known and unknown risks, which could cause actual results to differ materially from those projected or anticipated. Therefore, such statements are not intended to be a guarantee of our performance in future periods. Such forward-looking statements can generally be identified by our use of 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 on these forward-looking statements, which speak only as of the date this Quarterly Report on Form 10-Q is filed with the Securities and Exchange Commission, or the SEC. We make no representation or warranty (express or implied) about the accuracy of any such forward-looking statements contained in this Quarterly Report on Form 10-Q, and we do not undertake to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. We caution investors not to place undue reliance on forward-looking statements, which reflect our management's view only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results. See Item 1A. "Risk Factors" of our 2013 Annual Report on Form 10-K for a discussion of some, although not all, of the risks and uncertainties that could cause actual results to differ materially from those presented in our forward-looking statements. Management's discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with the generally accepted accounting principles in the United States, or GAAP. The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate these estimates. These estimates are based on management's historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.



Overview

We were formed on December 16, 2009 under the laws of Maryland to acquire and operate a diversified portfolio of income producing commercial real estate. We may also invest in real estate related securities. We are a real estate investment trust, or a REIT, under the Internal Revenue Code of 1986, as amended, or the Code, for federal income tax purposes. On March 23, 2010, we filed a registration statement on Form S-11 under the Securities Act of 1933, as amended, or the Securities Act, to conduct a best efforts initial public offering, or the Offering, in which we were offering to the public up to 150,000,000 shares of common stock at a price of $10.00 per share in our primary offering and up to 25,000,000 additional shares pursuant to a distribution reinvestment plan, or DRIP, under which our stockholders may elect to have distributions reinvested in additional shares at the higher of $9.50 per share or 95% of the of the fair market value per share as determined by our board of directors, for a maximum offering of up to $1,737,500,000. The SEC first declared our registration statement effective as of December 10, 2010. On May 16, 2014, we reallocated 18,750,000 shares of common stock from the DRIP offering to the primary portion of the Offering. As a result of this reallocation, we were authorized to sell a maximum of 168,750,000 shares of common stock at a price of $10.00 per share, and up to 6,250,000 additional shares of common stock pursuant to the DRIP, under which our stockholders may elect to have distributions reinvested in additional shares at the higher of $9.50 per share or 95% of the of the fair market value per share as determined by our board of directors, for a maximum offering of up to $1,746,875,000. On June 6, 2014, the Offering terminated. We had raised $1,716,046,000 in gross proceeds from the Offering (including proceeds from the DRIP) before offering expenses, selling commissions and dealer manager fees. On October 11, 2013, we filed with the SEC a registration statement on Form S-11 under the Securities Act with respect to a proposed follow-on offering of up to $240,000,000 of shares of common stock to be offered pursuant to a primary offering, and up to $10,000,000 of shares of common stock to be offered pursuant to the DRIP, or the Follow-On Offering. On July 11, 2014, we withdrew the registration statement relating to the Follow-On Offering. We did not issue any shares in connection with the Follow-On Offering as it was not declared effective by the SEC. 25



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On April 14, 2014, we filed a registration statement on Form S-3 under the Securities Act to register $100,000,000 in shares of common stock pursuant to the Second DRIP, which will offer existing stockholders a convenient method for purchasing additional shares of common stock by reinvesting cash distributions without paying any selling commissions, fees or service charges. The registration statement became effective with the SEC automatically upon filing; however, we did not commence offering shares pursuant to the Second DRIP until June 7, 2014 following the termination of our offering. As of June 30, 2014, no shares of common stock were issued pursuant to the Second DRIP. Substantially all of our operations are conducted through Carter/Validus Operating Partnership, LP, or our Operating Partnership. We are externally advised by Carter/Validus Advisors, LLC or our Advisor, pursuant to an advisory agreement, or the Advisory Agreement, between us and our Advisor, which is our affiliate. Our Advisor supervises and manages our day-to-day operations and selects the properties and real estate-related investments we acquire, subject to the oversight and approval of our board of directors. Our Advisor also provides marketing, sales and client services on our behalf. Our Advisor engages affiliated entities to provide various services to us. Our Advisor is managed by and is a subsidiary of our sponsor, Carter/Validus REIT Investment Management Company, LLC. We have no paid employees. We currently operate through two reportable segments - data centers and medical facilities. As of June 30, 2014, we had completed 38 acquisitions (including one property owned through a consolidated partnership) comprised of 49 buildings and parking facilities and approximately 3,907,000 square feet of gross leasable area (excluding parking facilities), for an aggregate purchase price of $1,378,127,000. As of June 30, 2014, we had also invested in real estate-related notes receivables in the aggregate principal amount outstanding of $41,480,000.



Critical Accounting Policies

Our critical accounting policies were disclosed in our 2013 Annual Report on Form 10-K. There have been no material changes to our critical accounting policies as disclosed therein.

Interim Unaudited Financial Data

Our accompanying condensed consolidated financial statements have been prepared by us in accordance with GAAP in conjunction with the rules and regulations of the SEC. Certain information and footnote disclosures required for annual financial statements have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, our accompanying condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. Our accompanying condensed consolidated financial statements reflect all adjustments, which are, in our view, of a normal recurring nature and necessary for a fair presentation of our financial position, results of operations and cash flows for the interim period. Interim results of operations are not necessarily indicative of the results to be expected for the full year; such full year results may be less favorable. Our accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our 2013 Annual Report on Form 10-K.



Qualification as a REIT

To maintain our qualification as a REIT, we must meet certain organizational and operational requirements, including a requirement to currently distribute at least 90.0% of our REIT taxable income to stockholders. As a REIT, we generally are not subject to federal income tax on taxable income that we distribute to our stockholders. If we fail to maintain our qualification as a REIT in any taxable year, we will then be subject to federal income taxes on our taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year during which qualification is lost unless the Internal Revenue Service grants us relief under certain statutory provisions. Such an event could have a material adverse effect on our net income and net cash available for distribution to our stockholders.



Recently Issued Accounting Pronouncements

For a discussion of recently issued accounting pronouncements, see Note 2-"Summary of Significant Accounting Policies-Recently Issued Accounting Pronouncements" to our condensed consolidated financial statements that are a part of this Quarterly Report on Form 10-Q.



Segment Reporting

The Company reports its financial performance based on two reporting segments. See Note 14-"Segment Reporting" to the condensed consolidated financial statements for additional information on the Company's two reporting segments.

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Results of Operations

Our results of operations are influenced by the timing of acquisition, the operating performance of our real estate investments and our investments in real estate-related notes receivables. The following table shows the property statistics of our real estate properties as of June 30, 2014 and 2013:

June 30, 2014 June 30, 2013 Number of commercial properties (2) 37 22 Approximate aggregate rentable square feet (1) 3,761,000



1,697,000

Weighted average percentage of rentable square feet leased 96 % 100 %



(1) Excludes parking facilities.

(2) As of June 30, 2014, we owned 38 properties and one property was under

construction.

The following table summarizes our real estate investment activity during the three and six months ended June 30, 2014 and 2013:

Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 Commercial properties acquired 3 4 6 7 Approximate aggregate purchase price of acquired properties $ 291,865,000$ 46,400,000$ 435,055,000$ 100,900,000 Approximate aggregate rentable square feet 458,000 154,198 780,000 452,068 As shown in the table above, we owned 37 commercial properties as of June 30, 2014, compared to 22 commercial properties as of June 30, 2013. Accordingly, our results of operations for the three and six months ended June 30, 2014, as compared to the three and six months ended June 30, 2013, are not comparable; therefore, we have not included the percentage change.



The following table summarizes our investments in real estate-related notes receivables as of June 30, 2014 and 2013:

June 30, 2014 June



30, 2013

Number of notes receivables outstanding 4



4

Real estate-related notes receivables, net $ 42,208,000$ 60,317,000

The following table summarizes our activity in investments in real estate-related notes receivables for the three and six months ended June 30, 2014 and 2013: Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 Number of notes receivables originated - 1 - 1 Number of notes receivables repaid - 1 1 1 Interest income earned on notes receivables $ 1,280,000$ 1,475,000



$ 2,431,000$ 2,260,000

Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013

Revenue. Revenue increased $18,446,000 to $34,024,000 for the three months ended June 30, 2014, as compared to $15,578,000 for the three months ended June 30, 2013. Revenue consisted of rental and parking revenue, tenant reimbursement revenue and interest income. Rental and parking revenue increased $17,763,000 to $29,391,000 for the three months ended June 30, 2014, as compared to $11,628,000 for the three months ended June 30, 2013, and tenant reimbursement revenue increased $878,000 to $3,353,000 for the three months ended June 30, 2014, as compared to $2,475,000 for the three months ended June 30, 2013. The increase in rental and parking revenue and tenant reimbursement revenue was primarily due to owning 37 properties with leases in-place as of June 30, 2014 as compared to 22 properties with leases in-place as of June 30, 2013. Interest income decreased $195,000 to $1,280,000 for the three months ended June 30, 2014, as compared to $1,475,000 for the three months ended June 30, 2013. The decrease was primarily due to a decrease in real estate-related notes receivables income of $49,000 and loan commitment fees of $432,000, offset by a decrease in loan origination fees of $286,000. 27



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Rental and Parking Expenses. Rental and parking expenses increased $1,523,000 to $4,580,000 for the three months ended June 30, 2014, as compared to $3,057,000 for the three months ended June 30, 2013. The increase was primarily due to owning 37 properties with leases in-place as of June 30, 2014 as compared to 22 properties with leases in-place as of June 30, 2013, which resulted in increased utility costs of $529,000, increased property management fees of $661,000, increased administrative costs of $336,000 and increased other rental and parking expenses of $78,000, offset by a decrease in real estate taxes of $81,000. General and Administrative Expenses. General and administrative expenses increased $476,000 to $879,000 for the three months ended June 30, 2014, as compared to $403,000 for the three months ended June 30, 2013. The increase was primarily due to an increase in allocated personnel costs and allocated overhead costs, which resulted in increased personnel costs and professional fees of $346,000 and increased other administrative expenses of $130,000. Acquisition Related Expenses. Acquisition related expenses increased $3,685,000 to $5,286,000 for the three months ended June 30, 2014, as compared to $1,601,000 for the three months ended June 30, 2013. The increase primarily related to acquisition fees and expenses associated with the purchase of two properties acquired during the three months ended June 30, 2014, which were determined to be business combinations. Acquisition fees and expenses associated with transactions determined to be business combinations are expensed as incurred. For the three months ended June 30, 2013, acquisition fees and expenses related to the acquisitions of four properties that were determined to be business combinations. Pursuant to the advisory agreement, we pay an acquisition fee to our Advisor of 2.0% of the contract purchase price of each property or asset acquired. We also reimburse our Advisor for acquisition expenses incurred in the process of acquiring a property or in the origination or acquisition of a loan other than for personnel costs for which our Advisor receives acquisition fees. Asset Management Fees. Asset management fees increased $2,322,000 to $3,094,000 for the three months ended June 30, 2014, as compared to $772,000 for the three months ended June 30, 2013. The increase in asset management fees was primarily related to fees incurred for investments in real estate and investments in real estate-related notes receivables. For the three months ended June 30, 2014 and 2013 the Advisor waived irrevocably, without recourse, asset management fees of $0 and $180,000, respectively. Depreciation and Amortization. Depreciation and amortization increased $5,901,000 to $10,006,000 for the three months ended June 30, 2014, as compared to $4,105,000 for the three months ended June 30, 2013. The increase was primarily due to an increase in the weighted average depreciable basis of real estate properties of $789,747,000 as of June 30, 2014, compared to $312,660,000 as of June 30, 2013. Interest Expense. Interest expense increased $958,000 to $4,076,000 for the three months ended June 30, 2014, as compared to $3,118,000 for the three months ended June 30, 2013. The increase was due to increased interest expense on notes payable and the KeyBank Credit Facility (as defined below) of $1,314,000, and increased amortization expense of debt issue costs of $334,000, offset by increased interest income earned on deposits at banks in the amount of $159,000 and capitalized interest of $531,000. The increase in interest expense on notes payable and the KeyBank Credit Facility of $1,314,000 was due to having an outstanding balance on notes payable in the amount of $290,000,000 and an outstanding balance on the KeyBank Credit Facility of $75,000,000 as of June 30, 2014, as compared to an outstanding balance on notes payable in the amount of $169,259,000 and an outstanding balance on the KeyBank Credit Facility of $55,000,000 as of June 30, 2013.



Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013

Revenue. Revenue increased $32,503,000 to $61,327,000 for the six months ended June 30, 2014, as compared to $28,824,000 for the six months ended June 30, 2013. Revenue consisted of rental and parking revenue, tenant reimbursement revenue and interest income. Rental and parking revenue increased $30,552,000 to $52,801,000 for the six months ended June 30, 2014, as compared to $22,249,000 for the six months ended June 30, 2013, and tenant reimbursement revenue increased $1,780,000 to $6,095,000 for the six months ended June 30, 2014, as compared to $4,315,000 for the six months ended June 30, 2013. The increase in rental and parking revenue and tenant reimbursement revenue was primarily due to owning 37 properties with leases in-place as of June 30, 2014, as compared to 22 properties with leases in-place as of June 30, 2013. Interest income increased $171,000 to $2,431,000 for the six months ended June 30, 2014, compared to $2,260,000 for the six months ended June 30, 2013. The increase was primarily due to an increase in real estate-related notes receivables income of $792,000 and a decrease in loan origination fees of $23,000, offset by a decrease in loan commitment fees of $644,000. Rental and Parking Expenses. Rental and parking expenses increased $2,950,000 to $8,321,000 for the six months ended June 30, 2014, as compared to $5,371,000 for the six months ended June 30, 2013. The increase was primarily due to owning 37 properties with leases in-place as of June 30, 2014, as compared to 22 properties with leases in-place as of June 30, 2013, which resulted in increased utility costs of $1,086,000, increased real estate taxes of $141,000, increased property management fees of $1,023,000, increased administrative costs of $567,000 and increased other rental and parking expenses of $133,000 for such period. General and Administrative Expenses. General and administrative expenses increased $646,000 to $1,801,000 for the six months ended June 30, 2014, as compared to $1,155,000 for the six months ended June 30, 2013. The increase was primarily due to an increase in allocated personnel costs and allocated overhead costs, which resulted in increased personnel costs and professional fees of $431,000, increased state taxes of $57,000 and increased other administrative expenses of $158,000. Acquisition Related Expenses. Acquisition related expenses increased $3,314,000 to $6,511,000 for the six months ended June 30, 2014, as compared to $3,197,000 for the six months ended June 30, 2013. The increase primarily related to acquisition fees 28



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and expenses associated with the purchase of four properties acquired during the six months ended June 30, 2014, which were determined to be business combinations. Acquisition fees and expenses associated with transactions determined to be business combinations are expensed as incurred. For the six months ended June 30, 2013, acquisition fees and expenses related to the acquisitions of seven properties that were determined to be business combinations. Pursuant to the advisory agreement, we pay an acquisition fee to our Advisor of 2.0% of the contract purchase price of each property or asset acquired. We also reimburse our Advisor for acquisition expenses incurred in the process of acquiring a property or in the origination or acquisition of a loan other than for personnel costs for which our Advisor receives acquisition fees. Asset Management Fees. Asset management fees increased $3,834,000 to $5,460,000 for the six months ended June 30, 2014, as compared to $1,626,000 for the six months ended June 30, 2013. The increase in asset management fees was primarily related to fees incurred for investments in real estate and investments in real estate-related notes receivables. For the six months ended June 30, 2014 and 2013 the Advisor waived irrevocably, without recourse, asset management fees of $0 and $180,000, respectively. Depreciation and Amortization. Depreciation and amortization increased $10,409,000 to $18,273,000 for the six months ended June 30, 2014, as compared to $7,864,000 for the six months ended June 30, 2013. The increase was primarily due to an increase in the weighted average depreciable basis of real estate properties of $789,747,000 as of June 30, 2014, compared to $312,660,000 as of June 30, 2013. Interest Expense. Interest expense increased $2,320,000 to $8,227,000 for the six months ended June 30, 2014, as compared to $5,907,000 for the six months ended June 30, 2013. The increase was due to increased interest expense on notes payable and the KeyBank Credit Facility of $2,412,000 and increased amortization expense of debt issue costs of $639,000, offset by increased interest income earned on deposits at banks in the amount of $200,000 and capitalized interest of $531,000. The increase in interest expense on notes payable and the KeyBank Credit Facility of $2,412,000 was due to having an outstanding balance on notes payable in the amount of $290,000,000 and an outstanding balance on the KeyBank Credit Facility of $75,000,000 as of June 30, 2014, as compared to an outstanding balance on notes payable in the amount of $169,259,000 and an outstanding balance on the KeyBank Credit Facility of $55,000,000 as of June 30, 2013.



Organization and Offering Costs

We reimburse our Advisor or its affiliates for organization and offering costs it incurs on our behalf, but only to the extent the reimbursement would not cause the selling commissions, the dealer manager fee and the other organization and offering costs incurred by us to exceed 15% of gross offering proceeds as of the date of the reimbursement. As of June 30, 2014, since inception, we paid approximately $156,519,000 in selling commissions and dealer manager fees to our dealer manager and we reimbursed our Advisor or its affiliates approximately $14,063,000 in offering expenses, and incurred approximately $3,832,000 of other organization and offering costs. Other organizational and offering costs (other than selling commissions and dealer manager fees) were approximately $17,895,000, or 1.04%, of total gross offering proceeds which were $1,716,046,000. When incurred, other organization costs are expensed as incurred and selling commissions and dealer manager fees are charged to stockholders' equity as the amounts related to raising capital. For a further discussion of other organization and offering costs, see Note 12-"Related-Party Transactions and Arrangements" to the condensed consolidated financial statements that are a part of this Quarterly Report on Form 10-Q.



Real Estate-Related Notes Receivables, Net

We have invested, and may continue to invest, in notes receivables, including first mortgage loans, real estate-related bridge loans, construction loans and mezzanine loans. As of June 30, 2014, we had investments in four real estate-related notes receivables, which are intended to be held to maturity. As of June 30, 2014, the aggregate balance on the investments in real estate-related notes receivables, net was $42,208,000.



Liquidity and Capital Resources

Our principal demands for funds will be for real estate and real estate-related investments, for the payment of acquisition related costs, operating expenses, distributions and redemptions to stockholders and principal and interest on any current and any future indebtedness. Generally, cash needs for items other than acquisitions and acquisition related costs will be generated from operations of our current and future investments. We expect to utilize funds from the Offering and future proceeds from secured and unsecured financings to complete future real estate-related investments. As the Offering has closed, we expect to meet cash needs for real estate-related investments from proceeds raised pursuant to the DRIP, cash flows from operations and from debt financings. The sources of our operating cash flows will primarily be provided by the rental income received from current and future tenants of our leased properties. On June 6, 2014, the Offering terminated. We had raised $1,716,046,000 in gross proceeds from the Offering (including proceeds from the DRIP) before offering expenses, selling commissions and dealer manager fees.



Short-term Liquidity and Capital Resources

On a short-term basis, our principal demands for funds will be for the acquisition of real estate and real estate-related notes and investments and payments of tenant improvements, acquisition related costs, operating expenses, distributions, and interest and 29



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principal payments on current and future debt financings. We expect to meet our short-term liquidity requirements through net cash flows provided by operations, funds from the Offering, and proceeds from the DRIP, as well as secured and unsecured borrowings from banks and other lenders to finance our expected future acquisitions. We expect our operating cash flows to increase as we acquire additional properties.



Long-term Liquidity and Capital Resources

On a long-term basis, our principal demands for funds will be for the acquisition of real estate and real estate-related investments and payments of tenant improvements, acquisition related costs, operating expenses, distributions and redemptions to stockholders, and interest and principal payments on current and future indebtedness.

We expect that substantially all cash flows from operations will be used to pay distributions to our stockholders after certain capital expenditures, however, we may use other sources to fund distributions, as necessary, excluding proceeds from our Offering, borrowing on the KeyBank Credit Facility and/or future borrowings on unencumbered assets. To the extent cash flows from operations are lower due to fewer properties being acquired or lower than expected returns on the properties held, distributions paid to stockholders may be lower. We expect that substantially all net cash flows from the Offering or debt financings will be used to fund acquisitions, certain capital expenditures identified at acquisition, repayments of outstanding debt or distributions to our stockholders in excess of cash flows from operations.



Capital Expenditures

We estimate that we will require approximately $1.5 million in expenditures for capital improvements over the next 12 months. We cannot provide assurances, however, that actual expenditures will not exceed these estimated expenditure levels. As of June 30, 2014, we had $3.2 million of restricted cash in lender controlled escrow reserve accounts for such capital expenditures.



KeyBank Credit Facility

As of June 30, 2014, the maximum principal amount available under the KeyBank Credit Facility was $365,000,000, consisting of a $290,000,000 revolving line of credit, with a maturity date of May 28, 2017, subject to the Operating Partnership's right to a 12-month extension, and $75,000,000 in term loans, with a maturity date of May 28, 2018, subject to the Operating Partnership's right to a 12-month extension. The KeyBank Credit Facility can be increased to $500,000,000 under certain circumstances. Generally, proceeds of the KeyBank Credit Facility are used to acquire our real estate properties. See Note 9-"Credit Facility." The actual amount of credit available under the KeyBank Credit Facility is a function of certain loan-to-cost, loan-to-value, debt yield and debt service coverage ratios contained in the KeyBank Loan Agreement. The unencumbered pool availability under the KeyBank Credit Facility is equal to the maximum principal amount of the value of the assets that are included in the unencumbered pool. As of June 30, 2014, we had drawn down $75,000,000 under the KeyBank Credit Facility and we had an aggregate unencumbered pool availability of $125,697,000. The KeyBank Credit Facility agreement contains various affirmative and negative covenants that are customary for credit facilities and transactions of this type, including limitations on the incurrence of debt and limitations on distributions by the properties that are included in the unencumbered pool for the KeyBank Credit Facility in the event of a default. The KeyBank Credit Facility agreement also imposes the following financial covenants: (i) a maximum property value requirement; (ii) a maximum ratio of liabilities to asset value; (iii) a maximum daily distribution covenant; (iv) a minimum number of unencumbered pool properties in the unencumbered pool; (v) a minimum consolidated net worth; and (vi) a minimum unencumbered pool actual debt service coverage ratio. In addition, the KeyBank Credit Facility agreement includes events of default that are customary for credit facilities and transactions of this type. We believe we were in compliance with all financial covenant requirements at June 30, 2014. 30



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Cash Flows

Operating Activities. During the six months ended June 30, 2014, net cash provided by operations increased $21,471,000 to $29,517,000, as compared to $8,046,000 for the six months ended June 30, 2013. The change was primarily due to our 2013 and 2014 acquisitions, which resulted in an increase in operating income from our properties, coupled with the deferral of asset management fees. Investing Activities. Net cash used in investing activities increased $285,990,000 to $423,315,000 for the six months ended June 30, 2014, as compared to $137,325,000 for the six months ended June 30, 2013. The increase was primarily due to the acquisition of six commercial properties for an aggregate purchase price of $410,025,000 during the six months ended June 30, 2014, compared to the acquisition of seven commercial properties for an aggregate purchase price of $100,900,000 during the six months ended June 30, 2013; offset by a decrease in real estate-related notes receivables, net of $27,150,000 to $8,350,000 for the six months ended June 30, 2014, compared to $35,500,000 net, for the six months ended June 30, 2013. Financing Activities. Net cash provided by financing activities increased $692,799,000 to $861,453,000 for the six months ended June 30, 2014, as compared to $168,654,000 for the six months ended June 30, 2013. The change was primarily due to an increase in net proceeds from the issuance of common stock of $706,978,000, an increase in net escrow funds of $1,112,000, a decrease in distributions to noncontrolling interests in consolidated partnerships of $155,000, an increase in payments of deferred financing costs of $2,730,000, a decrease in net borrowings on the credit facility and notes payable of $89,000, an increase in distributions to stockholders of $11,627,000 and an increase in repurchase of common stock of $1,000,000.



Distributions

The amount of distributions payable to our stockholders is determined by our board of directors and is dependent on a number of factors, including funds available for distribution, financial condition, capital expenditure requirements and annual distribution requirements needed to maintain our status as a REIT under the Code. Our board of directors may reduce the amount of distributions paid or suspend distribution payments at any time and therefore distribution payments are not assured. Our Advisor may also defer, suspend and/or waive fees and expense reimbursements if we have not generated sufficient cash flow from our operations and other sources to fund distributions. Additionally, our organizational documents permit us to pay distributions from unlimited amounts of any source, and we may use sources other than operating cash flows to fund distributions, including proceeds from our Offering, which may reduce the amount of capital we ultimately invest in properties or other permitted investments. We have funded distributions with operating cash flows from our properties and offering proceeds raised in our Offering. To the extent that we do not have taxable income, distributions paid will be considered a return of capital to stockholders. The following table shows distributions paid during the six months ended June 30, 2014 and 2013: Six Months Ended Six Months Ended June 30, 2014 June 30, 2013 Distributions paid in cash - common stockholders $ 16,567,000$ 4,940,000 Distributions reinvested (shares issued) 17,126,000 4,021,000 Total distributions $ 33,693,000 (1) $ 8,961,000 Source of distributions: Cash flows provided by operations (2) $ 16,567,000 49 % $ 4,940,000 55 % Offering proceeds from issuance of common stock pursuant to the DRIP 17,126,000 51 % 4,021,000 45 % Total sources $ 33,693,000 100 % $ 8,961,000 100 %



(1) Total distributions declared but not paid as of June 30, 2014 were $9.8

million for common stockholders. These distributions were paid on July 1,

2014.

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

total sources of distributions.

For the six months ended June 30, 2014, we paid and declared distributions of approximately $33.7 million to common stockholders including shares issued pursuant to the DRIP, as compared to FFO (as defined below) and MFFO (as defined below) for the six months ended June 30, 2014 of $28.1 million and $27.0 million, respectively. The payment of distributions from sources other than FFO or MFFO may reduce the amount of proceeds available for investment and operations or cause us to incur additional interest expense as a result of borrowed funds. 31



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Contractual Obligations

As of June 30, 2014, we had approximately $365,000,000 of debt outstanding, of which $290,000,000 related to notes payable and $75,000,000 related to the Key Bank Credit Facility. See Note 8-"Notes Payable" and Note 9-"Credit Facility" to the condensed consolidated financial statements that are a part of this Quarterly Report on Form 10-Q for certain terms of the debt outstanding. Our contractual obligations as of June 30, 2014 were as follows (amounts in thousands): Less than More than 1 Year 1-3 Years 3-5 Years 5 Years Total



Principal payments - fixed rate debt $ 2,672$ 30,435$ 50,858$ 51,715$ 135,680 Interest payments - fixed rate debt

6,347 13,346 7,743 7,816 35,252 Principal payments - variable rate debt fixed through interest rate swap agreements (1) 2,953 6,828 179,235 - 189,016 Interest payments - variable rate debt fixed through interest rate swap agreements (2) 7,179 15,862 8,902 - 31,943 Principal payments - variable rate debt 484 1,150 38,670 - 40,304 Interest payments - variable rate debt 971 2,158 1,347 - 4,476 Commitments - real estate-related notes receivables 11,645 - - - 11,645 Contingent consideration (3) - 5,030 - - 5,030 Tenant improvements 1,342 41,602 1,717 - 44,661 Total $ 33,593$ 116,411$ 288,472$ 59,531$ 498,007



(1) As of June 30, 2014, we had an aggregate of $189.0 million outstanding on

notes payable and borrowings under the KeyBank 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

June 30, 2014 to calculate the debt payment obligations in future periods.

(3) 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 operating objectives are

achieved by the acquired entity. Our maximum cash payment under this

arrangement is $5,030,000 in 2016.

Off-Balance Sheet Arrangements

As of June 30, 2014, we had no off-balance sheet arrangements.

Related-Party Transactions and Arrangements

We have entered into agreements with our Advisor and its affiliates, whereby we agreed to pay certain fees to, or reimburse certain expenses of, our Advisor, or its affiliates, for acquisition fees and expenses, organization and offering expenses, sales commissions, dealer manager fees, asset and property management fees and reimbursement of operating costs. Refer to Note 12-"Related-Party Transactions and Arrangements" to our condensed consolidated unaudited financial statements included in this Quarterly Report on Form 10-Q for a detailed discussion of the various related-party transactions and agreements.



Funds from Operations and Modified Funds from Operations

One of our objectives is to provide cash distributions to our stockholders from cash generated by our operations. The purchase of real estate assets and real estate-investments, and the corresponding expenses associated with that process, is a key operational feature of our business plan in order to generate cash from operations. Due to certain unique operating characteristics of real estate companies, the National Association of Real Estate Investment Trusts, or NAREIT, an industry trade group, has promulgated a measure known as funds from operations, or FFO, which we believe is an appropriate supplemental measure to reflect the operating performance of a REIT. The use of FFO is recommended by the REIT industry as a supplemental performance measure. FFO is not equivalent to our net income (loss) as determined under GAAP. We define FFO, consistent with NAREIT's definition, as net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from sales of property and asset impairment write-downs, plus depreciation and amortization of real estate assets, and after adjustments for unconsolidated partnership and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect FFO on the same basis. 32



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We, along with the others in the real estate industry, consider FFO to be an appropriate supplemental measure of a REIT's operating performance because it is based on a net income (loss) analysis of property portfolio performance that excludes non-cash items such as depreciation and amortization and asset impairment write-downs, which we believe provides a more complete understanding of our performance to investors and to our management, and when compared year over year, reflects the impact on our operations from trends in occupancy. Historical accounting convention (in accordance with GAAP) for real estate assets requires companies to report its investment in real estate at its carrying value, which consists of capitalizing the cost of acquisitions, development, construction, improvements and significant replacements, less depreciation and amortization and asset impairment write-downs, if any, which is not necessarily equivalent to the fair market value of its investment in real estate assets. The historical accounting convention requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time, which could be the case if such assets are not adequately maintained or repaired and renovated as required by relevant circumstances and/or as requested or required by lessees for operational purposes in order to maintain the value disclosed. We believe that, since fair value of real estate assets historically rises and falls with market conditions including, but not limited to, inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation could be less informative. In addition, we believe it is appropriate to disregard asset impairment write-downs as it is a non-cash adjustment to recognize losses on prospective sales of real estate assets. Since losses from sales of real estate assets are excluded from FFO, we believe it is appropriate that asset impairment write-downs in advancement of realization of losses should be excluded. Impairment write-downs are based on negative market fluctuations and underlying assessments of general market conditions, which are independent of our operating performance, including, but not limited to, a significant adverse change in the financial condition of our tenants, changes in supply and demand for similar or competing properties, changes in tax, real estate, environmental and zoning law, which can change over time. When indicators of potential impairment suggest that the carrying value of real estate and related assets may not be recoverable, we assess the recoverability by estimating whether we will recover the carrying value of the asset through undiscounted future cash flows and eventual disposition (including, but not limited to, net rental and lease revenues, net proceeds on the sale of property and any other ancillary cash flows at a property or group level under GAAP). If based on this analysis, we do not believe that we will be able to recover the carrying value of the real estate asset, we will record an impairment write-down to the extent that the carrying value exceeds the estimated fair value of the real estate asset. Testing for indicators of impairment is a continuous process and is analyzed on a quarterly basis. Investors should note, however, that determinations of whether impairment charges have been incurred are based partly on anticipated operating performance, because estimated undiscounted future cash flows from a property, including estimated future net rental and lease revenues, net proceeds on the sale of the property, and certain other ancillary cash flows, are taken into account in determining whether an impairment charge has been incurred. While impairment charges are excluded from the calculation of FFO as described above, investors are cautioned that due to the fact that impairments are based on estimated future undiscounted cash flows and that we intend to have a relatively limited term of our operations, it could be difficult to recover any impairment charges through the eventual sale of the property. No impairment losses have been recorded to date. In developing estimates of expected future cash flow, we make certain assumptions regarding future market rental income amounts subsequent to the expiration of current lease arrangements, property operating expenses, terminal capitalization and discount rates, the expected number of months it takes to re-lease the property, required tenant improvements and the number of years the property will be held for investment. The use of alternative assumptions in the future cash flow analysis could result in a different determination of the property's future cash flows and a different conclusion regarding the existence of an asset impairment, the extent of such loss, if any, as well as the carrying value of the real estate asset. Publicly registered, non-listed REITs, such as ours, typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operations. While other start up entities may also experience significant acquisition activity during their initial years, we believe that publicly registered, non-listed REITs are unique in that they have a limited life with targeted exit strategies within a relatively limited time frame after the acquisition activity ceases. We will use the proceeds raised in our offering to acquire real estate assets and real estate-related investments, and we intend to begin the process of achieving a liquidity event (i.e., listing of our shares of common stock on a national securities exchange, a merger or sale, the sale of all or substantially all of our assets, or another similar transaction) within five years after the completion of our offering stage, which is generally comparable to other publicly registered, non-listed REITs. Thus, we do not intend to continuously purchase real estate assets and intend to have a limited life. Due to these factors and other unique features of publicly registered, non-listed REITS, the Investment Program Association, or the IPA, an industry trade group, has standardized a measure known as modified funds from operations, or MFFO, which we believe to be another appropriate supplemental measure to reflect the operating performance of a publicly registered, non-listed REIT. MFFO is a metric used by management to evaluate sustainable performance and dividend policy. MFFO is not equivalent to our net income (loss) as determined under GAAP. We define MFFO, a non-GAAP measure, consistent with the IPA's definition: FFO further adjusted for the following items included in the determination of GAAP net income (loss); acquisition fees and expenses; amounts related to straight-line rental income and amortization of above and below intangible lease assets and liabilities; accretion of discounts and amortization of premiums on debt investments; mark-to-market adjustments included in net income; nonrecurring gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business 33



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plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, adjustments related to contingent purchase price obligations where such adjustments have been included in the derivation of GAAP net income, and after adjustments for a consolidated and unconsolidated partnership and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. Our MFFO calculation complies with the IPA's Practice Guideline, described above. In calculating MFFO, we exclude paid and accrued acquisition fees and expenses that are reported in our condensed consolidated statements of comprehensive income (loss), amortization of above and below-market leases, amounts related to straight-line rents (which are adjusted in order to reflect such payments from a GAAP accrual basis to closer to an expected to be received cash basis of disclosing the rent and lease payments); and the adjustments of such items related to noncontrolling interests in the Operating Partnership. The other adjustments included in the IPA's guidelines are not applicable to us. Since MFFO excludes acquisition fees and expenses, it should not be construed as a historic performance measure. Acquisition fees and expenses are paid in cash by us, and we have not set aside or put into escrow any specific amount of proceeds from our offerings to be used to fund acquisition fees and expenses. Acquisition fees and expenses include payments to our Advisor or its affiliates and third parties. Such fees and expenses will not be reimbursed by our Advisor or its affiliates and third parties, and therefore if there are no further proceeds from the sale of shares of our common stock to fund future acquisition fees and expenses, such fees and expenses will need to be paid from either additional debt, operational earnings or cash flows, net proceeds from the sale of properties, or from ancillary cash flows. As a result, the amount of proceeds available for investment and operations would be reduced, or we may incur additional interest expense as a result of borrowed funds. Nevertheless, our Advisor or its affiliates will not accrue any claim on our assets if acquisition fees and expenses are not paid from the proceeds of our offerings. Under GAAP, acquisition fees and expenses related to the acquisition of properties determined to be business combinations are expensed as incurred, including investment transactions that are no longer under consideration, and are included in acquisition related expenses in the accompanying condensed consolidated statements of comprehensive income (loss) and acquisition fees and expenses associated with transactions determined to be an asset purchase are capitalized. All paid and accrued acquisition fees and expenses have negative effects on returns to investors, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of other properties are generated to cover the purchase price of the real estate asset, these fees and expenses and other costs related to such property. In addition, MFFO may not be an indicator of our operating performance, especially during periods in which properties are being acquired.



In addition, certain contemplated non-cash fair value and other non-cash adjustments are considered operating non-cash adjustments to net income (loss) in determining cash flows from operations in accordance with GAAP.

We use MFFO and the adjustments used to calculate it in order to evaluate our performance against other publicly registered, non-listed REITs, which intend to have limited lives with short and defined acquisition periods and targeted exit strategies shortly thereafter. As noted above, MFFO may not be a useful measure of the impact of long-term operating performance if we do not continue to operate in this manner. We believe that our use of MFFO and the adjustments used to calculate it allow us to present our performance in a manner that reflects certain characteristics that are unique to publicly registered, non-listed REITs, such as their limited life, limited and defined acquisition period and targeted exit strategy, and hence the use of such measures may be useful to investors. For example, acquisition fees and expenses are intended to be funded from the proceeds of our offering and other financing sources and not from operations. By excluding acquisition fees and expenses, the use of MFFO provides information consistent with management's analysis of the operating performance of its real estate assets. Additionally, fair value adjustments, which are based on the impact of current market fluctuations and underlying assessments of general market conditions, but can also result from operational factors such as rental and occupancy rates, may not be directly related or attributable to our current operating performance. By excluding such charges that may reflect anticipated and unrealized gains or losses, we believe MFFO provides useful supplemental information. Presentation of this information is intended to assist management and investors in comparing the operating performance of different REITs, although it should be noted that not all REITs calculate FFO and MFFO the same way, so comparisons with other REITs may not be meaningful. Furthermore, FFO and MFFO are not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) as an indication of our performance, as an indication of our liquidity, or indicative of funds available to fund our cash needs, including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with other measurements as an indication of our performance. MFFO has limitations as a performance measure in an offering such as ours where the price of a share of common stock is stated value and there is no asset value determination during the offering stage for a period thereafter. MFFO may be useful in assisting management and investors in assessing the sustainability of operating performance in future operating periods, and in particular, after the offering and acquisition stages are complete and net asset value is disclosed. MFFO is not a useful measure in evaluating net asset value since impairment write-downs are taken into account in determining net asset value but not in determining MFFO. FFO and MFFO, as described above, should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income (loss) or in its applicability in evaluating our operational performance. The method used to evaluate the value and performance of real estate under GAAP should be construed as a more relevant measure of operation performance and considered more prominently than the non-GAAP FFO and measures and the adjustments to GAAP in calculating FFO and MFFO. MFFO has not been scrutinized to the level of other similar non-GAAP performance measures by the SEC or any other regulatory body. 34



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The following is a reconciliation of net income/(loss) attributable to controlling interests, which is the most directly comparable GAAP financial measure, to FFO and MFFO for the three and six months ended June 30, 2014 and 2013 (in thousands, except share data):

Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 Net income attributable to common stockholders $ 5,463$ 2,001$ 11,449$ 2,864 Adjustments: Depreciation and amortization - real estate 10,006 4,105 18,273 7,864 Noncontrolling interests' share of the above adjustments related to the consolidated partnerships (831 ) (824 ) (1,662 ) (1,643 ) FFO $ 14,638$ 5,282$ 28,060$ 9,085 Adjustments: Acquisition related expenses (1) $ 5,286$ 1,601$ 6,511$ 3,197 Amortization of above and below-market leases (2) (996 ) (972 ) (1,959 ) (1,839 ) Straight-line rents (3) (3,876 ) (1,136 ) (6,590 ) (2,320 ) Noncontrolling interests' share of the above adjustments related to the consolidated partnerships 480 (4) 515 (5) 963 (6) 1,029 (7) MFFO $ 15,532$ 5,290$ 26,985$ 9,152 Weighted average common shares outstanding - basic 141,345,082 33,830,429 114,104,136 28,911,913 Weighted average common shares outstanding - diluted 141,369,156 33,844,471 114,129,241 28,926,705



Net income per common share - basic $ 0.04$ 0.06$ 0.10$ 0.10

Net income per common share - diluted $ 0.04$ 0.06$ 0.10$ 0.10

FFO per common share - basic $ 0.10 $



0.16 $ 0.25$ 0.31

FFO per common share - diluted $ 0.10$ 0.16$ 0.25$ 0.31



(1) In evaluating investments in real estate assets, management differentiates

the costs to acquire the investment from the operations derived from the

investment. Such information would be comparable only for publicly

registered, non-listed REITs that have completed their acquisitions

activities and have other similar operating characteristics. By excluding

expensed acquisition related expenses, management believes MFFO provides

useful supplemental information that is comparable for each type of real

estate investment and is consistent with management's analysis of the

investing and operating performance of our properties. Acquisition fees and

expenses include payments in cash to our Advisor and third parties.

Acquisition fees and expenses incurred in a business combination, under GAAP,

are considered operating expenses and as expenses included in the

determination of net income (loss), which is a performance measure under

GAAP. All paid and accrued acquisition fees and expenses will have negative

effects on returns to investors, the potential for future distributions, and

cash flows generated by us, unless earnings from operations or net sales

proceeds from the disposition of properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to the property.



(2) Under GAAP, certain intangibles are accounted for at cost and reviewed at

least annually for impairment, and certain intangibles are assumed to

diminish predictably in value over time and are amortized, similar to

depreciation and amortization of real estate-related assets that are excluded

from FFO. However, because real estate values and market lease rates

historically rise or fall with market conditions, management believes that by

excluding charges related to amortization of these intangibles, MFFO provides

useful supplemental information on the performance of the real estate.

(3) Under GAAP, rental revenue is recognized on a straight-line basis over the

terms of the related lease (including rent holidays if applicable). This may

result in income recognition that is significantly different than the

underlying contract terms. By adjusting for the change in deferred rent

receivables, MFFO may provide useful supplemental information on the realized

economic impact of lease terms, providing insight on the expected contractual

cash flows of such lease terms, and aligns with our analysis of operating

performance.

(4) Of this amount, $116,000 related to straight-line rents and $364,000 related

to above and below-market leases.

(5) Of this amount, $151,000 related to straight-line rents and $364,000 related

to above and below-market leases.

(6) Of this amount, $234,000 related to straight-line rents and $729,000 related

to above and below-market leases.

(7) Of this amount, $300,000 related to straight-line rents and $729,000 related

to above and below-market leases. 35



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