UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

___________________________________________

FORM 10-Q

___________________________________________

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016

OR 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 000-54675

___________________________________________

CARTER VALIDUS MISSION CRITICAL REIT, INC. 

(Exact name of registrant as specified in its charter) 

___________________________________________

Maryland	27-1550167
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
4890 West Kennedy Blvd., Suite 650 Tampa, FL 33609	(813) 287-0101
(Address of Principal Executive Offices; Zip Code)	(Registrant’s Telephone Number)

Not Applicable

(Former name, former address, and former fiscal year, if changed since last report)

___________________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒ (Do not check if a smaller reporting company)	Smaller reporting company	☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

As of November 10, 2016, there were approximately 184,856,000 shares of common stock of Carter Validus Mission Critical REIT, Inc. outstanding.

CARTER VALIDUS MISSION CRITICAL REIT, INC.

(A Maryland Corporation)

TABLE OF CONTENTS

		Page
PART I.	FINANCIAL INFORMATION (Unaudited)	3
Item 1.	Condensed Consolidated Financial Statements	3
	Condensed Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015	3
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2016 and 2015	4
	Condensed Consolidated Statement of Stockholders' Equity for the Nine Months Ended September 30, 2016	5
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	44
Item 4.	Controls and Procedures	45
PART II.	OTHER INFORMATION	46
Item 1.	Legal Proceedings	46
Item 1A.	Risk Factors	46
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 3.	Defaults Upon Senior Securities	47
Item 4.	Mine Safety Disclosures	47
Item 5.	Other Information	47
Item 6.	Exhibits	47
SIGNATURES

PART 1. FINANCIAL STATEMENTS

Item 1. Financial Statements. 

CARTER VALIDUS MISSION CRITICAL REIT, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

	(Unaudited) September 30, 2016			December 31, 2015
ASSETS
Real estate:
Land ($4,280 and $4,280, respectively, related to VIE)	$	181,960		$	177,179
Buildings and improvements, less accumulated depreciation of $138,726 and $100,142, respectively ($84,681 and $86,200, respectively, related to VIE)	1,821,390			1,749,571
Construction in process	13,763			9,438
Total real estate, net ($88,961 and $90,480, respectively, related to VIE)	2,017,113			1,936,188
Cash and cash equivalents ($1,326 and $1,060, respectively, related to VIE)	41,410			28,527
Preferred equity investment	127,147			127,147
Acquired intangible assets, less accumulated amortization of $49,133 and $37,374, respectively ($6,649 and $7,416, respectively, related to VIE)	182,669			197,530
Other assets ($6,104 and $6,651, respectively, related to VIE)	111,432			93,048
Total assets	$	2,479,771		$	2,382,440
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Notes payable, net of deferred financing costs of $2,935 and $4,261, respectively ($51,481 and $52,271, respectively, related to VIE)	$	486,722		$	539,071
Credit facility, net of deferred financing costs of $1,987 and $2,544, respectively	476,013			290,456
Accounts payable due to affiliates ($38 and $41, respectively, related to VIE)	5,533			2,164
Accounts payable and other liabilities ($4,035 and $1,689, respectively, related to VIE)	47,860			35,457
Intangible lease liabilities, less accumulated amortization of $15,461 and $12,614, respectively ($8,287 and $9,244, respectively, related to VIE)	50,269			53,116
Total liabilities	1,066,397			920,264
Stockholders’ equity:
Preferred stock, $0.01 par value per share, 50,000,000 shares authorized; none issued and outstanding	—			—
Common stock, $0.01 par value per share, 300,000,000 shares authorized; 188,082,528 and 182,707,901 shares issued, respectively; 183,880,022 and 181,200,952 shares outstanding, respectively	1,839			1,812
Additional paid-in capital	1,616,189			1,591,076
Accumulated distributions in excess of earnings	(233,606		)	(161,798		)
Accumulated other comprehensive loss	(5,761		)	(2,580		)
Total stockholders’ equity	1,378,661			1,428,510
Noncontrolling interests	34,713			33,666
Total equity	1,413,374			1,462,176
Total liabilities and stockholders’ equity	$	2,479,771		$	2,382,440

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

CARTER VALIDUS MISSION CRITICAL REIT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands, except share data and per share amounts)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Revenue:
Rental and parking revenue	$	38,317		$	47,649		$	144,856		$	141,663
Tenant reimbursement revenue	4,916			4,168			14,011			14,253
Real estate-related notes receivable interest income	15			18			46			373
Total revenue	43,248			51,835			158,913			156,289
Expenses:
Rental and parking expenses	7,372			6,409			21,384			21,092
General and administrative expenses	1,465			1,609			4,633			4,469
Change in fair value of contingent consideration	125			160			370			460
Acquisition related expenses	5			—			1,645			3,654
Asset management fees	5,036			4,708			14,700			13,274
Depreciation and amortization	32,110			19,490			66,458			51,718
Total expenses	46,113			32,376			109,190			94,667
(Loss) income from operations	(2,865		)	19,459			49,723			61,622
Other income (expense):
Other interest and dividend income	2,705			2,709			8,116			5,828
Interest expense, net	(9,292		)	(7,733		)	(29,119		)	(21,043		)
Provision for loan losses	(42		)	—			(1,708		)	—
Total other expense	(6,629		)	(5,024		)	(22,711		)	(15,215		)
Net (loss) income	(9,494		)	14,435			27,012			46,407
Net income attributable to noncontrolling interests in consolidated partnerships	(1,006		)	(863		)	(2,995		)	(4,057		)
Net (loss) income attributable to common stockholders	$	(10,500	)	$	13,572		$	24,017		$	42,350
Other comprehensive (loss) income:
Unrealized income (loss) on interest rate swaps, net	$	3,288		$	(4,031	)	$	(3,181	)	$	(4,959	)
Other comprehensive income (loss)	3,288			(4,031		)	(3,181		)	(4,959		)
Other comprehensive loss attributable to noncontrolling interests in consolidated partnerships	—			14			—			106
Other comprehensive income (loss) attributable to common stockholders	3,288			(4,017		)	(3,181		)	(4,853		)
Comprehensive (loss) income	(6,206		)	10,404			23,831			41,448
Comprehensive income attributable to noncontrolling interests in consolidated partnerships	(1,006		)	(849		)	(2,995		)	(3,951		)
Comprehensive (loss) income attributable to common stockholders	$	(7,212	)	$	9,555		$	20,836		$	37,497
Weighted average number of common shares outstanding:
Basic	183,726,479			179,270,022			182,827,193			177,717,870
Diluted	183,726,479			179,286,709			182,846,104			177,736,797
Net (loss) income per common share attributable to common stockholders:
Basic	$	(0.06	)	$	0.08		$	0.13		$	0.24
Diluted	$	(0.06	)	$	0.08		$	0.13		$	0.24
Distributions declared per common share	$	0.18		$	0.18		$	0.52		$	0.52

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

CARTER VALIDUS MISSION CRITICAL REIT, INC. 

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

(in thousands, except share data) 

(Unaudited)

	Common Stock					Additional Paid-in Capital			Accumulated Distributions in Excess of Earnings			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity			Noncontrolling Interests			Total Equity
	No. of Shares		Par Value
Balance, December 31, 2015	181,200,952		$	1,812		$	1,591,076		$	(161,798	)	$	(2,580	)	$	1,428,510		$	33,666		$	1,462,176
Vesting of restricted stock	9,000		—			67			—			—			67			—			67
Issuance of common stock under the distribution reinvestment plan	5,365,629		53			51,174			—			—			51,227			—			51,227
Distributions to noncontrolling interests	—		—			—			—			—			—			(1,948		)	(1,948		)
Distributions declared to common stockholders	—		—			—			(95,825		)	—			(95,825		)	—			(95,825		)
Other offering costs	—		—			(8		)	—			—			(8		)	—			(8		)
Repurchase of common stock	(2,695,559	)	(26		)	(26,120		)	—			—			(26,146		)	—			(26,146		)
Other comprehensive loss	—		—			—			—			(3,181		)	(3,181		)	—			(3,181		)
Net income	—		—			—			24,017			—			24,017			2,995			27,012
Balance, September 30, 2016	183,880,022		$	1,839		$	1,616,189		$	(233,606	)	$	(5,761	)	$	1,378,661		$	34,713		$	1,413,374

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

CARTER VALIDUS MISSION CRITICAL REIT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands) 

(Unaudited)

	Nine Months Ended September 30,
	2016			2015
Cash flows from operating activities:
Net income	$	27,012		$	46,407
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	66,458			51,718
Amortization of deferred financing costs	3,425			2,794
Amortization of above-market leases	329			296
Amortization of intangible lease liabilities	(2,847		)	(4,072		)
Amortization of real estate-related notes receivable origination costs and commitment fees	4			114
Provision for doubtful accounts	1,799			3,376
Provision for loan losses	1,708			—
Loss on debt extinguishment	1,133			—
Straight-line rent	(3,717		)	(15,787		)
Stock-based compensation	67			67
Change in fair value of contingent consideration	370			460
Changes in operating assets and liabilities:
Accounts payable and other liabilities	2,650			4,698
Accounts payable due to affiliates	1,237			359
Other assets	(12,741		)	(9,136		)
Net cash provided by operating activities	86,887			81,294
Cash flows from investing activities:
Investment in real estate	(71,000		)	(123,753		)
Capital expenditures	(55,096		)	(44,178		)
Real estate deposits, net	450			166
Real estate-related notes receivable advances	—			(267		)
Collections of real estate-related notes receivable	—			9,500
Preferred equity investment	—			(127,147		)
Notes receivable advances	(4,019		)	(11,000		)
Net cash used in investing activities	(129,665		)	(296,679		)
Cash flows from financing activities:
Proceeds from notes payable	—			64,305
Payments on notes payable	(53,675		)	(8,617		)
Proceeds from credit facility	185,000			235,000
Payments on credit facility	—			(27,000		)
Payments of deferred financing costs	(457		)	(2,415		)
Repurchase of common stock	(26,146		)	(5,521		)
Offering costs	(8		)	(82		)
Distributions to stockholders	(44,816		)	(42,407		)
Payments to escrow funds	(5,024		)	(2,152		)
Collections of escrow funds	2,735			1,838
Purchase of noncontrolling interest in consolidated partnerships	—			(67,224		)
Distributions to noncontrolling interests in consolidated partnerships	(1,948		)	(2,053		)
Net cash provided by financing activities	55,661			143,672
Net change in cash and cash equivalents	12,883			(71,713		)
Cash and cash equivalents - Beginning of period	28,527			113,093
Cash and cash equivalents - End of period	$	41,410		$	41,380
Supplemental cash flow disclosure:
Interest paid, net of interest capitalized of $1,820 and $3,739, respectively	$	26,314		$	21,352
Supplemental disclosure of non-cash transactions:
Common stock issued through distribution reinvestment plan	$	51,227		$	50,720
Net unrealized loss on interest rate swap	$	(3,181	)	$	(4,959	)
Real estate-related notes receivable converted to investment in real estate	$	—		$	13,674
Accrued capital expenditures	$	6,475		$	—

The accompanying notes are an integral part of these condensed consolidated financial statements.

6

CARTER VALIDUS MISSION CRITICAL REIT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

September 30, 2016

Note 1—Organization and Business Operations

Carter Validus Mission Critical REIT, Inc., or the Company, a Maryland corporation, was incorporated on December 16, 2009 and elected to be taxed and currently qualifies as a real estate investment trust, or a REIT, under the Internal Revenue Code of 1986, as amended, for federal income tax purposes. The Company was organized to acquire and operate a diversified portfolio of income-producing commercial real estate, with a focus on the data center and healthcare property sectors, net leased to investment grade and other creditworthy tenants, as well as to make other real estate-related investments that relate to such property types. The Company operates through two reportable segments—commercial real estate investments in data centers and healthcare. Substantially all of the Company’s business is conducted through Carter/Validus Operating Partnership, LP, a Delaware limited partnership, or the Operating Partnership. The Company is the sole general partner of the Operating Partnership. Carter/Validus Advisors, LLC, or the Advisor, the Company’s affiliated advisor, is the sole limited partner of the Operating Partnership.

As of September 30, 2016, the Company owned 49 real estate investments (including onereal estate investment owned through a consolidated partnership), consisting of 84 properties located in 46 metropolitan statistical areas, or MSAs.

On November 25, 2015, the Company registered 10,473,946 shares of common stock with a price per share of $9.5475 for a proposed maximum offering price of $100,000,000 in shares of common stock under its distribution reinvestment plan, or the DRIP, pursuant to a registration statement on Form S-3. As of September 30, 2016, the Company had issued approximately 188,025,000 shares of common stock in its initial public offering and DRIP offerings for gross proceeds of $1,862,909,000, before share repurchases of $40,673,000 and offering costs, selling commissions and dealer manager fees of $174,783,000. Except as the context otherwise requires, “we,” “our,” “us,” and the “Company” refer to Carter Validus Mission Critical REIT, Inc., the Operating Partnership, all majority-owned subsidiaries and controlled subsidiaries.

Note 2—Summary of Significant Accounting Policies

The summary of significant accounting policies presented below is designed to assist in understanding the Company’s condensed consolidated financial statements. Such condensed consolidated financial statements and the accompanying notes thereto are the representation of management. The accompanying condensed consolidated unaudited financial statements of the Company have been prepared in accordance with the accounting principles generally accepted in the United States, or GAAP, for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal and recurring nature considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ended December 31, 2016.

The condensed consolidated balance sheet at December 31, 2015 has been derived from the audited consolidated financial statements at that date but does not include all of the information and notes required by GAAP for complete financial statements. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s audited consolidated financial statements as of and for the year ended December 31, 2015 and related notes thereto set forth in the Company’s Annual Report on Form 10-K, filed with the SEC on March 28, 2016.

7

Principles of Consolidation and Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of the Company, the Operating Partnership, all majority-owned subsidiaries and controlled subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

On January 1, 2016, the Company adopted Accounting Standards Update, or ASU, ASU 2015-02, Amendments to the Consolidation Analysis, which amends the current consolidation guidance affecting both the variable interest entity, or VIE, and voting interest entity, or VOE, consolidation models. The standard does not add or remove any of the characteristics in determining if an entity is a VIE or VOE, but rather enhances the way the Company assesses some of these characteristics. The Company concluded that no change was required to its accounting for its joint venture. However, the Operating Partnership now meets the criteria as a VIE, the Company is the primary beneficiary and, accordingly, the Company continues to consolidate the Operating Partnership. The Company’s sole asset is its investment in the Operating Partnership, and consequently, all of the Company’s assets and liabilities represent those assets and liabilities of the Operating Partnership. All of the Company’s debt is an obligation of the Operating Partnership.

Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with GAAP necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. These estimates are made and evaluated on an ongoing basis using information that is currently available as well as various other assumptions believed to be reasonable under the circumstances. Actual results could differ from those estimates.

Impairment of Long Lived Assets

The Company continually monitors events and changes in circumstances that could indicate that the carrying amounts of its real estate and related intangible assets may not be recoverable. When indicators of potential impairment suggest that the carrying value of real estate and related intangible assets may not be recoverable, the Company assesses the recoverability of the assets by estimating whether the Company will recover the carrying value of the assets through the undiscounted future cash flows and eventual disposition. If based on this analysis the Company does not believe that it will be able to recover the carrying value of the assets, the Company will record an impairment loss to the extent that the carrying value exceeds the estimated fair value of the assets.  The Company has not recognized impairment losses related to real estate. During the three and nine months ended September 30, 2016, the Company accelerated the amortization of one in-place lease intangible asset in the amount of $14,634,000 as a result of one tenant experiencing financial difficulties which the Company believes will result in new lease terms. During the three and nine months ended September 30, 2015, the Company accelerated the amortization of one in-place lease intangible asset in the amount of $3,121,000 as a result of one lease termination. These amounts are included as a component of depreciation and amortization expense in the accompanying condensed consolidated statements of comprehensive income (loss).

Allowance for Uncollectible Accounts

Tenant receivables and unbilled deferred rent receivables are carried net of the allowances for uncollectible amounts. An allowance will be maintained for estimated losses resulting from the inability of certain tenants to meet the contractual obligations under their lease agreements. The Company also maintains an allowance for deferred rent receivables arising from the straight-lining of rents. The Company’s determination of the adequacy of these allowances is based primarily upon evaluations of historical loss experience, the tenant’s financial condition, security deposits, letters of credit, lease guarantees and current economic conditions and other relevant factors. For the three and nine months ended September 30, 2016, the Company recorded $990,000 and $1,799,000, respectively, in bad debt expense related to reserves for rental and parking revenue and tenant reimbursement revenue, which are recognized in the accompanying condensed consolidated statements of comprehensive income (loss) as a deduction from rental and parking revenue and tenant reimbursement revenue. In addition, for the three and nine months ended September 30, 2016, the Company wrote off $14,366,000 related to straight-line rent receivable and $1,146,000 related to a lease incentive asset, which are recognized in the accompanying condensed consolidated statements of comprehensive income (loss) as a deduction from rental and parking revenue. The bad debt expense and write offs of straight-line rent receivable and the lease incentive asset are the result of one tenant experiencing financial difficulties which the Company believes will result in new lease terms. For the three and nine months ended September 30, 2015, the Company recorded $3,376,000 in bad debt expense.

8

Notes Receivable

Notes receivable are reported at their outstanding principal balance, net of any unearned income, unamortized deferred fees and costs and allowances for doubtful accounts. The Company evaluates the collectability of both interest and principal on each note receivable to determine whether it is collectible, primarily through the evaluation of the credit quality indicators, such as the tenant's financial condition, evaluations of historical loss experience, current economic conditions and other relevant factors. Impairment occurs when it is determined probable that the Company will not be able to collect principal and interest amounts due according to the contractual terms of the note. As of September 30, 2016 and December 31, 2015, the aggregate balance on the Company’s notes receivable was $17,327,000 and $13,000,000, respectively. For the three and nine months ended September 30, 2016, the Company recorded $0 and $1,625,000, respectively, as an allowance to reduce the carrying value of a note receivable and $42,000 and $83,000, respectively, recorded as a corresponding reserve related to accrued interest in provision for loan losses in the accompanying condensed consolidated financial statements.

Concentration of Credit Risk and Significant Leases

As of September 30, 2016, the Company had cash on deposit, including restricted cash, in certain financial institutions that had deposits in excess of current federally insured levels; however, the Company has not experienced any losses in such accounts. The Company limits its cash investments to financial institutions with high credit standings; therefore, the Company believes it is not exposed to any significant credit risk on its cash deposits. To date, the Company has experienced no loss of or lack of access to cash in its accounts. Concentration of credit risk with respect to accounts receivable from tenants is limited.

As of September 30, 2016, the Company owned real estate investments in 46 MSAs, (including one real estate investment owned through a consolidated partnership), three of which accounted for 10.0% or more of contractual rental revenue. Real estate investments located in the Dallas-Ft. Worth-Arlington, Texas MSA, the Chicago-Naperville-Elgin, Illinois-Indiana-Wisconsin MSA and the Houston-The Woodlands-Sugar Land, Texas MSA accounted for an aggregate of 12.9%, 11.3% and 10.0%, respectively, of contractual rental revenue for the nine months ended September 30, 2016.

As of September 30, 2016, the Company had two exposures to tenant concentration that accounted for 10.0% or more of contractual rental revenue. The leases with AT&T Services, Inc. and the lease with Bay Area Regional Medical Center, LLC accounted for 12.2% and 10.0%, respectively, of contractual rental revenue for the nine months ended September 30, 2016.

Deferred Financing Costs

Deferred financing costs are loan fees, legal fees and other third-party costs associated with obtaining financing. These costs are amortized over the terms of the respective financing agreements using the effective interest method. Unamortized deferred financing costs are generally expensed when the associated debt is refinanced or repaid before maturity unless specific rules are met that would allow for the carryover of such costs to the refinanced debt. Costs incurred in seeking financing transactions that do not close are expensed in the period in which it is determined that the financing will not close.

On January 1, 2016, the Company adopted ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, and ASU 2015-15, Interest—Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated With Line-of-Credit Arrangements, or ASUs 2015-03 and 2015-15. According to ASUs 2015-03 and 2015-15, deferred financing costs related to a recognized debt liability in connection with term loans, including the term loan portion of the Company's credit facility, are presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. Deferred financing costs related to the revolving line of credit portion of the Company's unsecured credit facility are presented in the balance sheet as an asset, which is included in other assets on the condensed consolidated balance sheet. As required, the Company retrospectively applied the guidance in ASUs 2015-03 and 2015-15 to the prior period presented, which resulted in a decrease of $6,805,000 in other assets, $4,261,000 in notes payable and $2,544,000 in credit facility on the condensed consolidated balance sheet as of December 31, 2015.

Share Repurchase Program

The Company’s share repurchase program allows for repurchases of shares of the Company’s common stock when certain criteria are met. The share repurchase program provides that all repurchases during any calendar year, including those redeemable upon death or a qualifying disability of a stockholder, are limited to those that can be funded with equivalent reinvestments pursuant to the DRIP offerings during the prior calendar year and other operating funds, if any, as the board of directors, in its sole discretion, may reserve for this purpose.

9

Repurchases of shares of the Company’s common stock are at the sole discretion of the Company’s board of directors. In addition, the Company’s board of directors, in its sole discretion, may amend, suspend, reduce, terminate or otherwise change the share repurchase program upon 30 days' prior notice to the Company’s stockholders for any reason it deems appropriate. The share repurchase program provides that the Company will limit the number of shares repurchased during any calendar year to 5.0% of the number of shares of common stock outstanding as of December 31^st of the previous calendar year. During the nine months ended September 30, 2016, the Company received valid repurchase requests related to approximately 2,696,000 shares of common stock, all of which were repurchased in full for an aggregate purchase price of approximately $26,146,000 (an average of $9.70 per share). During the nine months ended September 30, 2015, the Company received valid repurchase requests related to approximately 577,000 shares of common stock, all of which were repurchased in full for an aggregate purchase price of approximately $5,521,000 (an average of $9.57 per share).

Earnings Per Share

Basic earnings per share attributable to common stockholders for all periods presented are computed by dividing net income attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Shares of non-vested restricted common stock give rise to potentially dilutive shares of common stock. Diluted earnings per share are computed based on the weighted average number of shares outstanding and all potentially dilutive securities. For the three months ended September 30, 2016, there were approximately 17,000 shares of non-vested restricted common stock outstanding; however, such shares were excluded from the computation of diluted earnings per share because such shares were anti-dilutive during this period. For the three months ended September 30, 2015, diluted earnings per share reflected the effect of approximately 17,000 non-vested shares of restricted common stock that were outstanding as of such period. For the nine months ended September 30, 2016 and 2015, diluted earnings per share reflected the effect of approximately 19,000 non-vested shares of restricted common stock that were outstanding as of such periods.

Recently Issued Accounting Pronouncements

On May 28, 2014, the Financial Accounting Standards Board, or the FASB, issued ASU 2014-09, Revenue from Contracts with Customers, or ASU 2014-09. The objective of ASU 2014-09 is to clarify the principles for recognizing revenue and to develop a common revenue standard for GAAP. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle, which may require more judgment and estimates within the revenue recognition process than are required under existing GAAP. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606) Deferral of the Effective Date, or ASU 2015-14. ASU 2015-14 defers the effective date of ASU 2014-09 by one year to fiscal years and interim periods beginning after December 15, 2017. Early adoption is permitted as of the original effective date, which was annual reporting periods beginning after December 15, 2016, and the interim periods within that year. On March 17, 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers Principal versus Agent Considerations (Reporting Revenue Gross versus Net), or ASU 2016-08, which clarifies the implementation guidance on principal versus agent considerations in the new revenue recognition standard. ASU 2016-08 clarifies that an entity is a principal when it controls the specified good or service before that good or service is transferred to the customer, and is an agent when it does not control the specified good or service before it is transferred to the customer. The effective date and transition of this update is the same as the effective date and transition of ASU 2015-14. The Company is in the process of evaluating the impact ASUs 2014-09 and 2016-08 will have on the Company’s condensed consolidated financial statements.

On June 16, 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses, or ASU 2016-13. ASU 2016-13 requires more timely recording of credit losses on loans and other financial instruments that are not accounted for at fair value through net income, including loans held for investment, held-to-maturity debt securities, trade and other receivables, net investment in leases and other such commitments. ASU 2016-13 requires that financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The amendments in ASU 2016-13 require the Company to measure all expected credit losses based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the financial assets and eliminates the “incurred loss” methodology in current GAAP. ASU 2016-13 is effective for fiscal years, and interim periods within, beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within, beginning after December 15, 2018. The Company is in the process of evaluating the impact ASU 2016-13 will have on the Company’s condensed consolidated financial statements.

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On August 26, 2016, the FASB issued ASU 2016-15, Statement of Cash Flows, or ASU 2016-15. ASU 2016-15 is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. ASU 2016-15 addresses eight classification issues related to the statement of cash flows: 1) debt prepayment or debt extinguishment costs; 2) settlement of zero-coupon bonds; 3) contingent consideration payments made after a business combination; 4) proceeds from the settlement of insurance claims; 5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; 6) distributions received from equity method investees; 7) beneficial interests in securitization transactions; and 8) separately identifiable cash flows and application of the predominance principle. ASU 2016-15 is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. Entities should apply this ASU using a retrospective transition method to each period presented. The Company is in the process of evaluating the impact ASU 2016-15 will have on the Company’s condensed consolidated financial statements.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current financial statement presentation, with no effect on the Company’s condensed consolidated financial position or results of operations.

Note 3—Real Estate Investments

During the nine months ended September 30, 2016, the Company completed the acquisition of one healthcare real estate investment, consisting of five properties, that was determined to be a business combination, or the 2016 Acquisition. The aggregate purchase price of the 2016 Acquisition was $71,000,000, plus closing costs. The Company funded the purchase price of the 2016 Acquisition using cash and its unsecured credit facility.

The following table summarizes the 2016 Acquisition:

Property Description	Date Acquired	Ownership Percentage
Post Acute Medical Portfolio	05/23/2016	100%

Results of operations for the 2016 Acquisition are reflected in the accompanying condensed consolidated statements of comprehensive income (loss) for three and nine months ended September 30, 2016 for the period subsequent to the acquisition date of the real estate investment. For the period from the acquisition date through September 30, 2016, the Company recorded $2,790,000 in revenues and a net income of $67,000 for the 2016 Acquisition.

In addition, during the nine months ended September 30, 2016 and 2015, the Company incurred aggregate charges related to acquisition fees and costs of $1,645,000 and $3,478,000, respectively, in connection with acquisitions determined to be business combinations, which are included in the accompanying condensed consolidated statements of comprehensive income (loss). The total amount of all acquisition fees and costs is limited to 6.0% of the contract purchase price of the property. The contract purchase price is the amount actually paid or allocated in respect of the purchase, development, construction or improvement of a property, exclusive of acquisition fees and acquisition expenses. For the nine months ended September 30, 2016 and 2015, acquisition fees and costs did not exceed 6.0% of the purchase price of the Company’s acquisitions during such periods.

The following table summarizes management’s allocation of the fair value of the 2016 Acquisition during the nine months ended September 30, 2016 (amounts in thousands):

	Total
Land	$	4,781
Buildings and improvements	53,284
In-place leases	12,935
Total assets acquired	$	71,000

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Assuming the 2016 Acquisition described above had occurred on January 1, 2015, pro forma revenues, net (loss) income and net (loss) income attributable to common stockholders would have been as follows for the periods listed below (amounts in thousands, except per share amounts, unaudited):

	Three Months Ended September 30,					Nine Months Ended September 30,
	2016			2015		2016		2015
Pro forma basis:
Revenues	$	43,249		$	53,475	$	161,459	$	163,884
Net (loss) income	$	(9,489	)	$	15,325	$	30,045	$	48,952
Net (loss) income attributable to common stockholders	$	(10,495	)	$	14,462	$	27,050	$	44,895
Net (loss) income per common share attributable to common stockholders:
Basic	$	(0.06	)	$	0.08	$	0.15	$	0.25
Diluted	$	(0.06	)	$	0.08	$	0.15	$	0.25

The condensed pro forma consolidated financial statements for the three and nine months ended September 30, 2016 and 2015 include pro forma adjustments related to the acquisitions during 2016 and 2015. The pro forma information for the nine months ended September 30, 2016 was adjusted to exclude approximately $1,645,000 of acquisition fees and costs recorded related to the Company’s real estate investments. The pro forma information may not be indicative of what actual results of operations would have been had the transactions occurred at the beginning of 2015, nor is it necessarily indicative of future operating results.

Note 4—Acquired Intangible Assets, Net

Acquired intangible assets, net, consisted of the following as of September 30, 2016 and December 31, 2015 (amounts in thousands, except weighted average life amounts):

	September 30, 2016		December 31, 2015
In-place leases, net of accumulated amortization of $47,690 and $36,260, respectively (with a weighted average remaining life of 13.1 years and 14.3 years, respectively)	$	176,938	$	191,470
Above-market leases, net of accumulated amortization of $1,223 and $932, respectively (with a weighted average remaining life of 10.5 years and 11.1 years, respectively)	3,137		3,428
Ground lease interest, net of accumulated amortization of $220 and $182, respectively (with a weighted average remaining life of 59.8 years and 60.4 years, respectively)	2,594		2,632
	$	182,669	$	197,530

The aggregate weighted average remaining life of the acquired intangible assets was 13.7 years and 14.9 years as of September 30, 2016 and December 31, 2015, respectively.

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Note 5—Other Assets

Other assets consisted of the following as of September 30, 2016 and December 31, 2015 (amounts in thousands):

	September 30, 2016		December 31, 2015
Deferred financing costs related to the revolver portion of the unsecured credit facility, net of accumulated amortization of $5,278 and $3,690, respectively	$	1,426	$	2,854
Lease commissions, net of accumulated amortization of $501 and $227, respectively	6,808		4,194
Investments in unconsolidated partnerships	112		100
Tenant receivables, net of allowances for doubtful accounts of $1,799 and $0, respectively	13,914		5,318
Notes receivable, net of allowances for doubtful accounts of $1,708 and $0, respectively	15,619		13,000
Real estate-related notes receivable	514		514
Straight-line rent receivable	52,872		47,807
Restricted cash held in escrow	15,950		13,661
Real estate escrow deposits	—		450
Restricted cash	974		882
Derivative assets	—		61
Prepaid and other assets	3,243		4,207
	$	111,432	$	93,048

Note 6—Future Minimum Rent

Rental Revenue

The Company’s real estate assets are leased to tenants under operating leases with varying terms. The leases frequently have provisions to extend the lease agreements. The Company retains substantially all of the risks and benefits of ownership of the real estate assets leased to tenants.

The future minimum rent to be received from the Company’s investments in real estate assets under non-cancelable operating leases, including optional renewal periods for which exercise is reasonably assured, for the three months ending December 31, 2016 and for each of the next four years ending December 31 and thereafter, are as follows (amounts in thousands):

Year	Amount
Three months ending December 31, 2016	$	48,134
2017	194,091
2018	198,818
2019	201,704
2020	202,824
Thereafter	1,924,094
	$	2,769,665

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Rental Expense

The Company has ground lease obligations that generally require fixed annual rental payments and may also include escalation clauses and renewal options.

The future minimum rent obligations under non-cancelable ground leases for the three months ending December 31, 2016 and for each of the next four years ending December 31 and thereafter, are as follows (amounts in thousands):

Year	Amount
Three months ending December 31, 2016	$	175
2017	700
2018	702
2019	746
2020	746
Thereafter	37,836
	$	40,905

Note 7—Notes Payable and Unsecured Credit Facility

The Company's debt outstanding as of September 30, 2016 and December 31, 2015 consisted of the following (amounts in thousands):

	September 30, 2016			December 31, 2015
Notes payable:
Fixed rate notes payable	$	115,481		$	131,233
Variable rate notes payable fixed through interest rate swaps	332,199			369,002
Variable rate notes payable	41,977			43,097
Total notes payable, principal amount outstanding	489,657			543,332
Unamortized deferred financing costs related to notes payable	(2,935		)	(4,261		)
Total notes payable, net of deferred financing costs	486,722			539,071
Unsecured credit facility:
Revolving line of credit	268,000			83,000
Term loan	210,000			210,000
Total unsecured credit facility, principal amount outstanding	478,000			293,000
Unamortized deferred financing costs related to the term loan of the unsecured credit facility	(1,987		)	(2,544		)
Total unsecured credit facility, net of deferred financing costs	476,013			290,456
Total debt outstanding	$	962,735		$	829,527

Significant loan activity since December 31, 2015, excluding scheduled principal payments, includes:

• On March 30, 2016, the Company paid off its debt in connection with one of the Company's notes payable with an outstanding principal balance of $31,167,000 at the time of repayment. The original note payable had a variable rate fixed through an interest rate swap of 6.19% with a maturity date on February 25, 2019. As a result of this extinguishment, the Company expensed $343,000 of unamortized deferred financing costs, $62,000 of termination fees and $728,000 of the early extinguishment of the hedged debt obligation, which were recognized in loss on debt extinguishment on the Company's condensed consolidated statements of comprehensive income (loss). The lender waived the prepayment penalty fee.

• The Company made a draw of $185,000,000 and repaid $0 on its unsecured credit facility.

• The Company entered into five interest rate swap agreements to effectively fix London Interbank Offered Rate, or LIBOR, on $155,000,000 of the term loans of the unsecured credit facility. As of September 30, 2016, $210,000,000 of the term loans of the unsecured credit facility were fixed through interest rate swaps.

14

• As of September 30, 2016, the Company had a total unencumbered pool availability under the unsecured credit facility of $514,575,000 and an aggregate outstanding principal balance of $478,000,000. As of September 30, 2016, $36,575,000 remained available to be drawn on the unsecured credit facility.

• As of September 30, 2016, the Company had six variable rate notes payable that were fixed through interest rate swaps.

The principal payments due on the notes payable and unsecured credit facility for the three months ending December 31, 2016 and for each of the next four years ending December 31 and thereafter, are as follows (amounts in thousands):

Year	Amount
Three months ending December 31, 2016	$	2,830
2017 (1)	459,058
2018	149,059
2019	170,548
2020	136,160
Thereafter	50,002
	$	967,657

(1) Of this amount, $268,000,000 relates to the revolving line of credit under the unsecured credit facility. The maturity date on the revolving line of credit under the unsecured credit facility is May 28, 2017, subject to the Company's right to a 12-month extension.

Note 8—Intangible Lease Liabilities, Net

Intangible lease liabilities, net, consisted of the following as of September 30, 2016 and December 31, 2015 (amounts in thousands, except weighted average life amounts):

	September 30, 2016		December 31, 2015
Below-market leases, net of accumulated amortization of $15,191 and $12,437, respectively (with a weighted average remaining life of 17.2 years and 17.7 years, respectively)	$	45,214	$	47,968
Ground leasehold liabilities, net of accumulated amortization of $270 and $177, respectively (with a weighted average remaining life of 42.4 years and 43.2 years, respectively)	5,055		5,148
	$	50,269	$	53,116

The aggregate weighted average remaining life of intangible lease liabilities was 19.8 years and 20.2 years as of September 30, 2016 and December 31, 2015, respectively.

Note 9—Commitments and Contingencies

Litigation

In the ordinary course of business, the Company may become subject to litigation or claims. As of September 30, 2016, there were, and currently there are, no material pending legal proceedings to which the Company is a party.

Note 10—Related-Party Transactions and Arrangements

The Company pays to the Advisor 2.0% of the contract purchase price of each property or asset acquired, 2.0% of the cost of development/redevelopment projects, other than the initial acquisition of the property and 2.0% of the amount advanced with respect to a mortgage loan. For the three months ended September 30, 2016 and 2015, the Company incurred $0 and for the nine months ended September 30, 2016 and 2015, the Company incurred $1,420,000 and $2,748,000, respectively, in acquisition fees to the Advisor or its affiliates related to investments in real estate. For the three months ended September 30, 2016 and 2015, the Company incurred $1,200,000 and $0, respectively and for the nine months ended September 30, 2016 and 2015, the Company incurred $1,200,000 and $0, respectively, in acquisition fees to the Advisor or its affiliates related to one redevelopment project.

15

The Company pays the Advisor an annual asset management fee of 0.85% of the aggregate asset value plus costs and expenses incurred by the Advisor in providing asset management services. The fee is payable monthly in an amount equal to 0.07083% of the aggregate asset value as of the last day of the immediately preceding month. For the three months ended September 30, 2016 and 2015, the Company incurred $5,036,000 and $4,708,000, respectively, and for the nine months ended September 30, 2016 and 2015, the Company incurred $14,700,000 and $13,274,000, respectively, in asset management fees to the Advisor.

The Company reimburses the Advisor for all expenses it paid or incurred in connection with the services provided to the Company, subject to certain limitations. The Company will not reimburse the Advisor for personnel costs in connection with services for which the Advisor receives an acquisition and advisory fee or a disposition fee. For the three months ended September 30, 2016 and 2015, the Advisor allocated $511,000 and $376,000, respectively, and for the nine months ended September 30, 2016 and 2015, the Advisor allocated $1,368,000 and $941,000, respectively, in operating expenses incurred on the Company’s behalf.

The Company has no direct employees. The employees of the Advisor and other affiliates provide services to the Company related to acquisitions, property management, asset management, accounting, investor relations, and all other administrative services. If the Advisor or its affiliates provides a substantial amount of services, as determined by a majority of the Company’s independent directors, in connection with the sale of one or more properties, the Company will pay the Advisor a disposition fee up to the lesser of 1.0% of the contract sales price and one-half of the brokerage commission paid if a third party broker is involved. In no event will the combined real estate commission paid to the Advisor, its affiliates and unaffiliated third parties exceed 6.0% of the contract sales price. Notwithstanding the terms of the advisory agreement, the Advisor agreed to receive a reduced disposition fee payable to the Advisor or its affiliates in the event of a disposition of all or substantially all of the assets of the Company, a sale of the Company, or a merger with a change of control of the Company, of up to the lesser of 50% of the fees paid in the aggregate to third party investment bankers for such transaction, not to exceed 0.50% of the transaction price. The disposition fee is otherwise payable in accordance with the advisory agreement. This reduction in the disposition fee would not impact a disposition fee paid in the event of a sale of an individual property or portfolio of properties. The reduced disposition fee in such situations was approved by the Company's board of directors on May 5, 2016. In addition, after investors have received a return on their net capital contributions and an 8.0% cumulative non-compounded annual return, then the Advisor is entitled to receive 15.0% of the remaining net sale proceeds. As of September 30, 2016, the Company has not incurred a disposition fee or a subordinated participation in net sale proceeds to the Advisor or its affiliates.

Upon listing of the Company’s common stock on a national securities exchange, the Company will pay the Advisor a subordinated incentive listing fee equal to 15.0% of the amount by which the market value of the Company’s outstanding stock plus all distributions paid by the Company prior to listing exceeds the sum of the total amount of capital raised from investors and the amount of cash flow necessary to generate an 8.0% cumulative, non-compounded annual return to investors. As of September 30, 2016, the Company has not incurred a subordinated incentive listing fee.

Upon termination or non-renewal of the advisory agreement, with or without cause, the Advisor will be entitled to receive distributions from the Operating Partnership equal to 15.0% of the amount by which the sum of the Company’s adjusted market value plus distributions exceeds the sum of the aggregate capital contributed by investors plus an amount equal to an annual 8.0% cumulative, non-compounded return to investors. In addition, the Advisor may elect to defer its right to receive a subordinated distribution upon termination until either shares of the Company’s common stock are listed and traded on a national securities exchange or another liquidity event occurs. As of September 30, 2016, the Company has not incurred any subordinated termination fees to the Advisor or its affiliates.

The Company pays Carter Validus Real Estate Management Services, LLC, or the Property Manager, leasing and property management fees for the Company’s properties. Such fees equal 3.0% of monthly gross revenues from single-tenant properties and 4.0% of monthly gross revenues from multi-tenant properties. The Company will reimburse the Property Manager and its affiliates for property-level expenses that any of them pay or incur on the Company’s behalf, including salaries, bonuses and benefits of persons employed by the Property Manager and its affiliates, except for the salaries, bonuses and benefits of persons who also serve as one of the Company’s executive officers. The Property Manager and its affiliates may subcontract the performance of their duties to third parties and pay all or a portion of the property management fee to the third parties with whom they contract for these services. If the Company contracts directly with third parties for such services at customary market fees, the Company may pay the Property Manager an oversight fee equal to 1.0% of the gross revenues of the property managed. In no event will the Company pay the Property Manager, the Advisor or its affiliates both a property management fee and an oversight fee with respect to any particular property. The Company will pay the Property Manager a separate fee for the one-time initial rent-up, lease renewals or leasing-up of newly constructed properties. For the three months ended September 30, 2016 and 2015, the Company incurred $1,405,000 and $1,139,000, respectively, and for the nine months ended September 30, 2016 and 2015, the Company incurred $4,016,000 and $3,585,000, respectively, in property management fees to the Property Manager, which are recorded in rental and parking expenses in the accompanying condensed consolidated statements of comprehensive income (loss). For the three months ended September 30, 2016 and 2015, the Company incurred

16

$861,000 and $2,391,000, respectively, and for the nine months ended September 30, 2016 and 2015, the Company incurred $1,138,000 and $2,435,000, respectively, in leasing commissions to the Property Manager. Leasing commission fees are capitalized in other assets in the accompanying condensed consolidated balance sheets.

For acting as general contractor and/or construction manager to supervise or coordinate projects or to provide major repairs or rehabilitation on our properties, the Company may pay the Property Manager up to 5.0% of the cost of the projects, repairs and/or rehabilitation, as applicable, or construction management fees. For the three months ended September 30, 2016 and 2015, the Company incurred $933,000 and $639,000, respectively, and for the nine months ended September 30, 2016 and 2015, the Company incurred $933,000 and $1,470,000, respectively, in construction management fees to the Property Manager.

Construction management fees are capitalized in buildings and improvements in the accompanying condensed consolidated balance sheets.

Accounts Payable Due to Affiliates

The following amounts were outstanding due to affiliates as of September 30, 2016 and December 31, 2015 (amounts in thousands):

Entity	Fee	September 30, 2016		December 31, 2015
Carter/Validus Advisors, LLC and its affiliates	Asset management fees	$	1,684	$	1,589
Carter/Validus Advisors, LLC and its affiliates	Acquisition fees for redevelopment projects	1,200		—
Carter Validus Real Estate Management Services, LLC	Property management fees	640		401
Carter/Validus Advisors, LLC and its affiliates	General, administrative and other costs	215		174
Carter Validus Real Estate Management Services, LLC	Construction management fees	933		—
Carter Validus Real Estate Management Services, LLC	Leasing commissions	861		—
		$	5,533	$	2,164

Note 11—Segment Reporting

Management reviews the performance of individual properties and aggregates individual properties based on operating criteria into two reportable segments—commercial real estate investments in data centers and healthcare—and makes operating decisions based on these two reportable segments. The Company’s commercial real estate investments in data centers and healthcare are based on certain underwriting assumptions and operating criteria, which are different for data centers and healthcare. There were no intersegment sales or transfers during the nine months ended September 30, 2016 and 2015.

The Company evaluates performance based on net operating income of the individual properties in each segment. Net operating income, a non-GAAP financial measure, is defined as total revenues, less rental expenses, which excludes depreciation and amortization, general and administrative expenses, acquisition related expenses, asset management fees, change in fair value of contingent consideration, interest expense, net, loss on debt extinguishment, provision for loan losses, and other interest and dividend income. The Company believes that segment net operating income serves as a useful supplement to net income because it allows investors and management to measure unlevered property-level operating results and to compare operating results to the operating results of other real estate companies between periods on a consistent basis. Segment net operating income should not be considered as an alternative to net income determined in accordance with GAAP as an indicator of financial performance, and accordingly, the Company believes that in order to facilitate a clear understanding of the consolidated historical operating results, segment net operating income should be examined in conjunction with net income as presented in the accompanying condensed consolidated financial statements and data included elsewhere in this Quarterly Report on Form 10-Q.

Real estate-related notes receivable interest income, general and administrative expenses, change in fair value of contingent consideration, acquisition related expenses, asset management fees, depreciation and amortization, provision for loan losses, other interest and dividend income and interest expense, net are not allocated to individual segments for purposes of assessing segment performance.

17

Non-segment assets primarily consist of corporate assets, including cash and cash equivalents, real estate and escrow deposits, deferred financing costs attributable to the revolving line of credit portion of the Company's unsecured credit facility, real estate-related notes receivable, the Preferred Equity Investment and other assets not attributable to individual properties.

Summary information for the reportable segments during the three and nine months ended September 30, 2016 and 2015, is as follows (amounts in thousands):

	Data Centers			Healthcare			Three Months Ended September 30, 2016
Revenue:
Rental, parking and tenant reimbursement revenue	$	29,487		$	13,746		$	43,233
Expenses:
Rental and parking expenses	(5,284		)	(2,088		)	(7,372		)
Segment net operating income	$	24,203		$	11,658		35,861
Revenue:
Real estate-related notes receivable interest income							15
Expenses:
General and administrative expenses							(1,465		)
Change in fair value of contingent consideration							(125		)
Acquisition related expenses							(5		)
Asset management fees							(5,036		)
Depreciation and amortization							(32,110		)
Loss from operations							(2,865		)
Other income (expense):
Other interest and dividend income							2,705
Interest expense, net							(9,292		)
Provision for loan losses							(42		)
Net loss							$	(9,494	)

	Data Centers			Healthcare			Three Months Ended September 30, 2015
Revenue:
Rental, parking and tenant reimbursement revenue	$	28,407		$	23,410		$	51,817
Expenses:
Rental and parking expenses	(4,847		)	(1,562		)	(6,409		)
Segment net operating income	$	23,560		$	21,848		45,408
Revenue:
Real estate-related notes receivable interest income							18
Expenses:
General and administrative expenses							(1,609		)
Change in fair value of contingent consideration							(160		)
Acquisition related expenses							—
Asset management fees							(4,708		)
Depreciation and amortization							(19,490		)
Income from operations							19,459
Other income (expense):
Other interest and dividend income							2,709
Interest expense, net							(7,733		)
Net income							$	14,435

18

	Data Centers			Healthcare			Nine Months Ended September 30, 2016
Revenue:
Rental, parking and tenant reimbursement revenue	$	87,120		$	71,747		$	158,867
Expenses:
Rental and parking expenses	(15,043		)	(6,341		)	(21,384		)
Segment net operating income	$	72,077		$	65,406		137,483
Revenue:
Real estate-related notes receivable interest income							46
Expenses:
General and administrative expenses							(4,633		)
Change in fair value of contingent consideration							(370		)
Acquisition related expenses							(1,645		)
Asset management fees							(14,700		)
Depreciation and amortization							(66,458		)
Income from operations							49,723
Other income (expense):
Other interest and dividend income							8,116
Interest expense, net							(29,119		)
Provision for loan losses							(1,708		)
Net income							$	27,012

	Data Centers			Healthcare			Nine Months Ended September 30, 2015
Revenue:
Rental, parking and tenant reimbursement revenue	$	86,226		$	69,690		$	155,916
Expenses:
Rental and parking expenses	(15,287		)	(5,805		)	(21,092		)
Segment net operating income	$	70,939		$	63,885		134,824
Revenue:
Real estate-related notes receivable interest income							373
Expenses:
General and administrative expenses							(4,469		)
Change in fair value of contingent consideration							(460		)
Acquisition related expenses							(3,654		)
Asset management fees							(13,274		)
Depreciation and amortization							(51,718		)
Income from operations							61,622
Other income (expense):
Other interest and dividend income							5,828
Interest expense, net							(21,043		)
Net income							$	46,407

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Assets by each reportable segment as of September 30, 2016 and December 31, 2015 are as follows (amounts in thousands):

	September 30, 2016		December 31, 2015
Assets by segment:
Data centers	$	1,111,084	$	1,097,952
Healthcare	1,202,174		1,124,928
All other	166,513		159,560
Total assets	$	2,479,771	$	2,382,440

Capital additions and acquisitions by reportable segments for the nine months ended September 30, 2016 and 2015 are as follows (amounts in thousands):

	Nine Months Ended September 30,
	2016		2015
Capital additions and acquisitions by segment:
Data centers	$	21,867	$	2,793
Healthcare	104,229		178,812
Total capital additions and acquisitions	$	126,096	$	181,605

Note 12—Accounts Payable and Other Liabilities

Accounts payable and other liabilities, as of September 30, 2016 and December 31, 2015, were comprised of the following (amounts in thousands):

	September 30, 2016		December 31, 2015
Accounts payable and accrued expenses	$	10,663	$	6,283
Accrued interest expense	2,899		2,905
Accrued property taxes	4,840		1,247
Contingent consideration obligation	5,710		5,340
Distributions payable to stockholders	10,560		10,776
Tenant deposits	1,039		1,039
Deferred rental income	6,388		5,226
Derivative liabilities	5,761		2,641
	$	47,860	$	35,457

Note 13—Preferred Equity Investment

During the year ended December 31, 2015, the Company invested an aggregate amount of $127,147,000 in 7.875% Series B Redeemable Cumulative Preferred Stock in a private healthcare real estate corporation, or the Preferred Equity Investment. The Preferred Equity Investment is stated at cost and consisted of a principal amount of $125,000,000, plus origination costs of $2,772,000, offset by closing fees of $625,000. For the three months ended September 30, 2016 and 2015, the Company recognized $2,461,000 and $2,461,000, respectively, and for the nine months ended September 30, 2016 and 2015, the Company recognized $7,383,000 and $5,359,000, respectively, of dividend income related to the Preferred Equity Investment. On October 4, 2016, the Company received proceeds for the redemption of the Preferred Equity Investment in 7.875% Series B Redeemable Cumulative Preferred Stock for a total of approximately $131,250,000. Refer to Note 14—“Fair Value” for further discussion.

Note 14—Fair Value

Notes payable – Fixed Rate—The estimated fair value of notes payable – fixed rate measured using quoted prices and observable inputs from similar liabilities (Level 2) was approximately $118,865,000 and $131,984,000 as of September 30, 2016 and December 31, 2015, respectively, as compared to the outstanding principal of $115,481,000 and $131,233,000 as of September 30, 2016 and December 31, 2015, respectively.

20

Notes payable – Variable—The estimated fair value of notes payable – variable rate fixed through interest rate swap agreements (Level 2) was approximately $332,952,000 and $364,478,000 as of September 30, 2016 and December 31, 2015, respectively, as compared to the outstanding principal of $332,199,000 and $369,002,000 as of September 30, 2016 and December 31, 2015, respectively. The outstanding principal of the notes payable – variable was $41,977,000 and $43,097,000 as of September 30, 2016 and December 31, 2015, respectively, which approximated their fair value because they are interest rate adjustable.

Unsecured credit facility—The outstanding principal of the unsecured credit facility – variable was $268,000,000 and $238,000,000, which approximated its fair value, as of September 30, 2016 and December 31, 2015, respectively. The interest on the unsecured credit facility – variable is calculated at LIBOR, plus an applicable margin. The interest rate resets to market on a monthly basis. The fair value of the Company's unsecured credit facility – variable is estimated based on the interest rates currently offered to the Company by financial institutions. The estimated fair value of the unsecured credit facility – variable rate fixed through interest rate swap agreements (Level 2) was approximately $207,750,000 and $52,054,000 as of September 30, 2016 and December 31, 2015, respectively, as compared to the outstanding principal of $210,000,000 and $55,000,000 as of September 30, 2016 and December 31, 2015, respectively.

Notes receivable—The outstanding principal of the notes receivable approximated the fair value as of September 30, 2016 and December 31, 2015. The fair value of the Company’s notes receivable is estimated using significant unobservable inputs not based on market activity, but rather through particular valuation techniques (Level 3). The fair value was measured based on the income approach valuation methodology, which requires certain judgments to be made by management.

Contingent consideration—The Company has a contingent obligation to pay a former owner in conjunction with a certain acquisition if specified future operational objectives are met over future reporting periods. Liabilities for contingent consideration will be measured at fair value each reporting period, with the acquisition-date fair value included as part of the consideration transferred, and subsequent changes in fair value recorded in earnings as change in fair value of contingent consideration.

The estimated fair value of the contingent consideration was $5,710,000 and $5,340,000 as of September 30, 2016 and December 31, 2015, respectively, which is reported in the accompanying condensed consolidated balance sheets in accounts payable and other liabilities. The Company uses an income approach to value the contingent consideration liability, which is determined based on the present value of probability-weighted future cash flows. The Company has classified the contingent consideration liability as Level 3 of the fair value hierarchy due to the lack of relevant observable market data over fair value inputs such as probability-weighting for payment outcomes. Increases in the assessed likelihood of a high payout under a contingent consideration arrangement contributes to increases in the fair value of the related liability. Conversely, decreases in the assessed likelihood of a higher payout under a contingent consideration arrangement contributes to decreases in the fair value of the related liability. Changes in assumptions could have an impact on the payout of the contingent consideration arrangement with a maximum payout of $8,450,000 and a minimum payout of $0 as of September 30, 2016.

Derivative instruments—Considerable judgment is necessary to develop estimated fair values of financial instruments. Accordingly, the estimates presented herein are not necessarily indicative of the amount the Company could realize, or be liable for, on disposition of the financial instruments. The Company has determined that the majority of the inputs used to value its interest rate swaps fall within Level 2 of the fair value hierarchy. The credit valuation adjustments associated with these instruments utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by the Company and the respective counterparty. However, as of September 30, 2016, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions, and has determined that the credit valuation adjustments are not significant to the overall valuation of its interest rate swaps. As a result, the Company determined that its interest rate swaps valuation in its entirety is classified in Level 2 of the fair value hierarchy.

Preferred Equity Investment—The carrying value of the Preferred Equity Investment was $127,147,000, as compared to its fair value of $131,250,000 and $127,147,000, respectively, as of September 30, 2016 and December 31, 2015. The fair value of the Preferred Equity Investment was determined based on proceeds received from a redemption of the Preferred Equity Investment on October 4, 2016.

21

The following table shows the fair value of the Company’s financial assets and liabilities that are required to be measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015 (amounts in thousands):

	September 30, 2016
	Fair Value Hierarchy
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total Fair Value
Assets:
Derivative assets	$	—	$	—		$	—		$	—
Total assets at fair value	$	—	$	—		$	—		$	—
Liabilities:
Derivative liabilities	$	—	$	(5,761	)	$	—		$	(5,761	)
Contingent consideration obligation	—		—			(5,710		)	(5,710		)
Total liabilities at fair value	$	—	$	(5,761	)	$	(5,710	)	$	(11,471	)
	December 31, 2015
	Fair Value Hierarchy
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total Fair Value
Assets:
Derivative assets	$	—	$	61		$	—		$	61
Total assets at fair value	$	—	$	61		$	—		$	61
Liabilities:
Derivative liabilities	$	—	$	(2,641	)	$	—		$	(2,641	)
Contingent consideration obligation	—		—			(5,340		)	(5,340		)
Total liabilities at fair value	$	—	$	(2,641	)	$	(5,340	)	$	(7,981	)

The following table provides a rollforward of the fair value of recurring Level 3 fair value measurements for the three and nine months ended September 30, 2016 and 2015 (amounts in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Liabilities:
Contingent consideration obligation:
Beginning balance	$	5,585	$	6,870	$	5,340	$	6,570
Additions to contingent consideration obligation	—		—		—		—
Total changes in fair value included in earnings	125		160		370		460
Ending balance	$	5,710	$	7,030	$	5,710	$	7,030
Unrealized losses still held (1)	$	125	$	160	$	370	$	460

(1) Represents the unrealized losses recorded in earnings or other comprehensive income (loss) during the period for liabilities classified as Level 3 that are still held at the end of the period.

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Note 15—Derivative Instruments and Hedging Activities

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish these objectives, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable rate amounts from a counterparty in exchange for the Company making fixed rate payments over the life of the agreements without exchange of the underlying notional amount.

The effective portion of changes in the fair value of derivatives designated, and that qualify, as cash flow hedges is recorded in accumulated other comprehensive loss in the accompanying condensed consolidated statement of stockholders' equity and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the nine months ended September 30, 2016, such derivatives were used to hedge the variable cash flows associated with variable rate debt. The ineffective portion of changes in fair value of the derivatives is recognized directly in earnings. During the three months ended September 30, 2016, no income or losses were recognized due to ineffectiveness of hedges of interest rate risk. During the nine months ended September 30, 2016, the Company accelerated the reclassification of amounts in other comprehensive income (loss) to earnings as a result of a hedged forecasted transaction becoming probable not to occur due to a related debt extinguishment. The accelerated amount was a loss of $728,000. During the three and nine months ended September 30, 2015, no income or losses were recognized due to ineffectiveness of hedges of interest rate risk.

Amounts reported in accumulated other comprehensive loss related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable rate debt. During the next twelve months, the Company estimates that an additional $3,178,000 will be reclassified from accumulated other comprehensive loss as an increase to interest expense.

See Note 14—"Fair Value" for a further discussion of the fair value of the Company’s derivative instruments.

The following table summarizes the notional amount and fair value of the Company’s derivative instruments (amounts in thousands):

Derivatives Designated as Hedging Instruments	Balance Sheet Location	Effective Dates	Maturity Dates	September 30, 2016							December 31, 2015
				Outstanding Notional Amount		Fair Value of					Outstanding Notional Amount		Fair Value of
						Asset		(Liability)					Asset		(Liability)
Interest rate swaps	Other assets/Accounts payable and other liabilities	10/12/2012 to 05/03/2016	10/11/2017 to 08/21/2020	$	542,199	$	—	$	(5,761	)	$	424,002	$	61	$	(2,641	)

The notional amount under the agreements is an indication of the extent of the Company’s involvement in each instrument at the time, but does not represent exposure to credit, interest rate or market risks.

Accounting for changes in the fair value of a derivative instrument depends on the intended use and designation of the derivative instrument. The Company designated the interest rate swaps as cash flow hedges to hedge the variability of the anticipated cash flows on its variable rate notes payable. The change in fair value of the effective portion of the derivative instrument that is designated as a hedge is recorded in other comprehensive income (loss), or OCI, in the accompanying condensed consolidated statements of comprehensive income (loss).

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The table below summarizes the amount of income and loss recognized on interest rate derivatives designated as cash flow hedges for the three and nine months ended September 30, 2016 and 2015 (amounts in thousands):

Derivatives in Cash Flow Hedging Relationships	Amount of (Loss) Income Recognized in OCI on Derivatives (Effective Portion)			Location of (Loss) Income Reclassified From Accumulated Other Comprehensive Loss to Net Income (Effective Portion)	Amount of Loss Reclassified From Accumulated Other Comprehensive Loss to Net Income (Effective Portion)
Three Months Ended September 30, 2016
Interest rate swaps	$	2,206		Interest expense, net	$	(1,082	)
Total	$	2,206			$	(1,082	)
Three Months Ended September 30, 2015
Interest rate swaps	$	(5,246	)	Interest expense, net	$	(1,215	)
Total	$	(5,246	)		$	(1,215	)
Nine Months Ended September 30, 2016
Interest rate swaps	$	(7,114	)	Interest expense, net	$	(3,933	)
Total	$	(7,114	)		$	(3,933	)
Nine Months Ended September 30, 2015
Interest rate swaps	$	(7,999	)	Interest expense, net	$	(3,040	)
Total	$	(7,999	)		$	(3,040	)

Credit Risk-Related Contingent Features

The Company has agreements with each of its derivative counterparties that contain cross-default provisions, whereby if the Company defaults on certain of its unsecured indebtedness, then the Company could also be declared in default on its derivative obligations, resulting in an acceleration of payment thereunder.

In addition, the Company is exposed to credit risk in the event of non-performance by its derivative counterparties. The Company believes it mitigates its credit risk by entering into agreements with creditworthy counterparties. The Company records credit risk valuation adjustments on its interest rate swaps based on the respective credit quality of the Company and the counterparty. As of September 30, 2016, the fair value of derivatives in a net liability position, including accrued interest but excluding any adjustment for nonperformance risk related to these agreements, was $6,348,000. As of September 30, 2016, there was one termination event related to an early interest rate swap termination and no events of default related to the interest rate swaps.

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Tabular Disclosure Offsetting Derivatives

The Company has elected not to offset derivative positions in its condensed consolidated financial statements. The following table presents the effect on the Company’s financial position had the Company made the election to offset its derivative positions as of September 30, 2016 and December 31, 2015 (amounts in thousands):

Offsetting of Derivative Assets
							Gross Amounts Not Offset in the Balance Sheet
	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Balance Sheet		Net Amounts of Assets Presented in the Balance Sheet		Financial Instruments Collateral			Cash Collateral		Net Amount
September 30, 2016	$	—	$	—	$	—	$	—		$	—	$	—
December 31, 2015	$	61	$	—	$	61	$	(16	)	$	—	$	45

Offsetting of Derivative Liabilities
							Gross Amounts Not Offset in the Balance Sheet
	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Balance Sheet		Net Amounts of Liabilities Presented in the Balance Sheet		Financial Instruments Collateral			Cash Collateral		Net Amount
September 30, 2016	$	5,761	$	—	$	5,761	$	—		$	—	$	5,761
December 31, 2015	$	2,641	$	—	$	2,641	$	(16	)	$	—	$	2,625

The Company reports derivatives in the accompanying condensed consolidated balance sheets as other assets and accounts payable and other liabilities.

Note 16—Accumulated Other Comprehensive Loss

The following table presents a rollforward of amounts recognized in accumulated other comprehensive loss, net of noncontrolling interests, by component for the nine months ended September 30, 2016 and 2015 (amounts in thousands):

	Unrealized Loss on Derivative Instruments			Accumulated Other Comprehensive Loss
Balance as of December 31, 2015	$	(2,100	)	$	(2,580	)
Other comprehensive loss before reclassification	(7,114		)	(7,114		)
Amount of loss reclassified from accumulated other comprehensive loss to net income (effective portion and missed forecast)	3,933			3,933
Other comprehensive loss	(3,181		)	(3,181		)
Balance as of September 30, 2016	$	(5,281	)	$	(5,761	)

	Unrealized Loss on Derivative Instruments			Accumulated Other Comprehensive Loss
Balance as of December 31, 2014	$	(1,161	)	$	(1,161	)
Other comprehensive loss before reclassification	(7,661		)	(7,661		)
Amount of loss reclassified from accumulated other comprehensive loss to net income (effective portion)	2,808			2,808
Other comprehensive loss	(4,853		)	(4,853		)
Purchase of noncontrolling interests	—			(480		)
Balance as of September 30, 2015	$	(6,014	)	$	(6,494	)

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The following table presents reclassifications out of accumulated other comprehensive loss for the nine months ended September 30, 2016 and 2015 (amounts in thousands):

Details about Accumulated Other Comprehensive Loss Components	Amounts Reclassified from Accumulated Other Comprehensive Loss to Net Income				Affected Line Items in the Consolidated Statements of Comprehensive Income
	Nine Months Ended September 30,
	2016		2015
Interest rate swap contracts	$	3,933	$	3,040	Interest expense, net

Note 17—Subsequent Events

Distributions Paid

On October 3, 2016, the Company paid aggregate distributions of $10,560,000 ($4,990,000 in cash and $5,570,000 in shares of the Company’s common stock issued pursuant to the DRIP Offerings), which related to distributions declared for each day in the period from September 1, 2016 through September 30, 2016. On November 1, 2016, the Company paid aggregate distributions of $10,928,000 ($5,188,000 in cash and $5,740,000 in shares of the Company’s common stock issued pursuant to the DRIP offerings), which related to distributions declared for each day in the period from October 1, 2016 through October 31, 2016.

Distributions Declared

On November 3, 2016, the board of directors of the Company approved and declared a distribution to the Company’s stockholders of record as of the close of business on each day of the period commencing on December 1, 2016 and ending on February 28, 2017. The distributions for December 2016 will be calculated based on 366 days in the calendar year and will be equal to $0.001912568 per share of common stock and the distributions for January 2017 and February 2017 will be calculated based on 365 days in the calendar year and will be equal to $0.001917808 per share of common stock. The distributions declared for each record date in December 2016, January 2017 and February 2017 will be paid in January 2017, February 2017 and March 2017, respectively. The distributions will be payable to stockholders from legally available funds therefor.

Preferred Equity Investment

On October 4, 2016, the Company received proceeds for the redemption of the Preferred Equity Investment in 7.875% Series B Redeemable Cumulative Preferred Stock for a total of $131,250,000.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the notes thereto, and the other unaudited financial information appearing 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, 2015, as filed with the U.S. Securities and Exchange Commission, or the SEC, on March 28, 2016, or the 2015 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 reflect our management’s view only as of the date this Quarterly Report on Form 10-Q is filed with 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. See Item 1A. “Risk Factors” of our 2015 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 accounting principles generally accepted 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 in data centers and healthcare. We may also invest in real estate-related investments that relate to such property types. We qualified and elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, or the Code, for federal income tax purposes.

On June 6, 2014, we terminated our initial public offering of up to $1,746,875,000 shares of common stock, or our Offering. On November 25, 2015, we registered an additional 10,473,946 shares of common stock with a price per share of $9.5475 for a proposed maximum offering price of $100,000,000 in shares of common stock under the distribution reinvestment plan, or the DRIP, pursuant to a registration statement on Form S-3, or the Second DRIP Offering. The Second DRIP Offering includes shares of common stock previously registered under the DRIP pursuant to a registration statement on Form S-3, or the First DRIP Offering, that the Company carried forward in the Second DRIP Offering. We refer to the First DRIP Offering and the Second DRIP Offering as the DRIP Offerings, and collectively with our Offering, our Offerings. We will continue to issue shares of common stock under the Second DRIP Offering until such time as 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 DRIP Offering is terminated by our board of directors.

As of September 30, 2016, we had issued approximately 188,025,000 shares of common stock in our Offerings for gross proceeds of $1,862,909,000, before share repurchases of $40,673,000 and offering costs, selling commissions and dealer manager fees of $174,783,000.

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On November 16, 2015, our board of directors established an estimated value of our common stock, or NAV per share, calculated as of September 30, 2015, of $10.05 per share for purposes of assisting broker-dealers that participated in our Offering in meeting their customer account statement reporting obligations under the National Association of Securities Dealers Conduct Rule 2340. We intend to publish an updated estimated NAV per share on at least an annual basis. The purchase price per share in the Second DRIP Offering is equal to 95% of $10.05, or $9.5475.

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 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, or our Sponsor. We have no paid employees and rely upon our Advisor to provide substantially all of our services.

Carter Validus Real Estate Management Services, LLC, or our Property Manager, a wholly-owned subsidiary of our Sponsor, serves as our property manager. Our Advisor and our Property Manager received, and will continue to receive, fees during our acquisition and operational stages and our Advisor may be eligible to receive fees during the liquidation stage of the Company.

We currently operate through two reportable segments – commercial real estate investments in data centers and healthcare. As of September 30, 2016, we had completed acquisitions of 49 real estate investments (including onereal estate investment owned through a consolidated partnership) consisting of 84 properties, comprised of 94 buildings and parking facilities and approximately 6,160,000 square feet of gross rentable area (excluding parking facilities), for an aggregate purchase price of $2,189,062,000. 

Critical Accounting Policies

Our critical accounting policies were disclosed in our 2015 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 2015 Annual Report on Form 10-K.

Qualification as a REIT

We qualified and elected to be taxed as a REIT for federal income tax purposes and we intend to continue to be taxed as a REIT. To maintain our qualification as a REIT, we must continue to meet certain organizational and operational requirements, including a requirement to currently distribute at least 90.0% of our REIT taxable income to our stockholders. As a REIT, we generally will not be 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 would then be subject to federal income taxes on our taxable income at regular corporate rates and would 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, or the IRS, 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.

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Segment Reporting

We report our financial performance based on two reporting segments—commercial real estate investments in data centers and healthcare. See Note 11—"Segment Reporting" to the condensed consolidated financial statements for additional information on our two reporting segments.

Results of Operations

Our results of operations are influenced by the timing of acquisitions and the operating performance of our real estate properties. The following table shows the property statistics of our real estate properties as of September 30, 2016 and 2015:

	September 30,
	2016		2015
Number of commercial operating properties (1)	83		77
Leased rentable square feet	6,048,000		5,719,000
Weighted average percentage of rentable square feet leased	98	%	98	%

(1) As of September 30, 2016, we owned 84 properties, one of which was under construction. As of September 30, 2015, we owned 79 properties, two of which were under construction.

The following table summarizes our real estate properties' activity for the three and nine months ended September 30, 2016 and 2015:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Commercial operating properties acquired	—		—		5		21
Approximate aggregate purchase price of acquired properties	$	—	$	—	$	71,000,000	$	137,427,000
Leased rentable square feet	—		—		158,000		268,000

The following discussion is based on our condensed consolidated financial statements for the three and nine months ended September 30, 2016 and 2015.

This section describes and compares our results of operations for the three and nine months ended September 30, 2016 and 2015. We generate almost all of our net operating income from property operations. In order to evaluate our overall portfolio, management analyzes the net operating income of same store properties. We define "same store properties" as operating properties that were owned and operated for the entirety of both calendar periods being compared and exclude properties 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 for comparable periods to measure the performance of our current portfolio and determine the effects of our new acquisitions on net income.

We are not aware of any material trends and uncertainties, other than national economic conditions affecting real estate generally, that may be reasonably expected to have a material impact, favorable or unfavorable, on revenues or incomes from the acquisition, management and operation of properties other than those set forth in our Annual Report on Form 10-K for the year ended December 31, 2015 and in Part II, Item 1A. "Risk Factors" of this Quarterly Report on Form 10-Q.

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Three Months Ended September 30, 2016 Compared to Three Months Ended September 30, 2015

Changes in our revenues are summarized in the following table (amounts in thousands):

	Three Months Ended September 30,
	2016		2015		Change
Same store rental and parking revenue	$	33,808	$	47,585	$	(13,777	)
Non-same store rental and parking revenue	4,252		—		4,252
Same store tenant reimbursement revenue	4,668		4,168		500
Non-same store tenant reimbursement revenue	248		—		248
Other operating income	257		64		193
Real estate-related notes receivable interest income	15		18		(3		)
Total revenue	$	43,248	$	51,835	$	(8,587	)

• Same store rental and parking revenue decreased primarily due to bad debt expense write offs recorded for straight-line rent in the amount of $14.4 million and a lease incentive in the amount of $1.1 million during the three months ended September 30, 2016, which were a result of one tenant experiencing financial difficulties which we believe will result in new lease terms, offset by an increase in contractual rental revenues and straight-line rental revenues due to lease modifications at certain of our same store properties.

• Non-same store rental and parking revenue increased primarily as a result of the acquisition of five properties and one operating property placed in service since July 1, 2015.

• Same store tenant reimbursement revenue increased primarily due to an increase in electric recovery costs at certain same store properties.

• Non-same store tenant reimbursement revenue increased primarily as a result of the acquisition of five properties and one operating property placed in service since July 1, 2015.

• Other operating income increased primarily due to interest income recognized during the three months ended September 30, 2016 in connection with note receivable advances at one of our properties.

Changes in our expenses are summarized in the following table (amounts in thousands):

	Three Months Ended September 30,
	2016		2015		Change
Same store rental and parking expenses	$	6,946	$	6,409	$	537
Non-same store rental and parking expenses	426		—		426
General and administrative expenses	1,465		1,609		(144		)
Change in fair value of contingent consideration	125		160		(35		)
Acquisition related expenses	5		—		5
Asset management fees	5,036		4,708		328
Depreciation and amortization	32,110		19,490		12,620
Total expenses	$	46,113	$	32,376	$	13,737

• Same store rental and parking expenses, certain of which are subject to reimbursement by our tenants, increased primarily due to an increase in electric costs at certain same store properties.

• Non-same store rental and parking expenses increased primarily due to the acquisition of five operating properties and one property placed in service, since July 1, 2015.

• General and administrative expenses decreased primarily due to a decrease in transfer agent fees charged to us during the three months ended September 30, 2016, as compared to the three months ended September 30, 2015, coupled with a decrease in costs incurred related to our proxy statements due to timing.

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• Asset management fees increased due to an increase in the weighted average assets held of $2,404.5 million as of September 30, 2016, as compared to $2,092.0 million as of September 30, 2015.

• Depreciation and amortization increased primarily due to the acceleration of amortization of an in-place lease intangible in the amount of $14.6 million during the three months ended September 30, 2016, which was a result of one tenant experiencing financial difficulties which we believe will result in new lease terms, as compared to the acceleration of amortization of an in-place lease intangible in the amount of $3.1 million during the three months ended September 30, 2015, associated with a lease termination at one of our properties, offset by an increase in the weighted average depreciable basis of real estate investments to $2,056.4 million as of September 30, 2016, as compared to $1,837.4 million as of September 30, 2015.

Changes in other income (expense) are summarized in the following table (amounts in thousands):

	Three Months Ended September 30,
	2016			2015			Change
Other interest and dividend income:
Cash deposits interest	$	10		$	19		$	(9	)
Dividends on preferred equity investment	2,461			2,461			—
Notes receivable interest and other income	234			229			5
Total other interest and dividend income	2,705			2,709			(4		)
Interest expense, net:
Interest on notes payable	(5,949		)	(6,638		)	689
Interest on unsecured credit facility	(3,216		)	(1,531		)	(1,685		)
Amortization of deferred financing costs	(1,146		)	(989		)	(157		)
Capitalized interest	1,019			1,425			(406		)
Total interest expense, net	(9,292		)	(7,733		)	(1,559		)
Provision for loan losses	(42		)	—			(42		)
Total other expense	(6,629		)	(5,024		)	(1,605		)
Net (loss) income	$	(9,494	)	$	14,435		$	(23,929	)

• Interest on notes payable decreased due to a payoff of certain notes payable during 2016. The outstanding principal balance on notes payable was $489.7 million as of September 30, 2016, as compared to $546.6 million as of September 30, 2015.

• Interest on unsecured credit facility increased due to an increase in the average outstanding principal balance on our unsecured credit facility. The outstanding principal balance of our unsecured credit facility was $478.0 million as of September 30, 2016, and $283.0 million as of September 30, 2015.

• Capitalized interest decreased due to a decrease in the average accumulated expenditures on development properties to $62.4 million for the three months ended September 30, 2016, as compared to $87.0 million for the three months ended September 30, 2015.

• Provision for loan losses increased due to a $0.04 million reserve of one note receivable as of September 30, 2016.

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Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015

Changes in our revenues are summarized in the following table (amounts in thousands):

	Nine Months Ended September 30,
	2016		2015		Change
Same store rental and parking revenue	$	125,658	$	135,387	$	(9,729	)
Non-same store rental and parking revenue	18,296		6,093		12,203
Same store tenant reimbursement revenue	13,399		14,101		(702		)
Non-same store tenant reimbursement revenue	612		152		460
Other operating income	902		183		719
Real estate-related notes receivable interest income	46		373		(327		)
Total revenue	$	158,913	$	156,289	$	2,624

• Same store rental and parking revenue decreased primarily due to bad debt expense write offs recorded for straight-line rent in the amount of $14.4 million and a lease incentive in the amount of $1.1 million during the nine months ended September 30, 2016, which were a result of one tenant experiencing financial difficulties which we believe will result in new lease terms, offset by an increase in contractual rental revenues and straight-line rental revenues due to lease modifications at certain of our same store properties.

• Non-same store rental and parking revenue increased primarily as a result of the acquisition of 26 properties and one operating property placed in service since January 1, 2015.

• Same store tenant reimbursement revenue decreased primarily due to additional real estate taxes recognized in the prior year due to assumption of unpaid taxes by a former tenant, coupled with a decrease in a current year recovery income due to a reduction in recoverable repair and maintenance expenses at certain same store properties.

• Non-same store tenant reimbursement revenue increased primarily as a result of the acquisition of 26 properties and one operating property placed in service since January 1, 2015.

• Other operating income increased primarily due to interest income recognized during the nine months ended September 30, 2016 in connection with note receivable advances at one of our properties.

• Real estate-related notes receivable interest income decreased due to principal repayments of certain notes receivable during 2015.

Changes in our expenses are summarized in the following table (amounts in thousands):

	Nine Months Ended September 30,
	2016		2015		Change
Same store rental and parking expenses	$	19,912	$	20,656	$	(744	)
Non-same store rental and parking expenses	1,472		436		1,036
General and administrative expenses	4,633		4,469		164
Change in fair value of contingent consideration	370		460		(90		)
Acquisition related expenses	1,645		3,654		(2,009		)
Asset management fees	14,700		13,274		1,426
Depreciation and amortization	66,458		51,718		14,740
Total expenses	$	109,190	$	94,667	$	14,523

• Same store rental and parking expenses, certain of which are subject to reimbursement by our tenants, decreased due to a decrease in utility costs related to a construction project being completed in November 2015, which resulted in an electric usage reduction during the nine months ended September 30, 2016, coupled with a decrease in state and local taxes and insurance expenses, offset by an increase in real estate taxes.

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• Non-same store rental and parking expenses increased primarily due to the acquisition of 26 operating properties and one property placed in service since January 1, 2015.

• Acquisition related expenses decreased due to a decrease in real estate investments determined to be business combinations. Acquisition fees and expenses associated with transactions determined to be business combinations are expensed as incurred. During the nine months ended September 30, 2016, we acquired five properties for an aggregate purchase price of $71.0 million, as compared to 21 properties for an aggregate purchase price of $137.4 million during the nine months ended September 30, 2015.

• Asset management fees increased due to an increase in the weighted average assets held of $2,404.5 million as of September 30, 2016, as compared to $2,092.0 million as of September 30, 2015.

• Depreciation and amortization increased primarily due to the acceleration of amortization of an in-place lease intangible in the amount of $14.6 million during the nine months ended September 30, 2016, which was a result of one tenant experiencing financial difficulties which we believe will result in new lease terms, as compared to the acceleration of amortization of an in-place lease intangible in the amount of $3.1 million during the nine months ended September 30, 2015 associated with a lease termination at one of our properties, offset by an increase in the weighted average depreciable basis of real estate investments to $2,056.4 million as of September 30, 2016, as compared to $1,837.4 million as of September 30, 2015.

Changes in other income (expense) are summarized in the following table (amounts in thousands):

	Nine Months Ended September 30,
	2016			2015			Change
Other interest and dividend income:
Cash deposits interest	$	36		$	107		$	(71	)
Dividends on preferred equity investment	7,383			5,359			2,024
Notes receivable interest and other income	697			362			335
Total other interest and dividend income	8,116			5,828			2,288
Interest expense, net:
Interest on notes payable	(18,347		)	(18,507		)	160
Interest on unsecured credit facility	(8,034		)	(3,481		)	(4,553		)
Amortization of deferred financing costs	(3,425		)	(2,794		)	(631		)
Capitalized interest	1,820			3,739			(1,919		)
Loss on debt extinguishment	(1,133		)	—			(1,133		)
Total interest expense, net	(29,119		)	(21,043		)	(8,076		)
Provision for loan losses	(1,708		)	—			(1,708		)
Total other expense	(22,711		)	(15,215		)	(7,496		)
Net income	$	27,012		$	46,407		$	(19,395	)

• Dividends on preferred equity investment increased due to earning dividends for the full nine months ended September 30, 2016 on our Preferred Equity Investment, as compared to earning dividends for a partial nine months ended September 30, 2015. Our preferred equity investment was originated on March 11, 2015.

• Interest on unsecured credit facility increased due to an increase in the average outstanding principal balance on our unsecured credit facility. The outstanding principal balance of our unsecured credit facility was $478.0 million as of September 30, 2016, and $283.0 million as of September 30, 2015.

• Capitalized interest decreased due to a decrease in the average accumulated expenditures on development properties to $37.1 million for the nine months ended September 30, 2016, as compared to $76.2 million for the nine months ended September 30, 2015.

• The Company had a loss on debt extinguishment for the nine months ended September 30, 2016 due to the associated early extinguishment of one hedged debt obligation.

• Provision for loan losses increased due to a $1.7 million reserve of one note receivable.

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Organization and Offering Costs

Prior to the termination of our Offering on June 6, 2014, we reimbursed our Advisor or its affiliates for organization and offering costs it incurred on our behalf, but only to the extent the reimbursement did not cause the selling commissions, dealer manager fees and the other organization and offering costs incurred by us to exceed 15% of gross offering proceeds as of the date of the reimbursement. Since inception and through the termination of our Offering on June 6, 2014, we paid approximately $156,519,000 in selling commissions and dealer manager fees to SC Distributors, LLC, or our Dealer Manager, which is an affiliate of our Advisor, we reimbursed our Advisor or its affiliates approximately $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 were approximately $1,716,046,000.

Subsequent to the termination of our Offering and as of September 30, 2016, we had incurred approximately $157,000 in other offering costs related to the DRIP Offerings.

Other organization costs were expensed as incurred and selling commissions and dealer manager fees were charged to stockholders’ equity as the amounts related to raising capital. For a further discussion of other organization and offering costs, see Note 10—"Related-Party Transactions and Arrangements" to the condensed consolidated financial statements that are a part of this Quarterly Report on Form 10-Q.

Preferred Equity Investment

During the year ended December 31, 2015, we invested an aggregate amount of $127,147,000 in 7.875% Series B Redeemable Cumulative Preferred Stock in a private healthcare real estate corporation. Our Preferred Equity Investment is stated at cost and consisted of a principal amount of $125,000,000, plus origination costs of $2,772,000, offset by closing fees of $625,000. On October 4, 2016, we received proceeds for the redemption of the Preferred Equity Investment for a total of $131,250,000.

Inflation

We are exposed to inflation risk as income from long-term leases is the primary source of our cash flows from operations. There are provisions in certain of our leases, with tenants, that are intended to protect us from, and mitigate the risk of, the impact of inflation. These provisions include scheduled increases in contractual 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 may not reset frequently enough to adequately offset the effects of inflation.

Liquidity and Capital Resources

Our principal demands for funds are for real estate and real estate-related investments, the payment of acquisition related costs, capital expenditures, operating expenses, distributions and repurchases 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 equal to amounts reinvested in the DRIP Offerings and future proceeds from secured and unsecured financings to complete future real estate-related investments. As our Offering terminated on June 6, 2014, we expect to meet future cash needs for real estate-related investments from cash flows from operations, funds equal to amounts reinvested in the DRIP Offerings and debt financings. In addition, cash paid for distributions will be reduced due to the DRIP Offerings. The sources of our operating cash flows will be primarily provided by the rental income received from current and future tenants of our leased properties.

We are required by the terms of applicable loan documents to meet certain financial covenants, such as coverage ratios and reporting requirements. In addition, certain loan agreements include cross-default provisions to financial covenants in lease agreements with our tenants so that a default in the financial covenant in the lease agreement is a default in our loan. We were in compliance with all financial covenant requirements as of September 30, 2016.

In the event we are not in compliance with these covenants in future periods and are unable to obtain a consent or waiver, the lender may choose to pursue remedies under the respective loan agreements, which could include, at the lender's discretion, declaring the loans to be immediately due and payable and payment of termination fees and costs incurred by the lender, among other potential remedies.

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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 the payment of tenant improvements, acquisition related costs, operating expenses, distributions, and interest and principal payments on current and future debt financings. We expect to meet our short-term liquidity requirements through net cash flows provided by operations, borrowings on our unsecured credit facility, as well as secured and unsecured borrowings from banks and other lenders to finance our expected future acquisitions.

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 repurchases to stockholders, and interest and principal payments on current and future indebtedness. We expect to meet our long-term liquidity requirements through proceeds from cash flow from operations, borrowings on our unsecured credit facility and proceeds from secured or unsecured borrowings from banks or other lenders.

We expect that substantially all cash flows from operations will be used to pay distributions to our stockholders after certain capital expenditures; however, we have used, and may continue to use other sources to fund distributions, as necessary, such as funds equal to amounts reinvested in the DRIP Offerings, borrowing on our unsecured 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 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 $30.4 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 September 30, 2016, we had $2.2 million of restricted cash in lender-controlled escrow reserve accounts for such capital expenditures. In addition, as of September 30, 2016, we had approximately $41.4 million in cash and cash equivalents. For the nine months ended September 30, 2016, we had capital expenditures of $55.1 million that primarily related to two healthcare real estate investments and one data center real estate investment.

Unsecured Credit Facility

The proceeds of loans made under the unsecured credit facility may be used to finance the acquisition of real estate investments, for tenant improvements and leasing commissions with respect to real estate, for repayment of indebtedness, for capital expenditures with respect to real estate and for general corporate and working capital purposes. As of September 30, 2016, we had a total unencumbered pool availability under the unsecured credit facility of $514,575,000 and an aggregate outstanding principal balance of $478,000,000. As of September 30, 2016, $36,575,000 remained available to be drawn under the unsecured credit facility.

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Cash Flows

(in thousands)	Nine Months Ended September 30,
	2016			2015			Change
Net cash provided by operating activities	$	86,887		$	81,294		$	5,593
Net cash used in investing activities	$	(129,665	)	$	(296,679	)	$	167,014
Net cash provided by financing activities	$	55,661		$	143,672		$	(88,011	)

Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015

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 September 30, 2015, partially offset by increased operating expenses.

Investing Activities.

• Net cash used in investing activities decreased due to a decrease in investments in real estate of $52.8 million, anincrease in real estate deposits, net of $0.3 million, a decrease in real estate-related notes receivable advances of $0.2 million, a decrease in notes receivable advances of $7.0 million, and no additions to our preferred equity investment of $127.1 million, offset by an increase in capital expenditures of $10.9 million and a decrease of $9.5 million in collections of real estate-related notes receivable.

Financing Activities.

• Net cash provided by financing activities decreased due to a decrease in draws on our unsecured credit facility of $50.0 million, a decrease in proceeds from notes payable of $64.3 million, an increase in payments on notes payable of $45.1 million, an increase in repurchases of our common stock of $20.6 million, an increase in distributions to our stockholders of $2.4 million, and an increase in use of escrow funds of $2.0 million, offset by a decrease in payments of deferred financing costs of $2.0 million, decrease in purchase of noncontrolling interests of $67.2 million, a decrease in distributions to noncontrolling interests of $0.1 million, a decrease in payments of offering costs of $0.1 million and a decrease in payments on our unsecured credit facility of $27.0 million.

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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 qualification 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 of directors must authorize each distribution and may, in the future, authorize lower amounts of distributions or not authorize additional distributions 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 funds equal to amounts reinvested in the DRIP Offerings, 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, offering proceeds raised in our Offering and funds equal to amounts reinvested in the DRIP Offerings. 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 nine months ended September 30, 2016 and 2015:

	Nine Months Ended September 30,
	2016				2015
Distributions paid in cash - common stockholders	$	44,816,000			$	42,407,000
Distributions reinvested (shares issued)	51,227,000				50,720,000
Total distributions	$	96,043,000			$	93,127,000
Source of distributions:
Cash flows provided by operations (1)	$	44,816,000	47	%	$	42,407,000	46	%
Offering proceeds from issuance of common stock pursuant to the DRIP (1)	51,227,000		53	%	50,720,000		54	%
Total sources	$	96,043,000	100	%	$	93,127,000	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 September 30, 2016 were $10.6 million for common stockholders. These distributions were paid on October 3, 2016.

For the nine months ended September 30, 2016, we paid and declared distributions of approximately $96.0 million to common stockholders including shares issued pursuant to the DRIP Offerings, as compared to FFO (as defined below) for the nine months ended September 30, 2016 of $88.3 million. The payment of distributions from sources other than FFO 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.

For a discussion of distributions paid subsequent to September 30, 2016, see Note 17—"Subsequent Events" to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

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Contractual Obligations

As of September 30, 2016, we had approximately $967,657,000 of principal debt outstanding, of which $489,657,000 related to notes payable and $478,000,000 related to the unsecured credit facility. See Note 7—"Notes Payable and Unsecured 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 September 30, 2016 were as follows (amounts in thousands):

	Payments due by period
	Less than 1 Year			1-3 Years		3-5 Years		More than 5 Years		Total
Principal payments — fixed rate debt	$	13,336		$	50,700	$	2,363	$	49,082	$	115,481
Interest payments — fixed rate debt	5,230			7,627		6,025		1,014		19,896
Principal payments — variable rate debt fixed through interest rate swap agreements (1)	112,415		(3)	294,784		135,000		—		542,199
Interest payments — variable rate debt fixed through interest rate swap agreements (2)	19,635			24,956		3,761		—		48,352
Principal payments — variable rate debt	269,373		(4)	40,604		—		—		309,977
Interest payments — variable rate debt	7,844			3,132		—		—		10,976
Contingent consideration (5)	—			5,710		—		—		5,710
Capital expenditures	30,429			1,724		—		—		32,153
Ground lease payments	665			1,550		1,554		37,489		41,258
Total	$	458,927		$	430,787	$	148,703	$	87,585	$	1,126,002

(1) As of September 30, 2016, we had $542.2 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 September 30, 2016 to calculate the debt payment obligations in future periods.

(3) Of this amount, $105,850,000 relates to one loan agreement, the maturity date of which is August 21, 2017, subject to our right to a two-year extension.

(4) Of this amount, $268,000,000 relates to the revolving line of credit under the unsecured credit facility. The maturity date on the revolving line of credit under the unsecured credit facility is May 28, 2017, subject to our right to a 12-month extension.

(5) 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 and a minimum payout of $0 as of September 30, 2016.

Off-Balance Sheet Arrangements

As of September 30, 2016, 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 agree to pay certain fees to, or reimburse certain expenses of, our Advisor or its affiliates for acquisition fees and expenses, organization and offering expenses, asset and property management fees and reimbursement of operating costs. Refer to Note 10—"Related-Party Transactions and Arrangements" to our condensed consolidated financial statements that are a part of this Quarterly Report on Form 10-Q for a detailed discussion of the various related-party transactions and agreements.

38

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-related 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 as determined under GAAP.

We define FFO, consistent with NAREIT’s definition, as net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property and asset impairment write-downs, plus depreciation and amortization of real estate assets, and after adjustments for unconsolidated partnership and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect FFO on the same basis.

We, along with others in the real estate industry, consider FFO to be an appropriate supplemental measure of a REIT’s operating performance because it is based on a net income analysis of property portfolio performance that excludes non-cash items such as depreciation and amortization and asset impairment write-downs, which 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 the 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 they are 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.

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Publicly registered, non-listed REITs, such as us, 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 cash flows from operations and debt financings 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 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; acquisition fees and expenses; amounts related to straight-line rental income and amortization of above and below intangible lease assets and liabilities; accretion of discounts and amortization of premiums on debt investments; mark-to-market adjustments included in net income; nonrecurring gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, adjustments related to contingent purchase price obligations where such adjustments have been included in the derivation of GAAP net income, and after adjustments for a consolidated and unconsolidated partnership and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. 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, adjustments related to contingent purchase price obligations, gains or losses from the extinguishment of debt and hedges, 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 our 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 in determining cash flows from operations in accordance with GAAP.

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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 as an indication of our performance, as an indication of our liquidity, or indicative of funds available for 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 and 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 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 operating performance and considered more prominently than the non-GAAP FFO and MFFO 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.

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The following is a reconciliation of net (loss) income attributable to common stockholders, which is the most directly comparable GAAP financial measure, to FFO and MFFO for the three and nine months ended September 30, 2016 and 2015 (amounts in thousands, except share data and per share amounts):

	Three Months Ended September 30,								Nine Months Ended September 30,
	2016				2015				2016				2015
Net (loss) income attributable to common stockholders	$	(10,500	)		$	13,572			$	24,017			$	42,350
Adjustments:
Depreciation and amortization	32,110				19,490				66,458				51,718
Noncontrolling interests’ share of the above adjustments related to the consolidated partnerships	(704		)		(876		)		(2,207		)		(3,563		)
FFO attributable to common stockholders (4)	$	20,906			$	32,186			$	88,268			$	90,505
Adjustments:
Acquisition related expenses (1)	$	5			$	—			$	1,645			$	3,654
Amortization of intangible assets and liabilities (2)	(800		)		(1,022		)		(2,518		)		(3,776		)
Change in fair value of contingent consideration	125				160				370				460
Straight-line rents (3)	8,972				(4,326		)		(3,717		)		(15,787		)
Loss on debt extinguishment	—				—				1,133				—
Noncontrolling interests’ share of the above adjustments related to the consolidated partnerships	33			(5)	484			(6)	708			(7)	2,358			(8)
MFFO attributable to common stockholders (4)	$	29,241			$	27,482			$	85,889			$	77,414
Weighted average common shares outstanding - basic	183,726,479				179,270,022				182,827,193				177,717,870
Weighted average common shares outstanding - diluted	183,726,479				179,286,709				182,846,104				177,736,797
Net (loss) income per common share - basic	$	(0.06	)		$	0.08			$	0.13			$	0.24
Net (loss) income per common share - diluted	$	(0.06	)		$	0.08			$	0.13			$	0.24
FFO per common share - basic	$	0.12			$	0.18			$	0.48			$	0.51
FFO per common share - diluted	$	0.12			$	0.18			$	0.48			$	0.51

(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 are included in the determination of net income, 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.

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(4) Subsequent to the filing of the Quarterly Report on Form 10-Q for the period ended September 30, 2015, we updated FFO and MFFO calculations to reflect an adjustment for depreciation and amortization related to the full amortization of lease intangibles associated with a lease termination. This resulted in additional positive impact to FFO and MFFO in the amount of $3,121,000 for the quarter ended September 30, 2015.

(5) Of this amount, $(167,000) related to straight-line rents and $200,000 related to above- and below-market leases.

(6) Of this amount, $120,000 related to straight-line rents and $364,000 related to above- and below-market leases.

(7) Of this amount, $25,000 related to straight-line rents and $683,000 related to above- and below-market leases.

(8) Of this amount, $1,265,000 related to straight-line rents and $1,093,000 related to above- and below-market leases.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. In pursuing our business plan, the primary market risk to which we are exposed is interest rate risk.

We have obtained variable rate debt financing to fund certain property acquisitions, and we are exposed to changes in the one-month LIBOR. Our objectives in managing interest rate risk seek to limit the impact of interest rate changes on operations and cash flows, and to lower overall borrowing costs. To achieve these objectives, we will borrow primarily at interest rates with the lowest margins available and, in some cases, with the ability to convert variable interest rates to fixed rates.

We have entered, and may continue to enter, into derivative financial instruments, such as interest rate swaps, in order to mitigate our interest rate risk on a given variable rate financial instrument. To the extent we do, we are exposed to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us. When the fair value of a derivative contract is negative, we owe the counterparty and, therefore, it does not possess credit risk. Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates. We manage the market risk associated with interest rate contracts by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken. We have not entered, and do not intend to enter, into derivative or interest rate transactions for speculative purposes. We may also enter into rate-lock arrangements to lock interest rates on future borrowings.

The following table summarizes our principal debt outstanding as of September 30, 2016 (amounts in thousands):

	September 30, 2016
Notes payable:
Fixed rate notes payable	$	115,481
Variable rate notes payable fixed through interest rate swaps	332,199
Variable rate notes payable	41,977
Total notes payable	489,657
Unsecured credit facility:
Variable rate unsecured credit facility fixed through interest rate swaps	210,000
Variable rate unsecured credit facility	268,000
Total unsecured credit facility	478,000
Total principal debt outstanding (1)	$	967,657

(1) As of September 30, 2016, the weighted average interest rate on our total principal debt outstanding was 3.7%.

As of September 30, 2016, $310.0 million of the $967.7 million total principal debt outstanding was subject to variable interest rates with a weighted average interest rate of 2.8% per annum. As of September 30, 2016, an increase of 50 basis points in the market rates of interest would have resulted in a change in interest expense of $1.5 million per year.

As of September 30, 2016, we had 18 interest rate swap agreements outstanding, which mature on various dates from October 2017 through August 2020, with an aggregate notional amount under the swap agreements of $542.2 million and an aggregate settlement liability value of $6.3 million. The settlement value of these interest rate swap agreements is dependent upon existing market interest rates and swap spreads. As of September 30, 2016, an increase of 50 basis points in the market rates of interest would have resulted in a decrease to the settlement liability value of these interest rate swaps to $0.4 million. These interest rate swaps were designated as hedging instruments.

We do not have any foreign operations and thus we are not exposed to foreign currency fluctuations.

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Item 4. Controls and Procedures.

(a) Evaluation of disclosure controls and procedures. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports pursuant to the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms, and that such information is accumulated and communicated to us, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and we necessarily were required to apply our judgment in evaluating whether the benefits of the controls and procedures that we adopt outweigh their costs.

As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, an evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q was conducted under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures, as of September 30, 2016, were effective at a reasonable assurance level.

(b) Changes in internal control over financial reporting. There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the three months ended September 30, 2016, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

We are not aware of any material pending legal proceedings to which we are a party or to which our properties are the subject.

Item 1A. Risk Factors.

There have been no material changes from the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the SEC on March 28, 2016, except as noted below.

Distributions paid from sources other than our cash flows from operations will result in us having fewer funds available for the acquisition of properties and other real estate-related investments, which may adversely affect our ability to fund future distributions with cash flow from operations and may adversely affect your overall return.

We have paid, and may continue to pay, distributions from sources other than from our cash flows from operations. For the nine months ended September 30, 2016, our cash flows provided by operations of approximately $86.9 million was a shortfall of $9.1 million, or 9.5%, of our distributions (total distributions were approximately $96.0 million, of which $44.8 million was cash and $51.2 million was reinvested in shares of our common stock pursuant to the DRIP Offerings) during such period and such shortfall was paid from proceeds from our DRIP Offerings. For the year ended December 31, 2015, our cash flows provided by operations of approximately $107.5 million was a shortfall of $17.1 million, or 13.7%, of our distributions (total distributions were approximately $124.6 million, of which $56.8 million was cash and $67.8 million was reinvested in shares of our common stock pursuant to the DRIP Offerings) during such period and such shortfall was paid from proceeds from our DRIP Offerings. Until we acquire additional properties or other real estate-related investments, we may not generate sufficient cash flow from operations to pay distributions. Our inability to acquire additional properties or other real estate-related investments may result in a lower return on your investment than you expect.

We may pay, and have no limits on the amounts we may pay, distributions from any source, such as from borrowings, the sale of assets, the sale of additional securities, advances from our Advisor, our Advisor’s deferral, and suspension and/or waiver of its fees and expense reimbursements. Funding distributions from borrowings could restrict the amount we can borrow for investments, which may affect our profitability. Funding distributions with the sale of assets may affect our ability to generate cash flows. Funding distributions from the sale of additional securities could dilute your interest in us if we sell shares of our common stock to third party investors. Our inability to acquire additional properties or real estate-related investments may have a negative effect on our ability to generate sufficient cash flow from operations from which to pay distributions. As a result, the return investors may realize on their investment may be reduced and investors who invested in us before we generated significant cash flow may realize a lower rate of return than later investors. Payment of distributions from any of the aforementioned sources could restrict our ability to generate sufficient cash flow from operations, affect our profitability and/or affect the distributions payable upon a liquidity event, any or all of which may have an adverse effect on an investment in us.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Unregistered Sales of Equity Securities

During the three months ended September 30, 2016, we did not sell any equity securities that were not registered or otherwise exempt under the Securities Act.

Use of Public Offering Proceeds

As of September 30, 2016, we had issued approximately 188.0 million shares of common stock in our Offerings for gross proceeds of $1,862.9 million, out of which we paid $156.5 million in selling commissions and dealer manager fees, $18.3 million in other offering costs and $54.6 million in acquisition related expenses to our Advisor or its affiliates. With the net offering proceeds and associated borrowings, we had acquired $2,189.1 million in real estate investments, $117.2 million in real estate-related notes receivable, $17.0 million in notes receivable and $127.1 million in a preferred equity investment as of September 30, 2016. In addition, as of September 30, 2016, we had invested $144.0 million in capital improvements related to certain real estate investments.

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Share Repurchase Program

Our share repurchase program permits stockholders to sell their shares back to us after they have held them for at least one year, subject to certain conditions and limitations. We will limit the number of shares repurchased during any calendar year to 5.0% of the number of shares of our common stock outstanding on December 31st of the previous calendar year. In addition, the share repurchase program provides that all redemptions during any calendar year, including those upon death or a qualifying disability of a stockholder, are limited to those that can be funded with equivalent reinvestments pursuant to the DRIP, which terminated on June 6, 2014, and the DRIP Offerings during the prior calendar year and other operating funds, if any, as the board of directors, in its sole discretion, may reserve for this purpose. The prices at which we repurchase our shares of common stock are based on the most recent estimated value of our shares, which currently is $10.05, and the period of time each stockholder has held their shares. Our board of directors has the right, in its sole discretion, to waive such holding requirement in the event of the death or qualifying disability of a stockholder, or other involuntary exigent circumstances, such as bankruptcy, or a mandatory requirement under a stockholder’s IRA.

During the three months ended September 30, 2016, we fulfilled the following repurchase requests pursuant to our share repurchase program:

Period	Total Number of Shares Repurchased	Average Price Paid per Share		Total Numbers of Shares Purchased as Part of Publicly Announced Plans and Programs	Approximate Dollar Value of Shares Available that may yet be Repurchased under the Program
07/01/2016 - 07/31/2016	355,862	$	9.76	355,862	$	—
08/01/2016 - 08/31/2016	273,070	$	9.73	273,070	$	—
09/01/2016 - 09/30/2016	308,654	$	9.78	308,654	$	—
Total	937,586			937,586

During the three months ended September 30, 2016, we repurchased approximately $9,150,000 of common stock, which represented all repurchase requests received in good order and eligible for repurchase during the three months ended September 30, 2016 repurchase date.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

The exhibits listed on the Exhibit Index (following the signatures section of this Quarterly Report on Form 10-Q) are filed herewith, or incorporated by reference.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		CARTER VALIDUS MISSION CRITICAL REIT, INC.
		(Registrant)
Date: November 14, 2016	By:	/s/    JOHN E. CARTER
		John E. Carter
		Chief Executive Officer
		(Principal Executive Officer)
Date: November 14, 2016	By:	/s/    TODD M. SAKOW
		Todd M. Sakow
		Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)

EXHIBIT INDEX

Pursuant to Item 601(a)(2) of Regulation S-K, this Exhibit Index immediately precedes the exhibits.

The following exhibits are included, or incorporated by reference, in this Quarterly Report on Form 10-Q for the nine months ended September 30, 2016 (and are numbered in accordance with Item 601 of Regulation S-K).

Exhibit No:
3.1	Second Articles of Amendment and Restatement (included as Exhibit 3.3 to the Registrant's Quarterly Report on Form 10-Q filed on November 16, 2015, and incorporated herein by reference).
3.2	Amended and Restated Bylaws of Carter Validus Mission Critical REIT, Inc (included as Exhibit 3.5 to the Registrant's Quarterly Report on Form 10-Q (Commission File No. 000-54675) filed on November 16, 2015, and incorporated herein by reference).
4.1	Distribution Reinvestment Plan (included as Exhibit A to Registrant’s Registration Statement on Form S-3 (Commission File No. 333-208204), filed on November 25, 2015, and incorporated herein by reference).
4.2	Carter Validus Mission Critical REIT, Inc. 2010 Restricted Share Plan (included as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (Commission File No. 333-165643) filed on March 24, 2011, and incorporated herein by reference).
4.3	Form of Restricted Stock Award Agreement (included as Exhibit 10.6 to the Pre-Effective Amendment No. 1 to the Registrant’s Registration Statement on Form S-11 (Commission File No. 333-165643) filed on June 25, 2010, and incorporated herein by reference).
10.1	Joinder Agreement (Master Credit Facility), dated August 4, 2016, by DC-3300 ESSEX, LLC to KeyBank National Association, as Agent (included as Exhibit 10.1 to the Registrant's Current Report on Form 8-K (Commission File No. 000-54675) filed on August 8, 2016, and incorporated herein by reference).
10.2	Joinder Agreement (Term Loan), dated August 4, 2016, by DC-3300 ESSEX, LLC to KeyBank National Association, as Agent (included as Exhibit 10.2 to the Registrant's Current Report on Form 8-K (Commission File No. 000-54675) filed on August 8, 2016, and incorporated herein by reference).
31.1*	Certification of Chief Executive Officer of the Company pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*	Certification of Chief Financial Officer of the Company pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1**	Certification of Chief Executive Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2**	Certification of Chief Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1	Carter Validus Mission Critical REIT, Inc. Press Release, dated September 1, 2016 (Commission File No. 000-54675) filed on September 1, 2016, and incorporated herein by reference).
101.INS*	XBRL Instance Document
101.SCH*	XBRL Taxonomy Extension Schema Document
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document

*

Filed herewith.

**

Furnished herewith in accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is not deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.