Physicians Realty Trust [DOC] Filings

10-Q 1 doc-20230930.htm 10-Q doc-20230930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2023

☐ 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: 001-36007

PHYSICIANS REALTY TRUST

(Exact Name of Registrant as Specified in its Charter)


Maryland		46-2519850
(State of Organization)		(IRS Employer Identification No.)

309 N. Water Street, Suite 500		53202
Milwaukee,	Wisconsin
(Address of Principal Executive Offices)		(Zip Code)

(414) 367-5600

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common stock, $0.01 par value per share

DOC

New York Stock Exchange

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

The number of Physicians Realty Trust’s common shares outstanding as of October 27, 2023 was 238,487,448.

PHYSICIANS REALTY TRUST

Quarterly Report on Form 10-Q

for the Quarter Ended September 30, 2023

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		Page Number
Part I	Financial Information

Item 1	Financial Statements (Unaudited)


	Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022	3
	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2023 and 2022	4
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2023 and 2022	5
	Consolidated Statements of Equity for the Three and Nine Months Ended September 30, 2023 and 2022	6
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2023 and 2022	8









	Notes to Consolidated Financial Statements	9

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3	Quantitative and Qualitative Disclosures About Market Risk	38
Item 4	Controls and Procedures	39

Part II	Other Information

Item 1	Legal Proceedings	41
Item 1A	Risk Factors	41
Item 2	Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities	46
Item 5	Other Information	46
Item 6	Exhibits	47

SIGNATURES		48

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements made pursuant to safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts may be forward-looking statements within the meaning of the federal securities laws. In particular, statements pertaining to our capital resources, property performance, and results of operations contain forward-looking statements. Likewise, all of our statements regarding anticipated growth in our funds from operations and anticipated market conditions, demographics, and results of operations are forward-looking statements. You can identify forward-looking statements by the use of forward-looking terminology such as “believe,” “expect,” “outlook,” “continue,” “project,” “may,” “will,” “should,” “seek,” “approximately,” “intend,” “plan,” “pro forma,” “estimate,” or “anticipate” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans, expectations, or intentions.

These forward-looking statements reflect the views of our management regarding current expectations and projections about future events and are based on currently available information. These forward-looking statements are not guarantees of future performance and involve numerous risks and uncertainties and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data, or methods which may be incorrect or imprecise and we may not be able to realize them. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:

•general economic conditions, including inflation and recession;

•changes in our business or strategy;

•risks associated with the Company Merger and the Partnership Merger (each as defined below and collectively, the “Mergers”), including our ability to consummate the Mergers on the proposed terms or on the anticipated timeline, or at all, and unanticipated difficulties or expenditures relating to the Mergers, potential difficulties in employee retention as a result of the Mergers, the occurrence of any event, change or other circumstances that could give rise to the termination of the Mergers and the outcome of legal proceedings instituted against us, our trustees and others related to the Mergers;

•our ability to operate as a public company;

•adverse economic or real estate developments, either nationally or in the markets where our properties are located;

•our geographic concentration in Texas may cause us to be particularly exposed to downturns in the Texas economy or other changes in Texas market conditions;

•our concentration of investment in health care properties;

•the disruption of our business and the compromise of confidential information resulting from cybersecurity attacks, breaches, and other incidents;

•any adverse effects to the business, financial position, or results of operations of CommonSpirit Health (“CommonSpirit”), or one or more of the CommonSpirit-affiliated tenants, that impact the ability of CommonSpirit-affiliated tenants to pay us rent;

•the degree and nature of our competition;

•competition for investment opportunities;

•difficulties in identifying health care properties to acquire and completing acquisitions;

•risks related to development, redevelopment, or construction projects;

•changes in health care laws or government reimbursement rates;

•decreased rental rates or increased vacancy rates;

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•defaults on or non-renewal of leases by tenants;

•the potential impact of severe weather events and climate change;

•our failure to generate sufficient cash flows to, subject to the restrictions in the Merger Agreement (as defined below), service, pay down, or refinance our indebtedness or make distributions on our common shares;

•fluctuations and increases in interest rates and operating costs;

•the availability, terms, and issuance of debt and equity capital, including our unsecured revolving credit facility, in each case, subject to the restrictions in the Merger Agreement;

•general volatility of the market price of our common shares;

•our dependence upon key personnel whose continued service is not guaranteed;

•our ability to identify, hire, and retain highly qualified personnel in the future;

•the impact of our investments in joint ventures we have made and may make in the future;

•the financial condition and liquidity of, or disputes with, any joint venture and development partners with whom we may make co-investments in the future;

•changes in governmental regulations or interpretations thereof, such as real estate and zoning laws and increases in real property tax rates, taxation of real estate investment trusts (“REITs”), and similar matters;

•our failure to maintain our qualification as a REIT for U.S. federal income tax purposes;

•limitations imposed on our business and our ability to satisfy complex rules in order for us to qualify as a REIT for U.S. federal income tax purposes;

•changes in accounting principles generally accepted in the United States (“GAAP”);

•lack of or insufficient amounts of insurance;

•other factors affecting the real estate industry generally; and

•other factors that may materially adversely affect us, or the per share trading price of our common shares, including:

•the number of our common shares available for future issuance or sale;

•our issuance of equity securities or the perception that such issuance might occur;

•future debt;

•failure of securities analysts to publish research or reports about us or our industry; and

•securities analysts’ downgrade of our common shares or the health care-related real estate sector.

While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, new information, data or methods, future events, or other changes after the date of this report, except as required by applicable law. You should not place undue reliance on any forward-looking statements that are based on information currently available to us or the third parties making the forward-looking statements. For a further discussion of these and other factors that could impact our future results, performance or transactions, see Part I, Item 1A (Risk Factors) of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 filed with the Securities and Exchange Commission (the “Commission”) on February 24, 2023 (the “2022 Annual Report”) and Part II, Item 1A of this report.

As used in this report, unless the context otherwise requires, references to “we,” “us,” “our,” and the “Company” refer to Physicians Realty Trust (the “Trust”), a Maryland real estate investment trust, and Physicians Realty L.P. (the “Operating Partnership”), a Delaware limited partnership and the consolidated subsidiary of the Trust through which we conduct our business.

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PART I. Financial Information

Item 1. Financial Statements

Physicians Realty Trust

Consolidated Balance Sheets

(In thousands, except share and per share data)


	September 30, 2023		December 31, 2022
	(unaudited)
ASSETS
Investment properties:
Land and improvements	$	249,468	$	241,559
Building and improvements	4,703,606		4,659,780
Construction in progress	41,722		18,497
Tenant improvements	95,447		88,640
Acquired lease intangibles	509,468		505,335
	5,599,711		5,513,811
Accumulated depreciation	(1,140,208)		(996,888)
Net real estate property	4,459,503		4,516,923

Right-of-use lease assets, net	227,967		231,225
Real estate loans receivable, net	79,883		104,973
Investments in unconsolidated entities	72,069		77,716
Net real estate investments	4,839,422		4,930,837
Cash and cash equivalents	195,772		7,730
Tenant receivables, net	11,131		11,503
Other assets	166,142		146,807
Total assets	$	5,212,467	$	5,096,877
LIABILITIES AND EQUITY
Liabilities:
Credit facility	$	393,090	$	188,328
Notes payable	1,451,536		1,465,437
Mortgage debt	127,630		164,352
Accounts payable	4,933		4,391
Dividends and distributions payable	60,928		60,148
Accrued expenses and other liabilities	95,637		87,720
Lease liabilities	104,802		105,011
Acquired lease intangibles, net	23,170		24,381
Total liabilities	2,261,726		2,099,768

Redeemable noncontrolling interests - partially owned properties	3,066		3,258

Equity:
Common shares, $0.01 par value, 500,000,000 common shares authorized, 238,482,769 and 233,292,030 common shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively	2,385		2,333
Additional paid-in capital	3,817,545		3,743,876
Accumulated deficit	(1,012,869)		(881,672)
Accumulated other comprehensive income	15,216		5,183
Total shareholders’ equity	2,822,277		2,869,720
Noncontrolling interests:
Operating Partnership	116,079		123,015
Partially owned properties	9,319		1,116
Total noncontrolling interests	125,398		124,131
Total equity	2,947,675		2,993,851
Total liabilities and equity	$	5,212,467	$	5,096,877

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

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Physicians Realty Trust

Consolidated Statements of Income

(In thousands, except share and per share data) (Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Revenues:
Rental and related revenues	$	134,520	$	128,636	$	397,096	$	385,755
Interest income on real estate loans and other	4,027		2,877		10,895		8,315
Total revenues	138,547		131,513		407,991		394,070
Expenses:
Interest expense	20,050		18,299		59,837		52,356
General and administrative	9,771		10,079		31,133		30,400
Operating expenses	47,625		43,647		138,094		128,080
Depreciation and amortization	47,932		47,040		143,555		142,002

Total expenses	125,378		119,065		372,619		352,838
Income before equity in (loss) gain of unconsolidated entities and gain on sale of investment properties, net:	13,169		12,448		35,372		41,232
Equity in (loss) gain of unconsolidated entities	(278)		(62)		1,260		(452)
Gain on sale of investment properties, net	—		53,894		13		57,375
Net income	12,891		66,280		36,645		98,155
Net income attributable to noncontrolling interests:
Operating Partnership	(505)		(3,252)		(1,443)		(4,830)
Partially owned properties (1)	(51)		(70)		(121)		(384)


Net income attributable to common shareholders	$	12,335	$	62,958	$	35,081	$	92,941
Net income per share:
Basic	$	0.05	$	0.28	$	0.15	$	0.41
Diluted	$	0.05	$	0.28	$	0.15	$	0.41
Weighted average common shares:
Basic	238,480,299		226,529,041		238,124,981		225,743,856
Diluted	249,445,312		239,898,462		249,226,913		239,145,383

Dividends and distributions declared per common share	$	0.23	$	0.23	$	0.69	$	0.69

(1)Includes amounts attributable to redeemable noncontrolling interests.

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

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Physicians Realty Trust

Consolidated Statements of Comprehensive Income

(In thousands) (Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Net income	$	12,891	$	66,280	$	36,645	$	98,155
Other comprehensive income:
Change in fair value of interest rate swap agreements, net	7,697		1,753		11,796		6,215
Reclassification of accumulated gains on interest rate swap to earnings	(1,763)		—		(1,763)		—
Total other comprehensive income	5,934		1,753		10,033		6,215
Comprehensive income	18,825		68,033		46,678		104,370
Comprehensive income attributable to noncontrolling interests - Operating Partnership	(739)		(3,336)		(1,839)		(5,137)
Comprehensive income attributable to noncontrolling interests - partially owned properties	(51)		(70)		(121)		(384)
Comprehensive income attributable to common shareholders	$	18,035	$	64,627	$	44,718	$	98,849

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

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Physicians Realty Trust

Consolidated Statements of Equity

(In thousands) (Unaudited)


	Par Value		Additional Paid in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income (Loss)		Total Shareholders’ Equity		Operating Partnership Noncontrolling Interest		Partially Owned Properties Noncontrolling Interest		Total Noncontrolling Interests		Total Equity
Balance at December 31, 2022	$	2,333	$	3,743,876	$	(881,672)	$	5,183	$	2,869,720	$	123,015	$	1,116	$	124,131	$	2,993,851

Net proceeds from sale of common shares	44		65,769		—		—		65,813		—		—		—		65,813
Restricted share award grants, net	5		(1,127)		(408)		—		(1,530)		—		—		—		(1,530)

Conversion of OP Units	2		2,417		—		—		2,419		(2,419)		—		(2,419)		—
Dividends/distributions declared	—		—		(54,912)		—		(54,912)		(2,263)		—		(2,263)		(57,175)


Contributions	—		—		—		—		—		—		7,884		7,884		7,884
Distributions	—		—		—		—		—		—		(53)		(53)		(53)




Change in fair value of interest rate swap agreements	—		—		—		(1,021)		(1,021)		—		—		—		(1,021)
Adjustment for Noncontrolling Interests ownership in Operating Partnership	—		(431)		—		—		(431)		431		—		431		—


Net income	—		—		10,202		—		10,202		423		64		487		10,689
Balance as of March 31, 2023	$	2,384	$	3,810,504	$	(926,790)	$	4,162	$	2,890,260	$	119,187	$	9,011	$	128,198	$	3,018,458

Net proceeds from sale of common shares	—		294		—		—		294		—		—		—		294
Restricted share award grants, net	1		3,459		(561)		—		2,899		—		—		—		2,899
Purchase of OP Units	—		—		—		—		—		(72)		—		(72)		(72)

Dividends/distributions declared	—		—		(54,936)		—		(54,936)		(2,257)		—		(2,257)		(57,193)


Contributions	—		—		—		—		—		—		287		287		287
Distributions	—		—		—		—		—		—		(52)		(52)		(52)




Change in fair value of interest rate swap agreements	—		—		—		5,120		5,120		—		—		—		5,120
Adjustment for Noncontrolling Interests ownership in Operating Partnership	—		(393)		—		—		(393)		393		—		393		—


Net income	—		—		12,544		—		12,544		515		59		574		13,118
Balance as of June 30, 2023	$	2,385	$	3,813,864	$	(969,743)	$	9,282	$	2,855,788	$	117,766	$	9,305	$	127,071	$	2,982,859


Restricted share award grants, net	—		3,746		(523)		—		3,223		—		—		—		3,223

Conversion of OP Units	—		350		—		—		350		(350)		—		(350)		—
Dividends/distributions declared	—		—		(54,938)		—		(54,938)		(2,257)		—		(2,257)		(57,195)



Distributions	—		—		—		—		—		—		(53)		(53)		(53)



Reclassification of accumulated gains on interest rate swap to earnings	—		—		—		(1,763)		(1,763)		—		—		—		(1,763)
Change in fair value of interest rate swap agreements	—		—		—		7,697		7,697		—		—		—		7,697
Adjustment for Noncontrolling Interests ownership in Operating Partnership	—		(415)		—		—		(415)		415		—		415		—


Net income	—		—		12,335		—		12,335		505		67		572		12,907
Balance as of September 30, 2023	$	2,385	$	3,817,545	$	(1,012,869)	$	15,216	$	2,822,277	$	116,079	$	9,319	$	125,398	$	2,947,675

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

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Physicians Realty Trust

Consolidated Statements of Equity

(In thousands) (Unaudited)


	Par Value		Additional Paid in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income (Loss)		Total Shareholders’ Equity		Operating Partnership Noncontrolling Interest		Partially Owned Properties Noncontrolling Interest		Total Noncontrolling Interests		Total Equity
Balance at December 31, 2021	$	2,247	$	3,610,954	$	(776,001)	$	(892)	$	2,836,308	$	150,241	$	484	$	150,725	$	2,987,033

Net proceeds from sale of common shares	3		5,029		—		—		5,032		—		—		—		5,032
Restricted share award grants, net	3		118		(421)		—		(300)		—		—		—		(300)
Purchase of OP Units	—		—		—		—		—		(184)		—		(184)		(184)

Dividends/distributions declared	—		—		(51,879)		—		(51,879)		(2,740)		—		(2,740)		(54,619)


Contributions	—		—		—		—		—		—		569		569		569
Distributions	—		—		—		—		—		—		(55)		(55)		(55)
Change in market value of Redeemable Noncontrolling Interest in partially owned properties	—		—		717		—		717		—		—		—		717



Change in fair value of interest rate swap agreement	—		—		—		1,379		1,379		—		—		—		1,379
Adjustment for Noncontrolling Interests ownership in Operating Partnership	—		(217)		—		—		(217)		217		—		217		—


Net income	—		—		13,092		—		13,092		692		82		774		13,866
Balance as of March 31, 2022	$	2,253	$	3,615,884	$	(814,492)	$	487	$	2,804,132	$	148,226	$	1,080	$	149,306	$	2,953,438

Net proceeds from sale of common shares	9		18,475		—		—		18,484		—		—		—		18,484
Restricted share award grants, net	1		3,588		(911)		—		2,678		—		—		—		2,678


Dividends/distributions declared	—		—		(52,116)		—		(52,116)		(2,712)		—		(2,712)		(54,828)



Distributions	—		—		—		—		—		—		(61)		(61)		(61)
Change in market value of Redeemable Noncontrolling Interest in partially owned properties	—		—		527		—		527		—		—		—		527



Change in fair value of interest rate swap agreement	—		—		—		3,083		3,083		—		—		—		3,083
Adjustment for Noncontrolling Interests ownership in Operating Partnership	—		(488)		—		—		(488)		488		—		488		—


Net income	—		—		16,891		—		16,891		886		79		965		17,856
Balance as of June 30, 2022	$	2,263	$	3,637,459	$	(850,101)	$	3,570	$	2,793,191	$	146,888	$	1,098	$	147,986	$	2,941,177

Net proceeds from sale of common shares	5		7,925		—		—		7,930		—		—		—		7,930
Restricted share award grants, net	—		4,326		(536)		—		3,790		—		—		—		3,790
Purchase of OP Units	—		—		—		—		—		(2,139)		—		(2,139)		(2,139)

Dividends/distributions declared	—		—		(52,563)		—		(52,563)		(2,302)		—		(2,302)		(54,865)



Distributions	—		—		—		—		—		—		(61)		(61)		(61)
Change in market value of Redeemable Noncontrolling Interest in partially owned properties	—		—		1,513		—		1,513		—		—		—		1,513



Change in fair value of interest rate swap agreement	—		—		—		1,753		1,753		—		—		—		1,753
Adjustment for Noncontrolling Interests ownership in Operating Partnership	—		(727)		—		—		(727)		727		—		727		—


Net income	—		—		62,958		—		62,958		3,252		74		3,326		66,284
Balance as of September 30, 2022	$	2,268	$	3,648,983	$	(838,729)	$	5,323	$	2,817,845	$	146,426	$	1,111	$	147,537	$	2,965,382

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

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Physicians Realty Trust

Consolidated Statements of Cash Flows

(In thousands) (Unaudited)


	Nine Months Ended September 30,
	2023		2022
Cash Flows from Operating Activities:
Net income	$	36,645	$	98,155
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization	143,555		142,002
Amortization of deferred financing costs	2,028		1,739
Amortization of lease inducements and above/below-market lease intangibles	4,055		4,458
Straight-line rental revenue, net	(2,756)		(5,359)
Amortization of discount on unsecured senior notes	824		794
Amortization of above market assumed debt	—		(10)
Gain on extinguishment of debt	(1,763)		—
Gain on sale of investment properties, net	(13)		(57,375)
Equity in (gain) loss of unconsolidated entities	(1,260)		452
Distributions from unconsolidated entities	5,707		6,077
Change in fair value of derivatives	185		—
Provision for bad debts	571		269
Non-cash share compensation	12,290		12,400


Change in operating assets and liabilities:
Tenant receivables	711		(5,927)
Other assets	(3,019)		(1,455)
Accounts payable	542		(125)
Accrued expenses and other liabilities	7,610		6,258
Net cash provided by operating activities	205,912		202,353
Cash Flows from Investing Activities:
Proceeds from sale of investment properties	2,553		123,179
Acquisition of investment properties, net	(39,282)		(111,587)
Investment in unconsolidated entities, net	(3,671)		(13,349)
Returns of investment in unconsolidated entities	3,737		—
Development of real estate	(12,672)		—
Escrowed cash - acquisition deposits/earnest deposits	—		360
Capital expenditures on investment properties	(31,194)		(29,840)
Investment in real estate loans receivable	(22,272)		(29,618)
Repayment of real estate loans receivable	41,065		22,441


Leasing commissions	(2,588)		(2,766)
Lease inducements	(399)		(500)
Net cash used in investing activities	(64,723)		(41,680)
Cash Flows from Financing Activities:
Net proceeds from sale of common shares	65,914		31,446
Proceeds from credit facility borrowings	513,000		239,000
Repayment of credit facility borrowings	(306,000)		(251,000)
Repayment of senior unsecured notes	(15,000)		—


Principal payments on mortgage debt	(36,803)		(15,845)
Payment of debt issuance costs	(3,911)		(67)

Dividends paid - shareholders	(165,491)		(156,854)
Distributions to noncontrolling interests - Operating Partnership	(6,783)		(8,191)

Contributions from noncontrolling interest	8,171		569
Distributions to noncontrolling interests - partially owned properties	(281)		(517)
Payments of employee taxes for withheld stock-based compensation shares	(5,891)		(4,255)

Purchase of OP Units	(72)		(2,323)
Net cash provided by (used in) financing activities	46,853		(168,037)
Net increase (decrease) in cash and cash equivalents	188,042		(7,364)
Cash and cash equivalents, beginning of period	7,730		9,876
Cash and cash equivalents, end of period	$	195,772	$	2,512
Supplemental disclosure of cash flow information—interest paid during the period	$	66,082	$	57,977

Supplemental disclosure of noncash activity—change in fair value of interest rate swap agreements	$	11,796	$	6,215
Supplemental disclosure of noncash activity—conversion of loan receivable in connection to the acquisition of investment property	$	5,398	$	5,700

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

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Physicians Realty Trust

Notes to Consolidated Financial Statements

Unless otherwise indicated or unless the context requires otherwise, the use of the words “we,” “us,” “our,” and the “Company,” refer to Physicians Realty Trust, together with its consolidated subsidiaries, including Physicians Realty L.P.

Note 1. Organization and Business

Physicians Realty Trust (the “Trust” or the “Company”) was organized in the state of Maryland on April 9, 2013. As of September 30, 2023, the Trust was authorized to issue up to 500,000,000 common shares of beneficial interest, par value $0.01 per share. The Trust filed a Registration Statement on Form S-11 with the Commission with respect to a proposed underwritten initial public offering (the “IPO”) and completed the IPO of its common shares and commenced operations on July 24, 2013.

The Trust contributed the net proceeds from the IPO to Physicians Realty L.P, a Delaware limited partnership (the “Operating Partnership”), and is the sole general partner of the Operating Partnership. The Trust’s operations are conducted through the Operating Partnership and wholly-owned and majority-owned subsidiaries of the Operating Partnership. The Trust, as the general partner of the Operating Partnership, controls the Operating Partnership and consolidates the assets, liabilities, and results of operations of the Operating Partnership.

The Trust is a self-managed REIT formed primarily to acquire, selectively develop, own, and manage health care properties that are leased to physicians, hospitals, and health care delivery systems.

ATM Program

In May 2021, the Trust and the Operating Partnership entered into an At Market Issuance Sales Agreement (the “2021 Sales Agreement”) with KeyBanc Capital Markets Inc., Credit Agricole Securities (USA) Inc., BMO Capital Markets Corp., and Raymond James & Associates, Inc. in their capacity as agents for the Company and/or forward sellers and Stifel, Nicolaus & Company, Incorporated in its capacity as sales agent for the Company (collectively, the “2021 Agents”) and Bank of Montreal, Credit Agricole Corporate and Investments Bank, KeyBanc Capital Markets Inc., and Raymond James & Associates, Inc. as forward purchasers for the Company (the “2021 Forward Purchasers”), pursuant to which the Trust may issue and sell, from time to time, its common shares having an aggregate offering price of up to $500 million through the 2021 Agents (the “2021 ATM Program”). The 2021 Sales Agreement contemplates that, in addition to the issuance and sale of the Trust’s common shares through the 2021 Agents, the Trust may also enter into one or more forward sales agreements from time to time in the future with each of the 2021 Forward Purchasers.

In August 2023, the Trust and the Operating Partnership entered into an At Market Issuance Sales Agreement (the “2023 Sales Agreement”) with BMO Capital Markets Corp., Credit Agricole Securities (USA) Inc., KeyBanc Capital Markets Inc., Raymond James & Associates, Inc., Regions Securities LLC and Stifel, Nicolaus & Company, Incorporated as sales agents for the Company and/or forward sellers (collectively, “2023 Agents”), and Bank of Montreal, Crédit Agricole Corporate and Investment Bank, KeyBanc Capital Markets Inc., Raymond James & Associates, Inc., Regions Securities LLC and Stifel, Nicolaus & Company, Incorporated (collectively, “2023 Forward Purchasers”), pursuant to which the Trust may issue and sell, from time to time, its common shares having an aggregate offering price of up to $600 million through the 2023 Agents (the “2023 ATM Program”). The 2023 Sales Agreement contemplates that, in addition to the issuance and sale of the Trust’s common shares through the 2023 Agents, the Trust may also enter into one or more forward sales agreements from time to time in the future with each of the 2023 Forward Purchasers. Upon entry into the 2023 Sales Agreement, we terminated the 2021 ATM Program.

During the quarters ended March 31, 2023, June 30, 2023, and September 30, 2023, the Trust issued and sold common shares through the 2021 ATM Program as follows (net proceeds in thousands):


	Common shares sold	Weighted average price		Net proceeds
Quarter ended March 31, 2023	4,400,000	$	15.10	$	65,776
Quarter ended June 30, 2023	—	—		—
Quarter ended September 30, 2023	—	—		—
Year to date	4,400,000	$	15.10	$	65,776

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As of September 30, 2023, the Trust has $600.0 million of common shares remaining available under the 2023 ATM Program. Subsequent to September 30, 2023, in connection with the Merger Agreement, the Trust suspended the 2023 ATM Program.

Note 2. Summary of Significant Accounting Policies

The accompanying unaudited consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the periods ended September 30, 2023 and 2022 pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X. All such adjustments are of a normal recurring nature. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the audited financial statements included in the Trust’s 2022 Annual Report. The Company has consistently applied its accounting policies to all periods presented in these consolidated financial statements.

Noncontrolling Interests

The Company presents the portion of any equity it does not own in entities that it controls (and thus consolidates) as noncontrolling interests and classifies such interests as a component of consolidated equity, separate from the Company’s total shareholders’ equity, on the consolidated balance sheets.

Operating Partnership: Noncontrolling interests in the Company include partnership interests of the Operating Partnership (“OP Units”) held by other investors. Net income or loss is allocated to noncontrolling interests (limited partners) based on their respective ownership percentage of the Operating Partnership. The ownership percentage is calculated by dividing the number of OP Units held by the noncontrolling interests by the total OP Units held by the noncontrolling interests and the Trust. Issuance of additional common shares and OP Units changes the ownership interests of both the noncontrolling interests and the Trust. Such transactions and the related proceeds are treated as capital transactions.

As of September 30, 2023, the Trust held a 96.1% interest in the Operating Partnership. As the sole general partner and the majority interest holder, the Trust consolidates the financial position and results of operations of the Operating Partnership.

Partially Owned Properties: The Trust reflects noncontrolling interests in partially owned properties on the consolidated balance sheets for the portion of consolidated properties that are not wholly owned by the Company. The earnings or losses from those properties attributable to the noncontrolling interests are reflected as noncontrolling interests in partially owned properties in the consolidated statements of income.

Redeemable Noncontrolling Interests - Partially Owned Properties

In connection with the Company’s acquisitions of the outpatient medical facility, ambulatory surgery center, and hospital located on the Great Falls Hospital campus in Great Falls, Montana, physicians affiliated with the sellers retained non-controlling interests which were, at the holders’ option, able to be redeemed at any time after May 1, 2023. Due to the redemption provision, which was outside of the control of the Trust, the Trust classified the investment in the mezzanine section of its consolidated balance sheets. On July 14, 2022, the Company disposed of these three properties and removed the related redeemable noncontrolling interests from its consolidated balance sheets.

Through a consolidated joint venture with MedProperties Realty Advisors, LLC (“MedProperties”), the Company acquired Calko Medical Center in Brooklyn, New York. As part of the joint venture, MedProperties can redeem its interest, at its option, at any time after September 9, 2025. Due to the redemption provision, which is outside of the control of the Company, the Company classifies the noncontrolling interests in the mezzanine section of its consolidated balance sheets. The Company records the carrying amount of the redeemable noncontrolling interests at the greater of the carrying value or redemption value.

Dividends and Distributions

On September 21, 2023, the Trust announced that its Board of Trustees authorized, and the Trust declared, a cash dividend of $0.23 per common share for the quarter ended September 30, 2023. The dividend was paid on October 17, 2023, to common shareholders and holders of record of OP Units as of the close of business on October 3, 2023.

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Tax Status of Dividends and Distributions

The Company’s distributions of current and accumulated earnings and profits for U.S. federal income tax purposes generally are taxable to shareholders as ordinary income. Distributions in excess of these earnings and profits generally are treated as a non-taxable reduction of the shareholders’ basis in the shares to the extent thereof (non-dividend distributions) and thereafter as taxable gain.

Any cash distributions received by an OP Unit holder in respect of its OP Units generally will not be taxable to such OP Unit holder for U.S. federal income tax purposes, to the extent that such distribution does not exceed the OP Unit holder’s basis in its OP Units. Any such distribution will instead reduce the OP Unit holder’s basis in its OP Units (and OP Unit holders will be subject to tax on the taxable income allocated to them by the Operating Partnership in respect of their OP Units when such income is earned by the Operating Partnership, with such income allocation increasing the OP Unit holders’ basis in their OP Units).

The Company has elected taxable REIT subsidiary (“TRS”) status for certain of its corporate subsidiaries and, as a result, these entities will incur both federal and state income taxes on any taxable income of such entities after consideration of any net operating losses. To date, these income taxes have been de minimis.

Real Estate Loans Receivable, Net

Real estate loans receivable consists of nine mezzanine loans, three term loans, and two construction loans as of September 30, 2023. Generally, each mezzanine loan is collateralized by a pledge of the borrower’s ownership interest in the respective real estate owner, each term loan is secured by a mortgage on a related outpatient medical facility, and construction loans are secured by mortgages on the land and the improvements as constructed. The reserve for loan losses was $0.4 million as of September 30, 2023.

Rental and Related Revenues

Rental revenue is recognized on a straight-line basis over the terms of the related leases when collectability is probable. Recognizing rental revenue on a straight-line basis for leases may result in recognizing revenue for amounts more or less than amounts currently due from tenants. Amounts recognized in excess of amounts currently due from tenants are included in other assets and were approximately $105.0 million and $101.3 million as of September 30, 2023 and December 31, 2022, respectively. If the Company determines that collectability of straight-line rents is not probable, income recognition is limited to the lesser of cash collected, or lease income reflected on a straight-line basis, plus variable rent when it becomes accruable.

In accordance with ASC 842, Leases, Topic 842, if the collectability of a lease changes after the commencement date, any difference between lease income that would have been recognized and the lease payments shall be recognized as an adjustment to lease income. Bad debt recognized as an adjustment to rental and related revenues was $0.9 million for the nine months ended September 30, 2023 and $0.2 million for the nine months ended September 30, 2022.

Rental revenue is adjusted by the amortization of lease inducements and above-market or below-market rents on certain leases. Lease inducements and above-market or below-market rents are amortized on a straight-line basis over the remaining lease term. Rental and related revenues also include expense recoveries, which relate to tenant reimbursement of real estate taxes, insurance, and other operating expenses that are recognized in the period the applicable expenses are incurred. The reimbursements are recorded gross, as these costs are incurred by the Company and reimbursed by the tenants. The Company has certain tenants with absolute net leases. Under these lease agreements, the tenant is responsible for operating and building expenses and the Company does not recognize expense recoveries.

Derivative Instruments

When the Company has derivative instruments, it records them either as an asset or a liability measured at their fair value unless they qualify for a normal purchase or normal sale exception. When specific hedge accounting criteria are not met or if the Company does not elect to apply for hedge accounting, changes in the Company’s derivative instruments’ fair value are recognized currently in earnings. If hedge accounting is applied to a derivative instrument, the entire change in the fair value of its derivatives designated and qualified as cash flow hedges are recorded in accumulated other comprehensive income (“AOCI”) on the consolidated balance sheets and are subsequently reclassified into earnings in the period in which the hedged forecasted transaction affects earnings.

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To manage interest rate risk for certain of its variable-rate debt, the Company uses interest rate swaps as part of its risk management strategy. These derivatives are designed to mitigate the risk of future interest rate increases by providing a fixed interest rate for a limited, pre-determined period of time. 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. As of September 30, 2023, the Company had three outstanding interest rate swaps designated as cash flow hedges of interest rate risk, and one interest rate swap that was de-designated as a hedging instrument during the quarter ended September 30, 2023 but remains outstanding. Further detail is provided in Note 7 (Derivatives).

Reclassifications

Certain amounts in the accompanying consolidated balance sheet for 2022 have been reclassified to conform to the 2023 consolidated financial statement presentation. The reclassifications had no impact on total assets or any balance sheet total or subtotal.

New Accounting Pronouncements

In March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-04, Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional relief to applying reference rate reform to changing reference rates, contracts, hedging relationships, and other transactions that reference the London Inter-Bank Offered Rate (“LIBOR”). The amendments in this update may be applied through December 31, 2024.

On March 31, 2023, the Operating Partnership, as borrower, and the Trust, as guarantor, executed a First Amendment to the Third Amended and Restated Credit Agreement to update the benchmark provisions to replace LIBOR with the Secured Overnight Financing Rate (“SOFR”), as the reference rate for the purpose of calculating interest under the agreement. The Company also amended its fixed interest rate swap agreement on its mortgage debt to update the reference rate from LIBOR to SOFR. As a result, the Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients maintains the presentation of derivatives consistent with past presentation. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

Note 3. Investment and Disposition Activity

During the nine months ended September 30, 2023, the Company executed contractual commitments related to a $40.5 million development project, with $12.7 million spent on construction in progress thus far, completed the acquisition of three outpatient medical facilities and three medical condominium units for an investment of $38.5 million and two parcels of land adjacent to existing outpatient medical facilities for an investment of $1.7 million, and paid $2.2 million of additional purchase consideration under six earn-out agreements. The Company also closed on a $35.8 million construction loan, funding $10.7 million to date. Additionally, the Company funded an aggregate of $13.2 million on new term loans, previously announced loan commitments, and other investments, including an $1.3 million investment in IJRI Properties, LLC, which is an entity constructing and operating an outpatient medical facility in Indiana. The Company contributed $2.0 million to the joint venture with Davis Medical Investors, LLC (the “Davis Joint Venture”) to fund additional purchase consideration related to the venture’s acquisitions. Investment activity totaled approximately $81.0 million during the nine months ended September 30, 2023. As part of these investments, the Company incurred approximately $2.0 million of capitalized acquisition costs.

Investment activity for the three months ended September 30, 2023, included the acquisition of one outpatient medical facility and a parcel of land adjacent to one of our existing properties for an aggregate purchase price of $3.5 million. Additionally, the Company funded an aggregate $5.9 million under two earn-out agreements, previously announced loan commitments, and other investments, including an $1.3 million investment in IJRI Properties, LLC, which is an entity constructing and operating an outpatient medical facility in Indiana. The Company also funded construction in progress of $7.4 million, resulting in total investment activity of approximately $16.8 million as of September 30, 2023.

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The following table summarizes the acquisition date fair values of the assets acquired and the liabilities assumed, as well as follow-on capitalized costs during the nine months ended September 30, 2023, which the Company determined using Level 2 and Level 3 inputs (in thousands):


	1st Quarter		2nd Quarter		3rd Quarter		Total
Land	$	1,356	$	6,016	$	1,345	$	8,717
Building and improvements	1,294		28,353		2,459		32,106
In-place lease intangibles	—		3,491		919		4,410

Below market in-place lease intangibles	—		—		(553)		(553)



Net assets acquired	$	2,650	$	37,860	$	4,170	$	44,680

Satisfaction of real estate loans receivable	—		(5,398)		—		(5,398)

Cash used in acquisition of investment property	$	2,650	$	32,462	$	4,170	$	39,282

Dispositions

During the nine months ended September 30, 2023, the Company sold one outpatient medical facility for approximately $2.6 million, realizing an insignificant gain.

Note 4. Intangibles

The following is a summary of the carrying amount of intangible assets and liabilities as of September 30, 2023 and December 31, 2022 (in thousands):


	September 30, 2023						December 31, 2022
	Cost		Accumulated Amortization		Net		Cost		Accumulated Amortization		Net
Assets
In-place leases	$	449,716	$	(272,643)	$	177,073	$	445,583	$	(241,643)	$	203,940
Above-market leases	$	59,752	$	(34,282)	$	25,470	$	59,752	$	(30,096)	$	29,656
Liabilities
Below-market leases	$	36,962	$	(13,792)	$	23,170	$	37,002	$	(12,621)	$	24,381

The following is a summary of acquired lease intangible amortization for the three and nine months ended September 30, 2023 and 2022 (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Amortization expense related to in-place leases	$	10,204	$	10,629	$	31,278	$	32,814
Decrease in rental income related to above-market leases	1,373		1,384		4,187		4,390
Increase in rental income related to below-market leases	594		556		1,764		1,522

Future aggregate net amortization of acquired lease intangibles as of September 30, 2023, is as follows (in thousands):


	Net Decrease (Increase) in Revenue		Net Increase in Expenses
2023	$	748	$	9,642
2024	2,887		35,184
2025	2,316		29,663
2026	1,161		23,548
2027	994		20,625
Thereafter	(5,806)		58,411
Total	$	2,300	$	177,073

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As of September 30, 2023, the weighted average remaining amortization period is 7 years for in-place and above-market lease intangible assets and 15 years for below-market lease intangibles.

Note 5. Other Assets

Other assets consisted of the following as of September 30, 2023 and December 31, 2022 (in thousands):


	September 30, 2023		December 31, 2022
Straight line rent receivable, net	$	104,991	$	101,306
Interest rate swaps	14,731		2,045
Leasing commissions, net	14,043		13,231
Prepaid expenses	14,013		11,009
Lease inducements, net	7,577		7,894
Escrows	1,574