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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

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: 001-36007
PHYSICIANS REALTY TRUST
(Exact Name of Registrant as Specified in its Charter)
Maryland46-2519850
(State of Organization)(IRS Employer Identification No.)
309 N. Water Street, Suite 50053202
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 classTrading SymbolName of each exchange on which registered
Common stock, $0.01 par value per shareDOCNew 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
 
Table of Contents
 
  Page Number
 
 
 
 
 
 
 
 
   
 
   
   


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;
1


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.
2

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 improvements4,703,606 4,659,780 
Construction in progress41,722 18,497 
Tenant improvements95,447 88,640 
Acquired lease intangibles509,468 505,335 
 5,599,711 5,513,811 
Accumulated depreciation(1,140,208)(996,888)
Net real estate property4,459,503 4,516,923 
Right-of-use lease assets, net227,967 231,225 
Real estate loans receivable, net79,883 104,973 
Investments in unconsolidated entities72,069 77,716 
Net real estate investments4,839,422 4,930,837 
Cash and cash equivalents195,772 7,730 
Tenant receivables, net11,131 11,503 
Other assets166,142 146,807 
Total assets$5,212,467 $5,096,877 
LIABILITIES AND EQUITY  
Liabilities:  
Credit facility$393,090 $188,328 
Notes payable1,451,536 1,465,437 
Mortgage debt127,630 164,352 
Accounts payable4,933 4,391 
Dividends and distributions payable60,928 60,148 
Accrued expenses and other liabilities95,637 87,720 
Lease liabilities104,802 105,011 
Acquired lease intangibles, net23,170 24,381 
Total liabilities2,261,726 2,099,768 
Redeemable noncontrolling interests - partially owned properties3,066 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 capital3,817,545 3,743,876 
Accumulated deficit(1,012,869)(881,672)
Accumulated other comprehensive income15,216 5,183 
Total shareholders’ equity2,822,277 2,869,720 
Noncontrolling interests:  
Operating Partnership116,079 123,015 
Partially owned properties9,319 1,116 
Total noncontrolling interests125,398 124,131 
Total equity2,947,675 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.
3

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,
 2023202220232022
Revenues:    
Rental and related revenues$134,520 $128,636 $397,096 $385,755 
Interest income on real estate loans and other4,027 2,877 10,895 8,315 
Total revenues138,547 131,513 407,991 394,070 
Expenses:    
Interest expense20,050 18,299 59,837 52,356 
General and administrative9,771 10,079 31,133 30,400 
Operating expenses47,625 43,647 138,094 128,080 
Depreciation and amortization47,932 47,040 143,555 142,002 
Total expenses125,378 119,065 372,619 352,838 
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:    
Basic238,480,299 226,529,041 238,124,981 225,743,856 
Diluted249,445,312 239,898,462 249,226,913 239,145,383 
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.
4

Physicians Realty Trust
Consolidated Statements of Comprehensive Income
(In thousands) (Unaudited)
Three Months Ended
September 30,
Nine Months Ended
September 30,
 2023202220232022
Net income$12,891 $66,280 $36,645 $98,155 
Other comprehensive income:
Change in fair value of interest rate swap agreements, net7,697 1,753 11,796 6,215 
Reclassification of accumulated gains on interest rate swap to earnings(1,763) (1,763) 
Total other comprehensive income5,934 1,753 10,033 6,215 
Comprehensive income18,825 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.
5

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 shares44 65,769 — — 65,813 — — — 65,813 
Restricted share award grants, net5 (1,127)(408)— (1,530)— — — (1,530)
Conversion of OP Units2 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, net1 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.
6

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 shares3 5,029 — — 5,032 — — — 5,032 
Restricted share award grants, net3 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 shares9 18,475 — — 18,484 — — — 18,484 
Restricted share award grants, net1 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 shares5 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.
7

Physicians Realty Trust
Consolidated Statements of Cash Flows
(In thousands) (Unaudited)
 Nine Months Ended
September 30,
20232022
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 amortization143,555 142,002 
Amortization of deferred financing costs2,028 1,739 
Amortization of lease inducements and above/below-market lease intangibles4,055 4,458 
Straight-line rental revenue, net(2,756)(5,359)
Amortization of discount on unsecured senior notes824 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 entities5,707 6,077 
Change in fair value of derivatives185  
Provision for bad debts571 269 
Non-cash share compensation12,290 12,400 
Change in operating assets and liabilities:  
Tenant receivables711 (5,927)
Other assets(3,019)(1,455)
Accounts payable542 (125)
Accrued expenses and other liabilities7,610 6,258 
Net cash provided by operating activities205,912 202,353 
Cash Flows from Investing Activities:  
Proceeds from sale of investment properties2,553 123,179 
Acquisition of investment properties, net(39,282)(111,587)
Investment in unconsolidated entities, net(3,671)(13,349)
Returns of investment in unconsolidated entities3,737  
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 receivable41,065 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 shares65,914 31,446 
Proceeds from credit facility borrowings513,000 239,000 
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 interest8,171 569 
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 activities46,853 (168,037)
Net increase (decrease) in cash and cash equivalents188,042 (7,364)
Cash and cash equivalents, beginning of period7,730 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.
8

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 priceNet
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 date4,400,000 $15.10 $65,776 

9

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 Quarter2nd Quarter3rd QuarterTotal
Land$1,356 $6,016 $1,345 $8,717 
Building and improvements1,294 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, 2023December 31, 2022
 CostAccumulated
Amortization
NetCostAccumulated
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,
 2023202220232022
Amortization expense related to in-place leases$10,204 $10,629 $31,278 $32,814 
Decrease in rental income related to above-market leases1,373 1,384 4,187 4,390 
Increase in rental income related to below-market leases594 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 
20242,887 35,184 
20252,316 29,663 
20261,161 23,548 
2027994 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 swaps14,731 2,045 
Leasing commissions, net14,043 13,231 
Prepaid expenses14,013 11,009 
Lease inducements, net7,577 7,894 
Escrows1,574