Physicians Realty Trust [DOC] Filings

10-Q 1 doc-20220331.htm 10-Q doc-20220331

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 March 31, 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 April 27, 2022 was 225,296,089.

PHYSICIANS REALTY TRUST

Quarterly Report on Form 10-Q

for the Quarter Ended March 31, 2022

Table of Contents


		Page Number
Part I	Financial Information

Item 1	Financial Statements (Unaudited)


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









	Notes to Consolidated Financial Statements	9

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3	Quantitative and Qualitative Disclosures About Market Risk	33
Item 4	Controls and Procedures	34

Part II	Other Information

Item 1	Legal Proceedings	35
Item 1A	Risk Factors	35
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	35

Item 6	Exhibits	36

SIGNATURES		37

Table of Contents

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 its variants, including the Delta or Omicron variants and any future variants that may emerge, (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;

•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 in interest rates and increased 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;

Table of Contents

•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 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;

•cybersecurity incidents could disrupt our business and result in the compromise of confidential information;

•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;

•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.

Table of Contents

PART I. Financial Information

Item 1. Financial Statements

Physicians Realty Trust

Consolidated Balance Sheets

(In thousands, except share and per share data)


	March 31, 2022		December 31, 2021
	(unaudited)
ASSETS
Investment properties:
Land and improvements	$	235,216	$	235,453
Building and improvements	4,612,574		4,612,561
Tenant improvements	89,768		86,018
Acquired lease intangibles	498,221		498,221
	5,435,779		5,432,253
Accumulated depreciation	(867,799)		(821,036)
Net real estate property	4,567,980		4,611,217
Real estate held for sale	2,113		1,964
Right-of-use lease assets, net	234,345		235,483
Real estate loans receivable, net	93,176		117,844
Investments in unconsolidated entities	75,669		69,793
Net real estate investments	4,973,283		5,036,301
Cash and cash equivalents	2,729		9,876
Tenant receivables, net	5,783		4,948
Other assets	134,248		131,584
Total assets	$	5,116,043	$	5,182,709
LIABILITIES AND EQUITY
Liabilities:
Credit facility	$	249,075	$	267,641
Notes payable	1,464,358		1,464,008
Mortgage debt	179,886		180,269
Accounts payable	1,399		6,651
Dividends and distributions payable	56,689		57,246
Accrued expenses and other liabilities	79,013		86,254
Lease liabilities	104,739		104,957
Acquired lease intangibles, net	21,111		21,569
Total liabilities	2,156,270		2,188,595

Redeemable noncontrolling interests - partially owned properties	6,335		7,081

Equity:
Common shares, $0.01 par value, 500,000,000 common shares authorized, 225,293,058 and 224,678,116 common shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively	2,253		2,247
Additional paid-in capital	3,615,884		3,610,954
Accumulated deficit	(814,492)		(776,001)
Accumulated other comprehensive income (loss)	487		(892)
Total shareholders’ equity	2,804,132		2,836,308
Noncontrolling interests:
Operating Partnership	148,226		150,241
Partially owned properties	1,080		484
Total noncontrolling interests	149,306		150,725
Total equity	2,953,438		2,987,033
Total liabilities and equity	$	5,116,043	$	5,182,709

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

Table of Contents

Physicians Realty Trust

Consolidated Statements of Income

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


	Three Months Ended March 31,
		2022		2021
Revenues:
Rental and related revenues		$	126,676	$	107,955
Interest income on real estate loans and other		3,714		5,384
Total revenues		130,390		113,339
Expenses:
Interest expense		16,823		13,715
General and administrative		10,293		9,465
Operating expenses		41,752		33,934
Depreciation and amortization		47,260		37,976

Total expenses		116,128		95,090
Income before equity in loss of unconsolidated entities and loss on sale of investment properties, net:		14,262		18,249
Equity in loss of unconsolidated entities		(166)		(420)
Loss on sale of investment properties, net		(153)		(24)
Net income		13,943		17,805
Net income attributable to noncontrolling interests:
Operating Partnership		(692)		(459)
Partially owned properties (1)		(159)		(152)
Net income attributable to controlling interest		13,092		17,194
Preferred distributions		—		(13)
Net income attributable to common shareholders		$	13,092	$	17,181
Net income per share:
Basic		$	0.06	$	0.08
Diluted		$	0.06	$	0.08
Weighted average common shares:
Basic		225,069,208		210,529,698
Diluted		238,340,243		217,322,425

Dividends and distributions declared per common share		$	0.23	$	0.23

(1)Includes amounts attributable to redeemable noncontrolling interests.

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

Table of Contents

Physicians Realty Trust

Consolidated Statements of Comprehensive Income

(In thousands) (Unaudited)


	Three Months Ended March 31,
		2022		2021
Net income		$	13,943	$	17,805
Other comprehensive income:
Change in fair value of interest rate swap agreements, net		1,379		797
Total other comprehensive income		1,379		797
Comprehensive income		15,322		18,602
Comprehensive income attributable to noncontrolling interests - Operating Partnership		(761)		(480)
Comprehensive income attributable to noncontrolling interests - partially owned properties		(159)		(152)
Comprehensive income attributable to common shareholders		$	14,402	$	17,970

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

Table of Contents

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 Operating Partnership	—		—		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

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

Table of Contents

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 Interest in Operating Partnership	—		(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

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

Table of Contents

Physicians Realty Trust

Consolidated Statements of Cash Flows

(In thousands) (Unaudited)


	Three Months Ended March 31,
	2022		2021
Cash Flows from Operating Activities:
Net income	$	13,943	$	17,805
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization	47,260		37,976
Amortization of deferred financing costs	579		581
Amortization of lease inducements and above/below-market lease intangibles	1,575		1,143
Straight-line rental revenue/expense	(2,154)		(2,725)
Amortization of discount on unsecured senior notes	262		161
Amortization of above market assumed debt	(10)		(15)
Loss on sale of investment properties, net	153		24
Equity in loss of unconsolidated entities	166		420
Distributions from unconsolidated entities	2,002		1,761

Provision for bad debts	87		(49)
Non-cash share compensation	4,253		3,707


Change in operating assets and liabilities:
Tenant receivables	(791)		(1,937)
Other assets	(266)		2,766
Accounts payable	(5,252)		(4,349)
Accrued expenses and other liabilities	(7,272)		(15,968)
Net cash provided by operating activities	54,535		41,301
Cash Flows from Investing Activities:
Proceeds from sale of investment properties	1,804		436
Acquisition of investment properties, net	(10)		(1,135)
Investment in unconsolidated entities	(5,045)		37
Escrowed cash - acquisition deposits/earnest deposits	90		(311)
Capital expenditures on investment properties	(5,491)		(6,139)
Investment in real estate loans receivable	(904)		(7,398)
Repayment of real estate loans receivable	22,441		307


Leasing commissions	(704)		(1,044)

Net cash provided by (used in) investing activities	12,181		(15,247)
Cash Flows from Financing Activities:
Net proceeds from sale of common shares	5,032		52,432
Proceeds from credit facility borrowings	64,000		78,000
Repayment of credit facility borrowings	(83,000)		(88,000)


Principal payments on mortgage debt	(420)		(6,925)
Debt issuance costs	(10)		(7)

Dividends paid - shareholders	(52,858)		(49,406)
Distributions to noncontrolling interests - Operating Partnership	(2,739)		(1,307)
Preferred distributions paid - OP Unit holder	—		(303)
Contributions from noncontrolling interest	569		—
Distributions to noncontrolling interests - partially owned properties	(161)		(178)
Payments of employee taxes for withheld stock-based compensation shares	(4,092)		(3,996)
Purchase of Series A Preferred Units	—		(4,661)
Purchase of OP Units	(184)		(269)
Net cash used in financing activities	(73,863)		(24,620)
Net (decrease) increase in cash and cash equivalents	(7,147)		1,434
Cash and cash equivalents, beginning of period	9,876		2,515
Cash and cash equivalents, end of period	$	2,729	$	3,949
Supplemental disclosure of cash flow information—interest paid during the period	$	23,123	$	23,335
Supplemental disclosure of noncash activity—settlement of note receivable in exchange for Series A Preferred Units	$	—	$	20,646
Supplemental disclosure of noncash activity—change in fair value of interest rate swap agreements	$	1,379	$	797
Supplemental disclosure of noncash activity—conversion of loan receivable in connection to the acquisition of investment property	$	3,000	$	—

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

Table of Contents

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 March 31, 2022, 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 “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 “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 “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 Agents (the “ATM Program”). The Sales Agreement contemplates that, in addition to the issuance and sale of the Trust’s common shares through the Agents, the Trust may also enter into one or more forward sales agreements from time to time in the future with each of the Forward Purchasers.

During the quarter ended March 31, 2022, the Trust sold 259,977 common shares pursuant to the ATM Program, at a weighted average price of $18.93 per share, resulting in total net proceeds of approximately $4.9 million. As of March 31, 2022, the Trust has $326.3 million remaining available under the 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 March 31, 2022 and 2021 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 2021 Annual Report. The Company has consistently applied its accounting policies to all periods presented in these consolidated financial statements.

Noncontrolling Interests

As of March 31, 2022, the Trust held a 95.0% 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.

Redeemable Noncontrolling Interests - Partially Owned Properties

In connection with the Company’s acquisitions of the medical office building, 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 may, at the holders’ option, be redeemed at any time after May 1, 2023. Due to the redemption

Table of Contents

provision, which is outside of the control of the Trust, the Trust classifies the investment in the mezzanine section of its consolidated balance sheets. The Trust records the carrying amount of the redeemable noncontrolling interests at the greater of the carrying value or redemption value.

Dividends and Distributions

On March 18, 2022, 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 March 31, 2022. The dividend was paid on April 14, 2022 to common shareholders and holders of record of partnership interests of the Operating Partnership (“OP Units”) as of the close of business on March 31, 2022.

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.

Impairment of Intangible and Long-Lived Assets

The Company periodically evaluates its long-lived assets, primarily consisting of investments in real estate, for impairment indicators or whenever events or changes in circumstances indicate that the recorded amount of an asset may not be fully recoverable. The Company did not record an impairment charge for the three months ended March 31, 2022 or 2021.

Assets Held for Sale

The Company may sell properties from time to time for various reasons, including favorable market conditions. The Company classifies certain long-lived assets as held for sale once the criteria, as defined by GAAP, have been met. The Company classifies a real estate property as held for sale when: (i) management has approved the disposition of the property, (ii) the property is available for sale in its present condition, (iii) an active program to locate a buyer has been initiated, (iv) it is probable that the property will be disposed of within one year, (v) the property is being marketed at a reasonable price relative to its fair value, and (vi) it is unlikely that the disposition plan will significantly change or be withdrawn. Following the classification of a property as “held for sale,” no further depreciation or amortization is recorded for the asset and the book value of the asset is written down to the lower of carrying value or fair market value, less cost to sell. As of March 31, 2022, the Company classified one property as held for sale.

Real Estate Loans Receivable, Net

Real estate loans receivable consists of nine mezzanine loans, two term loans, and one construction loan as of March 31, 2022. 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 of a related medical office building, and construction loans are secured by mortgages on the land and the improvements as constructed. The reserve for loan losses was $0.1 million as of March 31, 2022.

Table of Contents

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, excluding assets classified as held for sale, are included in other assets and were approximately $97.9 million and $95.4 million as of March 31, 2022 and December 31, 2021, 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 $0.1 million for the three months ended March 31, 2022 and 2021.

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. We have certain tenants with absolute net leases. Under these lease agreements, the tenant is responsible for operating and building expenses and we do not recognize expense recoveries.

New Accounting Pronouncements

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting, that provides optional relief to applying reference rate reform to changing reference rates, contracts, hedging relationships, and other transactions that reference LIBOR, which has been discontinued at the end of 2021. The amendments in this update are effective immediately and may be applied through December 31, 2022. The Company will continue to use published LIBOR rates through June of 2023 at which time the Company does not expect the replacement benchmark to have a material impact on the Company’s consolidated financial statements.

In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The ASU is part of the FASB’s simplification initiative, which aims to reduce unnecessary complexity in U.S. GAAP. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021, with early adoption permitted. The Company adopted ASU 2020-06 on January 1, 2022, with no material effect on its consolidated financial statements.

Note 3. Investment and Disposition Activity

During the three months ended March 31, 2022, the Company acquired a 49% membership interest in three properties through the Davis Joint Venture for an aggregate purchase price of $8.0 million. The Company also funded $0.9 million of previous construction loan commitments, resulting in total investment activity of approximately $8.9 million as of March 31, 2022.

Dispositions

During the three months ended March 31, 2022, the Company sold one medical office building representing 9,997 square feet for approximately $2.0 million, realizing a net loss of approximately $0.2 million.

Table of Contents

Note 4. Intangibles

The following is a summary of the carrying amount of intangible assets and liabilities, excluding assets classified as held for sale if applicable, as of March 31, 2022 and December 31, 2021 (in thousands):


	March 31, 2022						December 31, 2021
	Cost		Accumulated Amortization		Net		Cost		Accumulated Amortization		Net
Assets
In-place leases	$	441,072	$	(212,925)	$	228,147	$	441,072	$	(201,885)	$	239,187
Above-market leases	$	57,149	$	(25,939)	$	31,210	$	57,149	$	(24,437)	$	32,712
Liabilities
Below-market leases	$	32,155	$	(11,044)	$	21,111	$	32,155	$	(10,585)	$	21,570

The following is a summary of acquired lease intangible amortization for the three month periods ended March 31, 2022 and 2021 (in thousands):


	Three Months Ended March 31,
		2022		2021
Amortization expense related to in-place leases		$	11,040	$	8,314
Decrease in rental income related to above-market leases		1,502		927
Increase in rental income related to below-market leases		459		322

Future aggregate net amortization of acquired lease intangibles, excluding one asset classified as held for sale, as of March 31, 2022, is as follows (in thousands):


	Net Decrease in Revenue		Net Increase in Expenses
2022	$	2,585	$	31,535
2023	3,157		38,805
2024	2,961		33,382
2025	2,431		27,935
2026	1,281		21,818
Thereafter	(2,316)		74,672
Total	$	10,099	$	228,147

As of March 31, 2022, the weighted average remaining amortization period is 8 years for in-place, above market tenant lease, and leasehold interest intangibles assets and 16 years for below market tenant lease intangibles.

Table of Contents

Note 5. Other Assets

Other assets consisted of the following, excluding assets classified as held for sale if applicable, as of March 31, 2022 and December 31, 2021 (in thousands):


	March 31, 2022		December 31, 2021
Straight line rent receivable, net	$	97,925	$	95,443
Leasing commissions, net	11,877		11,627
Prepaid expenses	8,446		8,910
Lease inducements, net	8,068		8,293
Escrows	1,517		1,780
Notes receivable, net	1,211		1,097
Interest rate swap	908		—
Other	4,296		4,434
Total	$	134,248	$	131,584

Note 6. Debt

The following is a summary of debt as of March 31, 2022 and December 31, 2021 (in thousands):


	March 31, 2022		December 31, 2021
Fixed interest mortgage notes (1)	$	75,094	$	75,395
Variable interest mortgage note (2)	105,510		105,629
Total mortgage debt	180,604		181,024
$1.0 billion unsecured revolving credit facility bearing variable interest of LIBOR plus 0.85%, due September 2025	255,000		274,000
$400 million senior unsecured notes bearing fixed interest of 4.30%, due March 2027	400,000		400,000
$350 million senior unsecured notes bearing fixed interest of 3.95%, due January 2028	350,000		350,000
$500 million senior unsecured notes bearing fixed interest of 2.625%, due November 2031	500,000		500,000
$150 million senior unsecured notes bearing fixed interest of 4.03% to 4.74%, due January 2023 to 2031	150,000		150,000
$75 million senior unsecured notes bearing fixed interest of 4.09% to 4.24%, due August 2025 to 2027	75,000		75,000
Total principal	1,910,604		1,930,024
Unamortized deferred financing costs	(9,124)		(9,694)
Unamortized discounts	(8,161)		(8,423)
Unamortized fair value adjustments	—		11
Total debt	$	1,893,319	$	1,911,918

(1)As of March 31, 2022, fixed interest mortgage notes bear interest from 3.33% to 4.83%, due in 2022 and 2024, with a weighted average interest rate of 4.05%. As of December 31, 2021, fixed interest mortgage notes bear interest from 3.33% to 4.83%, due in 2022 and 2024, with a weighted average interest rate of 4.05%. One mortgage bears interest at LIBOR + 1.90% and the Trust entered into a pay-fixed receive-variable interest rate swap, fixing the LIBOR component of this rate at 1.43%. The notes are collateralized by three properties with a net book value of $145.4 million as of March 31, 2022 and $151.9 million as of December 31, 2021.

(2)Variable interest mortgage notes bear variable interest of LIBOR + 2.75% and SOFR + 1.85% for a weighted average interest rate of 2.19% and 1.95% as of March 31, 2022 and December 31, 2021, respectively. The notes are due in 2026 and 2028 and collateralized by four properties with a net book value of $303.1 million as of March 31, 2022 and $307.2 million as of December 31, 2021.

On September 24, 2021, the Operating Partnership, as borrower, and the Trust, as guarantor, executed a Third Amended and Restated Credit Agreement (the “Credit Agreement”) which extended the maturity date of the revolving credit facility under the Credit Agreement to September 24, 2025 and reduced the interest rate margin applicable to borrowings. The

Table of Contents

Credit Agreement includes an unsecured revolving credit facility of $1.0 billion and contains a term loan feature of $250.0 million, bringing total borrowing capacity to $1.3 billion. The Credit Agreement also includes a swingline loan commitment for up to 10% of the maximum principal amount and provides an accordion feature allowing the Operating Partnership to increase borrowing capacity by up to an additional $500.0 million, subject to customary terms and conditions, resulting in a maximum borrowing capacity of $1.75 billion. The revolving credit facility under the Credit Agreement also includes two, six-month extension options.

Borrowings under the Credit Agreement bear interest on the outstanding principal amount at an adjusted LIBOR rate, which is based on the Trust’s investment grade rating under the Credit Agreement. As of March 31, 2022, the Trust had investment grade ratings of BBB from S&P, Baa2 from Moody’s, and BBB from Fitch. As such, borrowings under the revolving credit facility of the Credit Agreement accrue interest on the outstanding principal at a rate of LIBOR + 0.85%. The Credit Agreement includes a facility fee equal to 0.20% per annum, which is also determined by the Trust’s investment grade rating.

On October 13, 2021, the Operating Partnership issued $500.0 million in aggregate principle amount of 2.625% Senior Notes due November 1, 2031 (the “2031 Senior Notes”) in a public offering and the Company used the proceeds from the 2031 Senior Notes to pay off a $250.0 million term loan feature of the Credit Agreement. The Operating Partnership simultaneously terminated the existing pay-fixed receive-variable rate swaps associated with the full term loan borrowing of $250.0 million. As part of the termination, the Company made total cash payments of $3.3 million to the counterparties of the swap agreements. As defined by the Credit Agreement, the term loan feature is no longer available to the Company.

Base Rate Loans, Adjusted LIBOR Rate Loans, and Letters of Credit (each, as defined in the Credit Agreement) will be subject to interest rates, based upon the Trust’s investment grade rating as follows:


Credit Rating	Applicable Margin for Revolving Loans: LIBOR Rate Loans and Letter of Credit Fee	Applicable Margin for Revolving Loans: Base Rate Loans		Applicable Margin for Term Loans: LIBOR Rate Loans and Letter of Credit Fee	Applicable Margin for Term Loans: Base Rate Loans
At Least A- or A3	LIBOR + 0.725%	—	%	LIBOR + 0.85%	—	%
At Least BBB+ or Baa1	LIBOR + 0.775%	—	%	LIBOR + 0.90%	—	%
At Least BBB or Baa2	LIBOR + 0.85%	—	%	LIBOR + 1.00%	—	%
At Least BBB- or Baa3	LIBOR + 1.05%	0.05	%	LIBOR + 1.25%	0.25	%
Below BBB- or Baa3	LIBOR + 1.40%	0.40	%	LIBOR + 1.65%	0.65	%

The Credit Agreement contains financial covenants that, among other things, require compliance with leverage and coverage ratios and maintenance of minimum tangible net worth, as well as covenants that may limit the Trust’s and the Operating Partnership’s ability to incur additional debt, grant liens, or make distributions. The Company may, at any time, voluntarily prepay any revolving or term loan under the Credit Agreement in whole or in part without premium or penalty. As of March 31, 2022, the Company was in compliance with all financial covenants related to the Credit Agreement.

The Credit Agreement includes customary representations and warranties by the Trust and the Operating Partnership and imposes customary covenants on the Operating Partnership and the Trust. The Credit Agreement also contains customary events of default, and if an event of default occurs and continues, the Operating Partnership is subject to certain actions by the administrative agent, including without limitation, the acceleration of repayment of all amounts outstanding under the Credit Agreement.

As of March 31, 2022, the Company had $255.0 million of borrowings outstanding under its unsecured revolving credit facility. As defined by the Credit Agreement, the current unencumbered borrowing base allows the Company to borrow an additional $745.0 million before reaching the maximum allowed under the credit facility.

Notes Payable

As of March 31, 2022, the Company had $1.5 billion aggregate principal amount of senior notes issued and outstanding by the Operating Partnership, comprised of $15.0 million maturing in 2023, $25.0 million maturing in 2025, $70.0 million maturing in 2026, $425.0 million maturing in 2027, $395.0 million maturing in 2028, and $545.0 million maturing in 2031.

Certain properties have mortgage debt that contains financial covenants. As of March 31, 2022, the Trust was in compliance with all mortgage debt financial covenants.

Table of Contents

Scheduled principal payments due on consolidated debt as of March 31, 2022, are as follows (in thousands):


2022	$	15,674
2023	16,008
2024	59,719
2025	280,476
2026	170,476
Thereafter	1,368,251
Total Payments	$	1,910,604

As of March 31, 2022, the Company had total consolidated indebtedness of approximately $1.9 billion. The weighted average interest rate on consolidated indebtedness was 3.28% (based on the 30-day LIBOR rate of 0.40% and a SOFR rate of 0.29% as of March 31, 2022).

For the three month periods ending March 31, 2022 and 2021, the Company incurred interest expense on its debt, exclusive of deferred financing cost amortization, of $16.2 million and $13.1 million, respectively.

Note 7. Derivatives

In the normal course of business, a variety of financial instruments are used to manage or hedge interest rate risk. The Company has implemented ASC 815, Derivatives and Hedging (“ASC 815”), which establishes accounting and reporting standards requiring that all derivatives, including certain derivative instruments embedded in other contracts, be recorded as either an asset or a liability measured at their fair value unless they qualify for a normal purchase or normal sales exception.

When specific hedge accounting criteria are not met, ASC 815 requires that changes in a derivative’s fair value be recognized currently in earnings. Changes in the fair market values of the Company’s derivative instruments are recorded in the consolidated statements of income if such derivatives do not qualify for, or the Company does not elect to apply for, hedge accounting. As a result of the Company’s adoption of ASU 2017-12 as of January 1, 2019, the entire change in the fair value of its derivatives designated and qualified as cash flow hedges are recorded in accumulated other comprehensive income on the consolidated balance sheets and are subsequently reclassified into earnings in the period in which the hedged forecasted transaction affects earnings.

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 March 31, 2022, the Company had one outstanding interest rate swap contract designated as a cash flow hedge of interest rate risk. See Note 2 (Summary of Significant Accounting Policies) of the 2021 Annual Report for a further discussion of our derivatives.

The following table summarizes the location and aggregate fair value of the interest rate swaps on the Company’s consolidated balance sheets (in thousands):


Total notional amount		$	36,050
Effective fixed interest rate	(1)	3.33		%
Effective date		10/31/2019
Maturity date		10/31/2024
Asset balance at March 31, 2022 (included in Other assets)		$	908
Liability balance at December 31, 2021 (included in Accrued expenses and other liabilities)		$	452

(1)1.43% effective swap rate plus 1.90% spread per Credit Agreement.

Table of Contents

Note 8. Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities consisted of the following as of March 31, 2022 and December 31, 2021 (in thousands):


	March 31, 2022		December 31, 2021
Prepaid rent	$	24,919	$	22,714
Real estate taxes payable	17,968		23,487
Accrued interest	11,814		18,799
Accrued expenses	9,137		5,960
Security deposits	4,278		4,234
Tenant improvement allowances	1,857		1,857
Accrued incentive compensation	1,458		1,784
Interest rate swap	—		452


Other	7,582		6,967
Total	$	79,013	$	86,254

Note 9. Stock-based Compensation

The Company follows ASC 718, Compensation - Stock Compensation (“ASC 718”), in accounting for its share-based payments. This guidance requires measurement of the cost of employee services received in exchange for stock compensation based on the grant-date fair value of the employee stock awards. This cost is recognized as compensation expense ratably over the employee’s requisite service period. Incremental compensation costs arising from subsequent modifications of awards after the grant date must be recognized when incurred. Share-based payments classified as liability awards are marked to fair value at each reporting period. Any common shares issued pursuant to the Company's incentive equity compensation and employee stock purchase plans will result in the Operating Partnership issuing OP Units to the Trust on a one-for-one basis, with the Operating Partnership receiving the net cash proceeds of such issuances.

Certain of the Company’s employee stock awards vest only upon the achievement of performance targets. ASC 718 requires recognition of compensation cost only when achievement of performance conditions is considered probable. Consequently, the Company’s determination of the amount of stock compensation expense requires judgment in estimating the probability of achievement of these performance targets. Subsequent changes in actual experience are monitored and estimates are updated as information is available.

In connection with the IPO, the Trust adopted the 201