Physicians Realty Trust [DOC] Filings

10-Q 1 doc-20220930.htm 10-Q doc-20220930

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, 2022

☐ 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 26, 2022 was 228,260,860.

PHYSICIANS REALTY TRUST

Quarterly Report on Form 10-Q

for the Quarter Ended September 30, 2022

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		Page Number
Part I	Financial Information

Item 1	Financial Statements (Unaudited)


	Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021	3
	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2022 and 2021	4
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2022 and 2021	5
	Consolidated Statements of Equity for the Three and Nine Months Ended September 30, 2022 and 2021	6
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021	8









	Notes to Consolidated Financial Statements	9

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4	Controls and Procedures	37

Part II	Other Information

Item 1	Legal Proceedings	39
Item 1A	Risk Factors	39
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	39

Item 6	Exhibits	40

SIGNATURES		41

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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:

•the unknown duration and economic, operational, and financial impacts of the global outbreak of a novel strain of the coronavirus and any variants that have emerged or that may emerge in the future, (the “COVID-19 pandemic”) and the actions taken by governmental authorities or others in connection with the COVID-19 pandemic will have on the Company’s business;

•general economic conditions, including inflation and recession;

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

•our failure to generate sufficient cash flows to service our indebtedness or to pay down or refinance our indebtedness;

•fluctuations and increases in interest rates and operating costs;

•the availability, terms, and deployment of debt and equity capital, including our unsecured revolving credit facility;

•our ability to make distributions on our common shares;

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

•our increased vulnerability economically due to the concentration of our investments in health care properties;

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

•changes in our business or strategy;

•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 degree and nature of our competition;

•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;

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

•decreased rental rates or increased vacancy rates;

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

•competition for investment opportunities;

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

•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;

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

•our ability to operate as a public company;

•changes in health care laws or government reimbursement rates;

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

•lack of or insufficient amounts of insurance;

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

•other factors affecting the real estate industry generally;

•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; 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, 2021 filed with the Securities and Exchange Commission (the “Commission”) on February 24, 2022 (the “2021 Annual 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, 2022		December 31, 2021
	(unaudited)
ASSETS
Investment properties:
Land and improvements	$	241,385	$	235,453
Building and improvements	4,666,085		4,612,561
Tenant improvements	90,318		86,018
Acquired lease intangibles	505,335		498,221
	5,503,123		5,432,253
Accumulated depreciation	(948,883)		(821,036)
Net real estate property	4,554,240		4,611,217
Real estate held for sale	—		1,964
Right-of-use lease assets, net	232,320		235,483
Real estate loans receivable, net	120,576		117,844
Investments in unconsolidated entities	79,613		69,793
Net real estate investments	4,986,749		5,036,301
Cash and cash equivalents	2,512		9,876
Tenant receivables, net	9,644		4,948
Other assets	143,569		131,584
Total assets	$	5,142,474	$	5,182,709
LIABILITIES AND EQUITY
Liabilities:
Credit facility	$	256,893	$	267,641
Notes payable	1,465,078		1,464,008
Mortgage debt	164,556		180,269
Accounts payable	6,526		6,651
Dividends and distributions payable	58,382		57,246
Accrued expenses and other liabilities	92,494		86,254
Lease liabilities	104,905		104,957
Acquired lease intangibles, net	24,970		21,569
Total liabilities	2,173,804		2,188,595

Redeemable noncontrolling interests - partially owned properties	3,288		7,081

Equity:
Common shares, $0.01 par value, 500,000,000 common shares authorized, 226,763,146 and 224,678,116 common shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively	2,268		2,247
Additional paid-in capital	3,648,983		3,610,954
Accumulated deficit	(838,729)		(776,001)
Accumulated other comprehensive income (loss)	5,323		(892)
Total shareholders’ equity	2,817,845		2,836,308
Noncontrolling interests:
Operating Partnership	146,426		150,241
Partially owned properties	1,111		484
Total noncontrolling interests	147,537		150,725
Total equity	2,965,382		2,987,033
Total liabilities and equity	$	5,142,474	$	5,182,709

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,
	2022		2021		2022		2021
Revenues:
Rental and related revenues	$	127,381	$	110,314	$	381,785	$	326,017
Interest income on real estate loans and other	4,132		4,997		12,285		15,558
Total revenues	131,513		115,311		394,070		341,575
Expenses:
Interest expense	18,299		13,498		52,356		40,754
General and administrative	10,079		9,534		30,400		28,116
Operating expenses	43,647		35,679		128,080		103,069
Depreciation and amortization	47,040		38,582		142,002		114,663
Impairment loss	—		340		—		340
Total expenses	119,065		97,633		352,838		286,942
Income before equity in loss of unconsolidated entities and gain on sale of investment properties, net:	12,448		17,678		41,232		54,633
Equity in loss of unconsolidated entities	(62)		(390)		(452)		(1,213)
Gain on sale of investment properties, net	53,894		4,757		57,375		5,111
Net income	66,280		22,045		98,155		58,531
Net income attributable to noncontrolling interests:
Operating Partnership	(3,252)		(529)		(4,830)		(1,405)
Partially owned properties (1)	(70)		(152)		(384)		(455)
Net income attributable to controlling interest	62,958		21,364		92,941		56,671
Preferred distributions	—		—		—		(13)
Net income attributable to common shareholders	$	62,958	$	21,364	$	92,941	$	56,658
Net income per share:
Basic	$	0.28	$	0.10	$	0.41	$	0.26
Diluted	$	0.28	$	0.10	$	0.41	$	0.26
Weighted average common shares:
Basic	226,529,041		217,406,657		225,743,856		214,616,482
Diluted	239,898,462		223,992,049		239,145,383		221,399,649

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,
	2022		2021		2022		2021
Net income	$	66,280	$	22,045	$	98,155	$	58,531
Other comprehensive income:
Change in fair value of interest rate swap agreements, net	1,753		465		6,215		1,805
Total other comprehensive income	1,753		465		6,215		1,805
Comprehensive income	68,033		22,510		104,370		60,336
Comprehensive income attributable to noncontrolling interests - Operating Partnership	(3,336)		(541)		(5,137)		(1,449)
Comprehensive income attributable to noncontrolling interests - partially owned properties	(70)		(152)		(384)		(455)
Comprehensive income attributable to common shareholders	$	64,627	$	21,817	$	98,849	$	58,432

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 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, 2020	$	2,096	$	3,303,231	$	(658,171)	$	(5,859)	$	2,641,297	$	73,302	$	403	$	73,705	$	2,715,002

Net proceeds from sale of common shares	28		52,404		—		—		52,432		—		—		—		52,432
Restricted share award grants, net	4		(333)		(664)		—		(993)		—		—		—		(993)
Purchase of OP Units	—		—		—		—		—		(269)		—		(269)		(269)

Dividends/distributions declared	—		—		(49,011)		—		(49,011)		(1,243)		—		(1,243)		(50,254)
Preferred distributions	—		—		(13)		—		(13)		—		—		—		(13)


Distributions	—		—		—		—		—		—		(73)		(73)		(73)
Change in market value of Redeemable Noncontrolling Interests	—		(23)		896		—		873		—		—		—		873

Change in fair value of interest rate swap agreements	—		—		—		797		797		—		—		—		797
Adjustment for Noncontrolling Interests ownership in Operating Partnership	—		1,136		—		—		1,136		(1,136)		—		(1,136)		—


Net income	—		—		17,194		—		17,194		459		76		535		17,729
Balance as of March 31, 2021	$	2,128	$	3,356,415	$	(689,769)	$	(5,062)	$	2,663,712	$	71,113	$	406	$	71,519	$	2,735,231

Net proceeds from sale of common shares	46		82,781		—		—		82,827		—		—		—		82,827
Restricted share award grants, net	—		3,242		(482)		—		2,760		—		—		—		2,760
Purchase of OP Units	—		—		—		—		—		(5,063)		—		(5,063)		(5,063)

Dividends/distributions declared	—		—		(50,061)		—		(50,061)		(1,242)		—		(1,242)		(51,303)



Distributions	—		—		—		—		—		—		(50)		(50)		(50)
Change in market value of Redeemable Noncontrolling Interests	—		—		(388)		—		(388)		—		—		—		(388)

Change in fair value of interest rate swap agreements	—		—		—		543		543		—		—		—		543
Adjustment for Noncontrolling Interests ownership in Operating Partnership	—		(2,124)		—		—		(2,124)		2,124		—		2,124		—


Net income	—		—		18,113		—		18,113		417		76		493		18,606
Balance as of June 30, 2021	$	2,174	$	3,440,314	$	(722,587)	$	(4,519)	$	2,715,382	$	67,349	$	432	$	67,781	$	2,783,163

Net proceeds from sale of common shares	—		(117)		—		—		(117)		—		—		—		(117)
Restricted share award grants, net	—		3,642		113		—		3,755		—		—		—		3,755


Dividends/distributions declared	—		—		(50,062)		—		(50,062)		(1,233)		—		(1,233)		(51,295)



Distributions	—		—		—		—		—		—		(51)		(51)		(51)
Change in market value of Redeemable Noncontrolling Interests	—		—		22		—		22		—		—		—		22

Change in fair value of interest rate swap agreements	—		—		—		465		465		—		—		—		465
Adjustment for Noncontrolling Interests ownership in Operating Partnership	—		(91)		—		—		(91)		91		—		91		—


Net income	—		—		21,364		—		21,364		529		76		605		21,969
Balance as of September 30, 2021	$	2,174	$	3,443,748	$	(751,150)	$	(4,054)	$	2,690,718	$	66,736	$	457	$	67,193	$	2,757,911

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,
	2022		2021
Cash Flows from Operating Activities:
Net income	$	98,155	$	58,531
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization	142,002		114,663
Amortization of deferred financing costs	1,739		1,744
Amortization of lease inducements and above/below-market lease intangibles	4,458		3,526
Straight-line rental revenue/expense	(5,359)		(7,276)
Amortization of discount on unsecured senior notes	794		489
Amortization of above market assumed debt	(10)		(47)
Gain on sale of investment properties, net	(57,375)