Sila Realty Trust, Inc.(SILA) - 2021 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section covers the company's financial statements, management's analysis, market risk, and internal controls Item 1. Condensed Consolidated Financial Statements The financial statements reflect a strategic shift, reclassifying the data center segment as discontinued operations and impacting key financial metrics Condensed Consolidated Balance Sheets The balance sheets show a slight decrease in total assets and the reclassification of data center assets as held for sale Condensed Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total real estate, net | $1,843,928 | $1,849,552 | | Assets held for sale, net | $953,294 | $959,750 | | Total assets | $3,189,845 | $3,205,289 | | Total liabilities | $1,551,132 | $1,551,416 | | Total stockholders' equity | $1,638,713 | $1,653,873 | | Total liabilities and stockholders' equity | $3,189,845 | $3,205,289 | - A significant portion of the company's assets and liabilities are classified as 'held for sale' due to the board's decision to sell the data center portfolio. As of June 30, 2021, assets held for sale were $953.3 million and liabilities held for sale were $363.6 million[10][29] Condensed Consolidated Statements of Comprehensive Income (Loss) The statements show increased net income driven by discontinued operations, alongside significant impairment losses and higher general and administrative expenses Financial Performance Highlights (in thousands, except per share data) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Rental Revenue | $43,747 | $41,731 | $86,169 | $83,157 | | (Loss) income from continuing operations | $(249) | $4,323 | $(5,315) | $3,009 | | Income from discontinued operations | $16,305 | $6,772 | $24,253 | $13,755 | | Net income attributable to common stockholders | $16,056 | $11,095 | $18,938 | $16,764 | | Net income per common share (diluted) | $0.07 | $0.05 | $0.09 | $0.08 | - The company recorded significant impairment losses in 2021, with $6.5 million on real estate and $0.4 million on goodwill for the three months ended June 30, 2021. For the six-month period, these impairments were $16.9 million and $0.7 million, respectively. No such impairments were recorded in the comparable 2020 periods[12] - General and administrative expenses more than doubled for both the three and six-month periods year-over-year, while asset management fees were eliminated. This is a direct result of the internalization of management functions which closed on September 30, 2020[12][25][26] Condensed Consolidated Statements of Equity The equity statement details changes in stockholders' equity, including stock issuance, repurchases, distributions, and net income Changes in Stockholders' Equity (Six Months Ended June 30, 2021, in thousands) | Description | Amount | | :--- | :--- | | Balance, December 31, 2020 | $1,653,873 | | Issuance of common stock (DRIP) | $14,833 | | Repurchase of common stock | $(4,078) | | Distributions to common stockholders | $(53,615) | | Net income | $18,938 | | Other comprehensive income | $7,567 | | Balance, June 30, 2021 | $1,638,713 | Condensed Consolidated Statements of Cash Flows The cash flow statement shows increased operating cash flow and significant cash usage in investing activities due to real estate investments and internalization costs Cash Flow Summary (Six Months Ended June 30, in thousands) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $81,119 | $55,740 | | Net cash used in investing activities | $(46,791) | $(12,537) | | Net cash used in financing activities | $(31,690) | $(35,969) | | Net change in cash, cash equivalents and restricted cash | $2,638 | $7,234 | - Net cash from operating activities increased by 45.5% YoY, primarily due to higher net income adjusted for non-cash items like depreciation and impairment losses. Cash used in investing activities increased significantly due to a $25.0 million investment in real estate and a $7.5 million payment for the internalization transaction in 2021[22] Notes to the Condensed Consolidated Financial Statements The notes provide critical details on the reclassification of the data center segment, its subsequent sale, impairment charges, and the impact of management internalization - The company's board of directors decided to sell its entire data center segment, comprising 29 properties. This strategic shift resulted in the reclassification of these assets and liabilities to 'held for sale' and their operations to 'discontinued operations'[29] - The sale of the 29 data centers was completed subsequent to the quarter end, on July 22, 2021, for an aggregate price of $1.32 billion. Proceeds were used to pay down debt and fund a special cash distribution of $1.75 per share[30][88] - During the six months ended June 30, 2021, the company recorded real estate impairment charges of $16.9 million and goodwill impairment of $0.7 million related to its healthcare properties[49][50][51] - On September 30, 2020, the company completed an internalization transaction, acquiring its external manager for a total cash price of $40.0 million, payable in installments. This resulted in the elimination of asset management fees and other related-party payments[25][95] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the strategic sale of data centers, debt reduction, and special distribution, highlighting the company's shift to a pure-play healthcare REIT and improved liquidity - The company completed the sale of all 29 of its data center properties on July 22, 2021, for $1.32 billion. This represents a major strategic shift, focusing the company exclusively on healthcare properties[183][186] - Proceeds from the Data Center Sale were used to repay approximately $853.8 million in debt and fund a special cash distribution of $1.75 per share, paid on July 30, 2021[186][187] Comparison of Operations (Three Months Ended June 30, in thousands) | Metric | 2021 | 2020 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total rental revenue | $43,747 | $41,731 | $2,016 | 4.8% | | Total expenses | $34,462 | $29,302 | $5,160 | 17.6% | | Income from discontinued operations | $16,305 | $6,772 | $9,533 | 140.8% | - The increase in total expenses for Q2 2021 was primarily driven by a $6.5 million impairment loss on real estate and a $3.5 million increase in G&A expenses following the management internalization, offset by the elimination of $4.2 million in asset management fees[212][213] FFO and AFFO Reconciliation (Six Months Ended June 30, in thousands) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Net income attributable to common stockholders | $18,938 | $16,764 | | FFO attributable to common stockholders | $83,417 | $66,420 | | AFFO attributable to common stockholders | $77,478 | $58,074 | - For the six months ended June 30, 2021, total distributions were $53.8 million, which were covered by cash flows from operations ($39.0 million) and proceeds from the DRIP ($14.8 million). AFFO for the period was $77.5 million[253][255] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk on variable-rate debt, mitigated by swaps and significantly reduced post-quarter-end debt repayments - The primary market risk is interest rate risk. As of June 30, 2021, the company had $553.0 million in variable-rate debt indexed to LIBOR. A 50 basis point increase in market rates would increase annual interest expense by approximately $2.8 million[279][283] - The company is managing the transition from LIBOR, which is expected to be discontinued after June 30, 2023. The company's credit agreements include provisions for converting to an alternate index rate like SOFR[281][243] - To mitigate interest rate risk, the company utilized 15 interest rate swap agreements with a total notional value of $633.4 million as of June 30, 2021. Eight of these swaps were terminated in connection with the Data Center Sale[282] - Post-quarter end, on July 22, 2021, the company repaid approximately $450.8 million of notes payable and $403.0 million on its credit facility, significantly reducing its total debt and exposure to interest rate fluctuations[283][290] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2021, with no material changes to internal control over financial reporting - Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of June 30, 2021[293] - No changes occurred during the three months ended June 30, 2021, that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[294] PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, equity security sales, defaults, and other miscellaneous disclosures Item 1. Legal Proceedings The company is not aware of any material pending legal proceedings to which it or its properties are subject - As of the filing date, the company is not a party to any material pending legal proceedings[297] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2020 - No material changes from the risk factors set forth in the Annual Report on Form 10-K for the year ended December 31, 2020 have been identified[298] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company issued restricted Class A common stock to a new director and repurchased shares under its Share Repurchase Program during Q2 2021 - On April 23, 2021, the company granted 1,677 restricted shares of Class A common stock to a new director, an issuance exempt from registration under Section 4(a)(2) of the Securities Act[299][300] Share Repurchases (Q2 2021) | Period | Total Number of Shares Repurchased | Average Price Paid per Share | | :--- | :--- | :--- | | April 2021 | 260,086 | $8.69 | | May 2021 | 15,156 | $8.69 | | June 2021 | — | $— | | Total | 275,242 | N/A | Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities during the period - None[301] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[302] Item 5. Other Information The company reported no other information for this item - None[303] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including articles of incorporation, various agreements, and certifications - Key exhibits filed include the Purchase and Sale Agreement for the data center portfolio, amendments to credit facilities, and CEO/CFO certifications[305][306]