Healthcare Realty Trust Annual Report 2014

Plain-text annual report

2014 Healthcare Realty Trust Annual Report to Shareholders 2014 Annual Report to Shareholders Letter to Shareholders In 2014, Healthcare Realty Trust Incorporated continued to is projected to reach 19.3% of GDP by 2023. We believe execute its strategy of investing in medical office and outpa- Healthcare Realty’s investments will benefit not only from tient facilities. Healthcare Realty’s low business-risk model this increased spending, but also from the need for more phy- and its established relationships with investment-grade health sicians and outpatient facilities to treat the growing number systems have yielded a distinct portfolio of outpatient facili- of insured patients, as well as elderly patients that histori- ties with stable tenants, superior rent coverages and sustain- cally require more frequent care. The population cohort over able growth. Revenue and FFO growth for the year showed positive gains from strong internal operations, recently completed devel- opments and selective acquisitions. After streamlining the portfolio over the past several years, we continue to pursue opportunities to enhance the Company’s internal growth. Healthcare Realty’s operating metrics and active leasing reflected healthy momentum for the year. Occupancy in the same store portfolio remained consistent at 91%, and tenant the age of 65 is expected to surge from 14.9% of the popula- tion in 2015 to 20.6% by 2030; and those over 65 years of age visit physician offices 6.9 times each year, compared to 2.3 times for those under 45 years old. Moreover, contrary to common perception and negative headlines, physician income levels remain on the rise. Occupancy costs for Healthcare Realty’s physician tenants are generally only five percent of a typical practice’s revenue, thereby providing a healthy buffer against potential reimbursement changes. retention increased to approximately 89% in the multi-ten- Despite the tumultuous rollout and ongoing legal and ant properties at year-end. Annual contractual rent growth political battles concerning the Affordable Care Act, health among in-place multi-tenant leases averaged 3% in 2014, systems are looking beyond its costly initial phase of imple- and revenue per occupied square foot increased 2.1% over mentation. They are evaluating their assets to strategically the prior year. We believe the Company has a higher propensity for lease renewals and steady performance, with over 80% of our $3.2 billion in properties associated with credit-rated health systems and an average lease size of only 4,550 square feet in the multi-tenant properties. With stable tenants, aligned with well-established health systems, and consistent revenue increases combined with disciplined expense management, we foresee meaningful growth in the core portfolio and a positive backdrop to the Company’s investment activity. Healthcare spending nationwide accounted for 17.4% of the nation’s gross domestic product (GDP) in 2013 and position themselves for the future of outcome-based, lower- cost care with shared risk and reward payment models. The level of cost-savings these models will generate through accountable care organizations and other forms of bundled pay systems, remains to be seen. However, health systems are already expanding their outpatient services as a definitive, coordinated means to lower their cost of care. Furthermore, health systems are actively acquiring physician practices to create clinically-integrated networks that allow them to participate in these payment models, as well as increase their referral base. According to the American Hospital Association, outpatient services accounted for 25% of hospi- tals’ overall gross revenues in 1992. By 2012, hospitals gen- erated 44% of their revenue from outpatient care. 2014 Letter to Shareholders Healthcare employment reflects similar trends. The pace of Momentum at the Company’s development conversion prop- job growth in healthcare services picked up pace toward the erties continued in 2014, achieving occupancy of 80% and end of 2014, with the largest gains in outpatient settings. For quarterly net operating income of $4.2 million by year-end. the twelve months that ended in January, the ambulatory Having reached these milestones, and with visible progress care workforce grew by 241,600 jobs, or 3.7%, versus hos- ahead, these properties will shift to the stabilized portfolio in pital employment growth of 56,200 jobs, or 1.2%, a closely 2015, where they will contribute to the Company’s internal watched indicator of anticipated healthcare spending. growth profile. In the years ahead, the Company is well- It is in the context of this changing healthcare environment that we believe Healthcare Realty is positioned to acceler- positioned to initiate hospital-anchored, on-campus develop- ments—primarily repeat business based on proven execution. ate the internal growth of its core portfolio, enabling the Healthcare Realty remained disciplined in its investment and Company to be selective in prospective acquisitions and capital markets activity in 2014. The Company raised $75.7 opportunities for hospital-directed, outpatient facility devel- million of equity during the year through its at-the-market opment. With reimbursement policy now propelling out- equity program, which allowed the Company to accre- patient expansion, discussions with health systems for new tively match-fund its 2014 acquisitions. During 2014, the outpatient facilities are more active than we have seen in Company realized a full year’s benefit of the prior year’s debt some time. Healthcare Realty’s acquisitions in 2014 reflected our pursuit of value-creation—not mere top-line growth—by investing in facilities that are well-located, on leading hospital campuses, with low fungibility and embedded growth, all of which reduce risk and enhance long-term returns. The Company invested approximately $83.1 million in six medical office buildings. The properties are 97% leased, on average, at ini- tial rates of return above our cost of capital and have strong refinancings, which lowered the Company’s annual interest expense and reduced the effective interest rate on its debt to 4.75%. Those debt transactions, coupled with the perfor- mance of the existing portfolio and occupancy gains in the development conversion properties, improved the Company’s fixed charge coverage to 2.8 times and debt-to-EBITDA ratio to 6.4 times. Healthcare Realty’s credit metrics should con- tinue to improve in 2015 as we realize the growth from our core portfolio, new investments, and recent developments. contractual rent increases. We continue to see opportunities As we begin our third decade, Healthcare Realty’s long-held for investment in 2015 in properties that meet our criteria investment strategy remains focused and relevant to the cur- and will enhance the Company’s low business-risk profile. rent trends and changes in the healthcare industry, keeping In addition, in 2014, we improved the long-term perfor- mance of the Company’s portfolio by divesting nine assets, totaling $34.9 million, including eight smaller, off-campus medical office buildings, and re-investing the proceeds in newer, on-campus medical office buildings with better long- term growth prospects. the Company’s cash flow predictable and providing the foun- dation for growth in the years to come. The Company’s port- folio of well-located outpatient medical facilities, affiliated with respected healthcare providers, along with its financial and managerial resources, have and will continue to deliver lasting value to its shareholders. Sincerely yours, David R. Emery Chairman of the Board and Chief Executive Officer ANNUAL REPORT TO SHAREHOLDERS | 3 Selected Properties West Norman Professional Building Oklahoma City, Oklahoma First Hill Medical Building Seattle, Washington 425 University Boulevard Round Rock, Texas Fridley Medical Center Minneapolis, Minnesota Hale Pawa‘a Honolulu, Hawai‘i 17 Davis Medical Building Tampa, Florida Management Team B OA RD OF D IR ECTORS LEFT TO RIGHT, STANDING Dan S. Wilford Retired President and Chief Executive Officer, Memorial Hermann Healthcare System J. Knox Singleton President and Chief Executive Officer, Inova Health Systems David R. Emery Chairman of the Board and Chief Executive Officer, Healthcare Realty Trust Incorporated Roger O. West Retired General Counsel, Healthcare Realty Trust Incorporated LEFT TO RIGHT, SEATED C. Raymond Fernandez, M.D. Retired Chief Executive Officer, Piedmont Clinic Edwin B. Morris, III Managing Director, Morris & Morse Company, Inc. Bruce D. Sullivan Retired Audit Partner, Ernst & Young, LLP Errol L. Biggs, Ph.D. Director, Graduate Programs in Health Administration, University of Colorado EXE CUT IVE O FFI CER S LEFT TO RIGHT Scott W. Holmes Executive Vice President and Chief Financial Officer B. Douglas Whitman, II Executive Vice President, Corporate Finance David R. Emery Chief Executive Officer Todd J. Meredith Executive Vice President, Investments John M. Bryant, Jr. Executive Vice President and General Counsel MANAGEM ENT TEA M Marc Albright Vice President, Taxes and Risk Management Andrew Loope Senior Vice President and Corporate Counsel Anne Barbour Vice President, Leasing Amy Byrd Vice President, Management Amanda Callaway Vice President, Accounting Cory McLeod Associate Vice President, Management Revell Michael Vice President, Marketing Becca Oberlander Vice President, Human Resources Steve Cox Senior Vice President and Assistant General Counsel Ivy Parry Associate Vice President, Management Ryan Crowley Vice President, Acquisitions Burney Dawkins Vice President, Dispositions Robert Dillard Vice President, Technology Services Amy Poley Vice President, Leasing Sushil Puria Vice President, Acquisitions Nancy Redden Associate Vice President, Management Kris Douglas Senior Vice President, Acquisitions and Dispositions Connie Seal Vice President, Tax Joe Fogarty Associate Vice President, Investments Glenn Herndon Vice President and Corporate Controller Rob Hull Senior Vice President, Development Jessica King Vice President, Asset Management Rick Langreck Senior Vice President and Treasurer Matt Lederer Vice President, Development Greg Smith Associate Vice President, Design and Construction Tim Staggs Vice President, Internal Audit and Compliance Steve Standifer Vice President, Design and Construction Kim Sullivan Associate Vice President, Taxes and Risk Management Rita Todd Corporate Secretary Julie Wilson Senior Vice President, Leasing and Management ANNUAL REPORT TO SHAREHOLDERS | 5 Property Locations 2014 Review As of December 31, 2014, Healthcare Realty Trust had investments of approximately $3.2 billion in 199 real estate properties and mortgages. The Company’s 198 owned real estate properties are located in 30 states, totaling approximately 14.2 million square feet. In addition, the Company provided property management services to approximately 9.5 million square feet nationwide. (CHI) (CHI) (Ascension) $3.2B 14.2M 83% INVESTED IN 198 PROPERTIES SQ FT OWNED IN 30 STATES MULTI-TENANT ASSET M IX 84% 199 IN V E S $3.2B Total Assets MOB/OUTPATIENT INPATIENT OTHER T M E N T S 2 % 14% Portfolio TOP MA RKE TS TOP MA RKE TS SQ FT % 1 Dallas - Fort Worth 2,348,811 16.5% 2 Charlotte 3 Nashville 4 Denver - Colorado Springs 5 Houston 6 Richmond 7 8 Indianapolis Los Angeles 9 Des Moines 10 11 San Antonio Seattle - Bellevue 12 Memphis 13 Roanoke 14 Austin 15 Honolulu 16 Phoenix 17 Oklahoma City 18 Chicago 19 Washington, DC 20 Miami 820,457 762,708 724,410 591,027 558,801 558,694 551,371 532,610 523,597 521,451 515,876 466,204 417,820 298,427 288,511 268,860 243,491 241,739 215,980 5.8% 5.4% 5.1% 4.2% 3.9% 3.9% 3.9% 3.7% 3.7% 3.7% 3.6% 3.3% 2.9% 2.1% 2.0% 1.9% 1.7% 1.7% 1.5% Other (33 markets) 2,778,093 19.5% Total 14,228,938 100.0% TOTAL ASSETS W ITH N EW I NV E ST M E NTS $276M $88M $389M $332M $179M B 6 2 $ . B 8 2 $ . B 0 3 $ . B 2 3 $ . B 2 3 $ . 2010 2011 2012 2013 2014 NEW INVESTMENTS: ACQUISITIONS DEVELOPMENTS ANNUAL REPORT TO SHAREHOLDERS | 7 Corporate Information CORPORATE AD D RE SS Healthcare Realty Trust Incorporated 3310 West End Avenue, Suite 700 Nashville, Tennessee 37203 Phone: 615.269.8175 Fax: 615.269.8461 www.healthcarerealty.com communications@healthcarerealty.com INDEPENDEN T R EGI STER ED P U B L IC ACCOUNTIN G FI RM BDO USA, LLP 414 Union Street, Suite 1800 Nashville, Tennessee 37219 TRANSFE R AG ENT Wells Fargo Shareowner Services 1110 Centre Pointe Curve, Suite 101 Mendota Heights, Minnesota 55120-4100 1.800.468.9716 www.wellsfargo.com/shareownerservices CUSIP NUMBE RS Common Shares: 421946104 Senior Notes Due 2017: 42225BAA4 Senior Notes Due 2021: 421946AG9 Senior Notes Due 2023: 421946AH7 COMPARATI VE PER FOR M AN C E GRA P H E U L A V X E D N I 250 225 200 175 150 125 100 75 12.31.09 12.31.10 12.31.11 12.31.12 12.31.13 12.31.14 TOTA L RE TURN PERFO R MANC E Healthcare Realty Trust Incorporated Russell 3000 NAREIT All Equity REIT Index DI VID END REI NVE STMENT P LAN A Dividend Reinvestment Plan is offered as a convenience to shareholders of record who wish to increase their holdings in the Company. Additional shares may be purchased, without service or sales charge, through automatic reinvestment of quarterly cash dividends. For information write Wells Fargo Shareowner Services, P.O. Box 64856, St. Paul, Minnesota 55164-0856, or call 1.800.468.9716. Information may also be obtained at the transfer agent’s website, www.shareowneronline.com. DI RE CT DEP OSIT O F DIV IDE N DS Direct deposit of dividends is offered as a convenience to shareholders of record. For information, write Wells Fargo Shareowner Services, P.O. Box 64856, St. Paul, Minnesota 55164-0856, or call 1.800.468.9716. Information may also be obtained at the transfer agent’s website, www.shareowneronline.com. FOR M 10- K The Company has filed an Annual Report on Form 10-K for the year ended December 31, 2014, with the Securities and Exchange Commission. Shareholders may obtain a copy of this report, without charge, by writing: Investor Relations, Healthcare Realty Trust Incorporated, 3310 West End Avenue, Suite 700, Nashville, Tennessee 37203. Or, via e-mail: communications@healthcarerealty.com. CERTI FI CATI ON S The Company’s chief executive officer and chief financial officer have filed the certifications required by Section 302 of the Sarbanes-Oxley Act of 2002 with the Securities and Exchange Commission as exhibits to the Company’s Annual Report on Form 10-K. In addition, the Company’s chief executive officer certified to the New York Stock Exchange in 2014 that he was not aware of any violation by the Company of the New York Stock Exchange’s corporate governance listing standards. A NN UA L SHA RE HOLDER S M EET I NG The annual meeting of shareholders will be held on May 12, 2015, at 10:00 a.m. Central Time at 3310 West End Avenue, Suite 700, Nashville, Tennessee. INDEX PERIOD ENDING 12/31/09 12/31/10 12/31/11 12/31/12 12/31/13 12/31/14 Healthcare Realty Trust Incorporated Russell 3000 NAREIT All Equity REIT Index 100.00 100.00 100.00 104.22 116.93 127.95 97.45 118.13 138.55 132.73 137.52 165.84 123.53 183.66 170.58 166.39 206.72 218.38 2014 Form 10-K Table of Contents PART I Item 1 Item 1A Item 1B Item 2 Item 3 Item 4 PART II Item 5 Item 6 Item 7 Business Risk Factors Unresolved Staff Comments Properties Legal Proceedings Mine Safety Disclosures Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management’s Discussion and Analysis of Financial Condition and Results of Operations Item 7A Quantitative and Qualitative Disclosures About Market Risk Item 8 Item 9 Financial Statements and Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 9A Controls and Procedures PART III Item 10 Item 11 Item 12 Item 13 Item 14 Item 15 SIGNATURES Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accountant Fees and Services Exhibits and Financial Statement Schedules Page 1 6 13 13 13 13 14 16 17 40 41 86 86 88 89 89 89 89 90 94 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One)  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: December 31, 2014  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period to OR Form 10-K Commission File Number: 001-11852 HEALTHCARE REALTY TRUST INCORPORATED (Exact name of Registrant as specified in its charter) Maryland (State or other jurisdiction of Incorporation or organization) 62-1507028 (I.R.S. Employer Identification No.) 3310 West End Avenue Suite 700 Nashville, Tennessee 37203 (Address of principal executive offices) (615) 269-8175 (Registrant’s telephone number, including area code) Securities Registered Pursuant to Section 12(b) of the Act: Common stock, $0.01 par value per share Title of Each Class Name of Each Exchange on Which Registered New York Stock Exchange Securities Registered Pursuant to Section 12(g) of the Act: None (Title of Class) Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  No  Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  No  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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  No  Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b -2 of the Exchange Act. (Check one): Large accelerated filer  Non-accelerated filer  (Do not check if a smaller reporting company) Accelerated filer  Smaller reporting company  Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes  No  The aggregate market value of the shares of common stock (based upon the closing price of these shares on the New York Stock Exchange, Inc. on June 30, 2014) of the Registrant held by non-affiliates on June 30, 2014 was approximately $2,414,583,343. As of January 31, 2015, 99,409,062 shares of the Registrant’s common stock were outstanding. Portions of the Registrant’s definitive Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 12, 2015 are DOCUMENTS INCORPORATED BY REFERENCE incorporated by reference into Part III of this Report. PART I Item 1. Business Overview Healthcare Realty Trust Incorporated (“Healthcare Realty” or the “Company”) was incorporated in Maryland in 1992, listed on the New York Stock Exchange in 1993, and is a self-managed and self-administered real estate investment trust (“REIT”) that owns, acquires, manages, finances and develops income-producing real estate properties associated primarily with the delivery of outpatient healthcare services throughout the United States. The Company operates so as to qualify as a REIT for federal income tax purposes. As a REIT, the Company is not subject to corporate federal income tax with respect to taxable income distributed to its stockholders. See “Risk Factors” in Item 1A for a discussion of risks associated with qualifying as a REIT. The Company believes that its liquidity and sources of capital are adequate to satisfy its cash requirements. The Company expects to meet its liquidity needs through cash on hand, cash flows from operations, equity and debt issuances in the public or private markets and borrowings under commercial credit facilities. Real Estate Properties The Company had investments of approximately $3.3 billion in 199 real estate properties, mortgages, land held for development and corporate property at December 31, 2014. The Company provided property management services for 135 healthcare-related properties nationwide, totaling approximately 9.5 million square feet as of December 31, 2014. The Company’s real estate property investments by geographic area are detailed in Note 2 to the Consolidated Financial Statements. (Dollars and square feet in thousands) Owned properties: Multi-tenant leases Medical office/outpatient Other Single-tenant net leases Medical office/outpatient Inpatient Other Land held for development Corporate property Total owned properties Mortgage notes receivable: Medical office/outpatient Total real estate investments Number of Investments Gross Investment Square Feet Amount % Footage % 157 4 161 $ 2,443,784 61,634 2,505,418 74.9% 11,433 414 76.8% 11,847 1.9% 16 14 7 37 — — — 198 261,643 443,920 24,768 730,331 17,054 5,476 22,530 3,258,279 8.0% 13.6% 0.8% 22.4% 1,025 1,131 226 2,382 0.5% 0.2% 0.7% — — — 99.9% 14,229 1 1 199 1,900 1,900 $ 3,260,179 0.1% 0.1% — — 100.0% 14,229 80.4% 2.9% 83.3% 7.2% 7.9% 1.6% 16.7% — — — 100.0% — — 100.0% 1 The following table details occupancy of the Company’s owned properties by facility type as of December 31, 2014 and 2013: Medical office/outpatient Inpatient Other Total Investment as of Dec. 31, 2014 (1) (in thousands) Percentage of Square Feet (1) $ $ 2,705,427 443,920 86,402 3,235,749 87.6% 7.9% 4.5% 100.0% Occupancy as of December 31, (1) 2014 85.2% 2013 83.8% 100.0% 100.0% 85.8% 86.4% 83.4% 85.1% ______ (1) The investment and percentage of square feet columns include all owned real estate properties excluding land held for development and corporate property. The occupancy columns represent the percentage of total rentable square feet leased (including month-to-month and holdover leases), excluding properties classified as held for sale (two properties as of December 31, 2014 and three properties as of December 31, 2013). Properties under property operating or single-tenant net lease agreements are included at 100% occupancy. Upon expiration of these agreements, occupancy reflects underlying tenant leases in the building. Revenue Concentrations The Company’s real estate portfolio is leased to a diverse tenant base. For the year ended December 31, 2014, the Company had one tenant that accounted for 10% or more of the Company’s consolidated revenues including revenues from discontinued operations and that was Baylor Scott &White Health at 10%. The Company had approximately 144 leases with this tenant in 22 buildings throughout north and central Texas, including buildings at eight different hospital campuses. Expiring Leases As of December 31, 2014, the weighted average remaining years to maturity pursuant to the Company’s long-term single-tenant net leases, property operating agreements, and multi-tenant occupancy leases were approximately 5.1 years, with expirations through 2033. The table below details the Company’s lease maturities as of December 31, 2014, excluding two properties classified as held for sale. Expiration Year 2015 $ 2016 2017 2018 2019 2020 2021 2022 2023 2024 Thereafter Number of Leases Annualized Minimum Rents (1) (in thousands) Multi-Tenant Properties Single-Tenant Net Lease Properties Average Percentage of Revenues Total Square Feet 40,272 28,809 38,499 29,758 38,290 16,957 12,534 15,362 16,292 10,615 43,820 461 309 313 243 243 79 75 63 88 50 24 — 2 5 — 9 1 2 2 1 2 13.8% 1,580,574 9.9% 1,089,280 13.2% 10.2% 13.2% 5.8% 4.3% 5.3% 5.6% 3.7% 1,576,840 1,179,933 1,521,267 632,184 515,173 628,481 640,782 450,941 12 15.0% 1,384,835 ______ (1) Represents the annualized minimum rents on leases in-place as of December 31, 2014, excluding the impact of potential lease renewals, future increases in rent, property lease guaranty revenue under property operating agreements and straight- line rent that may be recognized relating to the leases. Mortgage Note Receivable The Company’s $1.9 million mortgage note receivable is classified as held-for-investment based on management’s intent and ability to hold the note until maturity. The loan is carried at amortized cost and the Company’s mortgage note receivable is secured by an existing building. See Note 5 to the Consolidated Financial Statements for details of this mortgage note. 2 Business Strategy The Company owns and operates healthcare properties that facilitate the delivery of care in a lower-cost, primarily outpatient setting. To execute its strategy, the Company integrates owning, managing, financing and developing such properties and provides a broad spectrum of real estate services including leasing, property management, acquisition and development. The Company generates stable, growing income and lowers the long-term risk profile of its portfolio of properties by focusing on facilities located on or near the campuses of large, acute care hospitals associated with leading health systems. The Company reduces financial and operational risk by owning properties in diverse geographic locations with a diversity of tenants, including over 30 physician specialties, as well as surgery, imaging, cancer and diagnostic centers. 2014 Acquisitions and Dispositions The Company acquired six properties during 2014 for a total purchase price of $83.1 million including cash consideration of $64.9 million and the assumption of debt of $18.2 million (excluding $1.4 million fair value adjustment premiums recorded upon acquisition). In addition, the Company acquired ownership of a multi-tenanted office building in Iowa in satisfaction of a $40.0 million note receivable and purchased an $85.4 million property in Oklahoma. The purchase price for the property in Oklahoma was offset by the repayment of an $81.2 million construction mortgage note receivable provided by the Company to fund the development of the property prior to acquisition and is further discussed in "Investing Activities" in "Liquidity and Capital Resources". The Company disposed of nine medical office buildings during 2014 for a total sales price of $34.9 million, including cash consideration of $32.3 million, the origination of a $1.9 million Company-financed mortgage note receivable and $0.7 million of closing costs and adjustments. See the Company's discussion regarding the 2014 acquisitions and dispositions activity in Note 4 to the Consolidated Financial Statements. Competition The Company competes for the acquisition and development of real estate properties with private investors, healthcare providers, other REITs, real estate partnerships and financial institutions, among others. The business of acquiring and developing new healthcare facilities is highly competitive and is subject to price, construction and operating costs, and other competitive pressures. Some of the Company's competitors may have lower costs of capital. The financial performance of all of the Company’s properties is subject to competition from similar properties. The extent to which the Company’s properties are utilized depends upon several factors, including the number of physicians using or referring patients to an associated healthcare facility, healthcare employment, competitive systems of healthcare delivery, and the area’s population, size and composition. Private, federal and state health insurance programs and other laws and regulations may also have an effect on the utilization of the properties. Virtually all of the Company’s properties operate in a competitive environment, and patients and referral sources, including physicians, may change their preferences for a healthcare facility from time to time. Government Regulation The facilities owned by the Company are utilized by medical tenants which are required to comply with extensive regulation at the federal, state, and local levels, including the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, the "Health Reform Law") and laws intended to combat fraud and waste such as the Anti-Kickback Statute, Stark Law, False Claims Act and Health Insurance Portability and Accountability Act of 1996. These laws and regulations establish, among other things, requirements for state licensure and criteria for medical tenants to participate in government-sponsored reimbursement programs, such as the Medicare and Medicaid programs. The Company's leases generally require the tenant to comply with all applicable laws relating to the tenant's use and occupation of the leased premises. Although lease payments to the Company are not directly affected by these laws and regulations, changes in these programs or the loss by a tenant of its license or ability to participate in government-sponsored reimbursement programs would have a material adverse effect on the tenant's ability to make lease payments and could impact facility revenues to the Company. The Medicare and Medicaid programs are highly regulated and subject to frequent evaluation and change. Government healthcare spending has increased over time; however, changes from year to year in reimbursement methodology, rates and other regulatory requirements have resulted in a challenging operating environment for healthcare providers. Aggregate spending on government reimbursement programs for healthcare services is expected to continue to rise significantly over the next 20 years with population growth and the anticipated expansion of public insurance programs for the uninsured and senior populations. However, the profitability of providing care to the rising number of Medicare and Medicaid patients may decline, which could adversely affect tenants' ability to make lease payments to the Company. 3In March 2010, the Health Reform Law was signed into law to provide for comprehensive reform of the United States' healthcare system and extend health insurance benefits to the uninsured population, with the potential to alleviate high uncompensated care expense to healthcare providers. However, the law also increases regulatory scrutiny of providers by federal and state administrative authorities, lowers annual increases in Medicare payment rates and will gradually implement broad cost-saving measures and shared risk-and-reward payment models. This may slow the growth of healthcare spending, while also requiring providers to expand access and quality of care, presenting the industry and its individual participants with uncertainty and greater financial risk. The Supreme Court of the United States continues to hear legal challenges to certain items included in the Health Reform Law. The implementation or repeal of the Health Reform Law, in whole or in part, could affect the economic performance of some or all of the Company's tenants and borrowers. The Company cannot predict the degree to which these changes may affect indirectly the economic performance of the Company, positively or negatively. The Protecting Access to Medicare Act of 2014 was signed into law on April 1, 2014 and delayed a scheduled cut in Medicare payment rates for physician and outpatient services and provided stable rates through March 31, 2015. Currently, there is widespread support in Congress to revise the current formula that determines Medicare physician-payment rates and provide long-term visibility for stable physician reimbursement. If these measures or other federal budget negotiations ultimately require cuts to other healthcare providers' Medicare reimbursement rates or the federal healthcare programs in general, the Company cannot predict the degree to which these changes may affect the economic performance of some or all of the Company's tenants, positively or negatively. The Company expects healthcare providers to continue to adjust to new operating and reimbursement challenges, as they have in the past, by increasing operating efficiency and modifying their strategies to profitably grow operations. Legislative Developments Each year, legislative proposals for health policy are introduced in Congress and state legislatures, and regulatory changes are enacted by government agencies. These proposals, individually or in the aggregate, could significantly change the delivery of healthcare services, either nationally or at the state level, if implemented. Examples of significant legislation currently under consideration, recently enacted or in the process of implementation include: • • • • the Health Reform Law and proposed amendments and repeal measures and related actions at the federal and state level; quality control, cost containment, and payment system reforms for Medicaid, Medicare and other public funding, such as expansion of pay-for-performance criteria and value-based purchasing programs, bundled provider payments, accountable care organizations, increased patient cost-sharing, geographic payment variations, comparative effectiveness research, and lower payments for hospital readmissions; implementation of state health insurance exchanges and regulations governing their operation, whether run by the state or by the federal government, whereby individuals and small businesses will purchase health insurance, including government-funded plans, many assisted by federal subsidies that are currently under legal challenge before the Supreme Court; reform of the Medicare physician fee-for-service reimbursement formula that dictates annual updates in Medicare payment rates for physician services, which in recent years has called for reductions in its “Sustainable Growth Rate.” As part of The Protecting Access to Medicare Act of 2014, Congress continued its practice of extending physician Medicare rates, currently through March 31, 2015, at which time Congress must pass another fix to avoid a substantial cut in Medicare rates to physicians; and • tax law changes affecting non-profit providers. The Company cannot predict whether any proposals will be fully implemented, adopted, repealed, or amended, or what effect, whether positive or negative, such proposals would have on the Company's business. 4Environmental Matters Under various federal, state and local environmental laws, ordinances and regulations, an owner of real property (such as the Company) may be liable for the costs of removal or remediation of certain hazardous or toxic substances at, under, or disposed of in connection with such property, as well as certain other potential costs (including government fines and injuries to persons and adjacent property) relating to hazardous or toxic substances. Most, if not all, of these laws, ordinances and regulations contain stringent enforcement provisions including, but not limited to, the authority to impose substantial administrative, civil, and criminal fines and penalties upon violators. Such laws often impose liability, without regard to whether the owner knew of, or was responsible for, the presence or disposal of such substances, and may be imposed on the owner in connection with the activities of a tenant or operator of the property. The cost of any required remediation, removal, fines or personal or property damages and the owner’s liability therefore could exceed the value of the property and/or the aggregate assets of the owner. In addition, the presence of such substances, or the failure to properly dispose of or remediate such substances, may adversely affect the owner’s ability to sell or lease such property or to borrow using such property as collateral. A property can also be negatively impacted either through physical contamination, or by virtue of an adverse effect on value, from contamination that has or may have emanated from other properties. Operations of the properties owned, developed or managed by the Company are and will continue to be subject to numerous federal, state, and local environmental laws, ordinances and regulations, including those relating to the following: the generation, segregation, handling, packaging and disposal of medical wastes; air quality requirements related to operations of generators, incineration devices, or sterilization equipment; facility siting and construction; disposal of non-medical wastes and ash from incinerators; and underground storage tanks. Certain properties owned, developed or managed by the Company contain, and others may contain or at one time may have contained, underground storage tanks that are or were used to store waste oils, petroleum products or other hazardous substances. Such underground storage tanks can be the source of releases of hazardous or toxic materials. Operations of nuclear medicine departments at some properties also involve the use and handling, and subsequent disposal of, radioactive isotopes and similar materials, activities which are closely regulated by the Nuclear Regulatory Commission and state regulatory agencies. In addition, several of the properties were built during the period that asbestos was commonly used in building construction and other such facilities may be acquired by the Company in the future. The presence of such materials could result in significant costs in the event that any asbestos-containing materials requiring immediate removal and/or encapsulation are located in or on any facilities or in the event of any future renovation activities. The Company has had environmental site assessments conducted on substantially all of the properties currently owned. These site assessments are limited in scope and provide only an evaluation of potential environmental conditions associated with the property, not compliance assessments of ongoing operations. While it is the Company’s policy to seek indemnification relating to environmental liabilities or conditions, even where leases and sale and purchase agreements do contain such provisions, there can be no assurances that the tenant or seller will be able to fulfill its indemnification obligations. In addition, the terms of the Company’s leases or financial support agreements do not give the Company control over the operational activities of its tenants or healthcare operators, nor will the Company monitor the tenants or healthcare operators with respect to environmental matters. Insurance The Company carries comprehensive liability insurance and property insurance covering its owned and managed properties, including those held under long-term ground leases. In addition, tenants under long-term single-tenant net leases are required to carry property insurance covering the Company’s interest in the buildings. Employees At December 31, 2014, the Company employed 239 people. The employees are not members of any labor union, and the Company considers its relations with its employees to be excellent. Available Information The Company makes available to the public free of charge through its internet website the Company’s Proxy Statement, Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after the Company electronically files such reports with, or furnishes such reports to, the Securities and Exchange Commission ("SEC"). The Company’s internet website address is www.healthcarerealty.com. The public may read and copy any materials that the Company files with the SEC at the SEC’s Public Reference Room located at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains electronic versions of the Company’s reports on its website at www.sec.gov. 5Corporate Governance Principles The Company has adopted Corporate Governance Principles relating to the conduct and operations of the Board of Directors. The Corporate Governance Principles are posted on the Company’s website (www.healthcarerealty.com) and are available in print to any stockholder who requests a copy. Committee Charters The Board of Directors has an Audit Committee, Compensation Committee, Corporate Governance Committee and Executive Committee. The Board of Directors has adopted written charters for each committee, except for the Executive Committee, which are posted on the Company’s website (www.healthcarerealty.com) and are available in print to any stockholder who requests a copy. Executive Officers Information regarding the executive officers of the Company is set forth in Part III, Item 10 of this report and is incorporated herein by reference. Item 1A. Risk Factors The following are some of the risks and uncertainties that could negatively affect the Company’s consolidated financial condition, results of operations, business and prospects. These risk factors are grouped into three categories: risks relating to the Company’s business and operations; risks relating to the Company’s capital structure and financings; and risks arising from the Company’s status as a REIT and the regulatory environment in which it operates. These risks, as well as the risks described in Item 1 under the headings “Competition,” “Government Regulation,” “Legislative Developments,” and “Environmental Matters,” and in Item 7 under the heading “Disclosure Regarding Forward-Looking Statements” should be carefully considered before making an investment decision regarding the Company. The risks and uncertainties described below are not the only ones facing the Company, and there may be additional risks that the Company does not presently know of or that the Company currently considers not likely to have a significant impact. If any of the events underlying the following risks actually occurred, the Company’s business, consolidated financial condition, operating results and cash flows, including distributions to the Company's stockholders, could suffer, and the trading price of its common stock could decline. Risk relating to our business and operations The Company's expected results may not be achieved. The Company's expected results may not be achieved, and actual results may differ materially from expectations. This may be the result of various factors, including, but not limited to: changes in the economy; the availability and cost of capital at favorable rates; changes to facility-related healthcare regulations; changes in interest rates; competition for quality assets; negative developments in the operating results or financial condition of the Company's tenants, including, but not limited to, their ability to pay rent and repay loans; the Company's ability to reposition or sell facilities with profitable results; the Company's ability to re-lease space at similar rates as vacancies occur; the Company's ability to timely reinvest proceeds from the sale of assets at similar yields; government regulations affecting tenants' Medicare and Medicaid reimbursement rates and operational requirements; unanticipated difficulties and/or expenditures relating to future acquisitions and developments; changes in rules or practices governing the Company's financial reporting; and other legal and operational matters. The Company’s long-term single-tenant net leases may not be extended. While the Company has no long-term single-tenant net leases expiring in 2015, such leases expiring in future years may not be extended. To the extent these properties have vacancies or subleases at lower rates upon expiration, income may decline if the Company is not able to re-let the properties at rental rates that are as high as the former rates. For more specific information concerning the Company’s expiring long-term single-tenant net leases, see “Single-Tenant Net Leases” in “Trends and Matters Impacting Operating Results” section of this report. The Company’s revenues depend on the ability of its tenants under its leases to generate sufficient income from their operations to make rent, loan and lease guaranty payments to the Company. The Company’s revenues are subject to the financial strength of its tenants and sponsoring health systems. The Company has no operational control over the business of these tenants and sponsoring health systems who face a wide range of economic, competitive, government reimbursement and regulatory pressures and constraints. Any slowdown in the economy, decline in the availability of financing from the capital markets, and changes in healthcare regulations may adversely affect the businesses of the Company’s tenants to varying degrees. Such conditions may further impact such tenants’ abilities to meet their obligations to the Company and, in certain cases, could lead to restructurings, disruptions, or bankruptcies of such tenants. In turn, these conditions could adversely affect the Company’s revenues and could increase allowances for losses and result in 6impairment charges, which could decrease net income attributable to common stockholders and equity, and reduce cash flows from operations. The Company may decide or may be required under purchase options to sell certain properties. The Company may not be able to reinvest the proceeds from sale at rates of return equal to the return received on the properties sold. The Company had approximately $162.2 million, or 5.0% of the Company’s real estate property investments, that were subject to purchase options held by lessees that were exercisable as of December 31, 2014 or could become exercisable in 2015. Other properties have purchase options that will become exercisable in future periods. Properties with options exercisable in 2015 produced aggregate net operating income (operating revenues, such as property operating revenue, single-tenant net lease revenue, and property lease guaranty revenue, less property operating expense) of approximately $18.8 million in 2014. The exercise of these purchase options exposes the Company to reinvestment risk and a reduction in investment return. Certain properties subject to purchase options are producing returns above the rates of return the Company expects to achieve with new investments. If the Company is unable to reinvest the sale proceeds at rates of return equal to the return received on the properties that are sold, it may experience a decline in lease revenues and profitability and a corresponding material adverse effect on the Company’s business and financial condition, the Company’s ability to make distributions to its stockholders, and the market price of its common stock. Owning real estate and indirect interests in real estate is subject to inherent risks. The Company’s operating performance and the value of its real estate assets are subject to the risk that if its properties do not generate revenues sufficient to meet its operating expenses, including debt service, the Company’s cash flow and ability to pay dividends to stockholders will be adversely affected. The Company may incur impairment charges on its real estate properties or other assets. The Company performs an impairment review on its real estate properties every fiscal year. In addition, the Company assesses the potential for impairment of identifiable intangible assets and long-lived assets, including real estate properties, whenever events occur or a change in circumstances indicates that the recorded value might not be fully recoverable. The decision to sell a property also requires the Company to assess the potential for impairment. At some future date, the Company may determine that an impairment has occurred in the value of one or more of its real estate properties or other assets. In such an event, the Company may be required to recognize an impairment which could have a material adverse effect on the Company’s consolidated financial condition and results of operations. If the Company is unable to promptly re-let its properties, if the rates upon such re-letting are significantly lower than the previous rates or if the Company is required to undertake significant expenditures to attract new tenants, then the Company’s business, consolidated financial condition and results of operations would be adversely affected. A portion of the Company’s leases will expire over the course of any year. For more specific information concerning the Company’s expiring leases, see the “Trends and Matters Impacting Operating Results” section. The Company may not be able to re-let space on terms that are favorable to the Company or at all. Further, the Company may be required to make significant capital expenditures to renovate or reconfigure space to attract new tenants. If it is unable to promptly re-let its properties, if the rates upon such re-letting are significantly lower than the previous rates, or if the Company is required to undertake significant capital expenditures in connection with re-letting units, the Company’s business, consolidated financial condition and results of operations, the Company’s ability to make distributions to the Company’s stockholders and the trading price of the Company’s common stock may be materially and adversely affected. Certain of the Company’s properties are special purpose healthcare facilities and may not be easily adaptable to other uses. Some of the Company’s properties are specialized medical facilities. If the Company or the Company’s tenants terminate the leases for these properties or the Company’s tenants lose their regulatory authority to operate such properties, the Company may not be able to locate suitable replacement tenants to lease the properties for their specialized uses. Alternatively, the Company may be required to spend substantial amounts to adapt the properties to other uses. Any loss of revenues and/or additional capital expenditures occurring as a result may have a material adverse effect on the Company’s business, financial condition and results of operations, the Company’s ability to make distributions to its stockholders, and the market price of the Company’s common stock. The Company has, and may have more in the future, exposure to fixed rent escalators, which could impact its growth and profitability. The Company receives a significant portion of its revenues by leasing assets in which the rental rate is generally fixed with annual escalations. Most of these annual increases are based upon fixed percentage increases while some are based on increases in the Consumer Price Index. If the fixed percentage increases begin to lag behind inflation, the Company's growth and profitability would be negatively impacted. 7The Company’s real estate investments are illiquid and the Company may not be able to sell properties strategically targeted for disposition. Because real estate investments are relatively illiquid, the Company’s ability to adjust its portfolio promptly in response to economic or other conditions is limited. Certain significant expenditures generally do not change in response to economic or other conditions, including debt service (if any), real estate taxes, and operating and maintenance costs. This combination of variable revenue and relatively fixed expenditures may result in reduced earnings and could have an adverse effect on the Company’s financial condition. In addition, the Company may not be able to sell properties targeted for disposition, including properties held for sale, due to adverse market conditions. This may negatively affect, among other things, the Company’s ability to sell properties on favorable terms, execute its operating strategy, repay debt, pay dividends or maintain its REIT status. The Company is subject to risks associated with the development and redevelopment of properties. The Company expects development and redevelopment of properties will continue to be a key component of its growth plans. The Company is subject to certain risks associated with the development of properties including the following: • The construction of properties generally requires various government and other approvals that may not be received when expected, or at all, which could delay or preclude commencement of construction; • Development opportunities that the Company pursued but later abandoned could result in the expensing of pursuit costs, which could impact the Company’s consolidated results of operations; • Construction costs could exceed original estimates, which could impact the building’s profitability to the Company; • Operating expenses could be higher than forecasted; • Time required to initiate and complete the construction of a property and to lease up a completed development property may be greater than originally anticipated, thereby adversely affecting the Company’s cash flow and liquidity; • Occupancy rates and rents of a completed development property may not be sufficient to make the property profitable to the Company; and • Favorable capital sources to fund the Company’s development activities may not be available when needed. The Company may make material acquisitions and undertake developments that may involve the expenditure of significant funds and may not perform in accordance with management’s expectations. The Company regularly pursues potential transactions to acquire or develop additional real estate assets. Future acquisitions could require the Company to issue equity securities, incur debt or other contingent liabilities or amortize expenses related to other intangible assets, any of which could adversely impact the Company’s consolidated financial condition or results of operations. In addition, equity or debt financing required for such acquisitions may not be available at favorable times or rates. The Company’s acquired, developed and existing real estate properties may not perform in accordance with management’s expectations because of many factors including the following: • The Company’s purchase price for acquired facilities may be based upon a series of market or building-specific judgments which may be incorrect; • The costs of any maintenance or improvements for properties might exceed estimated costs; • The Company may incur unexpected costs in the acquisition, construction or maintenance of real estate assets that could impact its expected returns on such assets; and • Leasing of real estate properties may not occur within expected time frames or at expected rental rates. Further, the Company can give no assurance that acquisition and development opportunities that meet management’s investment criteria will be available when needed or anticipated. The Company is exposed to risks associated with entering new geographic markets. The Company’s acquisition and development activities may involve entering geographic markets where the Company has not previously had a presence. The construction and/or acquisition of properties in new geographic areas involves risks, including the risk that the property will not perform as anticipated and the risk that any actual costs for site development and improvements identified in the pre-construction or pre-acquisition due diligence process will exceed estimates. There is, and it 8is expected that there will continue to be, significant competition for investment opportunities that meet management’s investment criteria, as well as risks associated with obtaining financing for acquisition activities, if necessary. Many of the Company’s properties are held under ground leases. These ground leases contain provisions that may limit the Company’s ability to lease, sell, or finance these properties. As of December 31, 2014, the Company had 93 properties, representing an aggregate net investment of approximately $1.1 billion, that were held under ground leases. The Company’s ground lease agreements with hospitals and health systems typically contain restrictions that limit building occupancy to physicians on the medical staff of an affiliated hospital and prohibit tenants from providing services that compete with the services provided by the affiliated hospital. Ground leases may also contain consent requirements or other restrictions on sale or assignment of the Company’s leasehold interest, including rights of first offer and first refusal in favor of the lessor. These ground lease provisions may limit the Company’s ability to lease, sell, or obtain mortgage financing secured by such properties which, in turn, could adversely affect the income from operations or the proceeds received from a sale. As a ground lessee, the Company is also exposed to the risk of reversion of the property upon expiration of the ground lease term, or an earlier breach by the Company of the ground lease, which may have a material adverse effect on the Company’s business, consolidated financial condition and results of operations, the Company’s ability to make distributions to the Company’s stockholders and the trading price of the Company’s common stock. The Company may experience uninsured or underinsured losses related to casualty or liability. The Company carries comprehensive liability insurance and property insurance covering its owned and managed properties. In addition, tenants under long-term single-tenant net leases are required to carry property insurance covering the Company’s interest in the buildings. Some types of losses, such as cyber breaches, however, either may be uninsurable or too expensive to insure against. Should an uninsured loss or a loss in excess of insured limits occur, the Company could lose all or a portion of the capital it has invested in a property, as well as the anticipated future revenue from the property. In such an event, the Company might remain obligated for any mortgage debt or other financial obligation related to the property. The Company cannot give assurance that material losses in excess of insurance proceeds will not occur in the future. The Company is subject to cyber security risks. A cyber-attack that bypasses the Company's information technology (“IT”) security systems causing an IT security breach, may lead to a material disruption of the Company's IT business systems and/or the loss of business information resulting in an adverse business impact. Risks may include: • • • future results could be adversely affected due to the theft, destruction, loss, misappropriation or release of confidential data or intellectual property; operational or business delays resulting from the disruption of IT systems and subsequent clean-up and mitigation activities; and/or negative publicity resulting in reputation or brand damage with the Company's tenants, sponsoring health systems or other operators. Risks relating to our capital structure and financings The Company has incurred significant debt obligations and may incur additional debt and increase leverage in the future. As of December 31, 2014, the Company had approximately $1.4 billion of outstanding indebtedness and the Company’s leverage ratio [debt divided by (debt plus stockholders’ equity less intangible assets plus accumulated depreciation)] was 42.4%. Covenants under the unsecured credit facility due 2017 (“Unsecured Credit Facility”), the Term Loan Agreement, dated as of February 27, 2014, among the Company, Wells Fargo Bank, National Association, as Administrative Agent, and the other lenders that are party thereto (the “Unsecured Term Loan due 2019 ”) and the indentures governing the Company’s senior notes permit the Company to incur substantial, additional debt, and the Company may borrow additional funds, which may include secured borrowings. A high level of indebtedness would require the Company to dedicate a substantial portion of its cash flows from operations to service the debt, thereby reducing the funds available to implement the Company’s business strategy and to make distributions to stockholders. A high level of indebtedness could also: • • • limit the Company’s ability to adjust rapidly to changing market conditions in the event of a downturn in general economic conditions or in the real estate and/or healthcare industries; impair the Company’s ability to obtain additional debt financing or require potentially dilutive equity to fund obligations and carry out its business strategy; and result in a downgrade of the rating of the Company’s debt securities by one or more rating agencies, which would increase the costs of borrowing under the Unsecured Credit Facility and the cost of issuance of new debt securities, among other things. 9In addition, from time to time, the Company mortgages properties to secure payment of indebtedness. If the Company is unable to meet its mortgage payments, then the encumbered properties could be foreclosed upon or transferred to the mortgagee with a consequent loss of income and asset value. A foreclosure on one or more of the Company's properties could have a material adverse effect on the Company’s consolidated financial condition and results of operations. Covenants in the Company’s debt instruments limit its operational flexibility, and a breach of these covenants could materially affect the Company’s consolidated financial condition and results of operations. The terms of the Unsecured Credit Facility, the Unsecured Term Loan due 2019, the indentures governing the Company’s outstanding senior notes and other debt instruments that the Company may enter into in the future are subject to customary financial and operational covenants. These provisions include, among other things: a limitation on the incurrence of additional indebtedness; limitations on mergers, investments, acquisitions, redemptions of capital stock, transactions with affiliates; and maintenance of specified financial ratios. The Company’s continued ability to incur debt and operate its business is subject to compliance with these covenants, which limit operational flexibility. Breaches of these covenants could result in defaults under applicable debt instruments, even if payment obligations are satisfied. Financial and other covenants that limit the Company’s operational flexibility, as well as defaults resulting from a breach of any of these covenants in its debt instruments, could have a material adverse effect on the Company’s consolidated financial condition and results of operations. A change to the Company’s current dividend payment may have an adverse effect on the market price of the Company’s common stock. The ability of the Company to pay dividends is dependent upon its ability to maintain funds from operations and cash flow, to make accretive new investments and to access capital. There can be no assurance that the Company will continue to pay dividends at current amounts, or at all. A failure to maintain dividend payments at current levels could result in a reduction of the market price of the Company’s common stock. If lenders under the Unsecured Credit Facility fail to meet their funding commitments, the Company’s operations and consolidated financial position would be negatively impacted. Access to external capital on favorable terms is critical to the Company’s success in growing and maintaining its portfolio. If financial institutions within the Unsecured Credit Facility were unwilling or unable to meet their respective funding commitments to the Company, any such failure would have a negative impact on the Company’s operations, consolidated financial condition and ability to meet its obligations, including the payment of dividends to stockholders. The unavailability of equity and debt capital, volatility in the credit markets, increases in interest rates, or changes in the Company’s debt ratings could have an adverse effect on the Company’s ability to meet its debt payments, make dividend payments to stockholders or engage in acquisition and development activity. A REIT is required by the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”) to make dividend distributions, thereby retaining less of its capital for growth. As a result, a REIT typically grows through steady investments of new capital in real estate assets. However, there may be times when the Company will have limited access to capital from the equity and/or debt markets. Changes in the Company’s debt ratings could have a material adverse effect on its interest costs and financing sources. The Company’s debt rating can be materially influenced by a number of factors including, but not limited to, acquisitions, investment decisions, and capital management activities. In recent years, the capital and credit markets have experienced volatility and at times have limited the availability of funds. The Company’s ability to access the capital and credit markets may be limited by these or other factors, which could have an impact on its ability to refinance maturing debt, fund dividend payments and operations, acquire healthcare properties and complete construction projects. If the Company is unable to refinance or extend principal payments due at maturity of its various debt instruments, its cash flow may not be sufficient to repay maturing debt and, consequently, make dividend payments to stockholders. If the Company defaults in paying any of its debts or honoring its debt covenants, it could experience cross-defaults among debt instruments, the debts could be accelerated and the Company could be forced to liquidate assets for less than the values it would otherwise receive. The Company is exposed to increases in interest rates, which could adversely impact its ability to refinance existing debt, sell assets or engage in acquisition and development activity. The Company receives a significant portion of its revenues by leasing its assets under long-term leases in which the rental rate is generally fixed, subject to annual rent escalators. A significant portion of the Company’s debt may be from time to time subject to floating rates, based on LIBOR or other indices. The generally fixed nature of revenues and the variable rate of certain debt obligations create interest rate risk for the Company. Increases in interest rates could make the financing of any acquisition or investment activity more costly. Rising interest rates could limit the Company’s ability to refinance existing debt when it matures or cause the Company to pay higher rates upon refinancing. An increase in interest rates also could have the effect of reducing the amounts that third parties might be willing to pay for real estate assets, which could limit the Company’s ability to sell assets at times when it might be advantageous to do so. 10The Company may enter into swap agreements from time to time that may not effectively reduce its exposure to changes in interest rates. The Company has entered into swap agreements in the past and may enter into such agreements from time to time to manage some of its exposure to interest rate volatility. These swap agreements involve risks, such as the risk that counterparties may fail to honor their obligations under these arrangements. In addition, these arrangements may not be effective in reducing the Company’s exposure to changes in interest rates. When the Company uses forward-starting interest rate swaps, there is a risk that it will not complete the long-term borrowing against which the swap is intended to hedge. If such events occur, the Company’s results of operations may be adversely affected. Risks relating to government regulations If a healthcare tenant loses its licensure or certification, becomes unable to provide healthcare services, cannot meet its financial obligations to the Company or otherwise vacates a facility, the Company would have to obtain another tenant for the affected facility. If the Company loses a tenant or sponsor health system and is unable to attract another healthcare provider on a timely basis and on acceptable terms, the Company’s cash flows and results of operations could suffer. Transfers of operations of healthcare facilities are often subject to regulatory approvals not required for transfers of other types of commercial operations and real estate. Adverse trends in the healthcare service industry may negatively affect the Company’s lease revenues and the values of its investments. The healthcare service industry may be affected by the following: • • • • • • • • • • • • • trends in the method of delivery of healthcare services; competition among healthcare providers; lower reimbursement rates from government and commercial payors, high uncompensated care expense, investment losses and limited admissions growth pressuring operating profit margins for healthcare providers; availability of capital; credit downgrades; liability insurance expense; regulatory and government reimbursement uncertainty resulting from the Health Reform Law; health reform initiatives to address healthcare costs through expanded value-based purchasing programs, bundled provider payments, health insurance exchanges, increased patient cost-sharing, geographic payment variations, comparative effectiveness research, lower payments for hospital readmissions, and shared risk-and-reward payment models such as accountable care organizations; Supreme Court decisions on several cases challenging the legality of certain aspects of the Health Reform Law, in particular, federal subsidies to individuals enrolled in the federal health insurance exchange in states where a state- based exchange has not been established; federal and state government plans to reduce budget deficits and address debt ceiling limits by lowering healthcare provider Medicare and Medicaid payment rates, while requiring increased patient access to care; congressional efforts to repeal the Health Reform Law in whole or in part; congressional efforts to reform the Medicare physician fee-for-service formula that dictates annual updates in payment rates for physician services, including significant reductions in the Sustainable Growth Rate, whether through a short- term fix or a more long-term solution; heightened health information technology security standards and the meaningful use of electronic health records by healthcare providers; and • potential tax law changes affecting non-profit providers. 11These changes, among others, can adversely affect the economic performance of some or all of the tenants and sponsoring health systems who provide financial support to the Company’s investments and, in turn, negatively affect the lease revenues and the value of the Company’s property investments. If the Company fails to remain qualified as a REIT, the Company will be subject to significant adverse consequences, including adversely affecting the value of its common stock. The Company intends to operate in a manner that will allow it to continue to qualify as a REIT for federal income tax purposes. Although the Company believes that it qualifies as a REIT, it cannot provide any assurance that it will continue to qualify as a REIT for federal income tax purposes. The Company’s continued qualification as a REIT will depend on the satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. The Company’s ability to satisfy the asset tests depends upon the characterization and fair market values of its assets. The Company’s compliance with the REIT income and quarterly asset requirements also depends upon the Company’s ability to successfully manage the composition of the Company’s income and assets on an ongoing basis. Accordingly, there can be no assurance that the Internal Revenue Service (“IRS”) will not contend that the Company has operated in a manner that violates any of the REIT requirements. If the Company were to fail to qualify as a REIT in any taxable year, the Company would be subject to federal income tax, including any applicable alternative minimum tax, on its taxable income at regular corporate rates and possibly increased state and local taxes (and the Company might need to borrow money or sell assets in order to pay any such tax). Further, dividends paid to the Company’s stockholders would not be deductible by the Company in computing its taxable income. Any resulting corporate tax liability could be substantial and would reduce the amount of cash available for distribution to the Company’s stockholders, which in turn could have an adverse impact on the value of, and trading prices for, the Company’s common stock. In addition, in such event the Company would no longer be required to pay dividends to maintain REIT status, which could adversely affect the value of the Company’s common stock. Unless the Company were entitled to relief under certain provisions of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), the Company also would continue to be disqualified from taxation as a REIT for the four taxable years following the year in which the Company failed to qualify as a REIT. Even if the Company remains qualified for taxation as a REIT, the Company is subject to certain federal, state and local taxes on its income and assets, including taxes on any undistributed taxable income, and state or local income, franchise, property and transfer taxes. These tax liabilities would reduce the Company’s cash flow and could adversely affect the value of the Company’s common stock. For more specific information on state income taxes paid, see Note 16 to the Consolidated Financial Statements. The Company’s Articles of Incorporation contain limits and restrictions on transferability of the Company’s common stock which may have adverse effects on the value of the Company’s common stock. In order to qualify as a REIT, no more than 50% of the value of the Company’s outstanding shares may be owned, directly or indirectly, by five or fewer individuals (as defined in the Internal Revenue Code to include certain entities) during the last half of a taxable year. To assist in complying with this REIT requirement, the Company’s Articles of Incorporation contain provisions restricting share transfers where the transferee (other than specified individuals involved in the formation of the Company, members of their families and certain affiliates, and certain other exceptions) would, after such transfer, own (a) more than 9.9% either in number or value of the outstanding common stock of the Company or (b) more than 9.9% either in number or value of any outstanding preferred stock of the Company. If, despite this prohibition, stock is acquired increasing a transferee’s ownership to over 9.9% in value of either the outstanding common stock or any preferred stock of the Company, the stock in excess of this 9.9% in value is deemed to be held in trust for transfer at a price that does not exceed what the purported transferee paid for the stock, and, while held in trust, the stock is not entitled to receive dividends or to vote. In addition, under these circumstances, the Company has the right to redeem such stock. These restrictions on transfer of the Company’s shares could have adverse effects on the value of the Company’s common stock. Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends. The federal tax rate applicable to income from “qualified dividends” payable to certain domestic stockholders that are individuals, trusts and estates is currently the preferential tax rate applicable to long-term capital gains. Dividends payable by REITs, however, are generally not qualified dividends and do not qualify for the preferential tax rate. The more favorable rates applicable to regular corporate qualified dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the stock of REITs, including the Company’s common stock. 12Complying with the REIT requirements may cause the Company to forego otherwise attractive opportunities. To qualify as a REIT for federal income tax purposes, the Company must continually satisfy tests concerning, among other things, the sources of its income, the nature of its assets, the amounts it distributes to its stockholders and the ownership of its stock. The Company may be unable to pursue investments that would be otherwise advantageous to the Company in order to satisfy the source-of-income, or distribution requirements for qualifying as a REIT. Thus, compliance with the REIT requirements may hinder the Company’s ability to make certain attractive investments. Qualifying as a REIT involves highly technical and complex provisions of the Internal Revenue Code. Qualification as a REIT involves the application of highly technical and complex provisions of the Internal Revenue Code for which only limited judicial and administrative authorities exist. Even a technical or inadvertent violation could jeopardize the Company’s REIT qualification. The Company’s continued qualification as a REIT will depend on the Company’s satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. In addition, the Company’s ability to satisfy the requirements to qualify as a REIT depends in part on the actions of third parties over which the Company has no control or only limited influence, including in cases where the Company owns an equity interest in an entity that is classified as a partnership for U.S. federal income tax purposes. New legislation or administrative or judicial action, in each instance potentially with retroactive effect, could make it more difficult or impossible for the Company to qualify as a REIT. The present federal income tax treatment of REITs may be modified, possibly with retroactive effect, by legislative, judicial or administrative action at any time, which could affect the federal income tax treatment of an investment in the Company. The federal income tax rules that affect REITs are constantly under review by persons involved in the legislative process, the IRS and the U.S. Treasury Department, which results in statutory changes as well as frequent revisions to regulations and interpretations. Revisions in federal tax laws and interpretations thereof could cause the Company to change its investments and commitments and affect the tax considerations of an investment in the Company. There can be no assurance that new legislation, regulations, administrative interpretations or court decisions will not change the tax laws significantly with respect to the Company’s qualification as a REIT or with respect to the federal income tax consequences of qualification. Item 1B. Unresolved Staff Comments None. Item 2. Properties In addition to the properties described in Item 1, “Business,” in Note 2 to the Consolidated Financial Statements, and in Schedule III of Item 15 of this Annual Report on Form 10-K, the Company leases office space from an unrelated third party for its headquarters, which are located at 3310 West End Avenue in Nashville, Tennessee. The Company’s corporate office lease currently covers approximately 36,653 square feet of rented space and expires on October 31, 2020. Annual base rent on the corporate office lease increases approximately 3.25% annually. The Company’s base rent for 2014 was approximately $0.8 million. Item 3. Legal Proceedings The Company is not aware of any pending or threatened litigation that, if resolved against the Company, would have a material adverse effect on the Company's consolidated financial position, results of operations, or cash flows. Item 4. Mine Safety Disclosures Not applicable. 13PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Shares of the Company’s common stock are traded on the New York Stock Exchange under the symbol “HR.” At December 31, 2014, there were approximately 1,093 stockholders of record. The following table sets forth the high and low sales prices per share of common stock and the dividends declared and paid per share of common stock related to the periods indicated. 2014 First Quarter Second Quarter Third Quarter Fourth Quarter (Payable on February 27, 2015) 2013 First Quarter Second Quarter Third Quarter Fourth Quarter High Low Dividends Declared and Paid per Share $ 24.66 $ 20.85 $ 26.03 25.96 28.00 23.88 23.41 23.50 $ 28.50 $ 24.07 $ 30.59 27.37 24.77 23.40 21.78 20.91 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 Future dividends will be declared and paid at the discretion of the Board of Directors. The Company’s ability to pay dividends is dependent upon its ability to generate funds from operations and cash flows, and to make accretive new investments. Equity Compensation Plan Information The following table provides information as of December 31, 2014 about the Company’s common stock that may be issued upon grants of restricted stock and the exercise of options, warrants and rights under all of the Company’s existing compensation plans, including the 2007 Employees Stock Incentive Plan and the 2000 Employee Stock Purchase Plan. Plan Category Equity compensation plans approved by security holders Equity compensation plans not approved by security holders Total Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights (1) Weighted Average Exercise Price of Outstanding Options, Warrants and Rights (1) Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in the First Column) 393,902 — 393,902 — — — 662,187 — 662,187 ______ (1) The Company’s outstanding rights relate only to its 2000 Employee Stock Purchase Plan. The Company is unable to ascertain with specificity the number of securities to be issued upon exercise of outstanding options under the 2000 Employee Stock Purchase Plan or the weighted average exercise price of outstanding rights under that plan. The 2000 Employee Stock Purchase Plan provides that shares of common stock may be purchased at a per share price equal to 85% of the fair market value of the common stock at the beginning of the offering period or a purchase date applicable to such offering period, whichever is lower. 14 Issuer Purchases of Equity Securities During the year ended December 31, 2014, the Company withheld shares of Company common stock to satisfy employee tax withholding obligations payable upon the vesting of non-vested shares, as follows: Period January 1 - January 31 February 1 - February 28 March 1 - March 31 April 1 - April 30 May 1 - May 31 June 1 - June 30 July 1 - July 31 August 1 - August 31 September 1 - September 30 October 1 - October 31 November 1 - November 30 December 1 - December 31 Total Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs 5,780 $ 4,194 — 2,925 3,271 — — — — — — 354,847 371,017 22.89 22.63 — 25.15 24.69 — — — — — — 27.31 — — — — — — — — — — — — — — — — — — — — — — — — 15Item 6. Selected Financial Data The following table sets forth financial information for the Company, which is derived from the Consolidated Financial Statements of the Company: (Amounts in thousands except per share data) Statement of Operations Data: Total revenues Total expenses Other income (expense) Income (loss) from continuing operations Discontinued operations Net income (loss) attributable to common stockholders Diluted earnings per common share: Income (loss) from continuing operations Discontinued operations Net income attributable to common stockholders Weighted average common shares outstanding - Diluted Balance Sheet Data (as of the end of the period): Real estate properties, gross Real estate properties, net Mortgage notes receivable Assets held for sale and discontinued operations, net Total assets Notes and bonds payable Total equity Other Data: $ $ $ $ $ $ 2014 2013 (1) 2012 (1) 2011 (1) 2010 (1) Year Ended December 31, $ 370,855 267,100 (69,776) 33,979 $ (1,779) $ $ 330,949 243,331 (100,710) (13,092) $ $ 20,075 $ 297,682 224,592 (73,982) (892) $ $ 6,427 $ 272,077 207,303 (77,125) (12,351) $ $ 12,167 229,721 173,513 (63,692) (7,484) 15,728 31,887 $ 6,946 $ 5,465 $ (214) $ 8,200 $ 0.35 (0.02) (0.14) $ 0.22 (0.01) $ 0.08 (0.17) $ 0.17 (0.12) 0.25 0.33 $ 0.08 $ 0.07 $ (0.00) $ 0.13 96,759 90,941 78,845 72,720 61,723 $ 3,258,279 $ 2,557,608 1,900 $ $ 3,067,187 $ 2,435,078 125,547 $ $ 2,821,323 $ 2,240,706 162,191 $ $ 2,778,903 $ 2,266,777 97,381 $ $ 2,562,570 $ 2,081,608 36,599 $ $ 9,146 $ 2,757,510 $ 1,403,692 $ 1,221,054 $ 6,852 $ 2,729,662 $ 1,348,459 $ 1,245,286 $ 3,337 $ 2,539,972 $ 1,293,044 $ 1,120,944 $ 28,650 $ 2,521,022 $ 1,393,537 $ 1,004,806 $ 23,915 $ 2,357,309 $ 1,407,855 842,740 $ Funds from operations - Diluted (2) $ Funds from operations per common share - Diluted (2) $ $ Cash flows from operations $ Dividends paid Dividends declared and paid per common share $ 143,493 1.48 125,370 116,371 1.20 $ $ $ $ $ 90,153 0.98 120,797 111,571 1.20 $ $ $ $ $ 104,665 1.31 116,397 96,356 1.20 $ $ $ $ $ 84,682 1.15 107,852 89,270 1.20 $ $ $ $ $ 79,084 1.26 87,756 75,821 1.20 ______ (1) The years ended December 31, 2013, 2012, 2011, and 2010 are restated to conform to the discontinued operations presentation for 2014. See Note 6 to the Consolidated Financial Statements for more information on the Company’s discontinued operations as of December 31, 2014. (2) See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of funds from operations (“FFO”), including why the Company presents FFO and a reconciliation of net income attributable to common stockholders to FFO. 16 Item 7. Management's Discussions and Analysis of Financial Condition and Results of Operations Disclosure Regarding Forward-Looking Statements This report and other materials Healthcare Realty has filed or may file with the Securities and Exchange Commission (“SEC”), as well as information included in oral statements or other written statements made, or to be made, by senior management of the Company, contain, or will contain, disclosures that are “forward-looking statements.” Forward-looking statements include all statements that do not relate solely to historical or current facts and can be identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “target,” “intend,” “plan,” “estimate,” “project,” “continue,” “should,” “could” and other comparable terms. These forward-looking statements are based on the current plans and expectations of management and are subject to a number of risks and uncertainties that could significantly affect the Company’s current plans and expectations and future financial condition and results. Such risks and uncertainties include, among other things, the following: • The Company's expected results may not be achieved; • The Company's long-term single-tenant net leases may not be extended; • The Company’s revenues depend on the ability of its tenants to generate sufficient income from their operations to make rent, loan and lease guaranty payments to the Company; • The Company may decide or may be required under purchase options to sell certain properties. The Company may not be able to reinvest the proceeds from sale at rates of return equal to the return received on the properties sold; • Owning real estate and indirect interests in real estate is subject to inherent risks; • The Company may incur impairment charges on its real estate properties or other assets; • If the Company is unable to promptly re-let its properties, if the rates upon such re-letting are significantly lower than the previous rates or if the Company is required to undertake significant expenditures to attract new tenants, then the Company’s business, financial condition and results of operations would be adversely affected; • Certain of the Company’s properties are special purpose healthcare facilities and may not be easily adaptable to other uses; • The Company has, and may have more in the future, exposure to fixed rent escalators, which could impact its growth and profitability; • The Company’s real estate investments are illiquid and the Company may not be able to sell properties strategically targeted for disposition; • The Company is subject to risks associated with the development and redevelopment of properties; • The Company may make material acquisitions and undertake developments that may involve the expenditure of significant funds and may not perform in accordance with management’s expectations; • The Company is exposed to risks associated with entering new geographic markets; • Many of the Company’s properties are held under ground leases. These ground leases contain provisions that may limit the Company’s ability to lease, sell, or finance these properties; • The Company may experience uninsured or underinsured losses related to casualty or liability; • The Company is subject to cyber security risks; • The Company has incurred significant debt obligations and may incur additional debt and increase leverage in the future; • Covenants in the Company’s debt instruments limit its operational flexibility, and a breach of these covenants could materially affect the Company’s financial condition and results of operations; • A change to the Company’s current dividend payment may have an adverse effect on the market price of the Company’s common stock; • If lenders under the Unsecured Credit Facility fail to meet their funding commitments, the Company’s operations and consolidated financial position would be negatively impacted; 17• The unavailability of equity and debt capital, volatility in the credit markets, increases in interest rates, or changes in the Company’s debt ratings could have an adverse effect on the Company’s ability to meet its debt payments, make dividend payments to stockholders or engage in acquisition and development activity; • The Company is exposed to increases in interest rates, which could adversely impact its ability to refinance existing debt, sell assets or engage in acquisition and development activity; • The Company may enter into swap agreements from time to time that may not effectively reduce its exposure to changes in interest rates; • If a healthcare tenant loses its licensure or certification, becomes unable to provide healthcare services, cannot meet its financial obligations to the Company or otherwise vacates a facility, the Company would have to obtain another tenant for the affected facility; • Adverse trends in the healthcare service industry may negatively affect the Company’s lease revenues and the value of its investments; • If the Company fails to remain qualified as a REIT, the Company will be subject to significant adverse consequences, including adversely affecting the value of its common stock; • The Company's Articles of Incorporation contain limits and restrictions on transferability of the Company's common stock which may have adverse effects on the value of the Company's common stock; • Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends; • Complying with the REIT requirements may cause the Company to forego otherwise attractive opportunities; • Qualifying as a REIT involves highly technical and complex provisions of the Internal Revenue Code; and • New legislation or administrative or judicial action, in each instance potentially with retroactive effect, could make it more difficult or impossible for the Company to qualify as a REIT. Other risks, uncertainties and factors that could cause actual results to differ materially from those projected are detailed in Item 1A “Risk Factors” of this report and in other reports filed by the Company with the SEC from time to time. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Stockholders and investors are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in the Company’s filings and reports, including, without limitation, estimates and projections regarding the performance of development projects the Company is pursuing. The purpose of this Management's Discussion and Analysis is to provide an understanding of the Company's consolidated financial condition, results of operations and cash flows by focusing on the changes in key measures from year to year. This section is provided as a supplement to, and should be read in conjunction with, the Company's Consolidated Financial Statements and accompanying notes. This section is organized in the following sections: • Overview • Liquidity and Capital Resources • Trends and Matters Impacting Operating Results • Non-GAAP Measures • Results of Operations • Off-balance Sheet Arrangements • Contractual Obligations • Application of Critical Accounting Policies Overview The Company owns and operates healthcare properties that facilitate the delivery of care in a lower-cost, primarily outpatient setting. To execute its strategy, the Company integrates owning, managing, financing and developing such properties and provides a broad spectrum of real estate services including leasing, property management, acquisition and development. The Company generates stable, growing income and lowers the long-term risk profile of its portfolio of properties by focusing on facilities located on or near the campuses of large, acute care hospitals associated with leading health systems. The Company reduces financial and operational risk by owning properties in diverse geographic locations with a diversity of tenants, including over 30 physician specialties, as well as surgery, imaging, cancer and diagnostic centers. 18Liquidity and Capital Resources The Company monitors its liquidity and capital resources and relies on several key indicators in its assessment of capital markets for financing acquisitions and other operating activities as needed, including the following: • Leverage ratios and lending covenants; • Dividend payout percentage; and • Interest rates, underlying treasury rates, debt market spreads and equity markets. The Company uses these indicators and others to compare its operations to its peers and to help identify areas in which the Company may need to focus its attention. Sources and Uses of Cash The Company's revenues are derived from its real estate property and mortgage portfolio based on contractual arrangements with its tenants, sponsoring health systems and borrowers. These sources of revenue represent the Company's primary source of liquidity to fund its dividends and its operating expenses, including interest incurred on debt, general and administrative costs, and other expenses incurred in connection with managing its existing portfolio and investing in additional properties. To the extent additional investments are not funded by these sources, the Company will fund its investment activity generally through equity or debt issuances either in the public or private markets or through proceeds from its Unsecured Credit Facility. The Company expects to continue to meet its liquidity needs, including capital for additional investments, dividend payments and debt service funds through cash on hand, cash flows from operations and the cash flow sources addressed above. The Company also had unencumbered real estate assets with a gross book value of approximately $2.9 billion at December 31, 2014, of which a portion could serve as collateral for secured mortgage financing. The Company believes that its liquidity and sources of capital are adequate to satisfy its cash requirements. The Company cannot, however, be certain that these sources of funds will be available at a time and upon terms acceptable to the Company in sufficient amounts to meet its liquidity needs. The Company has some exposure to variable interest rates and its common stock price has been impacted by the volatility in the stock markets. However, the Company’s leases, which provide its main source of income and cash flow, have terms of approximately one to 20 years and have lease rates that generally increase on an annual basis at fixed rates or based on consumer price indices. Operating Activities Cash flows provided by operating activities for the three years ended December 31, 2014, 2013 and 2012 were $125.4 million, $120.8 million and $116.4 million, respectively. Several items impact cash flows from operating activities including, but not limited to, cash generated from property operations, interest payments and the timing related to the payment of invoices and other expenses and receipts of tenant rent. The Company may sell additional properties and redeploy cash from property sales and mortgage repayments into new investments. To the extent revenues related to the properties being sold and the mortgages being repaid exceed income from these new investments, the Company's consolidated results of operations and cash flows could be adversely affected. See "Trends and Matters Impacting Operating Results" for additional information regarding the Company's operating activities. Security Deposits and Letters of Credit As of December 31, 2014, the Company held approximately $9.6 million in letters of credit and security deposits for the benefit of the Company in the event the obligated tenant fails to perform under the terms of its respective lease. Generally, the Company may, at its discretion and upon notification to the tenant, draw upon these instruments if there are any defaults under the leases. 19Investing Activities The following table details the Company's cash flows used in investing activities for the years ended December 31, 2014, 2013 and 2012: (Dollars in thousands) Acquisitions of real estate Development of real estate Additional long-lived assets Funding of mortgages and notes receivable Proceeds from acquisition of real estate upon mortgage note receivable default Proceeds from sales of real estate Proceeds from sale of cost method investment in real estate Proceeds from mortgage repayment by previously consolidated VIE Proceeds from mortgages and notes receivable repayments Net cash used in investing activities Year Ended December 31, 2014 2013 2012 $ (71,899) $ (177,744) $ (89,640) — — (7,833) (70,670) (72,784) (62,251) (1,244) (58,731) (78,297) 204 32,398 — — 5,623 — 96,132 2,717 — 2,464 — 74,817 — 35,057 14,893 $ (105,588) $ (207,946) $ (113,254) A summary of the significant transactions impacting investing activities for the year ended December 31, 2014 is listed below. In addition, see Notes 4 and 5 to the Consolidated Financial Statements for more detail on these activities. • The Company acquired six medical office buildings during 2014 for a total purchase price of $83.1 million, including cash consideration of $64.9 million and the assumption of mortgage notes payable of $18.2 million. • • In March 2014, the Company also acquired ownership of a 93% leased multi-tenanted office building in Iowa in satisfaction of a $40.0 million mortgage note receivable that matured on January 10, 2014. In May 2014, the Company purchased a build-to-suit facility in Oklahoma which is 100% leased to Missouri-based Mercy Health through 2028 for a purchase price of $85.4 million. The purchase price was credited by an outstanding construction mortgage note receivable of $81.2 million and the Company paid an additional $4.2 million in cash consideration. The Company funded $1.2 million on the outstanding construction mortgage note prior to purchasing the facility upon completion. Subsequent to the purchase, the Company funded an additional $5.0 million and anticipates funding approximately $0.8 million to complete the $91.2 million development during 2015. • The Company disposed of nine medical office buildings in 2014 for a total sales price of $34.9 million, including cash consideration of $32.3 million, the origination of a $1.9 million Company-financed mortgage note receivable and $0.7 million of closing costs and related adjustments. • The Company funded $40.0 million in tenant improvements at its owned properties during 2014, including $22.4 million in first generation tenant improvements. • The Company funded $15.6 million in capital additions at its owned properties during 2014, including $4.1 million related to ongoing redevelopment of properties. Subsequent Acquisition In January 2015, the Company acquired a 110,679 square foot medical office building in California for a purchase price and cash consideration of $39.3 million. The property is located adjacent to two hospital campuses, one affiliated with Kaiser Permanente, a 106-bed hospital, and another affiliated with Washington Hospital Healthcare System, a 353-bed hospital. This property was 97% leased, with leases to the two hospitals comprising 59% of the rentable square footage. Development Opportunities The Company is in the planning stages with several health systems and developers regarding new development opportunities, and management expects one or more developments to begin in 2015. Individual properties developed by the Company typically range in size from 50,000 to 150,000 square feet, depending largely on the demand for hospital-based outpatient services and third-party medical office use. Total costs to develop these properties can vary greatly depending on the scope and location of the facility, but typically range from $200 to $300 per square foot. Construction of new buildings generally takes 12 months or longer, and any development that starts in 2015 is not expected to have a material impact on 2015 results. The 20Company considers pursuing developments in light of existing obligations, the acquisition environment, capital availability, leasing activity, and cost, among other factors. Financing Activities The following table details the Company's cash flows provided by (used in) financing activities for the years ended December 31, 2014, 2013 and 2012: (Dollars in thousands) Net borrowings (repayments) on unsecured credit facility Borrowings on term loan Borrowings on notes and bonds payable Repayments on notes and bonds payable Redemption of notes and bonds payable Dividends paid Net proceeds from issuance of common stock Common stock redemptions Capital contributions received from noncontrolling interests Distributions to noncontrolling interest holders Purchase of noncontrolling interests Debt issuance and assumption costs Year Ended December 31, 2014 2013 2012 $ (153,000) $ 128,000 $ (102,000) 200,000 — — 247,948 — — (12,357) (19,984) (4,990) — (371,839) — (116,371) (111,571) (96,356) 76,856 220,252 202,352 (10,074) — (541) (8,189) (1,258) (454) 1,806 (32) — (5,082) (68) — (40) — (3) Net cash provided by (used in) financing activities $ (24,934) $ 89,044 $ (1,105) Below is a summary of the significant financing activity for the year ended December 31, 2014. See Notes 10 and 11 to the Consolidated Financial Statements for more information on the capital markets and financing activities. Changes in Debt Structure • • • • In February 2014, the Company entered into a $200.0 million unsecured term loan facility ("Unsecured Term Loan due 2019") with a syndicate of nine lenders that matures on February 26, 2019. The Unsecured Term Loan due 2019 bears interest at a rate equal to (x) LIBOR plus (y) a margin ranging from 1.00% to 1.95% (currently 1.45%) based upon the Company's unsecured debt ratings. Payments under the Unsecured Term Loan due 2019 are interest only, with the full amount of the principal due at maturity. The Unsecured Term Loan due 2019 may be prepaid at any time, without penalty. The proceeds from the Unsecured Term Loan due 2019 were used by the Company to repay borrowings on its unsecured revolving credit facility due 2017 ("Unsecured Credit Facility"). The Unsecured Term Loan due 2019 has various financial covenant provisions that are required to be met on a quarterly and annual basis that are equivalent to those of the Unsecured Credit Facility. In July 2014, upon the acquisition of a real estate property in Minnesota, the Company assumed a series 2010B Bond due 2017 totaling $0.5 million, a Series 2010A Bond due 2022 totaling $1.2 million, a Series 2010A Bond due 2030 totaling $2.8 million and a Series 2010A Bond due 2040 totaling $7.0 million. The aggregate outstanding balance of these bonds is approximately $11.4 million excluding a fair value adjustment premium recorded upon acquisition of approximately $1.0 million. The mortgage notes payable have a weighted average contractual interest rate of 6.67% (effective rate of 4.79%). The Series 2010A Bonds can be repaid without penalty on or after May 1, 2020. See Note 4 of the Consolidated Financial Statements for more information regarding this transaction. In October 2014, upon the acquisition of a real estate property, the Company assumed a mortgage note payable totaling $6.8 million excluding the fair value premium of $0.4 million recorded upon acquisition. This note bears a contractual interest rate of 6.10% (effective rate of 4.86%) and matures on August 1, 2020. See Note 4 of the Consolidated Financial Statements for more information regarding this transaction. In October 2014, the Company repaid three mortgage notes payable totaling $6.3 million bearing a weighted average contractual interest rate of 6.08% (effective rate of 4.06%) that encumbered two medical office buildings in Virginia. As of December 31, 2014, 96.4% of the Company’s debt balances were due after 2015. Also, as of December 31, 2014, the Company’s stockholders’ equity totaled approximately $1.2 billion and its leverage ratio [debt divided by (debt plus stockholders’ equity less intangible assets plus accumulated depreciation)] was approximately 42.4%. The Company’s fixed charge ratio, calculated in accordance with Item 503 of Regulation S-K, includes only income from continuing operations 21which is reduced by depreciation and amortization and the operating results of properties currently classified as held for sale, as well as other income from discontinued operations (see Note 6 to the Consolidated Financial Statements). In accordance with this definition, the Company’s earnings from continuing operations as of December 31, 2014 were sufficient to cover its fixed charges with a ratio of 1.46 to 1.00. Calculated in accordance with the fixed charge covenant ratio under its Unsecured Credit Facility, the Company’s earnings covered its fixed charges 2.8 times. The Company’s various debt agreements contain certain representations, warranties, and financial and other covenants customary in such debt agreements. Among other things, these provisions require the Company to maintain certain financial ratios and minimum tangible net worth and impose certain limits on the Company’s ability to incur indebtedness and create liens or encumbrances. At December 31, 2014, the Company was in compliance with the financial covenant provisions under all of its various debt instruments. The Company plans to manage its capital structure to maintain compliance with its debt covenants consistent with its current profile. Downgrades in ratings by the rating agencies could have a material adverse impact on the Company’s cost and availability of capital, which could in turn have a material adverse impact on consolidated results of operations, liquidity and/or financial condition. Common Stock Issuances The following table summarizes the sales of common stock under the Company's at-the-market equity program: 2014 2013 Shares Sold 3,009,761 5,207,871 Sales Price Per Share $24.35 - $27.53 $24.19 - $30.49 $ $ Net Proceeds (in millions) 75.7 140.6 The Company used the net proceeds from the at-the-market equity offering program for general corporate purposes, including the acquisition and development of healthcare facilities, funding of mortgage loans and the repayment of debt. Dividends Payable The Company is required to pay dividends to its stockholders at least equal to 90% of its taxable income in order to maintain its qualification as a REIT. Common stock cash dividends paid during or related to 2014 are shown in the table below: Quarter 4th Quarter 2013 1st Quarter 2014 2nd Quarter 2014 3rd Quarter 2014 4th Quarter 2014 Quarterly Dividend 0.30 0.30 0.30 0.30 0.30 $ $ $ $ $ Date of Declaration Date of Record Date Paid/*Payable February 4, 2014 February 18, 2014 February 28, 2014 April 29, 2014 May 16, 2014 May 30, 2014 July 29, 2014 August 14, 2014 August 29, 2014 November 4, 2014 November 14, 2014 November 28, 2014 February 3, 2015 February 17, 2015 * February 27, 2015 The ability of the Company to pay dividends is dependent upon its ability to generate cash flows and to make accretive new investments. Noncontrolling Interest Purchase In April 2014, the Company purchased the outstanding 40% noncontrolling equity interest in a consolidated partnership that owns a medical office building and parking garage in Texas, which were developed by the partnership, for an aggregate purchase price and cash consideration of $8.2 million. The book value of the noncontrolling interest prior to the equity purchase was $1.6 million. The remaining $6.6 million was recorded as a decrease to additional paid-in capital on the Company's Consolidated Balance Sheets. Trends and Matters Impacting Operating Results Management monitors factors and trends important to the Company and the REIT industry in order to gauge their potential impact on the operations of the Company. Discussed below are some of the factors and trends that management believes may impact future operations of the Company. 22 Acquisitions and Dispositions The Company acquired six properties during 2014 for a total purchase price of $83.1 million including cash consideration of $64.9 million and the assumption of debt of $18.2 million (excluding $1.4 million fair value adjustment premiums recorded upon acquisition). In addition, the Company acquired ownership of a multi-tenanted office building in Iowa in satisfaction of a $40.0 million note receivable and purchased an $85.4 million property in Oklahoma. The purchase price for the property in Oklahoma was offset by the repayment of an $81.2 million construction mortgage note receivable provided by the Company to fund the development of the property prior to acquisition and is discussed in Development Activity below. The Company will continue to make selective acquisitions as it monitors the availability of properties that meet its criteria, capitalization rates, and cost of capital. The Company disposed of nine medical office buildings during 2014 for a total purchase price of $34.9 million, including cash consideration of $32.3 million, the origination of a $1.9 million Company-financed mortgage receivable and $0.7 million of closing costs and adjustments. See the Company's discussion regarding the 2014 acquisitions and dispositions activity in Note 4 to the Consolidated Financial Statements. Development Activity In 2014, the Company had one development project in Oklahoma that was affiliated with Mercy Health, which is based in St. Louis, Missouri. On May 22, 2014, the Company acquired a 100%-leased, medical office building in Oklahoma for $85.4 million, including the elimination of the construction mortgage note receivable totaling $81.2 million. During the second half of 2014, the Company recognized single-tenant net lease rental income of $3.5 million from this property. See "Investing Activities" in "Liquidity and Capital Resources" for more detailed information on the Company’s activities related to this development projects. No new development projects were started in 2014. During 2014, the Company saw steady leasing and occupancy improvement at the 12 properties categorized as development conversions. These properties were 80% occupied at December 31, 2014, compared to 63% occupied at the beginning of 2014. The Company has additional executed leases beyond the current occupancy and expects leasing momentum for these properties to continue throughout 2015. NOI for these properties increased from $2.3 million in the fourth quarter of 2013 to $4.2 million in the fourth quarter of 2014. During 2014, the Company funded $17.4 million toward first generation tenant improvements and related capital improvements at these properties. The Company estimates it will need an incremental investment of at least $11.1 million for tenant improvements as these properties continue to lease up. Given the current level of occupancy and executed leases, the Company has moved these properties into its stabilized portfolio as of January 1, 2015. These 12 properties will be included in the Company’s same store properties beginning in the first quarter of 2015. The Company is in the process of redeveloping two properties in Tennessee and is in discussions to expand the scope and budget of those projects. The Company has spent approximately $4.1 million toward these projects through December 31, 2014. In the first quarter of 2015, the Company expects to commence the redevelopment of a property in Alabama, including the construction of a parking garage. The total redevelopment budget for this property is $15.4 million and it is expected that construction will be completed near the end of 2015. Multi-Tenant Leases The Company expects that approximately 15% to 20% of the leases in its multi-tenant portfolio will expire each year. During 2014, 499 leases in the Company's multi-tenant portfolio expired, of which 397 were renewed or the tenants continue to occupy the space. Demand for well-located real estate with complementary practice types and services remains consistent and the Company's 2014 quarterly tenant retention statistics ranged from 76% to 87%. In 2015, 411 leases in the Company's multi- tenant portfolio are scheduled to expire. Of those leases, 89% are physician practices in on-campus buildings, which tend to have a higher tenant retention rate. 23Multi-tenant Rental Rates and Lease Management The Company continues to emphasize revenue growth for its in-place leases. In 2014, the Company experienced contractual rental rate growth which averaged 2.9% for in-place leases compared to 3.1% in 2013. The Company saw increases in its quarterly weighted average rental rate growth for renewing leases, unadjusted for rent abatements. For the years ended December 31, 2014 and 2013, quarterly weighted average rental rate growth ("cash releasing spread") for renewing leases ranged from 1.1% to 4.4% and 0.5% to 2.5%, respectively. In a further effort to maximize revenue growth and reduce its exposure to uncontrollable expenses such as taxes and utilities, the Company carefully manages its balance of lease types. Gross leases, wherein the Company has full exposure to all operating expenses, comprise 17% of its lease portfolio. Generally, the Company seeks higher rental increases for gross leases to compensate for its exposure to all operating expenses. Modified gross or base year leases, in which the Company and tenant both pay a share of operating expenses, comprise 35% of the Company's leased portfolio. Net leases, in which tenants pay all allowable operating expenses, total 48% of the leased portfolio. Tenant Improvements The Company may provide a tenant improvement allowance in new or renewal leases for the purpose of refurbishing or renovating tenant space. Shorter-term leases (one to two years) generally do not include a tenant improvement allowance. In instances where the Company negotiates a renewal lease but does not increase the rental rate in the first year of the renewal term, it limits or eliminates a tenant's improvement allowance. Tenant improvements totaled approximately $40.0 million, or $2.81 per square foot in 2014, of which $22.4 million pertained to first generation space. Tenant improvements in 2013 totaled $46.1 million, or $3.31 per square foot, of which $34.9 million pertained to first generation space. If tenants spend more than the allowance, the Company generally offers the tenant the option to either amortize the overage over the lease term, with interest, or reimburse the overage to the Company in a lump sum. In either case, such overages are amortized by the Company as rental income over the term of the lease. Interest earned on tenant overages is included in other operating income in the Company's Consolidated Statements of Operations and totaled approximately $0.7 million in 2014 and $0.5 million in 2013. The tenant overage amount amortized to rent totaled approximately $4.2 million in 2014 and $3.9 million in 2013. Leasing Commissions In certain markets, the Company may pay leasing commissions to real estate brokers who represent either the Company's properties or prospective tenants, with commissions generally equating to 4% to 6% of the gross lease value for new leases and 2% to 4% of the gross lease value for renewal leases. In 2014, the Company paid leasing commissions of approximately $7.0 million, or $0.49 per square foot, of which $2.5 million pertained to the leases for first generation space. In 2013, the Company paid leasing commissions of approximately $7.8 million, or $0.56 per square foot, of which $4.1 million pertained to the leases for first generation space. The amount of leasing commissions amortized over the term of the applicable leases and included in property operating expense in the Company's Consolidated Statements of Operations totaled $3.0 million, $2.0 million and $1.2 million for the years ended December 31, 2014, 2013 and 2012, respectively. Rent Abatements Rent abatements, which generally take the form of deferred rent, are sometimes used to help induce a potential tenant to lease space in the Company's properties. Such abatements, when made, are amortized by the Company on a straight-line basis against rental income over the lease term. Rent abatements for 2014 totaled approximately $3.8 million, or $0.27 per square foot, of which $2.4 million pertained to leases for first generation space. Rent abatements for 2013 totaled approximately $4.1 million, or $0.29 per square foot, of which $1.7 million pertained to leases for first generation space. Single-Tenant Net Leases Leases on eight single-tenant net lease properties expired in the second half of 2014. These leases generated approximately $6.4 million in net operating income for the year ended December 31, 2014. Seven of these leases renewed at favorable rates. The remaining lease relates to an 45,548 square foot on-campus medical office building 83% occupied by subtenants. The Company is in the process of executing leases with the subtenants. There are no single-tenant net leases with expiration dates in 2015. The Company has a total of 36 single-tenant net leases with a weighted average remaining lease term of 10.5 years. Operating Leases As of December 31, 2014, the Company was obligated under operating lease agreements consisting primarily of the Company’s corporate office lease and ground leases related to 45 real estate investments, excluding those ground leases the Company has prepaid. These operating leases have expiration dates through 2105. Rental expense relating to the operating leases for the years ended December 31, 2014, 2013 and 2012 was $4.9 million, $4.4 million and $4.3 million, respectively. 24Capital Additions As a part of the Company's leasing practice, the Company generates a return on capital additions by setting lease rates for each property based on the Company's gross investment, inclusive of any actual or expected capital additions. The Company invested $15.6 million, or $1.10 per square foot, in capital additions in 2014 of which $4.0 million pertained to the redevelopment of two properties in Tennessee and $11.9 million, or $0.85 per square foot, in 2013 of which $0.1 million pertained to the redevelopment of two properties in Tennessee. Capital additions are long-term investments made to maintain and improve the physical and aesthetic attributes of the Company's owned properties. Examples of such improvements include, but are not limited to, material changes to, or the full replacement of, major building systems (exterior facade, building structure, roofs, elevators, mechanical systems, electrical systems, energy management systems, upgrades to existing systems for improved efficiency) and common area improvements (furniture, signage and artwork, bathroom fixtures and finishes, exterior landscaping, parking lots or garages). These additions are capitalized into the gross investment of a property and then depreciated over their estimated useful lives, typically ranging from 7 to 20 years. Capital additions specifically do not include recurring maintenance expenses, whether direct or indirect, related to the upkeep and maintenance of major building systems or common area improvements. Capital additions also do not include improvements related to a specific tenant suite, unless the improvement is part of a major building system or common area improvement. Purchase Options The Company had approximately $162.2 million in real estate properties as of December 31, 2014 that were subject to exercisable purchase options or purchase options that become exercisable during 2015. The Company has approximately $470.9 million in real estate properties that are subject to purchase options that will become exercisable after 2015. Additional information about the amount and basis for determination of the purchase price is detailed in the table below (dollars in thousands): Year Exercisable Current 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 and thereafter Total Gross Real Estate Investment as of December 31, 2014 Fair Market Value Method (1) 110,041 20,740 13,203 — — 41,521 — 16,578 19,356 — 16,012 79,372 316,823 $ $ Non Fair Market Value Method (2) 14,494 16,894 — 48,773 — — — 14,984 — — — 221,128 316,273 $ $ $ $ Total 124,535 37,634 13,203 48,773 — 41,521 — 31,562 19,356 — 16,012 300,500 633,096 _____ (1) The purchase option price includes a fair market value component that is determined by an appraisal process. (2) Includes properties with stated purchase prices or prices based on fixed capitalization rates. These properties have purchase prices that are on average 12% greater than the Company's current gross investment. Purchase Option Exercise In September 2014, the Company received notice from a tenant of its intent to purchase a medical office building in Pennsylvania pursuant to a purchase option contained in its lease with the Company. The Company's net investment in the building, included in assets held for sale, was $7.7 million at December 31, 2014, including straight-line rent receivables. The appraisal process is on-going and the purchase price, if the transaction closes, would be the greater of fair market value or approximately $15.0 million. Discontinued Operations As discussed in more detail in Note 1 to the Consolidated Financial Statements, the Company must present the results of operations of real estate assets disposed of or held for sale as discontinued operations. Therefore, the results of operations from such assets are classified as discontinued operations for the current period, and all prior periods presented are restated to conform to the current period presentation. However, as of January 1, 2015, the Company has adopted ASU 2014-08, which is discussed in more detail in Note 1 to the Consolidated Financial Statements. The Company does not expect future disposals of individual properties to meet the definition of a discontinued operation and, therefore, the financial position and results of operations will not be reclassified. 25Equity Issuances The Company maintains an at-the-market equity offering program to sell shares of the Company's common stock from time to time in at-the-market sales transactions. The primary use of the proceeds from these equity issuances is the acquisition and development of healthcare properties, the repayment of debt (primarily mortgage notes payable assumed through acquisitions), and other general corporate purposes. The Company sold 3,009,761 shares under this program in 2014 generating net proceeds of $75.7 million. In January 2015, the Company sold 531,153 shares of common stock, generating $14.9 million in net proceeds, leaving 1,850,486 authorized shares remaining available to be sold under the Company's existing sales agreements. Debt Management The Company maintains a conservative and flexible capital structure that allows it to fund new investments and operate its existing portfolio. In addition to its unsecured senior notes, Unsecured Credit Facility, and Unsecured Term Loan due 2019, the Company has approximately $173.3 million of mortgage notes payable, most of which were assumed when the Company acquired properties. In 2015, approximately $45.4 million of these mortgage notes payable will mature. The Company intends to repay the mortgage notes upon maturity. Impact of Inflation The Company is subject to the risk of inflation as most of its revenues are derived from long-term leases. Most of the Company's leases provide for fixed increases in base rents or increases based on the Consumer Price Index, and require the tenant to pay all or some portion of increases in operating expenses. The Company believes that these provisions mitigate the impact of inflation. However, there can be no assurance that the Company's ability to increase rents or recover operating expenses will always keep pace with inflation. Other Items Impacting Operations General and administrative expenses will fluctuate quarter-to-quarter and the Company typically has higher general and administrative costs in the first quarter of every year as a result of employee benefit plan expenses, the expenses related to the grant of employee stock purchase plan options and contributions to healthcare savings accounts. These items will likely increase general and administrative expenses by approximately $0.5 million in the first quarter of 2015. General and administrative expense is expected to be greater in 2015 as compared to 2014 due in part to an increase in non-cash pension expense of approximately $1.1 million. Non-GAAP Measures Management considers certain non-GAAP financial measures to be useful supplemental measures of the Company's operating performance. A non-GAAP financial measure is generally defined as one that purports to measure historical or future financial performance, financial position or cash flows, but excludes or includes amounts that would not be so adjusted in the most comparable measure determined in accordance with generally accepted accounting principles ("GAAP"). Set forth below are descriptions of the non-GAAP financial measures management considers relevant to the Company's business and useful to investors, as well as reconciliations of these measures to the most directly comparable GAAP financial measures. The non-GAAP financial measures presented herein are not necessarily identical to those presented by other real estate companies due to the fact that not all real estate companies use the same definitions. These measures should not be considered as alternatives to net income [determined in accordance with GAAP], as indicators of the Company's financial performance, or as alternatives to cash flow from operating activities (determined in accordance with GAAP) as measures of the Company's liquidity, nor are these measures necessarily indicative of sufficient cash flow to fund all of the Company's needs. Management believes that in order to facilitate a clear understanding of the Company's historical consolidated operating results, these measures should be examined in conjunction with net income and cash flows from operations as presented in the Consolidated Financial Statements and other financial data included elsewhere in this Annual Report on Form 10-K. Funds from Operations Funds from operations (“FFO”) and FFO per share are operating performance measures adopted by the National Association of Real Estate Investment Trusts, Inc. (“NAREIT”). NAREIT defines FFO as the most commonly accepted and reported measure of a REIT’s operating performance equal to “net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures.” Management believes FFO and FFO per share provide an understanding of the operating performance of the Company’s properties without giving effect to certain significant non-cash items, primarily depreciation and amortization expense. Historical cost accounting for real estate assets in accordance with GAAP assumes that the value of real estate assets diminishes predictably over time. However, real estate values instead have historically risen or fallen with market conditions. The Company believes that by excluding the effect of depreciation, amortization and gains or losses from sales of real estate, all of which are based on historical costs and which may be of limited relevance in evaluating current performance, FFO and FFO per 26share can facilitate comparisons of operating performance between periods. The Company reports FFO and FFO per share because these measures are observed by management to also be the predominant measures used by the REIT industry and by industry analysts to evaluate REITs and because FFO per share is consistently reported, discussed, and compared by research analysts in their notes and publications about REITs. For these reasons, management has deemed it appropriate to disclose and discuss FFO and FFO per share. However, FFO does not represent cash generated from operating activities determined in accordance with GAAP and is not necessarily indicative of cash available to fund cash needs. FFO should not be considered as an alternative to net income attributable to common stockholders as an indicator of the Company’s operating performance or as an alternative to cash flow from operating activities as a measure of liquidity. The comparability of FFO for the year ended December 31, 2014 compared to 2013 was most significantly affected by the various property acquisitions during 2013 and 2014 and the results of operations of the portfolio from period to period, as well as the commencement of operations of properties that were previously under construction and continued leasing of the development conversion properties. FFO for the year ended December 31, 2013 was negatively affected by the $29.9 million in losses incurred on the early repayment of debt. Also during 2013, the Company sold its interest in a cost method investment in an unconsolidated limited liability company and recognized a $1.5 million gain on the disposition. This gain is included in FFO for the year ended December 31, 2013. Other items that impacted the comparability of FFO are discussed in the "Results of Operations" section. The table below reconciles net income attributable to common stockholders to FFO for the years ended December 31, 2014, 2013, and 2012. (Amounts in thousands, except per share data) Net income attributable to common stockholders Gain on sales of real estate properties Impairments Real estate depreciation and amortization Total adjustments Funds from Operations Funds from Operations per Common Share - Diluted Weighted Average Common Shares Outstanding - Diluted Year Ended December 31, 2014 $ 31,887 $ 2013 6,946 $ 2012 5,465 (9,283) 12,029 108,860 111,606 143,493 1.48 96,759 $ $ (24,718) (10,874) 9,889 98,036 83,207 90,153 0.98 92,387 $ $ 14,908 95,166 99,200 104,665 1.31 80,128 $ $ Same Store NOI NOI and same store NOI are non-GAAP historical financial measures of performance. Management considers same store NOI a supplemental measure because it allows investors, analysts and Company management to measure unlevered property-level operating results. The Company defines NOI as operating revenues (property operating revenue, single-tenant net lease revenue, and property lease guaranty revenue) less property operating expenses related specifically to the property portfolio. NOI excludes straight-line rent, general and administrative expenses, interest expense, depreciation and amortization, gains and losses from property sales, property management fees and other revenues and expenses not specifically related to the property portfolio. NOI may also be adjusted for certain expenses that are related to prior periods or are not considered to be part of the operations of the properties. Same store NOI is historical and not necessarily indicative of future results. 27 The following table reflects the Company's same store NOI for the twelve months ended December 31, 2014 and 2013. Same Store NOI for the Twelve Months Ended December 31, (Dollars in thousands) Multi-tenant Properties Number of Properties (1) Investment at December 31, 2014 2014 2013 115 $ 1,527,356 $ 119,648 $ 118,642 Single-tenant Net Lease Properties 33 500,926 49,580 47,957 Total 148 $ 2,028,282 $ 169,228 $ 166,599 ______ (1) Mortgage notes receivable, corporate property and assets classified as held for sale are excluded. Properties included in the same store analysis are stabilized properties that have been included in operations and were consistently reported as leased and stabilized properties for the duration of the year-over-year comparison period presented. Accordingly, properties that were recently acquired or disposed of, properties classified as held for sale, and properties in stabilization or conversion from stabilization are excluded from the same store analysis. In addition, the Company excludes properties that meet the following Company-defined criteria to be included in the reposition property group: • • Properties having less than 60% occupancy; Properties that experience a loss of occupancy over 30% in a single quarter; • Anticipated significant or material changes to a particular property or its market environment; or • Conversions between the single-tenant net lease and multi-tenant portfolios. 28The following tables reconcile same store NOI to the respective line items in the Consolidated Statements of Operations and the same store property count to the total owned real estate portfolio: Twelve Months Ended December 31, Reconciliation of Same Store NOI: (Dollars in thousands) Rental income Property lease guaranty revenue (a) Property operating expense Exclude Straight-line rent revenue NOI NOI not included in same store Same store NOI ___________ (a) Other operating income reconciliation: Property lease guaranty revenue Interest income Other 2014 $ 361,525 $ 4,430 (134,057) (10,969) 220,929 (51,701) 169,228 $ 4,430 $ 731 504 $ $ Total consolidated other operating income $ 5,665 $ Reconciliation of Same Store Property Count: Same store properties Acquisitions Reposition Development conversions Total owned real estate properties 2013 312,322 5,114 (122,571) (9,452) 185,413 (18,814) 166,599 5,114 457 355 5,926 Property Count as of December 31, 2014 148 18 20 12 198 29Results of Operations Twelve Months Ended December 31, 2014 Compared to Twelve Months Ended December 31, 2013 The Company’s consolidated results of operations for 2014 compared to 2013 were significantly impacted by acquisitions, dispositions, development conversion properties, extinguishments of debt, gains on sale and impairment charges recorded on real estate properties. Revenues Rental income increased $49.2 million, or 15.8%, to approximately $361.5 million compared to $312.3 million in the prior year period and is comprised of the following: (Dollars in thousands) Property operating Single-tenant net lease Straight-line rent Total Rental income $ $ 2014 2013 285,304 $ 251,403 $ 65,252 10,969 51,467 9,452 361,525 $ 312,322 $ Change $ 33,901 13,785 1,517 49,203 % 13.5% 26.8% 16.0% 15.8% Property operating income increased $33.9 million, or 13.5%, from the prior year as a result of the following activity: • Acquisitions in 2013 and 2014 contributed $20.6 million. • Additional leasing activity at development conversion properties contributed $9.5 million. • Net leasing activity including contractual rent increases and renewals contributed $3.8 million. Single-tenant net lease income increased $13.8 million, or 26.8%, from the prior year as a result of the following activity: • Acquisitions in 2013 and 2014 contributed $12.1 million. • New leasing activity including contractual rent increases contributed $1.7 million. Straight-line rent income increased $1.5 million, or 16.0%, from the prior year as a result of the following activity: • Acquisitions in 2013 and 2014 contributed $2.7 million. • New leasing activity including contractual rent increases and the effects of current year rent abatements contributed $1.0 million. • The effects of prior year rent abatements that expired caused a decrease of $2.2 million. Mortgage interest income decreased approximately $9.0 million, or 71.1%, from the prior year as a result of the following activity: • Acquisition in 2013 of a property in Missouri affiliated with Mercy Health previously funded under a construction mortgage note receivable resulted in a decrease of $4.2 million. • Acquisition in 2014 of a property in Oklahoma affiliated with Mercy Health previously funded under a construction mortgage note receivable resulted in a decrease of $2.6 million. • The Company's receipt of a deed in lieu of foreclosure related to a mortgage note receivable on a property in Iowa resulted in a decrease of $2.1 million. Expenses Property operating expenses increased $11.5 million, or 9.4%, for the twelve months ended December 31, 2014 compared to the prior year as a result of the following activity: • Acquisitions in 2013 and 2014 accounted for an increase of $8.5 million. • The Company experienced an overall increase in maintenance and repair of approximately $1.7 million, professional fees of approximately $0.6 million and utilities of approximately $0.6 million. 30General and administrative expenses decreased approximately $0.9 million, or 3.8%, for the twelve months ended December 31, 2014 compared to the prior year as a result of the following activity: • Decrease in compensation-related expenses totaling $0.7 million. • Decrease in expenses related to potential acquisitions and developments of $0.6 million. • Increase in expenses related to state income taxes of $0.1 million and corporate office rent expense of $0.1 million. Depreciation expense increased $13.1 million, or 15.2%, for the twelve months ended December 31, 2014 compared to the prior year . Properties acquired in 2013 and 2014 and developments completed and commencing operations contributed a combined increase of $7.0 million. The remaining $6.1 million increase is related to various building and tenant improvement expenditures. Other Income (Expense) Other income (expense) increased $30.9 million, or 30.7%, for the twelve months ended December 31, 2014 compared to the prior year period mainly due to the following activity: Interest Expense Interest expense decreased $1.1 million for the twelve months ended December 31, 2014 compared to the prior year. The components of interest expense are as follows: (Dollars in thousands) Contractual interest Net discount/premium accretion Deferred financing costs amortization Interest cost capitalization Total interest expense 2014 2013 $ 68,327 $ 69,334 $ 954 3,132 — 1,132 3,228 (183) Change (1,007) (178) (96) 183 $ 72,413 $ 73,511 $ (1,098) Percentage Change (1.5)% (15.7%) (3.0%) (100.0)% (1.5)% Contractual interest decreased $1.0 million as a result of the following activity: • The Unsecured Credit Facility and Unsecured Term Loan due 2019 accounted for a net increase of $1.6 million. • • Senior Notes due 2023 were issued in the first quarter of 2013 and accounted for an increase of $2.3 million. Senior Notes due 2014 were repaid in the second quarter of 2013 and accounted for a decrease of $4.2 million. • Mortgage notes assumed upon acquisition of real properties accounted for an increase of $2.0 million, and mortgage notes repayments accounted for a decrease of $3.0 million. Deferred financing costs amortization decreased $0.2 million as a result of the Unsecured Credit Facility amendment in the first quarter on 2013 and related write-off of unamortized financing costs. Loss on Extinguishments of Debt In connection with the early repayments of debt during 2013, the Company incurred $29.6 million of losses on extinguishment of debt. Gain on Sale of Cost Method Investment in Real Estate In December 2013, the Company recognized a $1.5 million gain on the sale of a cost method investment in an unconsolidated limited liability company. Interest and other income, net In June 2014, the Company received a reimbursement of certain operating expenses paid for the years 2006 through 2013 of approximately $1.9 million. Discontinued Operations Loss from discontinued operations totaled $1.8 million and income from discontinued operations totaled $20.1 million, respectively, for the years ended December 31, 2014 and 2013, which includes the results of operations, impairments and gains on sale related to assets classified as held for sale as of December 31, 2014 or disposed of during 2014. The Company disposed of nine real estate properties in 2014 and disposed of 12 real estate properties and one land parcel in 2013 with two properties classified as held for sale as of December 31, 2014. 31Twelve Months Ended December 31, 2013 Compared to Twelve Months Ended December 31, 2012 The Company’s consolidated results of operations for 2013 compared to 2012 were significantly impacted by acquisitions, dispositions, development conversion properties, gains on sale and impairment charges recorded on real estate properties. Revenues Rental income increased $29.9 million, or 10.6%, to approximately $312.3 million compared to $282.4 million in the prior year and is comprised of the following: (Dollars in thousands) Property operating Single-tenant net lease Straight-line rent Total Rental income $ $ 2013 2012 251,403 $ 233,662 $ 51,467 9,452 42,183 6,599 312,322 $ 282,444 $ Change $ 17,741 9,284 2,853 29,878 % 7.6% 22.0% 43.2% 10.6% Property operating income increased $17.7 million, or 7.6%, from the prior year as a result of the following activity: • Acquisitions in 2012 and 2013 contributed $8.9 million. • Additional leasing activity at development conversion properties contributed $6.6 million. • Net leasing activity including contractual rent increases and renewals contributed $2.2 million. Single-tenant net lease income increased $9.3 million, or 22.0%, from the prior year as a result of the following activity: • Acquisitions in 2012 and 2013 contributed $7.7 million. • New leasing activity including contractual rent increases contributed $1.6 million. Straight-line rent income increased $2.9 million, or 43.2%, from the prior year as a result of the following activity: • Acquisitions in 2012 and 2013 contributed $1.5 million. • New leasing activity including contractual rent increases and the effects of rent abatements contributed $1.4 million. Mortgage interest increased $3.5 million, or 38.3% from the prior year as a result of the following activity: • Additional interest from fundings on two construction mortgage notes receivable for the two build-to-suit facilities affiliated with Mercy Health, one of which was acquired during 2013, of $4.4 million. • New Company-financed mortgage notes receivable funded during 2012 and 2013 of $0.2 million. • A reduction in mortgage interest income from the repayment of mortgage notes totaling $1.1 million. Expenses Property operating expenses increased $9.3 million, or 8.2%, for the twelve months ended December 31, 2013 compared to the prior year as a result of the following activity: • Acquisitions in 2012 and 2013 accounted for an increase of $3.7 million. • Properties that were previously under construction that commenced operations during 2012 accounted for an increase of $0.9 million. • An overall increase in real estate taxes of approximately $3.7 million, professional fees of approximately $0.9 million and utility expense of approximately $0.1 million. General and administrative expenses increased approximately $2.8 million, or 13.5%, for the twelve months ended December 31, 2013 compared to the prior year as a result of the following activity: • • Increase in compensation-related expenses totaling $3.3 million including $1.8 million of non-cash, stock-based compensation. Increase in expenses related to potential acquisitions and developments of $1.3 million. • Reduction in litigation costs of $1.7 million including a $1.0 million settlement recorded in 2012. Depreciation expense increased $6.5 million, or 8.1%, for the twelve months ended December 31, 2013 compared to the prior year. Properties acquired in 2012 and 2013 and developments completed and commencing operations contributed a combined 32increase of $4.5 million. The remaining $2.0 million increase is related to various building and tenant improvement expenditures. Other Income (Expense) Interest expense decreased $1.4 million for the twelve months ended December 31, 2013 compared to the prior year period. The components of interest expense are as follows: (Dollars in thousands) Contractual interest Net discount accretion Deferred financing costs amortization Interest cost capitalization Total interest expense 2013 2012 $ 69,334 $ 75,821 $ 1,132 3,228 (183) 987 3,168 (5,021) $ 73,511 $ 74,955 $ Change (6,487) 145 60 4,838 (1,444) Percentage Change (8.6)% 14.7 % 1.9 % (96.4)% (1.9)% Contractual interest decreased $6.5 million primarily as a result of a lower average interest rate and lower average utilization on the Unsecured Credit Facility, the lower interest on the Senior Notes due 2023 issued in the first quarter of 2013 compared to the Senior Notes due 2014 that were repaid in the second quarter of 2013, and the repayment of a $77.3 million secured loan in the second quarter of 2013. Capitalized interest costs decreased $4.8 million due to decreased development expenditures upon completion of various projects in progress. Loss on Extinguishments of Debt In connection with the early repayments of debt during 2013, the Company incurred $29.6 million of losses on extinguishment of debt. Gain on Sale of Cost Method Investment in Real Estate In December 2013, the Company recognized a $1.5 million gain on the sale of a cost method investment in an unconsolidated limited liability company. Discontinued Operations Income from discontinued operations totaled $20.1 million and $6.4 million, respectively, for the year ended December 31, 2013 and 2012, which includes the results of operations, impairments and gains on sale related to assets classified as held for sale as of December 31, 2013 or disposed of during 2013. The Company disposed of 12 real estate properties and one land parcel in 2013 and disposed of 19 properties in 2012 with three property classified as held for sale as of December 31, 2013. Off-Balance Sheet Arrangements The Company has no off-balance sheet arrangements that are reasonably likely to have a current or future material effect on its consolidated financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. 33Contractual Obligations The Company monitors its contractual obligations to manage the availability of funds necessary to meet obligations when due. The following table represents the Company’s long-term contractual obligations for which the Company was making payments as of December 31, 2014, including interest payments due where applicable. The Company is also required to pay dividends to its stockholders at least equal to 90% of its taxable income in order to maintain its qualification as a REIT under the Internal Revenue Code. The Company's material contractual obligations are included in the table below. As of December 31, 2014, the Company had no long-term capital lease obligations. Payments Due by Period (Dollars in thousands) Long-term debt obligations, including interest (1) Operating lease commitments (2) Tenant improvements (3) Pension obligations (4) Total Less than 1 Year 1 -3 Years 3 - 5 Years More than 5 Years $ 1,723,945 $ 111,624 $ 550,362 $ 282,630 $ 779,329 312,303 18,520 — 5,001 18,520 — 10,199 10,404 286,699 — — — — — — Total contractual obligations $ 2,054,768 $ 135,145 $ 560,561 $ 293,034 $ 1,066,028 ______ (1) The amounts shown include estimated interest on total debt other than the Unsecured Credit Facility, whose balance and interest rate may fluctuate from day to day. Excluded from the table above are the discounts on the Company's outstanding senior notes of approximately $4.6 million, and net premiums totaling approximately $0.7 million on 17 mortgage notes payable, which are included in notes and bonds payable on the Company’s Consolidated Balance Sheet as of December 31, 2014. The Company’s long-term debt principal obligations are presented in more detail in the table below. (In millions) Unsecured Credit Facility Unsecured Term Loan Facility Senior Notes due 2017 Senior Notes due 2021 Senior Notes due 2023 Mortgage notes payable Principal Balance at Dec. 31, 2014 Principal Balance at Dec. 31, 2013 Maturity Date Contractual Interest Rates at December 31, 2014 Principal Payments Interest Payments $ 85.0 $ 200.0 300.0 400.0 250.0 172.5 238.0 — 300.0 400.0 250.0 166.7 4/17 2/19 1/17 1/21 4/23 LIBOR + 1.40% At maturity LIBOR + 1.45% At maturity Quarterly Quarterly 6.50% At maturity Semi-Annual 5.75% At maturity Semi-Annual 3.75% At maturity Semi-Annual 5/15-5/40 5.00%-7.63% Monthly Monthly $ 1,407.5 $ 1,354.7 (2) Includes primarily the corporate office and ground leases, with expiration dates through 2105, related to various real estate investments for which the Company is currently making payments. (3) The Company has remaining tenant improvement allowances related to first generation tenant improvements of approximately $5.1 million on properties that were developed by the Company. Also, the Company has remaining tenant improvement allowances related to second generation tenant improvements of approximately $13.4 million. The Company expects to fund these improvements in 2015. (4) As of December 31, 2014, only the Company’s chief executive officer was eligible to retire under the Executive Retirement Plan. If the chief executive officer retired and received full retirement benefits based on his and his spouse's life expectancies, the future benefits to be paid are estimated to be approximately $24.5 million as of December 31, 2014. Because the Company does not know when its chief executive officer will retire, it has not projected when the retirement benefits would be paid in the table above. As of December 31, 2014, the Company had recorded a $16.5 million liability, included in other liabilities, related to its pension plan obligations. 34 Application of Critical Accounting Policies to Accounting Estimates The Company’s Consolidated Financial Statements are prepared in accordance with GAAP and the rules and regulations of the SEC. In preparing the Consolidated Financial Statements, management is required to exercise judgment and make assumptions that impact the carrying amount of assets and liabilities and the reported amounts of revenues and expenses reflected in the Consolidated Financial Statements. Management routinely evaluates the estimates and assumptions used in the preparation of its Consolidated Financial Statements. These regular evaluations consider historical experience and other reasonable factors and use the seasoned judgment of management personnel. Management has reviewed the Company’s critical accounting policies with the Audit Committee of the Board of Directors. Management believes the following paragraphs in this section describe the application of critical accounting policies by management to arrive at the critical accounting estimates reflected in the Consolidated Financial Statements. The Company’s accounting policies are more fully discussed in Note 1 to the Consolidated Financial Statements. Principles of Consolidation The Company’s Consolidated Financial Statements include the accounts of the Company, its wholly owned subsidiaries, joint ventures, partnerships and consolidated variable interest entities (“VIE”) where the Company controls the operating activities. All material intercompany accounts and transactions have been eliminated. Management relies on a qualitative analysis based on power and benefits regarding the Company’s level of influence or control over an entity to determine whether or not the Company is the primary beneficiary of a variable interest entity. Consideration of various factors includes, but is not limited to, the Company’s ability to direct the activities that most significantly impact the entity’s economic performance, the Company’s form of ownership interest, the Company’s representation on the entity’s governing body, the size and seniority of the Company’s investment, the Company’s ability and the rights of other investors to participate in policy making decisions, the Company’s ability to replace the manager and/or liquidate the entity. Management’s ability to correctly assess its influence or control over an entity when determining the primary beneficiary of a VIE affects the presentation of these entities in the Company’s Consolidated Financial Statements. If it is determined that the Company is the primary beneficiary of a VIE, the Company’s Consolidated Financial Statements would include the operating results of the VIE rather than the results of the variable interest in the VIE. The Company would also incorporate the VIE in its internal controls over financial reporting. Untimely or inaccurate financial information provided to the Company or deficiencies in the VIE's internal controls over financial reporting could impact the Company’s Consolidated Financial Statements and its internal control over financial reporting. Capitalization of Costs GAAP generally allows for the capitalization of various types of costs. The rules and regulations on capitalizing costs and the subsequent depreciation or amortization of those costs versus expensing them in the period incurred vary depending on the type of costs and the reason for capitalizing the costs. Direct costs of a development project generally include construction costs, professional services such as architectural and legal costs, travel expenses, and land acquisition costs as well as other types of fees and expenses. These costs are capitalized as part of the basis of an asset to which such costs relate. Indirect costs include capitalized interest and overhead costs. Indirect costs are capitalized during construction and on the unoccupied space in a property for up to one year after the certificate of substantial completion is received. Capitalized interest is calculated using the weighted average interest rate of the Company's unsecured debt or the interest rate on project specific debt, if applicable. The Company’s overhead costs are based on overhead load factors that are charged to a project based on direct time incurred. The Company computes the overhead load factors annually for its acquisition and development departments, which have employees who are involved in the projects. The overhead load factors are computed to absorb that portion of indirect employee costs (payroll and benefits, training, occupancy and similar costs) that are attributable to the productive time the employee incurs working directly on projects. The employees in the Company’s development departments who work on these projects maintain and report their hours daily, by project. Employee costs that are administrative, such as vacation time, sick time, or general and administrative time, are expensed in the period incurred. Acquisition-related costs of an existing real estate property include finder’s fees, advisory, legal, accounting, valuation, other professional or consulting fees, and certain general and administrative costs are expensed in the period incurred for acquisitions accounted for as a business combination under Accounting Standards Codification Topic 805, Business Combinations. These costs associated with asset acquisitions are capitalized in accordance with GAAP. 35Management’s judgment is also exercised in determining whether costs that have been previously capitalized to a project should be reserved for or written off if or when the project is abandoned or circumstances otherwise change that would call the project’s viability into question. The Company follows a standard and consistently applied policy of classifying pursuit activity as well as reserving for these types of costs based on their classification. The Company classifies its pursuit projects into two categories relating to development. The first category includes pursuits of developments that have a remote chance of producing new business. Costs for these projects are expensed in the period incurred. The second category includes those pursuits of developments that are either probable or highly probable to result in a project or contract. Since the Company believes it is probable that these pursuits will result in a project or contract, it capitalizes these costs in full and records no reserve. Each quarter, all capitalized pursuit costs are again reviewed carefully for viability or a change in classification, and a management decision is made as to whether any additional reserve is deemed necessary. If necessary and considered appropriate, management would record an additional reserve at that time. Capitalized pursuit costs, net of the reserve, are carried in other assets in the Company’s Consolidated Balance Sheets, and any reserve recorded is charged to general and administrative expenses on the Consolidated Statements of Operations. All pursuit costs will ultimately be written off to expense or capitalized as part of the constructed real estate asset. As of December 31, 2014 and 2013, the Company had fully reserved capitalized pursuit costs totaling $2.0 million and $4.0 million, respectively. Valuation of Long-Lived and Intangible Assets and Goodwill Long-Lived Assets Held and Used The Company assesses the potential for impairment of identifiable intangible assets and long-lived assets, primarily real estate properties, whenever events occur or a change in circumstances indicates that the carrying value might not be recoverable. Important factors that could cause management to review for impairment include significant underperformance of an asset relative to historical or expected operating results; significant changes in the Company's use of assets or the strategy for its overall business; plans to sell an asset before its depreciable life has ended; the expiration of a significant portion of leases in a property; or significant negative economic trends or negative industry trends for the Company or its operators. In addition, the Company reviews for possible impairment those assets subject to purchase options and those impacted by casualties, such as tornadoes and hurricanes. Management remains continuously alert to the factors above, and others, that could indicate an impairment exists. The Company may, from time to time, be approached by a third party with interest in purchasing one or more of the Company's operating real estate properties that was otherwise not for sale. Alternatively, the Company may explore disposing of an operating real estate property but without specific intent to sell the property and without the property meeting the criteria to be classified as held for sale (see discussion below). In such cases, the Company and a potential buyer typically negotiate a letter of intent followed by a purchase and sale agreement that includes a due diligence time line for completion of customary due diligence procedures. Anytime throughout this period the transaction could be terminated by the parties. The Company views the execution of a purchase and sale agreement as a circumstance that warrants an impairment assessment and must include its best estimates of the impact of a potential sale in the recoverability test discussed in more detail below. A property value is considered impaired only if management's estimate of current and projected (undiscounted and unleveraged) operating cash flows of the property is less than the net carrying value of the property. These estimates of future cash flows include only those that are directly associated with and that are expected to arise as a direct result of the use and eventual disposition of the property based on its estimated remaining useful life. These estimates, including the useful life determination which can be affected by any potential sale of the property, are based on management's assumptions about its use of the property. Therefore, significant judgment is involved in estimating the current and projected cash flows. When the Company executes a purchase and sale agreement for a held and used property, the Company performs the cash flow estimation described above. This assessment gives consideration to all available information, including an assessment of the likelihood the potential transaction will be consummated under the terms and conditions set forth in the purchase and sale agreement. Management will re-evaluate the recoverability of the property if and when significant changes occur as the transaction proceeds toward closing. Normally sale transactions will close within 15 to 30 days after the due diligence period expires. Upon expiration of the due diligence period, management will again re-evaluate the recoverability of the property, updating its assessment based on the status of the potential sale. Whenever management determines that the carrying value of an asset that has been tested may not be recoverable, then an impairment charge would be recognized to the extent the current carrying value exceeds the current fair value of the asset. Significant judgment is also involved in making a determination of the estimated fair value of the asset. 36The Company also performs an annual goodwill impairment review. The Company's reviews are performed as of December 31 of each year. The Company's 2014 and 2013 reviews indicated that no impairment had occurred with respect to the Company's $3.5 million goodwill asset. Long-Lived Assets to be Disposed of by Planned Sale From time to time management affirmatively decides to sell certain real estate properties under a plan of sale. The Company reclassifies the property or disposal group as held for sale when all the following criteria for a qualifying plan of sale are met: • Management, having the authority to approve the action, commits to a plan to sell the property or disposal group; • The property or disposal group is available for immediate sale (i.e., a seller currently has the intent and ability to transfer the property or disposal group to a buyer) in its present condition, subject only to conditions that are usual and customary for sales of such properties or disposal groups; • An active program to locate a buyer and other actions required to complete the plan to sell have been initiated; • The sale of the property or disposal group is probable (i.e., likely to occur) and the transfer is expected to qualify for recognition as a completed sale within one year, with certain exceptions; • The property or disposal group is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and • Actions necessary to complete the plan indicate that it is unlikely significant changes to the plan will be made or that the plan will be withdrawn. A property or disposal group classified as held for sale is initially measured at the lower of its carrying amount or fair value less estimated costs to sell. An impairment charge is recognized for any initial adjustment of the property's or disposal group's carrying amount to its fair value less estimated costs to sell in the period the held for sale criteria are met. The fair value less estimated costs to sell of the property (disposal group) should be assessed each reporting period it remains classified as held for sale. Depreciation ceases as long as a property is classified as held for sale. If circumstances arise that were previously considered unlikely and a subsequent decision not to sell a property classified as held for sale were to occur, the property is reclassified as held and used. The property is measured at the time of reclassification at the lower of its (a) carrying amount before it was classified as held for sale, adjusted for any depreciation expense or impairment losses that would have been recognized had the property been continuously classified as held and used or (b) fair value at the date of the subsequent decision not to sell. The effect of any required adjustment is reflected in income from continuing operations at the date of the decision not to sell. The Company recorded impairment charges totaling $12.0 million, $9.9 million, and $14.9 million, respectively, for the years ended December 31, 2014, 2013, and 2012 related to real estate properties and other long-lived assets. The impairment charges in 2014 related to seven properties sold, reducing the Company's carrying value on the property to the estimated fair value of the property less estimated costs to sell. The impairment charges in 2013 included $3.3 million related to one land parcel sold and $6.6 million related to three properties classified as held for sale and two properties sold, reducing the Company's carrying value on the property to the estimated fair value of the property less estimated costs to sell. The impairment charges in 2012 included $11.1 million related to twelve properties sold and $3.8 million related to one property classified as held for sale, reducing the Company's carrying value on the property to the estimated fair value of the property less estimated costs to sell. Depreciation of Real Estate Assets and Amortization of Related Intangible Assets As of December 31, 2014, the Company had investments of approximately $3.1 billion in depreciable real estate assets and related intangible assets. When real estate assets and related intangible assets are acquired or placed in service, they must be depreciated or amortized. Management’s judgment involves determining which depreciation method to use, estimating the economic life of the building and improvement components of real estate assets, and estimating the value of intangible assets acquired when real estate assets are purchased that have in-place leases. As described in more detail in Note 1 to the Consolidated Financial Statements, when the Company acquires real estate properties with in-place leases, the cost of the acquisition must be allocated between the acquired tangible real estate assets “as if vacant” and any acquired intangible assets. Such intangible assets could include above- (or below-) market in-place leases and at-market in-place leases, which could include the opportunity costs associated with absorption period rentals, direct costs associated with obtaining new leases such as tenant improvements, and customer relationship assets. With regard to the elements of estimating the “as if vacant” values of the property and the intangible assets, including the absorption period, occupancy increases during the absorption period, and tenant improvement amounts, the Company uses the same absorption 37period and occupancy assumptions for similar property types. Any remaining excess purchase price is then allocated to goodwill. The identifiable tangible and intangible assets are then subject to depreciation and amortization. Goodwill is evaluated for impairment on an annual basis unless circumstances suggest that a more frequent evaluation is warranted. With respect to the building components, there are several depreciation methods available under GAAP. Some methods record relatively more depreciation expense on an asset in the early years of the asset’s economic life, and relatively less depreciation expense on the asset in the later years of its economic life. The straight-line method of depreciating real estate assets is the method the Company follows because, in the opinion of management, it is the method that most accurately and consistently allocates the cost of the asset over its estimated life. The Company assigns a useful life to its owned properties based on many factors, including the age and condition of the property when acquired. Allowance for Doubtful Accounts and Credit Losses Many of the Company’s investments are subject to long-term leases or other financial support arrangements with hospital systems and healthcare providers affiliated with the properties. Due to the nature of the Company’s agreements, the Company’s accounts receivable, notes receivable and interest receivables result mainly from monthly billings of contractual tenant rents, lease guaranty amounts, principal and interest payments due on notes and mortgage notes receivable, late fees and additional rent. Payments on the Company’s accounts receivable are normally collected within 30 days of billing. When receivables remain uncollected, management must decide whether it believes the receivable is collectible and whether to provide an allowance for all or a portion of these receivables. Unlike a financial institution with a large volume of homogeneous retail receivables such as credit card loans or automobile loans that have a predictable loss pattern over time, the Company’s receivable losses have historically been infrequent, and are tied to a unique or specific event. The Company’s allowance for doubtful accounts is generally based on specific identification and is recorded for a specific receivable amount once determined that such an allowance is needed. The Company also evaluates collectability of its mortgage notes and notes receivable. A loan is impaired when it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan as scheduled, including both contractual interest and principal payments. This assessment also includes an evaluation of the loan collateral. Management monitors the age and collectability of receivables on an ongoing basis. At least monthly, a report is produced whereby all receivables are “aged” or placed into groups based on the number of days that have elapsed since the receivable was billed. Management reviews the aging report for evidence of deterioration in the timeliness of payments from tenants, sponsoring health systems or borrowers. Whenever deterioration is noted, management investigates and determines the reason or reasons for the delay, which may include discussions with the delinquent tenant, sponsoring health system or borrower. Considering all information gathered, management’s judgment must be exercised in determining whether a receivable is potentially uncollectible and, if so, how much or what percentage may be uncollectible. Among the factors management considers in determining uncollectibility are the following: • • • • • • • • • • • type of contractual arrangement under which the receivable was recorded, e.g., a mortgage note, a triple net lease, a gross lease, a property operating agreement or some other type of agreement; tenant’s or debtor’s reason for slow payment; industry influences and healthcare segment under which the tenant or debtor operates; evidence of willingness and ability of the tenant or debtor to pay the receivable; credit-worthiness of the tenant or debtor; collateral, security deposit, letters of credit or other monies held as security; tenant’s or debtor’s historical payment pattern; other contractual agreements between the tenant or debtor and the Company; relationship between the tenant or debtor and the Company; state in which the tenant or debtor operates; and existence of a guarantor and the willingness and ability of the guarantor to pay the receivable. Considering these factors and others, management must conclude whether all or some of the aged receivable balance is likely uncollectible. If management determines that some portion of a receivable, including straight-line rent receivables, is likely uncollectible, the Company records a provision for bad debt expense, or a reduction to straight-line rent revenue, for the amount 38expected to be uncollectible. There is a risk that management’s estimate is over- or under-stated. However, management believes that this risk is mitigated by the fact that it re-evaluates the allowance at least once each quarter and bases its estimates on the most current information available. As such, any over- or under-stated estimates in the allowance should be adjusted as soon as new and better information becomes available. Derivative Instruments Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the derivative instrument with the recognition of the changes in the fair-value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transaction in a cash flow hedge. The accounting for a derivative requires that the Company make judgments in determining the nature of the derivatives and their effectiveness, including ones regarding the likelihood that a forecasted transaction will take place. These judgments could materially affect our consolidated financial statements. The Company may enter into a derivative instrument to manage interest rate risk from time to time. When a derivative instrument is initiated, the Company will assess its intended use of the derivative instrument and may elect a hedging relationship and apply hedge accounting. As required by the accounting literature, the Company will formally document the hedging relationship for all derivative instruments prior to or contemporaneous with entering into the derivative instrument. 39Item 7A. Quantitative and Qualitative Disclosures About Market Risk The Company is exposed to market risk in the form of changing interest rates on its debt and mortgage notes receivable. Management uses regular monitoring of market conditions and analysis techniques to manage this risk. As of December 31, 2014, $1.1 billion of the Company’s $1.4 billion of outstanding debt bore interest at fixed rates. Additionally, all of the Company’s mortgage notes and other notes receivable bore interest at fixed rates. The following table provides information regarding the sensitivity of certain of the Company’s financial instruments, as described above, to market conditions and changes resulting from changes in interest rates. For purposes of this analysis, sensitivity is demonstrated based on hypothetical 10% changes in the underlying market interest rates. (Dollars in thousands) Variable Rate Debt: Unsecured Credit Facility Term Note due 2017 Outstanding Principal Balance as of December 31, 2014 Calculated Annual Interest Assuming 10% Increase in Market Interest Rates Assuming 10% Decrease in Market Interest Rates Impact on Earnings and Cash Flows $ $ 85,000 $ 1,335 $ 200,000 3,212 285,000 $ 4,547 $ (14) $ (31) (45) $ Fair Value 14 31 45 (Dollars in thousands) Fixed Rate Debt: Senior Notes due 2017, net of discount (2) Senior Notes due 2021, net of discount (2) Senior Notes due 2023, net of discount (2) Mortgage Notes Payable (2) Fixed Rate Receivables: Mortgage Notes Receivable (3) Carrying Value as of December 31, 2014 December 31, 2014 Assuming 10% Increase in Market Interest Rates Assuming 10% Decrease in Market Interest Rates December 31, 2013 (1) $ $ $ $ 299,308 $ 307,771 $ 306,644 $ 397,864 248,253 173,267 430,633 241,947 173,476 425,982 235,013 171,499 308,891 435,297 249,097 175,513 321,238 424,931 226,168 170,351 1,118,692 $ 1,153,827 $ 1,139,138 $ 1,168,798 $ 1,142,688 1,900 1,900 $ $ 1,892 1,892 $ $ 1,862 1,862 $ $ 1,922 1,922 $ $ 124,461 124,461 ______ (1) Fair values as of December 31, 2013 represent fair values of obligations or receivables that were outstanding as of that date, and do not reflect the effect of any subsequent changes in principal balances and/or additions or extinguishments of instruments. (2) Level 3 - Fair value derived from valuation techniques in which one or more significant inputs or significant drivers are unobservable. (3) Level 2 - Fair value based on quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which significant inputs and significant value drivers are observable in active markets. 40 Item 8. Financial Statements and Supplementary Data Report of INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders Healthcare Realty Trust Incorporated Nashville, Tennessee We have audited the accompanying consolidated balance sheets of Healthcare Realty Trust Incorporated as of December 31, 2014 and 2013 and the related consolidated statements of operations, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2014. In connection with our audits of the financial statements, we have also audited the financial statement schedules listed in the accompanying index. These financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedules. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Healthcare Realty Trust Incorporated at December 31, 2014 and 2013, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Healthcare Realty Trust Incorporated’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated February 17, 2015 expressed an unqualified opinion thereon. /s/ BDO USA, LLP Nashville, Tennessee February 17, 2015 41Healthcare Realty Trust Incorporated Consolidated Balance Sheets (Amounts in thousands, except per share data) ASSETS Real estate properties: Land Buildings, improvements and lease intangibles Personal property Land held for development Less accumulated depreciation Total real estate properties, net Cash and cash equivalents Mortgage notes receivable Assets held for sale and discontinued operations, net Other assets, net Total assets LIABILITIES AND EQUITY Liabilities: Notes and bonds payable Accounts payable and accrued liabilities Liabilities of discontinued operations Other liabilities Total liabilities Commitments and contingencies Stockholders' Equity: Preferred stock, $.01 par value; 50,000 shares authorized; none issued and outstanding Common stock, $.01 par value; 150,000 shares authorized; 98,828 and 95,924 shares issued and outstanding at December 31, 2014 and 2013, respectively. Additional paid-in capital Accumulated other comprehensive income (loss) Cumulative net income attributable to common stockholders Cumulative dividends Total stockholders’ equity Noncontrolling interests Total equity Total liabilities and equity See accompanying notes. December 31, 2014 2013 $ 183,060 $ 178,931 3,048,251 2,861,935 9,914 17,054 9,267 17,054 3,258,279 3,067,187 (700,671) (632,109) 2,557,608 2,435,078 3,519 1,900 9,146 185,337 8,671 125,547 6,852 153,514 $ 2,757,510 $ 2,729,662 $ 1,403,692 $ 1,348,459 70,240 372 62,152 73,741 1,112 61,064 1,536,456 1,484,376 — 988 — 959 2,389,830 2,325,228 (2,519) 51 840,249 808,362 (2,007,494) (1,891,123) 1,221,054 1,243,477 — 1,809 1,221,054 1,245,286 $ 2,757,510 $ 2,729,662 42 Healthcare Realty Trust Incorporated Consolidated Statements of Operations (Amounts in thousands, except per share data) REVENUES Rental income Mortgage interest Other operating EXPENSES Property operating General and administrative Depreciation Amortization Bad debt, net of recoveries OTHER INCOME (EXPENSE) Loss on extinguishment of debt Interest expense Gain on sale of cost method investment in real estate Interest and other income, net INCOME (LOSS) FROM CONTINUING OPERATIONS DISCONTINUED OPERATIONS Income from discontinued operations Impairments Gain on sales of real estate properties INCOME (LOSS) FROM DISCONTINUED OPERATIONS NET INCOME Less: Net income attributable to noncontrolling interests NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS BASIC EARNINGS (LOSS) PER COMMON SHARE: Income (loss) from continuing operations Discontinued operations Net income attributable to common stockholders DILUTED EARNINGS (LOSS) PER COMMON SHARE: Income (loss) from continuing operations Discontinued operations Net income attributable to common stockholders WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - DILUTED See accompanying notes. Year Ended December 31, 2014 2013 2012 $ 361,525 $ 312,322 $ 282,444 3,665 5,665 12,701 5,926 9,186 6,052 370,855 330,949 297,682 134,057 122,571 113,287 22,808 99,384 10,820 31 23,704 86,239 10,645 172 20,881 79,776 10,418 230 267,100 243,331 224,592 — (72,413) — 2,637 (29,638) (73,511) 1,492 947 — (74,955) — 973 (69,776) (100,710) (73,982) 33,979 (13,092) (892) 967 (12,029) 9,283 (1,779) 32,200 (313) 5,246 (9,889) 24,718 20,075 6,983 (37) 10,461 (14,908) 10,874 6,427 5,535 (70) 31,887 $ 6,946 $ 5,465 0.35 $ (0.14) $ (0.01) (0.02) 0.22 0.33 $ 0.08 $ 0.08 0.07 0.35 $ (0.14) $ (0.01) (0.02) 0.22 0.33 $ 0.08 $ 95,279 96,759 90,941 90,941 0.08 0.07 78,845 78,845 $ $ $ $ $ 43 Healthcare Realty Trust Incorporated Consolidated Statements of Comprehensive Income (Amounts in thousands) NET INCOME Other comprehensive income (loss): Defined benefit pension plan net gain (loss) arising during the period Other comprehensive income (loss) COMPREHENSIVE INCOME Less: Comprehensive income attributable to noncontrolling interests COMPREHENSIVE INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS See accompanying notes. Year Ended December 31, 2014 2013 2012 $ 32,200 $ 6,983 $ 5,535 (2,570) (2,570) 29,630 2,143 2,143 9,126 1,240 1,240 6,775 (313) (37) (70) $ 29,317 $ 9,089 $ 6,705 44 Healthcare Realty Trust Incorporated Consolidated Statements of Equity (Amounts in thousands, except per share data) Preferred Stock Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Cumulative Net Income Cumulative Dividends Total Stockholders’ Equity Non- controlling Interests Total Equity Balance at December 31, 2011 $ — $ 779 $1,894,604 $ (3,332) $ 795,951 $ (1,683,196) $ 1,004,806 $ — $1,004,806 Issuance of stock, net of costs Common stock redemption Stock-based compensation Net income Defined benefit pension plan net gain Dividends to common stockholders ($1.20 per share) Distributions to noncontrolling interests Balance at December 31, 2012 Issuance of stock, net of costs Common stock redemption Stock-based compensation Net income Defined benefit pension plan net gain Dividends to common stockholders ($1.20 per share) Distributions to noncontrolling interests Proceeds from noncontrolling interests Balance at December 31, 2013 Issuance of stock, net of costs Common stock redemption Stock-based compensation Net income Defined benefit pension plan net loss Dividends to common stockholders ($1.20 per share) Distributions to noncontrolling interests Purchase of noncontrolling interest in consolidated joint ventures — — — — — — — — — — — — — — — — — — — — — — — — 93 — 3 — — — — 202,272 (68) 3,489 — — — — — — — — 1,240 — — — — — 5,465 — — — — — — — — 202,365 (68) 3,492 5,465 1,240 (96,356) (96,356) — — — 70 — — 202,365 (68) 3,492 5,535 1,240 (96,356) — — (70) (70) 875 2,100,297 (2,092) 801,416 (1,779,552) 1,120,944 — 1,120,944 83 — 1 — — — — 959 31 (4) 2 — — — — — 220,176 (454) 5,209 — — — — 2,325,228 76,800 (10,070) 4,449 — — — — (6,577) — — — — 2,143 — — 51 — — — — (2,570) — — — — — — 6,946 — — — — — — — — 220,259 (454) 5,210 6,946 2,143 (111,571) (111,571) — — — 808,362 (1,891,123) 1,243,477 — — — — — 76,831 (10,074) 4,451 31,887 (2,570) (116,371) (116,371) — — — 31,887 — — — — — — — 37 — — 220,259 (454) 5,210 6,983 2,143 (111,571) (34) (34) 1,806 1,809 1,806 1,245,286 — — — 313 — — 76,831 (10,074) 4,451 32,200 (2,570) (116,371) — — — (510) (510) (6,577) (1,612) (8,189) Balance at December 31, 2014 $ — $ 988 $2,389,830 $ (2,519) $ 840,249 $ (2,007,494) $ 1,221,054 $ — $1,221,054 See accompanying notes. 45Healthcare Realty Trust Incorporated Consolidated Statements of Cash Flows (Amounts in thousands) OPERATING ACTIVITIES Net income Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization Stock-based compensation Straight-line rent receivable Straight-line rent liability Gain on sales of real estate properties Gain on sale of cost method investment in real estate Loss on extinguishment of debt Net gain from mortgage repayment by previously consolidated VIE Impairments Provision for bad debt, net Changes in operating assets and liabilities: Other assets Accounts payable and accrued liabilities Other liabilities Net cash provided by operating activities INVESTING ACTIVITIES Acquisitions of real estate Development of real estate Acquisition of additional long-lived assets Funding of mortgages and notes receivable Proceeds from acquisition of real estate upon mortgage note receivable default Proceeds from sales of real estate Proceeds from sale of cost method investment in real estate Proceeds from mortgage repayment by previously consolidated VIE Proceeds from mortgages and notes receivable repayments Net cash used in investing activities FINANCING ACTIVITIES Net borrowings (repayments) on unsecured credit facility Borrowings on term loan Borrowings on notes and bonds payable Repayments on notes and bonds payable Redemption of notes and bonds payable Dividends paid Net proceeds from issuance of common stock Common stock redemptions Capital contributions received from noncontrolling interest Distributions to noncontrolling interest holders Purchase of noncontrolling interest Year Ended December 31, 2014 2013 2012 $ 32,200 $ 6,983 $ 5,535 116,049 105,318 101,444 4,451 (11,050) 721 5,210 (8,608) 426 3,492 (6,013) 418 (9,283) (24,718) (10,874) — — — 12,029 34 (1,492) 29,907 — 9,889 185 — — (313) 14,908 240 (16,842) (5,660) (3,469) (1,914) (1,025) 740 2,617 (712) 11,741 125,370 120,797 116,397 (71,899) (177,744) (89,640) — — (7,833) (70,670) (72,784) (62,251) (1,244) (58,731) (78,297) 204 32,398 — — 5,623 — 96,132 2,717 — 2,464 — 74,817 — 35,057 14,893 (105,588) (207,946) (113,254) (153,000) 128,000 (102,000) 200,000 — — 247,948 — — (12,357) (19,984) (4,990) — (371,839) — (116,371) (111,571) (96,356) 76,856 220,252 202,352 (10,074) — (541) (8,189) (454) 1,806 (32) — (68) — (40) — 46 Debt issuance and assumption costs Net cash provided by (used in) financing activities Increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period Supplemental Cash Flow Information: Interest paid Capitalized interest Company-financed real estate property sales Invoices accrued for construction, tenant improvement and other capitalized costs Elimination of construction mortgage note receivable upon acquisition real estate property Mortgage notes payable assumed upon acquisition (adjusted to fair value) Mortgage note receivable eliminated upon acquisition Construction liabilities transferred upon deconsolidation of VIE See accompanying notes. $ $ $ $ $ $ $ $ $ (1,258) (5,082) (3) (24,934) 89,044 (1,105) (5,152) 8,671 1,895 6,776 3,519 $ 8,671 $ 68,173 $ 71,025 — $ 1,900 5,594 81,213 19,636 39,973 $ $ $ $ $ — $ $ $ $ $ $ $ 183 4,241 10,885 97,203 40,992 — $ — $ 2,038 4,738 6,776 75,348 5,021 11,200 4,297 — 5,171 — 3,450 47NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies Business Overview Healthcare Realty Trust Incorporated (the “Company”) is a real estate investment trust ("REIT") that owns, acquires, manages, finances and develops income-producing real estate properties associated primarily with the delivery of outpatient healthcare services throughout the United States of America. The Company had investments of approximately $3.3 billion in 199 real estate properties, mortgages, land held for development and corporate property as of December 31, 2014. The Company’s 198 owned real estate properties are located in 30 states and total approximately 14.2 million square feet. The Company provided property management services to approximately 9.5 million square feet nationwide. Square footage disclosures in this Annual Report on Form 10-K are unaudited. Principles of Consolidation The Consolidated Financial Statements include the accounts of the Company, its wholly owned subsidiaries, joint ventures, partnerships and consolidated variable interest entities (“VIE”) where the Company controls the operating activities of the VIE. In accordance with the consolidation accounting standards, the Company must evaluate each contractual relationship it has with its lessees, borrowers, or others to determine whether or not the contractual arrangement creates a variable interest in those entities. If the Company determines that it has a variable interest and the entity is a VIE, then management must determine whether or not the Company is the primary beneficiary of the VIE, resulting in consolidation of the VIE. A primary beneficiary has the power to direct those activities of the VIE that most significantly impact its economic performance and has the obligation to absorb the losses of, or receive the benefits from, the VIE. The Company had a variable interest in unconsolidated VIEs consisting of one construction mortgage notes receivable aggregating approximately $80.0 million as of December 31, 2013, in which management concluded that the Company was not the primary beneficiary. See Note 5 for more information on this construction mortgage notes receivable. There were no VIEs at December 31, 2014. During 2014, the Company acquired the outstanding 40% noncontrolling interest holders' investment in a partnership, HRP MAC III, LLC, that held $18.0 million in real estate assets and owns 100% as of December 31, 2014. During 2013, the Company received capital contributions of $1.8 million from a 40% noncontrolling interest holder in the partnership. The Company reports noncontrolling interests in subsidiaries as a component of equity and the related net income or loss attributable to the noncontrolling interests as part of consolidated net income or loss in its Consolidated Financial Statements. See Note 4 for additional information. All significant intercompany accounts, transactions and balances have been eliminated upon consolidation in the Consolidated Financial Statements. Use of Estimates in the Consolidated Financial Statements Preparation of the Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect amounts reported in the Consolidated Financial Statements and accompanying notes. Actual results may differ from those estimates. Segment Reporting The Company owns, acquires, manages, finances and develops outpatient and other healthcare-related properties. The Company is managed as one reporting unit, rather than multiple reporting units, for internal reporting purposes and for internal decision- making. Therefore, the Company discloses its operating results in a single reportable segment. Reclassifications Certain reclassifications for discontinued operations have been made to the Consolidated Statements of Operations for the years ended December 31, 2013 and 2012 to conform to the 2014 presentation. The operating results of those assets have been reclassified from continuing to discontinued operations for all periods presented. 48NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Real Estate Properties Real estate properties are recorded at cost or at fair value if acquired in a transaction that is a business combination under Accounting Standards Codification Topic 805, Business Combinations. Cost or fair value at the time of acquisition is allocated among land, buildings, tenant improvements, lease and other intangibles, and personal property as applicable. The Company’s gross real estate assets, on a financial reporting basis, totaled approximately $3.3 billion as of December 31, 2014 and $3.1 billion as of December 31, 2013. During 2014 and 2013, the Company eliminated against accumulated depreciation approximately $9.5 million and $4.3 million, respectively, of fully amortized real estate intangibles that were initially recorded as a component of certain real estate acquisitions. Also during 2014, approximately $0.4 million of fully depreciated tenant and capital improvements that were no longer in service were eliminated against accumulated depreciation. Depreciation and amortization of real estate assets and liabilities in place as of December 31, 2014, is provided for on a straight-line basis over the asset’s estimated useful life: Land improvements Buildings and improvements Lease intangibles (including ground lease intangibles) Personal property 15.0 to 38.1 years 3.3 to 39.0 years 1.0 to 93.1 years 1.9 to 15.8 years The Company capitalizes direct costs, including costs such as construction costs and professional services, and indirect costs, including capitalized interest and overhead costs, associated with the development and construction of real estate assets while substantive activities are ongoing to prepare the assets for their intended use. Capitalized interest cost is calculated using the weighted average interest rate of the Company's unsecured debt or the interest rate on project specific debt, if applicable. The Company continues to capitalize interest on the unoccupied portion of the properties in stabilization for up to one year after the buildings have been placed into service, at which time the capitalization of interest must cease. Land Held for Development Land held for development includes parcels of land owned by the Company, upon which the Company intends to develop and own outpatient healthcare facilities. The Company’s investment in land held for development totaled approximately $17.1 million as of December 31, 2014 and 2013. Asset Impairment The Company assesses the potential for impairment of identifiable, definite-lived, intangible assets and long-lived assets, including real estate properties, whenever events occur or a change in circumstances indicates that the carrying value might not be fully recoverable. Indicators of impairment may include significant underperformance of an asset relative to historical or expected operating results; significant changes in the Company’s use of assets or the strategy for its overall business; plans to sell an asset before its depreciable life has ended; the expiration of a significant portion of leases in a property; or significant negative economic trends or negative industry trends for the Company or its operators. In addition, the Company reviews for possible impairment, those assets subject to purchase options and those impacted by casualties, such as tornadoes and hurricanes. If management determines that the carrying value of the Company’s assets may not be fully recoverable based on the existence of any of the factors above, or others, management would measure and record an impairment charge based on the estimated fair value of the property or the estimated fair value less costs to sell the property. Acquisitions of Real Estate Properties with In-Place Leases Acquisitions of real estate properties are accounted for at fair value. When a building with in-place leases is acquired, the cost of the acquisition must be allocated between the tangible real estate assets "as-if vacant" and the intangible real estate assets related to in-place leases based on their estimated fair values. Where appropriate, the intangible assets recorded could include goodwill or customer relationship assets. The values related to above- or below-market in-place lease intangibles are amortized to rental income where the Company is the lessor, are amortized to property operating expense where the Company is the lessee, and are amortized over the remaining term of the leases upon acquisition. The Company considers whether any of the in-place lease rental rates are above- or below-market. An asset (if the actual rental rate is above-market) or a liability (if the actual rental rate is below-market) is calculated and recorded in an amount equal to the present value of the future cash flows that represent the difference between the actual lease rate and the average market rate. If an in-place lease is identified as a below-market rental rate, the Company would also evaluate any renewal options associated with that lease to determine if the intangible should include those periods. 49NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The Company also estimates an absorption period, which can vary by property, assuming the building is vacant and must be leased up to the actual level of occupancy when acquired. During that absorption period, the owner would incur direct costs, such as tenant improvements, and would suffer lost rental income. Likewise, the owner would have acquired a measurable asset in that, assuming the building was vacant, certain fixed costs would be avoided because the actual in-place lessees would reimburse a certain portion of fixed costs through expense reimbursements during the absorption period. All of these intangible assets (above- or below-market lease, tenant improvement costs avoided, rental income lost, and expenses recovered through in-place lessee reimbursements) are estimated and recorded in amounts equal to the present value of estimated future cash flows. The actual purchase price is allocated based on the various asset fair values described above. The building and tenant improvement components of the purchase price are depreciated over the estimated useful life of the building or the weighted average remaining term of the in-places leases. The above- or below-market rental rate assets or liabilities are amortized to rental income or property operating expense over the remaining term of the leases. The at-market, in- place lease intangibles are amortized to amortization expense over the weighted average remaining term of the leases, customer relationship assets are amortized to amortization expense over terms applicable to each acquisition, and any goodwill recorded would be reviewed for impairment at least annually. The fair values of at-market in-place lease and other intangible assets are amortized and reflected in amortization expense in the Company’s Consolidated Statements of Operations. See Note 9 for more details on the Company’s intangible assets. Fair Value Measurements Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants. In calculating fair value, a company must maximize the use of observable market inputs, minimize the use of unobservable market inputs and disclose in the form of an outlined hierarchy the details of such fair value measurements. A hierarchy of valuation techniques is defined to determine whether the inputs to a fair value measurement are considered to be observable or unobservable in a marketplace. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. This hierarchy requires the use of observable market data when available. These inputs have created the following fair value hierarchy: • • • Level 1 – quoted prices for identical instruments in active markets; Level 2 – quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and Level 3 – fair value measurements derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Executed purchase and sale agreements, that are binding agreements, are categorized as level one inputs. Brokerage estimates, letters of intent, or unexecuted purchase and sale agreements are considered to be level three as they are nonbinding in nature. During 2014, in connection with the sales of six medical office buildings, the Company recorded impairment charges in discontinued operations of approximately $3.7 million based on the contractual sales price, a level one input. The Company used level three inputs to record impairment charges of approximately $8.3 million related to two properties in held for sale and two properties that were reclassified to held for sale during 2014, reducing the Company's carrying value to the estimated fair value of the properties less costs to sell prior to sale. All four of these properties were sold during 2014. Cash and Cash Equivalents Cash and cash equivalents includes short-term investments with original maturities of three months or less when purchased. 50NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Allowance for Doubtful Accounts and Credit Losses Accounts Receivable Management monitors the aging and collectibility of its accounts receivable balances on an ongoing basis. Whenever deterioration in the timeliness of payment from a tenant or sponsoring health system is noted, management investigates and determines the reason or reasons for the delay. Considering all information gathered, management’s judgment is exercised in determining whether a receivable is potentially uncollectible and, if so, how much or what percentage may be uncollectible. Among the factors management considers in determining collectibility are: the type of contractual arrangement under which the receivable was recorded (e.g., a triple net lease, a gross lease, a property operating agreement, or some other type of agreement); the tenant’s reason for slow payment; industry influences under which the tenant operates; evidence of willingness and ability of the tenant to pay the receivable; credit-worthiness of the tenant; collateral, security deposit, letters of credit or other monies held as security; tenant’s historical payment pattern; other contractual agreements between the tenant and the Company; relationship between the tenant and the Company; the state in which the tenant operates; and the existence of a guarantor and the willingness and ability of the guarantor to pay the receivable. Considering these factors and others, management concludes whether all or some of the aged receivable balance is likely uncollectible. Upon determining that some portion of the receivable is likely uncollectible, the Company records a provision for bad debts for the amount it expects will be uncollectible. When efforts to collect a receivable are exhausted, the receivable amount is charged off against the allowance. The Company does not hold any accounts receivable for sale. Mortgage Notes The Company had one and four mortgage notes receivable outstanding as of December 31, 2014 and 2013 with aggregate principal balances totaling $1.9 million and $125.5 million, respectively. The weighted average maturity of the notes was approximately 2.8 and 0.4 years, respectively, with an interest rate of 6.50% and interest rates ranging from 5.00% to 7.72%, as of December 31, 2014 and 2013, respectively. No allowances were recorded on the Company's mortgage notes receivable during 2014 or 2013. The Company evaluates collectibility of its mortgage notes and records allowances on the notes as necessary. A loan is impaired when it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan as scheduled, including both contractual interest and principal payments. This assessment also includes an evaluation of the loan collateral. If a mortgage loan becomes past due, the Company will review the specific circumstances and may discontinue the accrual of interest on the loan. The loan is not returned to accrual status until the debtor has demonstrated the ability to continue debt service in accordance with the contractual terms. Loans placed on non-accrual status will be accounted for either on a cash basis, in which income is recognized only upon receipt of cash, or on a cost-recovery basis, in which all cash receipts reduce the carrying value of the loan, based on the Company’s expectation of future collectibility. As of December 31, 2014 and 2013, there were no recorded investments in mortgage notes that were either on non-accrual status or were past due more than ninety days and continued to accrue interest. Also, as of December 31, 2014, the Company did not hold any of its mortgage notes available for sale. In January 2014, one of the Company's mortgage notes receivable had a scheduled balloon payment due of $40.0 million that the borrower was not able to pay. The Company initiated the default process and negotiated a deed in lieu of foreclosure from the borrower. See Note 4 for additional information regarding this transaction. Goodwill and Other Intangible Assets Goodwill and intangible assets with indefinite lives are not amortized, but are tested at least annually for impairment. Intangible assets with finite lives are amortized over their respective lives to their estimated residual values and are reviewed for impairment only when impairment indicators are present. Identifiable intangible assets of the Company are comprised of enterprise goodwill, in-place lease intangible assets, customer relationship intangible assets, and deferred financing costs. In-place lease and customer relationship intangible assets are amortized on a straight-line basis over the applicable lives of the assets. Deferred financing costs are amortized over the term of the related credit facility or other debt instrument under the straight-line method, which approximates amortization under the effective interest method. Goodwill is not amortized but is evaluated annually as of December 31 for impairment. Both the 2014 and 2013 impairment evaluations indicated that no impairment had occurred with respect to the $3.5 million goodwill asset. See Note 9 for more detail on the Company’s intangible assets. Contingent Liabilities From time to time, the Company may be subject to loss contingencies arising from legal proceedings and similar matters. Additionally, while the Company maintains comprehensive liability and property insurance with respect to each of its properties, the Company may be exposed to unforeseen losses related to uninsured or underinsured damages. 51NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The Company continually monitors any matters that may present a contingent liability, and, on a quarterly basis, management reviews the Company’s reserves and accruals in relation to each of them, adjusting provisions as necessary in view of changes in available information. Liabilities for contingencies are first recorded when a loss is determined to be both probable and can be reasonably estimated. Changes in estimates regarding the exposure to a contingent loss are reflected as adjustments to the related liability in the periods when they occur. Because of uncertainties inherent in the estimation of contingent liabilities, it is possible that the Company’s provision for contingent losses could change materially in the near term. To the extent that any significant losses, in addition to amounts recognized, are at least reasonably possible, such amounts will be disclosed in the notes to the Consolidated Financial Statements. Defined Benefit Pension Plan The Company has a pension plan under which three of the Company’s founding officers may receive retirement benefits upon retirement (the “Executive Retirement Plan”). The plan is unfunded and benefits will be paid from cash flows of the Company. The Company recognizes pension expense on an accrual basis over an estimated service period. The Company calculates pension expense and the corresponding liability annually on the measurement date (December 31) which requires certain assumptions, such as a discount rate and the recognition of actuarial gains and losses. The maximum annual benefits payable to each individual under the plan have been frozen at $0.9 million, subject to cost-of-living adjustments. Stock-Based Compensation The Company has various employee and director stock-based awards outstanding. These awards include non-vested common stock and options to purchase common stock granted to employees pursuant to the 2007 Employees Stock Incentive Plan and its predecessor plan (the “Incentive Plan”) and the 2000 Employee Stock Purchase Plan (the “Employee Stock Purchase Plan”). The Company recognizes share-based payments to employees and directors in the Consolidated Statements of Operations on a straight-line basis over the requisite service period based on the fair value of the award on the measurement date. The Employee Stock Purchase Plan features a “look-back” provision which enables the employee to purchase a fixed number of common shares at the lesser of 85% of the market price on the date of grant or 85% of the market price on the date of exercise, with optional purchase dates occurring once each quarter for 27 months. The Company accounts for awards to its employees under the Employee Stock Purchase Plan based on fair value, using the Black-Scholes model, and generally recognizes expense over the award’s vesting period, net of estimated forfeitures. Since the options granted under the Employee Stock Purchase Plan immediately vest, the Company records compensation expense for those options when they are granted in the first quarter of each year and then may record additional compensation expense in subsequent quarters as warranted. In each of the years ended December 31, 2014, 2013 and 2012, the Company recognized in general and administrative expenses approximately $0.3 million, $0.3 million, and $0.4 million, respectively, of compensation expense related to the annual grant of options to its employees to purchase shares under the Employee Stock Purchase Plan. See Note 13 for details on the Company’s stock-based awards. Accumulated Other Comprehensive Income (Loss) Certain items must be included in comprehensive income, including items such as foreign currency translation adjustments, minimum pension liability adjustments, and unrealized gains or losses on available-for-sale securities. The Company’s accumulated other comprehensive income (loss) consists of only the cumulative pension liability adjustments, which are generally recognized in the fourth quarter of each year. Revenue Recognition The Company recognizes revenue when it is realized or realizable and earned. There are four criteria that must all be met before a Company may recognize revenue, including that persuasive evidence that an arrangement exists, delivery has occurred or services have been rendered (i.e., the tenant has taken possession of and controls the physical use of the leased asset), the price has been fixed or is determinable, and collectibility is reasonably assured. Income received but not yet earned is deferred until such time it is earned. Deferred revenue, included in other liabilities on the Consolidated Balance Sheets, was $35.4 million and $36.3 million, respectively, as of December 31, 2014 and 2013 which includes deferred tenant improvement reimbursements of $22.4 million and $21.9 million, respectively, which will be recognized as revenue over the life of each respective lease. The Company derives most of its revenues from its real estate property and mortgage notes receivable portfolio. The Company’s rental and mortgage interest income is recognized based on contractual arrangements with its tenants, sponsoring health systems or borrowers. These contractual arrangements fall into three categories: leases, mortgage notes receivable, and property operating agreements as described in the following paragraphs. The Company may accrue late fees based on the contractual terms of a lease or note. Such fees, if accrued, are included in rental income or mortgage interest income on the Company’s Consolidated Statements of Operations, based on the type of contractual agreement. 52NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Rental Income Rental income related to non-cancelable operating leases is recognized as earned over the life of the lease agreements on a straight-line basis. The Company's lease agreements generally include provisions for stated annual increases or increases based on a Consumer Price Index ("CPI"). Rental income from properties under multi-tenant office lease arrangements and rental income from properties with single-tenant lease arrangements are included in rental income on the Company's Consolidated Statements of Operations. The components of rental income are as follows: (Dollars in thousands) Property operating income Single-tenant net lease Straight-line rent Rental income Year Ended December 31, 2014 2013 2012 285,304 $ 251,403 $ 233,662 65,252 10,969 51,467 9,452 42,183 6,599 361,525 $ 312,322 $ 282,444 $ $ Operating expense recoveries, included in property operating income, were approximately $53.9 million, $40.9 million and $31.9 million, respectively, for the years ended December 31, 2014, 2013 and 2012. Additional rent, generally defined in most lease agreements as the cumulative increase in CPI from the lease start date to the CPI as of the end of the previous year, is calculated as of the beginning of each year, and is then billed and recognized as income during the year as provided for in the lease. Included in rental income was additional rental income, net of reserves, of approximately $0.7 million for the years ended December 31, 2014, 2013 and 2012. Mortgage Interest Income Interest income on the Company’s mortgage notes receivable is recognized based on the interest rates, maturity dates and amortization periods in accordance with each note agreement. The interest rate on its one mortgage note receivable outstanding as of December 31, 2014 was fixed. The Company amortizes any fees paid related to its mortgage notes receivable to mortgage interest income over the term of the loan on a straight-line basis which approximates amortization under the effective interest method. Other Operating Income Other operating income on the Company’s Consolidated Statements of Operations was comprised of the following: (Dollars in thousands) Property lease guaranty revenue Interest income Management fee income Other Year Ended December 31, 2014 2013 $ 4,430 $ 5,114 $ 731 289 215 457 164 191 2012 4,898 448 158 548 $ 5,665 $ 5,926 $ 6,052 Five of the Company’s 198 owned real estate properties as of December 31, 2014 were covered under property operating agreements between the Company and a sponsoring health system, which contractually obligate the sponsoring health system to provide to the Company a minimum return on the Company’s investment in the property in exchange for the right to be involved in the operating decisions of the property, including tenancy. If the minimum return is not achieved through normal operations of the property, the Company calculates and accrues to property lease guaranty revenue, each quarter, any shortfalls due from the sponsoring health systems under the terms of the property operating agreement. Interest income generally relates to interest on tenant improvement reimbursements as defined in each note or lease agreement. Management fees for property management services provided to third parties are generally calculated, accrued and billed monthly based on a percentage of cash collections of tenant receivables for the month or a stated amount per square foot. Management fees related to the Company’s owned properties are eliminated in consolidation. 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Federal Income Taxes No provision has been made for federal income taxes. The Company intends at all times to qualify as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). The Company must distribute at least 90% per annum of its real estate investment trust taxable income to its stockholders and meet other requirements to continue to qualify as a real estate investment trust. See Note 16 for further discussion. The Company classifies interest and penalties related to uncertain tax positions, if any, in the Consolidated Financial Statements as a component of general and administrative expenses. No such amounts were recognized during the three years ended December 31, 2014. Federal tax returns for the years 2011, 2012 and 2013 are currently subject to examination by taxing authorities. State Income Taxes The Company must pay certain state income taxes and the provisions for such taxes are generally included in general and administrative expense on the Company’s Consolidated Statements of Operations. See Note 16 for further discussion. Sales and Use Taxes The Company must pay sales and use taxes to certain state tax authorities based on rents collected from tenants in properties located in those states. The Company is generally reimbursed for these taxes by the tenant. The Company accounts for the payments to the taxing authority and subsequent reimbursement from the tenant on a net basis in revenues in the Company’s Consolidated Statements of Operations. Discontinued Operations The Company sells properties from time to time due to a variety of factors, including among other things, market conditions or the exercise of purchase options by tenants. The operating results of properties that have been sold or are held for sale are reported as discontinued operations in the Company’s Consolidated Statements of Operations for all periods presented. A company must report discontinued operations when a component of an entity has either been disposed of or is deemed to be held for sale if (i) both the operations and cash flows of the component have been or will be eliminated from ongoing operations as a result of the disposal transaction, and (ii) the entity will not have any significant continuing involvement in the operations of the component after the disposal transaction. Long-lived assets held for sale are reported at the lower of their carrying amount or their fair value less cost to sell estimate. Further, depreciation of these assets ceases at the time the assets are classified as discontinued operations. Losses resulting from the sale of such properties are characterized as impairment losses relating to discontinued operations in the Consolidated Statements of Operations. See Note 6 for more detail on discontinued operations. Earnings per Share Basic earnings per common share is calculated using weighted average shares outstanding less issued and outstanding non- vested shares of common stock. Diluted earnings per common share is calculated using weighted average shares outstanding plus the dilutive effect of the outstanding stock options from the Employee Stock Purchase Plan and non-vested shares of common stock using the treasury stock method and the average stock price during the period. See Note 14 for the calculations of earnings per share. New Accounting Pronouncements Accounting Standards Update No. 2014-08 In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” This standard changes the requirements for reporting discontinued operations by raising the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. The standard limits discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect on an entity’s operations and financial results. This standard is effective for the Company on a prospective basis for annual periods beginning on January 1, 2015 and interim periods within that year. Early adoption is permitted but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued. The Company adopted this standard on the effective date of January 1, 2015 and does not expect it to have a material impact on the Company's consolidated financial position or cash flows, but could have a material impact on the presentation of the Consolidated Statement of Operations. 54NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Accounting Standards Update No. 2014-09 In May 2014, the FASB issued Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers", a comprehensive new revenue recognition standard that supersedes most all existing revenue recognition guidance, including sales of real estate. This standard's core principle is that a company will recognize revenue when it transfers goods or services to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods and services. However, leasing contracts, representing the major source of the Company's revenues, are not within the scope of the new standard and will continue to be accounted for under existing standards. This new standard is effective for the Company for annual and interim periods beginning on January 1, 2017 with early adoption prohibited. The Company has not yet determined the effects on the Consolidated Financial Statements and related notes resulting from the adoption of this new standard. 55NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 2. Property Investments The Company invests in healthcare-related properties and mortgages located throughout the United States. The Company provides management, leasing and development services, and capital for the construction of new facilities, as well as for the acquisition of existing properties. The Company had investments of approximately $3.3 billion in 199 real estate properties, mortgages, land held for development and corporate property as of December 31, 2014. The following table summarizes the Company’s investments. (Dollars in thousands) Medical office/outpatient: Number of Facilities Arizona California Colorado District of Columbia Florida Hawaii Illinois Indiana Iowa Michigan Missouri North Carolina Oklahoma Tennessee Texas Virginia Washington Other (12 states) Inpatient: Arizona California Colorado Indiana Missouri Pennsylvania Texas Other: Alabama Indiana Iowa Michigan Tennessee Virginia Land Held for Development Corporate Property Total owned properties Mortgage notes receivable Total real estate investments 9 9 9 2 8 3 3 5 6 3 4 16 2 14 43 13 8 16 173 1 1 1 1 1 4 5 14 1 1 1 5 1 2 11 — — — 198 1 199 $ $ Land 3,726 17,430 7,197 — 6,891 8,327 6,142 3,891 12,665 5 4,668 5,096 7,673 10,353 45,036 2,451 8,974 7,248 157,773 3,641 — 623 1,071 1,989 6,555 9,507 23,386 181 96 — 193 253 1,178 1,901 17,054 — 17,054 200,114 — $ 200,114 $ Buildings, Improvements, and Lease Intangibles Personal Property Total Accumulated Depreciation 78,398 104,983 188,593 30,729 90,674 121,022 49,194 140,749 81,424 23,158 32,574 156,538 100,543 183,414 621,608 183,340 201,227 155,992 2,544,160 12,371 12,688 10,788 42,335 109,304 74,634 158,149 420,269 9,925 3,662 40,263 12,728 7,213 10,031 83,822 — — — 3,048,251 — 3,048,251 $ $ 441 195 208 — 252 68 143 — 94 33 7 95 — 255 1,290 136 186 91 3,494 — — — — — — 265 265 8 32 — 183 408 48 679 — 5,476 5,476 9,914 — 9,914 $ 82,565 122,608 195,998 30,729 97,817 129,417 55,479 144,640 94,183 23,196 37,249 161,729 108,216 194,022 667,934 185,927 210,387 163,331 2,705,427 16,012 12,688 11,411 43,406 111,293 81,189 167,921 443,920 $ (22,521) (53,254) (18,338) (8,992) (43,774) (17,726) (11,100) (22,575) (13,346) (7,644) (16,998) (34,824) (1,486) (58,932) (145,509) (36,277) (22,784) (49,142) (585,222) (1,839) (6,630) (362) (9,227) (3,503) (38,166) (24,558) (84,285) 10,114 3,790 40,263 13,104 7,874 11,257 86,402 17,054 5,476 22,530 3,258,279 1,900 $ 3,260,179 (6,605) (2,477) (1,536) (8,379) (2,279) (6,054) (27,330) (115) (3,719) (3,834) (700,671) — $ (700,671) 56NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 3. Real Estate Leases Real Estate Leases The Company’s properties are generally leased pursuant to non-cancelable, fixed-term operating leases or are supported through other financial support arrangements with expiration dates through 2033. Some leases and financial arrangements provide for fixed rent renewal terms in addition to market rent renewal terms. Some leases provide the lessee, during the term of the lease and for a short period thereafter, with an option or a right of first refusal to purchase the leased property. The Company’s portfolio of single-tenant net leases generally requires the lessee to pay minimum rent, additional rent based upon fixed percentage increases or increases in the Consumer Price Index and all taxes (including property tax), insurance, maintenance and other operating costs associated with the leased property. Future minimum lease payments under the non-cancelable operating leases and guaranteed amounts due to the Company under property operating agreements as of December 31, 2014 are as follows (in thousands): 2015 2016 2017 2018 2019 2020 and thereafter $ $ 290,283 263,505 235,690 203,285 166,003 679,757 1,838,523 Revenue Concentrations The Company’s real estate portfolio is leased to a diverse tenant base. The Company had one customer, Baylor Scott & White Health, that accounted for 10% or more of the Company’s consolidated revenues, including revenues from discontinued operations, for the years ended December 31, 2014 and 2013 at 10% and 11%, respectively. The Company did not have any customers that accounted for 10% or more of the Company's consolidated revenues, including discontinued operations for the year ended December 31, 2012. Purchase Option Provisions Certain of the Company’s leases include purchase option provisions. The provisions vary by agreement but generally allow the lessee to purchase the property covered by the agreement at fair market value or an amount equal to the Company’s gross investment. The Company expects that the purchase price from its purchase options will be greater than its net investment in the properties at the time of potential exercise. The Company had approximately $162.2 million in real estate properties as of December 31, 2014 that were subject to purchase options that were exercisable or become exercisable during 2015. Purchase Option Exercise In September 2014, the Company received notice from a tenant of its intent to purchase a medical office building in Pennsylvania pursuant to a purchase option contained in its lease with the Company. The Company's net investment in the building, included in assets held for sale, was $7.7 million at December 31, 2014, including straight-line rent receivables. The appraisal process is on-going and the purchase price, if the transaction closes, would be the greater of fair market value or approximately $15.0 million. 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 4. Acquisitions, Dispositions and Mortgage Repayments 2014 Real Estate Acquisitions During 2014, the Company acquired the following properties: • • • • • • • • a 152,655 square foot multi-tenanted office building in Iowa in which the Company acquired ownership in satisfaction of a $40.0 million mortgage note receivable that matured on January 10, 2014. The cash flows from the operations of the property were sufficient to pay the Company interest from the maturity date through the date of the transfer of ownership to the Company at the 7.7% fixed interest rate plus an additional 3% of interest for the default interest rate. The Company has accounted for this transaction as a business combination and recorded the acquisition of the property at its estimated fair value based primarily on level three inputs. Upon acquisition, the property was 93% leased with expirations through 2023; a 200,000 square foot medical office building in Oklahoma for a purchase price of approximately $85.4 million that was 100% leased to Mercy Health, based in Missouri, through 2028 under a single-tenant net lease. The Company funded the development of the facility through a construction mortgage loan of approximately $81.2 million that upon purchase was eliminated in the Company's Consolidated Financial Statements. At the closing of the purchase, the outstanding loan balance was credited to the purchase price and the Company paid an additional $4.2 million in cash consideration. Subsequent to the purchase, the Company funded an additional $5.0 million and anticipates funding approximately $0.8 million to complete the $91.2 million development during 2015; 56.9% of a medical office building and related land in Texas through an equity interest in a limited liability company for a purchase price and cash consideration of $8.7 million. Based on the nature of the transaction, the Company has accounted for the acquisition as an asset acquisition and has recorded the amounts in real estate assets on the Company's Consolidated Balance Sheet. Upon acquisition, the property was 95% leased with expirations through 2024. The building is adjacent to Seton Medical Center, a 534-bed hospital; a 35,292 square foot medical office building located in North Carolina for a purchase price and cash consideration of $6.5 million. Upon acquisition, the property was 100% leased with expirations through 2024. The building is adjacent to Wesley Long Hospital, a 175-bed hospital; a 60,476 square foot medical office building located in Minnesota for a purchase price of $19.8 million including cash consideration of $8.4 million and the assumption of debt of $11.4 million (excluding a $1.0 million fair value premium recorded upon acquisition). The mortgage notes payable assumed by the Company bear a weighted average contractual interest rate of 6.67% with maturities from 2017 to 2040. The property was constructed in 2010 and, upon acquisition, was 100% leased with expirations through 2025. The building is connected to Unity Hospital, a 220-bed hospital operated by Allina Health; a 47,962 square foot medical office building located in Florida for a purchase price and cash consideration of $7.9 million. Upon acquisition, the property was 89% leased with expirations through 2019. The building is adjacent to Tampa General Hospital, a 1,018-bed hospital; a 68,860 square foot medical office building in Oklahoma for a purchase price of $17.5 million, including cash consideration of $10.7 million and the assumption of debt of $6.8 million (excluding a $0.4 million fair value premium recorded upon acquisition). The mortgage note payable assumed by the Company bears a contractual interest rate of 6.1% and matures on August 1, 2020. Upon acquisition, the property was 97% leased with expirations through 2027. The building is located on the Norman Regional Healthplex campus, a 152-bed hospital; and a 60,161 square foot medical office building in Washington for a purchase price and cash consideration of $22.7 million. Upon acquisition, the property was 98% leased with expirations through 2021 and is located on the Highline Medical Center campus, a 177-bed hospital. 58NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The following table details the Company's acquisitions for the twelve months ended December 31, 2014: (Dollars in millions) Real estate acquisitions Date Acquired Purchase Price Elimination of Mortgage Note Receivable Mortgage Notes Payable Assumed (1) Cash Consideration (2) Real Estate Other (3) Square Footage Iowa Oklahoma Texas North Carolina Minnesota Florida Oklahoma Washington ______ 3/28/14 $ — $ (40.0) $ — $ — $ 40.2 $ (0.2) 152,655 5/22/14 6/4/14 6/6/14 7/28/14 9/16/14 10/29/14 12/1/14 85.4 8.7 6.5 19.8 7.9 17.5 22.7 (81.2) — — — — — — — — — (11.4) — (6.8) — 4.2 8.7 6.5 8.4 7.9 10.7 22.7 85.4 8.8 6.5 20.9 7.9 17.9 18.9 $ 168.5 $ (121.2) $ (18.2) $ 69.1 $ 206.5 $ — 200,000 (0.1) — (1.0) — (0.4) 3.8 2.1 48,048 35,292 60,476 47,962 68,860 60,161 673,454 (1) The mortgage notes payable assumed in the acquisitions do not reflect the fair value adjustment totaling $1.4 million recorded by the Company upon acquisition (included in Other). (2) Cash consideration excludes non-real estate assets acquired and liabilities assumed in the acquisitions. (3) Includes intangibles recognized at acquisition and fair value adjustments on debt assumed. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed in the real estate acquisitions for 2014 as of the acquisition date: Estimated Fair Value Estimated Useful Life (In millions) (In years) Building Land Intangibles: At-market lease intangibles Below-market lease intangibles Above-market ground lease intangibles Below-market ground lease intangibles Total intangibles Mortgage notes payable assumed, including fair value adjustments Foreclosed mortgage note receivable Elimination of mortgage note receivable upon acquisition Other assets acquired Accounts payable, accrued liabilities and other liabilities assumed Cash acquired Total cash paid (1) ______ $ 11.5-39.0 — 4.8-13.9 3.8-6.5 91.3 63.7 181.7 12.7 12.1 (0.4) (0.1) 3.8 15.4 (19.6) (40.0) (81.2) 3.0 (2.3) 0.2 69.9 (1) Total cash paid includes receivables acquired net of liabilities assumed in the acquisitions of approximately $0.8 million. 2014 Noncontrolling Interest Purchase In April 2014, the Company purchased the outstanding 40% noncontrolling equity interest in a consolidated partnership that owns a medical office building and parking garage in Texas, which were developed by the partnership, for an aggregate purchase price and cash consideration of $8.2 million. The book value of the noncontrolling interest prior to the equity purchase was $1.6 million. The remaining $6.6 million was recorded as a decrease to additional paid-in capital on the Company's Consolidated Balance Sheets. The Company held a term loan that was secured by the property and was payable from the partnership. Upon acquisition of the noncontrolling interest, the term loan, which was previously eliminated in the Company's Consolidated Financial Statements, was extinguished. 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 2013 Real Estate Acquisitions During 2013, the Company acquired the following properties: • • • • • • • • • • a 52,225 square foot medical office building in Tennessee for a purchase price and cash consideration of $16.2 million. The property was 100% leased to four tenants with expirations through 2021 and is adjacent to a 39,345 square foot medical office building the Company purchased in October 2012; a 42,627 square foot inpatient rehabilitation facility in Texas for a purchase price and cash consideration of $16.3 million. The property was 100% leased to one tenant that expires in 2033; a 205,573 square foot medical office building and garage in Indiana for a purchase price and cash consideration of $44.3 million. The property was 87% leased with expirations through 2029. The property is connected to and was 48% leased by St. Joseph's Medical Center, which is part of the CHE Trinity system, that opened in December 2009; an 80,153 square foot medical office building in Colorado for a purchase price of approximately $33.2 million, including cash consideration of $21.2 million and the assumption of debt of $12.0 million (excluding a $0.7 million fair value adjustment premium recorded upon acquisition). The mortgage note payable assumed by the Company bears a contractual interest rate of 6.17% and matures in 2027. The building was 100% leased with lease expirations through 2028. The property is connected to and was 71% leased by Poudre Valley Health System, which is part of the University of Colorado Health system; a 186,000 square foot orthopedic facility in Missouri for a purchase price of approximately $102.6 million. The Company funded the development of the facility through a construction mortgage loan of approximately $97.2 million that, upon acquisition, was eliminated in the Company's Consolidated Financial Statements. At the closing of the purchase, the outstanding loan balance was credited to the purchase price and the Company paid an additional $5.4 million in cash consideration. Subsequent to the acquisition, the Company funded an additional $6.5 million in 2013 and $2.3 million during 2014 to complete the development. The building was 100% leased to Mercy Health through 2027; an 81,956 square foot medical office building located in the state of Washington for a purchase price of $34.9 million. The property was 100% leased with lease expirations through 2020 and is adjacent to two hospital campuses and affiliated with Providence Health and Services. The Company assumed a mortgage note payable of $16.6 million (excluding a $0.5 million fair value adjustment premium recorded upon acquisition) on the property that bears interest at a rate of 6.01% and matures in 2036; a 70,138 square foot medical office building in Colorado for a purchase price and cash consideration of $21.6 million. The property was on the same campus as the 80,153 square foot medical office building the Company purchased in September 2013. The building was 83% leased to three tenants with lease expirations through 2026. The property is connected to and affiliated with the University of Colorado Health system; a 90,633 square foot medical office building in North Carolina for a purchase price of $20.1 million. The property was 100% leased with expirations through 2021 and is affiliated with CaroMont Health. The Company assumed a mortgage note payable of $11.0 million (excluding a $0.2 million fair value adjustment premium recorded upon acquisition) on the property that bears interest at a rate of 5.86% and matures in 2016; a 97,552 square foot medical office building located in Texas for a purchase price and cash consideration of $19.0 million. The property was 88% leased with expirations through 2026. The property is affiliated with and was 24% leased by Seton Healthcare; and a 34,068 square foot inpatient rehabilitation facility located in Colorado for a purchase price and cash consideration of $7.0 million. Concurrent with the closing on the acquisition, the Company executed a single-tenant net lease that expires in 2029 for 100% of the property. This transaction was accounted for as an asset acquisition. 60NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) A summary of the Company’s 2013 acquisitions is shown in the table below: (Dollars in millions) Real estate acquisitions Date Acquired Purchase Price Elimination of Construction Mortgage Note Receivable Mortgage Notes Payable Assumed(1) Cash Consideration (2) Real Estate Other (3) Square Footage Tennessee Texas Indiana Colorado Missouri Washington Colorado North Carolina Texas Colorado ______ 1/29/13 $ 16.2 $ — $ — $ 16.2 $ 15.7 $ 4/8/13 8/8/13 9/27/13 9/27/13 10/18/13 10/24/13 10/30/13 12/16/13 12/16/13 16.3 44.3 33.2 102.6 34.9 21.6 20.1 19.0 7.0 — — — (97.2) — — — — — — — (12.0) — (16.6) — (11.0) — — 16.3 44.3 21.2 5.4 18.3 21.6 9.1 19.0 7.0 16.3 43.3 32.9 102.6 35.4 21.7 20.0 19.1 7.1 0.5 — 1.0 0.3 — (0.5) (0.1) 0.1 (0.1) (0.1) 52,225 42,627 205,573 80,153 186,000 81,956 70,138 90,633 97,552 34,068 $ 315.2 $ (97.2) $ (39.6) $ 178.4 $ 314.1 $ 1.1 940,925 (1) The mortgage notes payable assumed in the acquisitions do not reflect the fair value adjustments totaling $1.4 million recorded by the Company upon acquisition (included in Other). (2) Cash consideration excludes non-real estate assets acquired and liabilities assumed in the acquisitions. (3) Includes intangibles recognized at acquisition and fair value adjustments on debt assumed. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed in the real estate acquisitions for 2013 as of the acquisition date: Buildings Land Personal property Intangibles: At-market lease intangibles Above-market lease intangibles Below-market lease intangibles Total intangibles Mortgage notes payable assumed, including fair value adjustments Elimination of mortgage note receivable upon acquisition Other assets acquired Accounts payable, accrued liabilities and other liabilities assumed Total cash paid (1) Estimated Fair Value Estimated Useful Life (In millions) (In years) 7.0-39.0 — 1.9 3.7-20.0 2.3-16.3 0.5-7.4 $ $ 280.2 21.6 0.3 12.0 2.9 (0.4) 14.5 (41.0) (97.2) 1.2 (1.9) 177.7 ______ (1) Total cash paid includes liabilities assumed net of receivables acquired in the acquisitions of $0.7 million. 61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 2014 Real Estate Asset Dispositions During 2014, the Company disposed of the following real estate assets: • • • • • • • a 52,608 square foot off-campus, medical office building located in Florida in which the Company had a $1.7 million net investment, including the impact of impairment charges recorded prior to the sale of approximately $3.3 million. The sales price was $1.8 million, comprised of $1.7 million in net cash proceeds and closing costs of $0.1 million. This property was previously classified as held for sale; a 58,365 square foot off-campus, medical office building located in Texas in which the Company had a $4.1 million net investment, including the impact of impairment charges recorded prior to the sale of approximately $2.6 million. The sales price was $4.4 million, comprised of $4.2 million in net cash proceeds and closing costs of $0.2 million. This property was previously classified as held for sale; a 31,026 square foot on-campus, medical office building located in Nevada in which the Company had a $4.9 million net investment. The sales price was approximately $2.3 million, comprised of net cash proceeds of approximately $0.2 million, a seller-financed mortgage note of $1.9 million, and closing costs of $0.2 million. The Company recognized a $2.8 million impairment on the disposal of this property that was not previously classified as held for sale; two off-campus medical office buildings in Tennessee, totaling 32,204 square feet, in which the Company had an aggregate net investment of $3.2 million. The sales price for the buildings was approximately $3.1 million comprised of net cash proceeds of $2.9 million and closing costs of approximately $0.2 million. The Company recognized a $0.4 million impairment on the disposal, net of straight-line rent receivables which were written off. These properties were not previously classified as held for sale; two off-campus medical office buildings in Texas, totaling 166,167 square feet, in which the Company had an aggregate net investment $12.1 million. The sales price and net cash proceeds for the buildings was approximately $21.5 million. The Company recognized a $9.2 million gain on the disposal, net of straight-line rent receivables which were written off. These properties were not previously classified as held for sale; a 26,166 square foot off-campus, medical office building located in Missouri in which the Company had a $1.4 million net investment, including a $3.1 million impairment charge recorded in the second quarter of 2014 as a result of the pending sale. The sales price and net cash proceeds for the building was approximately $1.3 million. The Company recognized a $0.2 million impairment on the disposal, net of straight-line rent receivables which were written off. This property was previously classified as held for sale; and a 110,000 square foot off-campus, medical office building located in Illinois in which the Company had a $0.8 million net investment, including the impact of impairment charges prior to the sale of $5.6 million. The sales price was $0.5 million and the Company recognized a $0.3 million impairment on the disposal. This property was previously classified as held for sale. 2014 Company-Financed Mortgage Notes During 2014, the Company originated an $1.9 million seller-financed mortgage note receivable with the purchaser of a medical office building located in Nevada. See "2014 Real Estate Asset Dispositions" above for more information. Also during 2014, two Company-financed mortgage notes receivable totaling $4.9 million were repaid. 62NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) A summary of the Company's 2014 dispositions are as follows: Sales Price Closing Adjustments Company- financed Mortgage Notes Net Proceeds Net Real Estate Investment Other (including receivables) Gain/ (Impairment) Square Footage 4/11/2014 $ $ (0.1) $ — $ (0.2) (0.2) (0.2) — — — (0.7) — $ 1.7 4.2 0.2 2.9 21.5 1.3 0.5 32.3 4.9 1.7 4.1 4.9 3.2 12.1 1.4 0.8 28.2 — $ — $ 0.1 — 0.1 0.2 0.1 — 0.5 — $ 37.2 $ 28.2 $ 0.5 $ — (1.9) — — — — (1.9) 4.9 3.0 — — (2.8) (0.4) 52,608 58,365 31,026 32,204 9.2 166,167 (0.2) 26,166 (0.3) 110,000 5.5 — 5.5 476,536 — 476,536 Date Disposed (Dollars in millions) Real estate dispositions Florida (1) Texas (1) 4/23/2014 Nevada Tennessee (2) Texas (2) Missouri (1) Illinois (1) 9/12/2014 11/14/2014 11/25/2014 12/18/2014 12/29/2014 Total dispositions Mortgage note repayments 1.8 4.4 2.3 3.1 21.5 1.3 0.5 34.9 — $ 34.9 $ (0.7) $ ______ (1) Previously included in assets held for sale. (2) Includes two properties. 2013 Real Estate Asset Dispositions During 2013, the Company disposed of the following real estate assets: • • • • • • 15.1 acres of land in Texas in which the Company had an aggregate net investment of approximately $8.1 million. The sales price was approximately $5.0 million, which included $1.1 million in net cash proceeds, the origination of a $3.7 million Company-financed mortgage note receivable and closing costs of $0.2 million. The Company recognized a $3.3 million impairment on the disposal; a 17,696 square foot medical office building in Tennessee, in which the Company had an aggregate net investment of $0.4 million, including the impact of impairment charges prior to the sale of $1.3 million. The sales price of $0.6 million was funded by the Company under a mortgage note receivable. The approximate $0.2 million gain was recognized as payments on the mortgage note were made under the installment method and fully recognized in October 2013 when the note was repaid. The property was previously classified as held for sale; an 8,000 square foot medical office building in Texas, in which the Company had an aggregate net investment of $0.9 million. The sales price was approximately $1.3 million comprised of $1.2 million in net cash proceeds and closing costs of $0.1 million. The Company recognized a $0.3 million gain on the disposal. The property was not previously classified as held for sale; a 100,920 square foot medical office building in Texas. The Company had an aggregate net investment of $3.0 million in this property, including the impact of impairment charges prior to the sale of $6.8 million. The sales price was approximately $3.2 million comprised of $3.0 million in net cash proceeds and closing costs of $0.2 million. The Company recognized an immaterial gain on the disposal of this property that was previously classified as held for sale; a 9,153 square foot medical office building and a 22,572 square foot medical office building, both in Iowa, in which the Company had an aggregate net investment of approximately $5.3 million. The total sales price and net cash proceeds for the two properties were $6.9 million. In connection with the sales, the Company repaid a mortgage note payable of $1.1 million and incurred debt extinguishment costs of $0.3 million. The Company recognized a $1.4 million aggregate gain on the disposal of the two properties, including the write-off of a straight-line rent receivable of $0.2 million. The properties were not previously classified as held for sale; a 62,782 square foot inpatient rehabilitation facility in Florida pursuant to a purchase option exercise and in which the Company had an aggregate net investment of $7.4 million. The sales price was approximately $11.9 million comprised of $11.7 million in net cash proceeds and closing costs of $0.2 million. The Company recognized a $4.3 million gain on the disposal of this property that was previously classified as held for sale; 63NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) • • • • • • an 82,000 square foot inpatient rehabilitation facility in Alabama pursuant to a purchase option exercise and in which the Company had an aggregate net investment of $11.2 million. The sales price was approximately $17.5 million comprised of $17.4 million in net cash proceeds and closing costs of $0.1 million. The Company recognized a $6.2 million gain on the disposal of this property that was previously classified as held for sale; a 76,324 square foot inpatient rehabilitation facility in Pennsylvania pursuant to a purchase option exercise in which the Company had an aggregate net investment of $12.2 million. The sales price was approximately $17.6 million comprised of $17.3 million in net cash proceeds and closing costs of $0.3 million. The Company recognized a $5.1 million gain on the disposal of this property. This property was not previously classified as held for sale; a 79,560 square foot inpatient rehabilitation facility in Pennsylvania pursuant to a purchase option exercise in which the Company had an aggregate net investment of $12.6 million. The sales price was approximately $17.6 million comprised of $17.2 million in net cash proceeds and closing costs of $0.4 million. The Company recognized a $4.6 million gain on the disposal of this property. This property was not previously classified as held for sale; a 14,322 square foot medical office building in Florida in which the Company had an aggregate net investment of $0.8 million, including the impact of impairment charges prior to the sale of $0.1 million. The sales price and net cash proceeds received were approximately $0.8 million. This property was previously classified as held for sale; a 57,580 square foot medical office building in North Carolina in which the Company had an aggregate net investment of $13.4 million. The sales price and net cash proceeds received were approximately $17.6 million. The Company recorded a $2.1 million gain on the disposal, net of approximately $2.1 million of straight-line rent receivables, prepaid ground lease payments and above-market lease intangibles which were written off. This property was not previously classified as held for sale; and a 10,593 square foot medical office building in Alabama in which the Company had an aggregate net investment of $1.4 million. The sales price and net cash proceeds received were approximately $1.9 million. The Company recorded a $0.5 million gain on the disposal of this property that was previously classified as held for sale. 64NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) A summary of the Company’s 2013 dispositions follows: (Dollars in millions) Real estate dispositions Date Disposed Sales Price Closing Adjustments Company -financed Mortgage Notes Net Proceeds Net Real Estate Investment Other (including receivables) Gain/ (Impairment) Square Footage $ (0.2) $ (3.7) $ 1.1 $ $ — $ (3.3) — Texas (land) Tennessee (1)(4) Texas Texas (1) Iowa (2) (3) Florida (1) Alabama (1) Pennsylvania Pennsylvania Florida (1) North Carolina Alabama (1) Total dispositions 3/25/13 $ 4/30/13 5/15/13 5/24/13 6/3/13 7/15/13 7/31/13 9/30/13 9/30/13 10/31/13 12/5/13 12/31/13 5.0 0.6 1.3 3.2 6.9 11.9 17.5 17.6 17.6 0.8 17.6 1.9 Mortgage note repayments ______ — (0.1) (0.2) — (0.2) (0.1) (0.3) (0.4) — — — (0.6) — — — — — — — — — — (4.3) 0.6 — 1.2 3.0 6.9 11.7 17.4 17.3 17.2 0.8 17.6 1.9 96.1 0.6 8.1 0.4 0.9 3.0 5.3 7.4 11.2 12.2 12.6 0.8 13.4 1.4 76.7 — 101.9 — $ 101.9 $ (1.5) — (1.5) $ (3.7) $ 96.7 $ 76.7 $ — — — 0.2 — — — — — 2.1 — 2.3 — 2.3 $ 0.2 0.3 — 1.4 4.3 6.2 5.1 4.6 — 2.1 0.5 21.4 — 21.4 17,696 8,000 100,920 31,725 62,782 82,000 76,324 79,560 14,322 57,580 10,593 541,502 — 541,502 (1) Previously included in assets held for sale. (2) (3) The Company repaid a mortgage note payable of $1.1 million upon sale and incurred debt extinguishment costs of $0.3 Includes two properties. million. (4) The Company-financed mortgage note receivable was repaid in October 2013. 2013 Company-Financed Mortgage Notes During 2013, the Company originated the following Company-financed mortgage notes receivable in disposal transactions discussed in the "2013 Real Estate Asset Dispositions" section above: • • $3.7 million with the purchaser of the 15.1 acres of land located in Texas that were sold in March 2013. The mortgage note receivable had an interest rate of 5.0% in the first year and 6.0% in the second year and was to mature in March 2015. This note was repaid in September 2014; and $0.6 million with the purchaser of a medical office building in Tennessee that was sold in April 2013 that was to mature on April 30, 2018 and had an interest rate of 7.5% per annum. This note was repaid in October 2013. 2013 Noncontrolling Interest Contribution During 2013, the Company received $1.8 million in capital contributions from a 40% noncontrolling interest holder in a partnership that owned a medical office building and parking garage in Texas. The partnership (HRP MAC III, LLC), in which the Company held a 60% majority controlling interest, was the borrower under a term loan from the Company of approximately $14.2 million, secured by the real estate assets, that matures in January 2016 and bears interest at 5.35%. These buildings, which were constructed by the Company, were completed in July 2012 and were previously subject to a construction mortgage note totaling $13.7 million. The Company's equity in and term loan to the partnership were eliminated in consolidation. 2015 Acquisition In January 2015, the Company acquired a 110,679 square foot medical office building in California for a purchase price and cash consideration of $39.3 million. The property is located adjacent to two hospital campuses, one affiliated with Kaiser Permanente, a 106-bed hospital, and another affiliated with Washington Hospital Healthcare System, a 353-bed hospital. Upon acquisition, this property was 97% leased, with leases to the two hospitals comprising 59% of the rentable square footage. 65NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 5. Mortgage Notes Receivable The Company’s mortgage note receivable is classified as held-for-investment based on management’s intent and ability to hold the loans until maturity. As such, the loans are carried at amortized cost. Also, the Company’s mortgage note receivable is secured by an existing building. Approximately $1.2 million and $58.7 million, respectively, were funded on existing construction mortgage loans during the years ended December 31, 2014 and 2013. A summary of the Company’s mortgage notes receivable for the years ended December 31, 2014 and 2013 is shown in the table below: State Property Type (1) Face Amount Interest Rate Maturity Date 2014 2013 Balance as of December 31, (dollars in thousands) Construction mortgage notes: Oklahoma MOB $ 94,889 7.72% 09/30/14 $ — $ Total construction mortgage notes Other mortgage notes: Iowa Florida Texas Nevada Other MOB Land MOB 40,000 3,750 3,666 1,900 7.70% 7.50% 5.00%-6.00% 01/10/14 04/10/15 03/25/15 6.50% 09/30/17 Total other mortgage notes Total mortgage notes receivable ______ (1) MOB - Medical office building. — — — — 1,900 1,900 79,969 79,969 39,973 3,750 1,855 — 45,578 $ 1,900 $ 125,547 Construction Mortgage Note Fundings In May 2014, the Company acquired a medical office building in Oklahoma for $85.4 million, including the elimination of the construction mortgage note receivable totaling $81.2 million and cash consideration of approximately $4.2 million. The building is 100% leased to Mercy Health. The Company provided $1.2 million in fundings toward the facility under a construction mortgage note during 2014. See Note 4 for details regarding the Company's acquisition. Mortgage Note Receivable Default As of December 31, 2013, the Company held a $40.0 million loan that was secured by a first position mortgage on a multi- tenant office building in Iowa that is 93% leased. Interest only payments at a fixed rate of 7.7% were due, and paid, through the maturity of the loan on January 10, 2014. The borrower did not make the balloon principal payment at maturity. The borrower transfered its interest in the property to the Company in satisfaction of the debt. See Note 4 for details regarding the Company's acquisition. 6. Discontinued Operations Assets and liabilities of properties sold or classified as held for sale on the Company’s Consolidated Balance Sheets, and the results of operations of such properties are included in discontinued operations on the Company’s Consolidated Statements of Operations for all periods presented. As of December 31, 2014 and 2013, the Company had two and three properties, respectively, classified as held for sale. The tables below reflect the assets and liabilities of the properties classified as held for sale and discontinued operations as of December 31, 2014 and 2013 and the results of operations of the properties included in discontinued operations on the Company’s Consolidated Statements of Operations for the years ended December 31, 2014, 2013 and 2012. 66NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Dollars in thousands) Balance Sheet data (as of the period ended): Land Buildings, improvements and lease intangibles Personal property Accumulated depreciation Assets held for sale, net Other assets, net (including receivables) Assets of discontinued operations, net Assets held for sale and discontinued operations, net Accounts payable and accrued liabilities Other liabilities Liabilities of discontinued operations $ $ $ $ December 31, 2014 422 $ 12,822 13 13,257 (4,464) 8,793 353 353 9,146 86 286 372 $ $ $ 2013 1,578 15,400 — 16,978 (10,211) 6,767 85 85 6,852 1,091 21 1,112 67 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Dollars in thousands, except per share data) Statements of Operations data: Revenues (1) Rental income Other operating Expenses (2) Property operating General and administrative Depreciation Amortization Bad debt, net of recoveries Other Income (Expense) (3) Loss on extinguishment of debt Interest expense Interest and other income, net Income from Discontinued Operations Impairments (4) Gain on sales of real estate properties (5) Income (Loss) from Discontinued Operations Income (Loss) from Discontinued Operations per Common Share - Basic Income (Loss) from Discontinued Operations per Common Share - Diluted ______ $ $ $ $ Year Ended December 31, 2014 2013 2012 $ $ 14,202 9 14,211 5,660 4 5,664 3,126 19 1,551 — 3 4,699 — — 2 2 967 (12,029) 9,283 (1,779) $ (0.02) $ (0.02) $ 24,290 69 24,359 6,894 33 6,888 147 10 13,972 — (97) 171 74 10,461 (14,908) 10,874 6,427 0.08 0.08 4,830 26 3,794 63 13 8,726 (270) (40) 71 (239) 5,246 (9,889) 24,718 20,075 0.22 0.22 $ $ $ (1) Total revenues for the years ended December 31, 2014, 2013 and 2012 included $4.3 million, $12.6 million and $22.2 million, respectively, related to properties sold; and $1.4 million, $1.6 million and $2.2 million, respectively, related to two properties held for sale as of December 31, 2014. (2) Total expenses for the years ended December 31, 2014, 2013 and 2012 included $4.7 million, $8.7 million and $13.5 million, respectively, related to properties sold; and for the year ended December 31, 2012 included $0.5 million related to two properties held for sale as of December 31, 2014. (3) Other income (expense) for the years ended December 31, 2014, 2013, and 2012 included income (expense) related to (4) properties sold. Impairments for the year ended December 31, 2014 included $3.7 million in connection with the sale of three properties and $8.3 million on two properties in held for sale and two properties there were reclassified to held for sale during 2014. All four properties of these were subsequently sold; December 31, 2013 included the following: $3.3 million related to the sale of a land parcel; $0.4 million related to two properties classified as held for sale and subsequently sold for a gain; and $6.2 million related to three properties held for sale; and December 31, 2012 included $11.1 million related to 12 properties sold and $3.8 million related to one properties held for sale. (5) Gain on sales of real estate properties for the years ended December 31, 2014, 2013 and 2012 included gains on the sale of three, 12 and seven properties, respectively. 7. Impairment Charges An asset is impaired when undiscounted cash flows expected to be generated by the asset are less than the carrying value of the asset. The Company must assess the potential for impairment of its long-lived assets, including real estate properties, whenever events occur or there is a change in circumstances, such as the sale of a property or the decision to sell a property, that indicate that the recorded value might not be fully recoverable. The Company recorded impairment charges on properties sold or classified as held for sale, which are included in discontinued operations, for the years ended December 31, 2014, 2013 and 2012 totaling $12.0 million, $9.9 million and $14.9 million, 68 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) respectively. Both level 1 and level 3 fair value techniques were used to derive these impairment charges. These impairment charges are discussed in more detail in Note 4. 8. Other Assets Other assets consist primarily of straight-line rent receivables, prepaids, intangible assets, deferred financing costs and receivables. Items included in "Other assets, net" on the Company’s Consolidated Balance Sheets as of December 31, 2014 and 2013 are detailed in the table below: (Dollars in millions) Prepaid assets Straight-line rent receivables Above-market intangible assets, net Additional long-lived assets, net Ground lease modification, net Deferred financing costs, net Accounts receivable Allowance for uncollectible accounts Goodwill Customer relationship intangible assets, net Other Ground Lease Modification, net $ December 31, $ 2014 61.4 52.6 17.3 14.4 11.7 9.9 8.7 (0.5) 3.5 1.9 4.4 2013 55.3 42.2 14.4 15.9 — 11.7 7.0 (0.5) 3.5 2.0 2.0 $ 185.3 $ 153.5 In May 2014, the Company modified the ground leases and property operating agreements of five on-campus medical office buildings, totaling 424,000 square feet, associated with the sponsoring health system. The Company paid the health system $12.0 million to modify these agreements and eliminate exercisable purchase options that would have resulted in a purchase price below estimated fair market value. This modification payment will be amortized over the remaining term of the in-place ground leases on a straight-line basis. 9. Intangible Assets and Liabilities The Company has several types of intangible assets and liabilities included in its Consolidated Balance Sheets, including goodwill, deferred financing costs, above-, below-, and at-market lease intangibles, and customer relationship intangibles. The Company’s intangible assets and liabilities as of December 31, 2014 and 2013 consisted of the following: (Dollars in millions) Goodwill Deferred financing costs Above-market lease intangibles Customer relationship intangibles Below-market lease intangibles At-market lease intangibles Gross Balance at December 31, 2014 $ 3.5 17.6 21.1 2.6 (9.2) 130.7 $166.3 $ 2013 3.5 16.4 17.3 2.6 (8.9) 118.6 $149.5 Accumulated Amortization at December 31, 2014 2013 $ — $ — 4.7 2.9 0.6 (4.1) 76.2 $ 80.3 7.7 3.8 0.7 (4.8) 86.9 $ 94.3 Weighted Avg. Remaining Life (Years) N/A 4.3 52.7 28.6 14.3 7.2 17.0 Balance Sheet Classification Other assets Other assets Other assets Other assets Other liabilities Real estate properties 69 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The following table represents expected amortization of the Company’s intangible assets and liabilities, in place as of December 31, 2014: (Dollars in millions) Future Amortization of Intangibles, net 2015 2016 2017 2018 2019 $ $ $ $ $ 12.4 11.4 8.3 6.5 4.9 10. Notes and Bonds Payable The table below details the Company’s notes and bonds payable. (Dollars in thousands) Unsecured Credit Facility Unsecured Term Loan Facility Senior Notes due 2017, net of discount Senior Notes due 2021, net of discount Senior Notes due 2023, net of discount Mortgage notes payable, net of discounts and including premiums December 31, 2014 2013 Maturity Dates Contractual Interest Rates Principal Payments Interest Payments $ 85,000 $ 238,000 4/17 LIBOR + 1.40% At maturity Quarterly 200,000 — 2/19 LIBOR + 1.45% At maturity Quarterly 299,308 299,008 397,864 397,578 248,253 248,077 1/17 1/21 4/23 6.500% At maturity Semi-Annual 5.750% At maturity Semi-Annual 3.750% At maturity Semi-Annual 173,267 165,796 5/15-5/40 5.00%-7.63% Monthly Monthly $ 1,403,692 $ 1,348,459 The Company’s various debt agreements contain certain representations, warranties, and financial and other covenants customary in such loan agreements. Among other things, these provisions require the Company to maintain certain financial ratios and minimum tangible net worth and impose certain limits on the Company’s ability to incur indebtedness and create liens or encumbrances. As of December 31, 2014, the Company was in compliance with its financial covenant provisions under its various debt instruments. Unsecured Credit Facility due 2017 On October 14, 2011, the Company entered into a $700.0 million unsecured credit facility ("Unsecured Credit Facility") with a syndicate of 17 lenders. On February 15, 2013, the Company amended the facility to extend the original maturity date to April 14, 2017. The amendment also provides the Company with two six-month extension options that could extend the maturity date to April 14, 2018. Each option is subject to an extension fee of 0.075% of the aggregate commitments. Amounts outstanding under the Unsecured Credit Facility bear interest at LIBOR plus an applicable margin rate. The margin rate, which depends on the Company's credit ratings, ranges from 0.95% to 1.75% (1.4% as of December 31, 2014). In addition, the Company pays a facility fee per annum on the aggregate amount of commitments ranging from 0.15% to 0.35% (0.30% as of December 31, 2014). In connection with the amendment, the Company paid up-front fees to the lenders of approximately $2.7 million, which will be amortized over the term of the facility. The Company wrote-off certain unamortized deferred financing costs of the original facility of approximately $0.3 million upon execution of the amendment. As of December 31, 2014, the Company had $85.0 million outstanding under the Unsecured Credit Facility with a weighted average interest rate of approximately 1.6% and a remaining borrowing capacity of approximately $615.0 million. 70 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Unsecured Term Loan Facility due 2019 In February 2014, the Company entered into a $200.0 million unsecured term loan facility ("Unsecured Term Loan due 2019") with a syndicate of nine lenders that matures on February 26, 2019. The Unsecured Term Loan due 2019 bears interest at a rate equal to (x) LIBOR plus (y) a margin ranging from 1.00% to 1.95% (1.45% as of December 31, 2014) based upon the Company's unsecured debt ratings. Payments under the Unsecured Term Loan due 2019 are interest only, with the full amount of the principal due at maturity. The Unsecured Term Loan due 2019 may be prepaid at any time, without penalty. The proceeds from the Unsecured Term Loan due 2019 were used by the Company to repay borrowings on its Unsecured Credit Facility. The Unsecured Term Loan due 2019 has various financial covenant provisions that are required to be met on a quarterly and annual basis that are equivalent to those of the Unsecured Credit Facility. As of December 31, 2014, the Company had $200.0 million outstanding under the Unsecured Term Loan due 2019 with a weighted average interest rate of approximately 1.6%. Senior Notes due 2017 On December 4, 2009, the Company publicly issued $300.0 million of unsecured senior notes due 2017 (the "Senior Notes due 2017"). The Senior Notes due 2017 bear interest at 6.50%, payable semi-annually on January 17 and July 17, and are due on January 17, 2017, unless redeemed earlier by the Company. The notes were issued at a discount of approximately $2.0 million, which yielded a 6.618% interest rate per annum upon issuance. For each of the years ended December 31, 2014, 2013 and 2012, the Company amortized approximately $0.3 million of the discount which is included in interest expense on the Company’s Consolidated Statements of Operations. The Company's board of directors has authorized the repurchase of up to $50 million of the Company's Senior Notes due 2017 in open market transactions from time to time. The Company currently has no specific timeframe within which to purchase these notes and has no obligation to repurchase any notes prior to maturity. The following table reconciles the balance of the Senior Notes due 2017 on the Company’s Consolidated Balance Sheets as of December 31, 2014 and 2013. (Dollars in thousands) Senior Notes due 2017 face value Unaccreted discount Senior Notes due 2017 carrying amount December 31, 2014 300,000 $ (692) 299,308 $ 2013 300,000 (992) 299,008 $ $ Senior Notes due 2021 On December 13, 2010, the Company publicly issued $400.0 million of unsecured senior notes due 2021 (the "Senior Notes due 2021"). The Senior Notes due 2021 bear interest at 5.75%, payable semi-annually on January 15 and July 15, and are due on January 15, 2021, unless redeemed earlier by the Company. The notes were issued at a discount of approximately $3.2 million, which yielded a 5.855% interest rate per annum upon issuance. For each of the years ended December 31, 2014, 2013 and 2012, the Company amortized approximately $0.3 million of the discount which is included in interest expense on the Company’s Consolidated Statement of Operations. The following table reconciles the balance of the Senior Notes due 2021 on the Company’s Consolidated Balance Sheets as of December 31, 2014 and 2013. (Dollars in thousands) Senior Notes due 2021 face value Unaccreted discount Senior Notes due 2021 carrying amount December 31, 2014 400,000 $ (2,136) 397,864 $ 2013 400,000 (2,422) 397,578 $ $ 71 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Senior Notes due 2023 On March 26, 2013, the Company publicly issued $250.0 million of unsecured senior notes due 2023 (the "Senior Notes due 2023"). The Senior Notes due 2023 bear interest at 3.75%, payable semi-annually on April 15 and October 15, beginning October 15, 2013, and are due on April 15, 2023, unless redeemed earlier by the Company. The notes were issued at a discount of approximately $2.1 million, which yielded a 3.849% interest rate per annum upon issuance. For the years ended December 31, 2014 and 2013, the Company amortized approximately $0.2 million and $0.1 million, respectively, of the discount which is included in interest expense on the Company’s Consolidated Statement of Operations. The following table reconciles the balance of the Senior Notes due 2023 on the Company’s Consolidated Balance Sheets as of December 31, 2014. (Dollars in thousands) Senior Notes due 2023 face value Unaccreted discount Senior Notes due 2023 carrying amount December 31, 2014 250,000 $ (1,747) 248,253 $ 2013 250,000 (1,923) 248,077 $ $ Mortgage Notes Payable The following table reconciles the Company’s aggregate mortgage notes principal balance with the Company’s Consolidated Balance Sheets as of December 31, 2014 and 2013. For the years ended December 31, 2014, 2013 and 2012, the Company amortized approximately $1.1 million, $1.2 million and $1.0 million of the discount and $1.0 million, $0.7 million, and $0.7 million of the premium, respectively, on the mortgage notes payable which is included in interest expense on the Company’s Consolidated Statement of Operations. (Dollars in thousands) Mortgage notes payable principal balance Unamortized premium Unaccreted discount Mortgage notes payable carrying amount December 31, 2014 172,530 3,205 (2,468) 173,267 $ $ 2013 166,684 2,708 (3,596) 165,796 $ $ 72 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The following table details the Company’s mortgage notes payable, with related collateral. Effective Interest Rate (21) Original Balance Maturity Date Collateral (22) Principal and Interest Payments (20) Investment in Collateral at December 31, Balance at December 31, 2014 2014 Monthly/20-yr amort. $ 12.1 $ (Dollars in millions) Life Insurance Co. Commercial Bank Life Insurance Co. Commercial Bank (1) Commercial Bank (2) Commercial Bank (3) Commercial Bank (4) Life Insurance Co. Investment Co. Life Insurance Co. (5) Life Insurance Co. (6) Insurance Co. (7) Commercial Bank (8) Life Insurance Co. (9) Life Insurance Co. (10) Life Insurance Co. (11) Commercial Bank (12) Commercial Bank (13) Commercial Bank (14) Life Insurance Co. (15) Municipal Government (16) (17) $ 4.7 1.8 15.1 17.4 12.0 15.2 12.9 7.0 4.6 13.9 21.5 7.3 8.1 5.3 3.1 7.9 15.0 18.3 13.1 7.3 11.9 7.77% 1/17 5.55% 10/30 5.49% 6.48% 6.11% 7.65% 6.43% 5.53% 5.25% 4.70% 4.70% 1/16 5/15 7/15 7/20 2/21 1/18 9/15 1/16 8/15 5.10% 12/18 4.54% 4.06% 4.06% 4.00% 5.25% 8/16 11/14 11/14 8/20 4/27 5.00% 12/16 5.00% 4.86% 4.79% 4/16 8/20 (18) MOB OTH MOB MOB Monthly/27-yr amort. Monthly/10-yr amort. Monthly/10-yr amort. 2 MOBs Monthly/10-yr amort. MOB MOB MOB MOB MOB MOB MOB MOB MOB MOB MOB MOB MOB MOB MOB MOB (19) Monthly/12-yr amort. Monthly/15-yr amort. Monthly/10-yr amort. Monthly/25-yr amort. Monthly/25-yr amort. Monthly/25-yr amort. Monthly/10-yr amort. Monthly/25-yr amort. Monthly/25-yr amort. Monthly/15-yr amort. Monthly/20-yr amort Monthly/30-yr amort Monthly/25-yr amort Monthly/27-yr amort Semi-Annual (18) $ 0.9 1.5 11.9 14.8 10.1 12.7 11.0 1.9 4.1 11.0 16.6 6.8 7.5 — — 4.0 11.9 16.5 10.7 7.1 12.3 2013 1.2 1.5 12.3 14.7 10.0 12.7 11.1 2.5 4.2 11.5 17.4 7.0 7.6 4.3 2.5 4.6 12.5 17.0 11.2 — — 7.9 36.1 20.2 19.4 20.2 20.7 14.9 6.5 26.7 41.5 13.7 15.7 — — 20.7 33.4 33.6 20.1 17.8 20.9 $ 402.1 $ 173.3 $ 165.8 The unaccreted portion of a $2.7 million discount recorded on this note upon acquisition is included in the balance above. The unaccreted portion of a $2.1 million discount recorded on this note upon acquisition is included in the balance above. The unaccreted portion of a $2.4 million discount recorded on this note upon acquisition is included in the balance above. The unaccreted portion of a $1.0 million discount recorded on this note upon acquisition is included in the balance above. The unamortized portion of a $0.3 million premium recorded on this note upon acquisition is included in the balance above. The unamortized portion of a $0.4 million premium recorded on this note upon acquisition is included in the balance above. The unamortized portion of the $0.6 million premium recorded on this note upon acquisition is included in the balance above. The unamortized portion of the $0.5 million premium recorded on this note upon acquisition is included in the balance above. Balance consists of two notes secured by the same building. The company repaid these notes in October 2014. ______ (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) The company repaid this mortgage note in October 2014. (11) The unamortized portion of the $0.3 million premium recorded on this note upon acquisition is included in the balance above. (12) The unamortized portion of the $0.7 million premium recorded on this note upon acquisition is included in the balance above. (13) The unamortized portion of the $0.5 million premium recorded on this note upon acquisition is included in the balance above. (14) The unamortized portion of the $0.2 million premium recorded on this note upon acquisition is included in the balance above. (15) The unamortized portion of the $0.4 million premium recorded on this note upon acquisition is included in the balance above. (16) Balance consists of four notes secured by the same building. (17) The unamortized portion of the $1.0 million premium recorded on the four notes upon acquisition is included in the balance above. (18) These four mortgage notes payable are series municipal bonds that have maturity dates ranging from from May 2017 to May 2040. The note payable with the earliest maturity date will require principal and interest payments while the remaining notes payable will require interest only payments. One of the notes payable matures in May 2017 and the remaining three have future maturity dates but allow repayment in May 2020 without penalty. The Company intends on repaying all three notes payable at that time. (19) Payable in monthly installments of interest only for 24 months and then installments of principal and interest based on an 11-year amortization with the final payment due at maturity. (20) Payable in monthly installments of principal and interest with the final payment due at maturity (unless otherwise noted). (21) The contractual interest rates for the 22 outstanding mortgage notes ranged from 5.0% to 7.6% as of December 31, 2014. (22) MOB-Medical office building; OTH-Other. Subsequent Mortgage Note Payable Repayment In February 2015, the Company repaid in full a secured loan from Wells Fargo Commercial Mortgage bearing an interest rate of 5.45% consisting of outstanding principal of $15.0 million and accrued interest as of the redemption date of $0.1 million. 73 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Other Long-Term Debt Information Future maturities of the Company’s notes and bonds payable as of December 31, 2014 were as follows: (Dollars in thousands) Principal Maturities Net Accretion/ Amortization (1) Notes and Bonds Payable 2015 2016 2017 2018 2019 2020 and thereafter $ 50,826 $ (624) $ 58,698 388,181 8,420 202,633 698,772 (473) (473) (496) (636) (1,136) 50,202 58,225 387,708 7,924 201,997 697,636 % 3.6% 4.1% 27.6% 0.6% 14.4% 49.7% ______ (1) Includes discount accretion and premium amortization related to the Company’s Senior Notes due 2017, Senior Notes due 2021, Senior Notes due 2023, and 17 mortgage notes payable. $ 1,407,530 $ (3,838) $ 1,403,692 100.0% 11. Stockholders’ Equity Common Stock The Company had no preferred shares outstanding and had common shares outstanding for the three years ended December 31, 2014 as follows: Balance, beginning of year Issuance of common stock Year Ended December 31, 2014 2013 2012 95,924,339 87,514,336 77,843,883 3,073,445 8,293,369 9,275,895 Non-vested stock-based awards, net of withheld shares and forfeitures (169,686) 116,634 394,558 Balance, end of year 98,828,098 95,924,339 87,514,336 Restricted Stock Vesting The Company's Chairman and Chief Executive Officer, David R. Emery, has received multiple grants of restricted stock in prior years, 838,886 of which vested by their terms on December 31, 2014. Mr. Emery surrendered 351,913 of these shares upon vesting to satisfy the Company's minimum income tax withholding requirement. Together with his other holdings, Mr. Emery will continue to retain approximately 784,669 shares of the Company's common stock, 87,779 of which will continue to be restricted and subject to future vesting requirements. Equity Offering On July 19, 2013, the Company issued 3,000,000 shares of common stock, par value $0.01 per share, at $26.13 per share in an underwritten public offering pursuant to the Company's existing effective registration statement. The net proceeds of the offering, after underwriting discounts, commissions and offering expenses, were approximately $78.3 million. On September 28, 2012, the Company sold 9,200,000 shares of common stock at a gross price of $23.87 per share (net price of $22.85 per share) in an underwritten public offering pursuant to the Company's existing effective registration statement. The net proceeds of the offering, after underwriting discounts and commissions and estimated offering expenses, were approximately $201.1 million. At-The-Market Equity Offering Program The Company has in place an at-the-market equity offering program to sell shares of the Company’s common stock from time to time in at-the-market sales transactions. The following table details the shares sold under this program. 2014 2013 Shares Sold Sales Price Per Share 3,009,761 $24.35 - $27.53 5,207,871 $24.19 - $30.49 Net Proceeds (in millions) $ $ 75.7 140.6 74 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) As of December 31, 2014, there were 2,381,639 authorized shares remaining available to be sold under the Company's existing sales agreements. In January 2015, the Company sold 531,153 shares of common stock, generating $14.9 million in net proceeds. Dividends Declared During 2014, the Company declared and paid common stock dividends aggregating $1.20 per share ($0.30 per share per quarter). On February 3, 2015, the Company declared a quarterly common stock dividend in the amount of $0.30 per share payable on February 27, 2015 to stockholders of record on February 17, 2015. Authorization to Repurchase Common Stock The Company’s Board of Directors has authorized management to repurchase up to 3,000,000 shares of the Company’s common stock. As of December 31, 2014, the Company had not repurchased any shares under this authorization. The Company may elect, from time to time, to repurchase shares either when market conditions are appropriate or as a means to reinvest excess cash flows. Such purchases, if any, may be made either in the open market or through privately negotiated transactions. Noncontrolling Interest Transfers The following schedule discloses the effects of changes in the Company's ownership interest in its less-than-wholly-owned subsidiary on the Company's stockholders' equity: (Dollars in thousands) Net income attributable to common stockholders Transfers to noncontrolling interest: Year Ended December 31, 2014 2013 2012 $ 31,887 $ 6,946 $ 5,465 Net decrease in the Company's additional paid-in capital for purchase of subsidiary partnership interest Net transfers to the noncontrolling interest (6,577) (6,577) — — — — Change to the Company's total stockholders' equity from net income attributable to common stockholders and transfers to noncontrolling interest $ 25,310 $ 6,946 $ 5,465 Accumulated Other Comprehensive Income (Loss) During the year ended December 31, 2014, the Company recorded an increase to future benefit obligations related to its pension plan of $2.6 million, resulting in an increase to Other liabilities and an offsetting increase to Accumulated other comprehensive income (loss) which is included in Stockholders' equity on the Consolidated Balance Sheets. During the year ended December 31, 2013, the Company had recorded a reduction to future benefit obligations related to its pension plan of $2.1 million, resulting in a decrease to Other liabilities and an offsetting decrease to Accumulated other comprehensive income (loss) which is included in Stockholders' equity on the Consolidated Balance Sheets. The following table represents the amounts reclassified out of Accumulated other comprehensive income (loss) related to the Company's pension plan during the years ended December 31, 2014 and 2013: (Dollars in thousands) Beginning balance Other comprehensive income (loss) before reclassifications Amounts reclassified from accumulated other comprehensive income (loss) Net current-period other comprehensive income (loss) Ending balance Year Ended December 31, 2014 51 $ (1,850) (720) (2,570) (2,519) $ 2013 (2,092) 1,952 191 2,143 51 $ $ 75 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The following table represents the details regarding the reclassifications from Accumulated other comprehensive income (loss) related to the Company's pension plan during the years ended December 31, 2014: Details about accumulated other comprehensive income (loss) components Amount reclassified from accumulated other comprehensive income (loss) Affected line item in the statement where net income is presented (Dollars in thousands) Prior service costs Actuarial loss 12. Benefit Plans $ $ (1,189) 469 (720) General and administrative expenses General and administrative expenses Executive Retirement Plan The Company has an Executive Retirement Plan under which three founding officers may receive pension benefits upon normal retirement (defined to be when the officer reaches age 65 and has completed five years of service with the Company) at an amount equal to 60% of the officer’s final average earnings (defined as the average of the executive’s highest three years’ earnings) plus 6% of final average earnings multiplied by the years of service after age 60 (but not more than five years), less 100% of certain other retirement benefits received by the officer to be paid either in lump sum or in monthly installments over a period not to exceed the greater of the life of the retired officer or his surviving spouse. In December 2008, the Company froze the maximum annual benefits payable to a single participant under the plan at $0.9 million, plus cost of living increases, which resulted in a curtailment of benefits under the retirement plan for the Company’s chief executive officer. In 2008, the officers under the plan elected the manner in which they would receive retirement benefits upon retirement. The Company’s chief executive officer agreed to receive his retirement benefits under the plan in installment payments upon retirement, rather than in a lump sum. Of the two remaining officers in the plan, one has elected to receive benefits in monthly installments and one has elected a lump-sum payment upon retirement. As of December 31, 2014, only the Company’s chief executive officer was eligible to retire under the plan. Upon retirement, the chief executive officer will be paid annual installments of approximately $0.9 million, increasing annually based on CPI. Net periodic benefit cost for the Executive Retirement Plan for the three years in the period ended December 31, 2014 is comprised of the following: (Dollars in thousands) Service cost Interest cost Amortization of prior service cost Amortization of net gain Year Ended December 31, 2014 2013 $ 88 $ 86 $ 687 597 (1,189) (1,189) 469 55 1,380 874 2012 77 725 (723) 990 1,069 Net (gain) loss recognized in Accumulated other comprehensive income (loss) 2,570 (2,143) (1,240) Total recognized in net periodic benefit gain and Accumulated other comprehensive income (loss) $ 2,625 $ (1,269) $ (171) The Company estimates that approximately $0.4 million of the amounts included in Accumulated other comprehensive income (loss) will be amortized to expense in 2015. The Executive Retirement Plan is unfunded, and benefits will be paid from earnings of the Company. The following table sets forth the benefit obligations as of December 31, 2014 and 2013. 76NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Dollars in thousands) Benefit obligation at beginning of year Service cost Interest cost Benefits paid Actuarial (gain) loss, net Benefit obligation at end of year Amounts recognized in the Consolidated Balance Sheets are as follows: (Dollars in thousands) Net liabilities included in other liabilities Amounts recognized in accumulated other comprehensive income (loss) Year Ended December 31, 2014 $ 13,890 $ 88 687 (42) 1,850 $ 16,473 $ 2013 15,201 86 597 (42) (1,952) 13,890 Year Ended December 31, 2014 2013 $ (13,954) $ (13,941) (2,519) 51 The Company's assumed discount rates and compensation increases, which are used to measure the year-end benefit obligations and earnings for the subsequent year related to the Executive Retirement Plan are detailed in the following table for the three years ended December 31, 2014: Discount rates Compensation increases 2014 4.08% 2.7% 2013 4.92% 2.7% 2012 3.91% 2.7% 13. Stock and Other Incentive Plans Stock Incentive Plan The Incentive Plan authorizes the Company to issue 2,390,272 shares of common stock to its employees and directors. The Incentive Plan will continue until terminated by the Company’s Board of Directors. As of December 31, 2014, 2013 and 2012, the Company had issued, net of forfeitures, a total of 1,816,580 shares, 1,693,266 shares and 1,576,632 shares, respectively, under the Incentive Plan for compensation-related awards to employees and directors, with a total of 573,692 authorized shares, 697,006 authorized shares and 813,640 authorized shares, respectively, remaining which had not been issued. Non-vested shares issued under the Incentive Plan are generally subject to fixed vesting periods varying from three to eight years beginning on the date of issue. If a recipient voluntarily terminates his or her relationship with the Company or is terminated for cause before the end of the vesting period, the shares are forfeited, at no cost to the Company. Once the shares have been issued, the recipient has the right to receive dividends and the right to vote the shares. Compensation expense recognized during the years ended December 31, 2014, 2013 and 2012 from the amortization of the value of shares over the vesting period issued to employees was $3.6 million, $4.3 million and $2.5 million, respectively. The Incentive Plan also authorizes the Company's Compensation Committee of its Board of Directors to grant restricted stock units or other performance awards to eligible employees. Such awards, if issued, will also be subject to restrictions and other conditions as determined appropriate by the Compensation Committee. Grantees of restricted stock units will not have stockholder voting rights and will not receive dividend payments. The award of performance units does not create any stockholder rights. Upon satisfaction of certain performance targets as determined by the Compensation Committee, payment of the performance units may be made in cash, shares of common stock, or a combination of cash and common stock, at the option of the Compensation Committee. As of December 31, 2014, the Company had not granted any restricted stock units or other performance awards under the Incentive Plan. Executive Incentive Program On July 31, 2012, the Company adopted a new Executive Incentive Program. The Executive Incentive Program was adopted to provide specific award criteria with respect to incentive awards made under the Incentive Plan subject to the discretion of the Compensation Committee. No new shares of common stock were authorized in connection with the Executive Incentive Program. Under the terms of the Executive Incentive Program, the Company's named executive officers, and certain other members of senior management beginning in 2013, may earn incentive awards in the form of cash and non-vested stock. Cash incentive awards are based on individual and Company performance. Company performance is measured over a four-quarter period against targeted financial and operational metrics set in advance by the Compensation Committee. Non-vested stock 77NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) awards are based on the Company's relative total shareholder return performance over one-year and three-year periods, measured against the Company's peer group. The officers may also receive non-vested stock awards by electing to take cash incentive awards in the form of non-vested stock. The following details the awards that have been earned from this program: • On December 31, 2014, the Company granted performance-based awards to its five named executive officers and five senior vice presidents with a grant date fair value totaling $3.9 million, which were granted in the form of 140,930 non-vested shares, with a three-year vesting period, which will result in annual compensation expense of $1.3 million for the years ended 2015, 2016 and 2017, respectively. • On December 31, 2013, the Company granted performance-based awards to its five named executive officers and six senior vice presidents with a grant date fair value totaling $1.0 million, which were granted in the form of 47,709 non-vested shares, with a three-year vesting period, which will result in annual compensation expense of $0.3 million for the years ended 2014, 2015 and 2016, respectively. • On December 31, 2012, the Company granted performance-based awards to its five named executive officers with a grant date fair value totaling $2.7 million, which were granted in the form of 112,132 non-vested shares, with a three-year vesting period, which will result in annual compensation expense of $0.9 million for the years ended 2013, 2014 and 2015, respectively. Long-Term Incentive Program In the first quarter of 2014 and fourth quarter of 2012, the Company granted a performance-based award under the Long-term Incentive Program adopted under the Incentive Plan (the "LTIP") totaling approximately $0.6 million and $3.6 million, respectively, which was granted in the form of 27,094 non-vested shares and 154,696 non-vested shares, respectively. The shares have vesting periods ranging from three to eight years with a weighted average vesting period of approximately six years. No performance-based awards were released under the Incentive Plan during 2013. Beginning in 2012, the Company's executive officers were no longer eligible to participate in the LTIP and beginning in 2013, five senior vice presidents were also no longer eligible to participate. In the first quarter of 2014, the Company granted a special release of 2,968 non-vested shares to three of its officers in lieu of a cash compensation increase. The shares have a vesting period of eight years. Salary Deferral Plan The Company's salary deferral plan allows officers to elect to defer up to 50% of their base salary in the form of non-vested shares subject to long-term vesting issued under the Incentive Plan. The number of shares will be increased through a Company match depending on the length of the vesting period selected by the officer. The officer's vesting period choices are: three years for a 30% match; five years for a 50% match; and eight years for a 100% match. During 2014, 2013 and 2012, the Company issued 71,460, shares 66,787 shares and 89,421 shares, respectively, to its officers through the salary deferral plan. 78NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Non-employee Directors Incentive Plan The Company issues non-vested shares to its non-employee directors under the Incentive Plan. The directors’ shares issued generally have a three-year vesting period and are subject to forfeiture prior to such date upon termination of the director’s service, at no cost to the Company. During 2014, 2013 and 2012, the Company issued 26,677 shares, 20,256 shares, and 27,864 shares, respectively, to its non-employee directors through the Incentive Plan. For 2014, 2013 and 2012, compensation expense resulting from the amortization of non-vested share grants to directors was approximately $0.5 million, $0.6 million, and $0.6 million, respectively. A summary of the activity under the Incentive Plan and related information for the three years in the period ended December 31, 2014 follows: Stock-based awards, beginning of year Granted Vested Forfeited Stock-based awards, end of year Weighted-average grant date fair value of: Stock-based awards, beginning of year Stock-based awards granted during the year Stock-based awards vested during the year Stock-based awards forfeited during the year Stock-based awards, end of year Year Ended December 31, 2014 2013 2012 1,788,168 1,770,061 1,430,675 269,129 134,752 (931,767) (116,645) (67,798) — 397,917 (58,531) — 1,057,732 1,788,168 1,770,061 $ $ $ $ $ 23.81 25.27 24.13 22.01 24.01 $ $ $ $ $ 23.97 23.90 26.35 $ $ $ — $ 23.81 $ 24.42 22.35 23.99 — 23.97 Grant date fair value of shares granted during the year $ 6,800,122 $ 3,220,623 $ 8,894,424 The vesting periods for the non-vested shares granted during 2014 ranged from three to eight years with a weighted-average amortization period remaining as of December 31, 2014 of approximately 3.7 years. During 2014, 2013 and 2012, the Company withheld 371,017 shares, 18,118 shares and 3,359 shares, respectively, of common stock from its officers to pay estimated withholding taxes related to the vesting of shares. 401(k) Plan The Company maintains a 401(k) plan that allows eligible employees to defer salary, subject to certain limitations imposed by the Code. The Company provides a matching contribution of up to 3% of each eligible employee’s salary, subject to certain limitations. The Company’s matching contributions were approximately $0.4 million during 2014, 2013 and 2012. Dividend Reinvestment Plan The Company is authorized to issue 1,000,000 shares of common stock to stockholders under the Dividend Reinvestment Plan. As of December 31, 2014, the Company had issued 532,071 shares under the plan of which 12,606 shares were issued in 2014, 16,422 shares were issued in 2013 and 16,732 shares were issued in 2012. Employee Stock Purchase Plan The Company has an Employee Stock Purchase Plan, pursuant to which the Company is authorized to issue shares of common stock. As of December 31, 2014, 2013 and 2012, the Company had a total of 88,495 shares, 142,367 shares and 169,099 shares authorized under the Employee Stock Purchase Plan, respectively, which had not been issued or optioned. Under the Employee Stock Purchase Plan, each eligible employee in January of each year is able to purchase up to $25,000 of common stock at the lesser of 85% of the market price on the date of grant or 85% of the market price on the date of exercise of such option. The number of shares subject to each year’s option becomes fixed on the date of grant. Options granted under the Employee Stock Purchase Plan expire if not exercised 27 months after each such option’s date of grant. Cash received from employees upon exercising options under the Employee Stock Purchase Plan was approximately $1.2 million for the year ended December 31, 2014, $1.3 million for the year ended December 31, 2013, and $1.0 million for the year ended December 31, 2012. 79NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) A summary of the Employee Stock Purchase Plan activity and related information for the three years in the period ended December 31, 2014 is as follows: Options outstanding, beginning of year Granted Exercised Forfeited Expired Options outstanding and exercisable, end of year Weighted-average exercise price of: Options outstanding, beginning of year Options granted during the year Options exercised during the year Options forfeited during the year Options expired during the year Options outstanding, end of year Weighted-average fair value of options granted during the year (calculated as of the grant date) Year Ended December 31, 2014 391,108 275,655 (51,078) (63,908) 2013 433,452 246,717 (69,076) (49,434) 2012 425,196 327,936 (59,163) (78,202) (157,875) (170,551) (182,315) 393,902 391,108 433,452 $ $ $ $ $ $ $ 17.05 18.11 17.76 18.58 15.80 19.17 4.35 $ $ $ $ $ $ $ 16.78 20.41 17.09 17.98 17.99 17.05 5.08 $ $ $ $ $ $ $ 15.80 15.80 16.18 16.74 18.24 16.78 4.13 Intrinsic value of options exercised during the year $ 436,547 $ 375,335 $ 439,645 Intrinsic value of options outstanding and exercisable (calculated as of December 31) Exercise prices of options outstanding (calculated as of December 31) Weighted-average contractual life of outstanding options (calculated as of December 31, in years) $ 3,209,456 $ 1,665,331 $ 3,132,506 $ 19.17 $ 17.05 $ 16.78 0.8 0.8 0.8 The fair values for these options were estimated at the date of grant using a Black-Scholes options pricing model with the weighted-average assumptions for the options granted during the period noted in the following table. The risk-free interest rate was based on the U.S. Treasury constant maturity-nominal two-year rate whose maturity is nearest to the date of the expiration of the latest option outstanding and exercisable; the expected dividend yield was based on the expected dividends of the current year as a percentage of the average stock price of the prior year; the expected life of each option was estimated using the historical exercise behavior of employees; expected volatility was based on historical volatility of the Company’s common stock; and expected forfeitures were based on historical forfeiture rates within the look-back period. Risk-free interest rates Expected dividend yields Expected life (in years) Expected volatility Expected forfeiture rates 2014 0.38% 4.94% 1.39 23.0% 75% 2013 0.25% 5.17% 1.35 25.6% 85% 2012 0.25% 6.17% 1.46 30.3% 70% 80NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 14. Earnings Per Share The table below sets forth the computation of basic and diluted earnings per common share for the three years in the period ended December 31, 2014. (Dollars in thousands, except per share data) Weighted Average Common Shares Weighted average Common Shares outstanding Non-vested shares Weighted average Common Shares - Basic Weighted average Common Shares - Basic Dilutive effect of non-vested shares Dilutive effect of employee stock purchase plan Weighted average Common Shares - Diluted Net Income (loss) Income (loss) from continuing operations Noncontrolling interests’ share in earnings Income (loss) from continuing operations attributable to common stockholders Discontinued operations Net income attributable to common stockholders Basic Earnings (loss) Per Common Share Income (loss) from continuing operations Discontinued operations Net income attributable to common stockholders Diluted Earnings (loss) Per Common Share Income (loss) from continuing operations Discontinued operations Net income attributable to common stockholders Year Ended December 31, 2014 2013 2012 97,093,960 92,725,112 80,360,422 (1,814,734) (1,784,485) (1,515,582) 95,279,226 90,940,627 78,844,840 95,279,226 90,940,627 78,844,840 1,364,236 115,948 — — — — 96,759,410 90,940,627 78,844,840 $ 33,979 $ (13,092) $ (313) (37) (892) (70) (962) 6,427 5,465 (13,129) 20,075 6,946 $ (0.14) $ (0.01) 0.22 0.08 0.08 0.07 33,666 (1,779) 31,887 0.35 (0.02) 0.33 $ $ 0.35 $ (0.14) $ (0.01) (0.02) 0.33 $ 0.22 0.08 $ 0.08 0.07 $ $ $ $ $ For the years ended December 31, 2013 and 2012, non-vested shares totaling 1,288,166 and 1,144,465, respectively, and options under the Employee Stock Purchase Plan to purchase shares totaling 157,733 and 138,578, respectively, of the Company’s common stock were excluded from the calculation of diluted earnings (loss) per common share because the effect was anti-dilutive due to the loss from continuing operations during those periods. 15. Commitments and Contingencies Tenant Improvements As of December 31, 2014, the Company had remaining funding commitments of tenant improvement allowances related to first generation tenant improvements ranging between $11.9 million and $15.6 million on properties that were developed by the Company. The Company may provide a tenant improvement allowance in new or renewal leases for the purpose of refurbishing or renovating tenant space. As of December 31, 2014, the Company had commitments of approximately $13.4 million that is expected to be spent on tenant improvements related second generation space throughout the portfolio. Operating Leases As of December 31, 2014, the Company was obligated under operating lease agreements consisting primarily of the Company’s corporate office lease and ground leases related to 45 real estate investments with expiration dates through 2105. The Company’s corporate office lease currently covers approximately 36,653 square feet of rented space and expires on October 31, 2020. Annual base rent on the corporate office lease increases approximately 3.25% annually. The Company’s ground leases generally increase annually based on increases in the consumer price index. Rental expense relating to the operating leases for the years ended December 31, 2014, 2013 and 2012 was $4.9 million, $4.4 million and $4.3 million, respectively. The Company prepaid certain of its ground leases which represented approximately $0.5 million, of the Company’s rental expense 81 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) for the years ended December 31, 2014, 2013, and 2012. The Company’s future minimum lease payments for its operating leases, excluding leases that the Company has prepaid and leases in which an operator pays or fully reimburses the Company, as of December 31, 2014 were as follows (in thousands): 2015 2016 2017 2018 2019 2020 and thereafter $ 5,001 5,070 5,129 5,154 5,250 286,699 $ 312,303 Legal Proceedings The Company paid $950,000 in 2013, which was accrued in general and administrative expenses at the end of 2012, in connection with the settlement of one litigation matter. The Company is not aware of any pending or threatened litigation that, if resolved against the Company, would have a material adverse effect on the Company's consolidated financial position, results of operations, or cash flows. 16. Other Data Taxable Income (unaudited) The Company has elected to be taxed as a REIT, as defined under the Internal Revenue Code. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement that it currently distribute at least 90% of its taxable income to its stockholders. As a REIT, the Company generally will not be subject to federal income tax on taxable income it distributes currently to its stockholders. Accordingly, no provision for federal income taxes has been made in the accompanying Consolidated Financial Statements. If the Company fails to qualify as a REIT for any taxable year, then it will be subject to federal income taxes at regular corporate rates, including any applicable alternative minimum tax, and may not be able to qualify as a REIT for four subsequent taxable years. Even if the Company qualifies as a REIT, it may be subject to certain state and local taxes on its income and property and to federal income and excise tax on its undistributed taxable income. Earnings and profits (as defined under the Internal Revenue Code), the current and accumulated amounts of which determine the taxability of distributions to stockholders, vary from net income attributable to common stockholders and taxable income because of different depreciation recovery periods, depreciation methods, and other items. On a tax-basis, the Company’s gross real estate assets totaled approximately $3.3 billion, $3.1 billion, and $2.8 billion, respectively, for the three years ended December 31, 2014. The following table reconciles the Company’s consolidated net income attributable to common stockholders to taxable income for the three years ended December 31, 2014: (Dollars in thousands) Net income attributable to common stockholders Reconciling items to taxable income: Depreciation and amortization Gain or loss on disposition of depreciable assets Impairments Straight-line rent Receivable allowances Stock-based compensation Other Taxable income (1) Dividends paid Year Ended December 31, 2014 2013 2012 $ 31,887 $ 6,946 $ 5,465 28,332 (4,940) — (12,203) 2,074 2,020 1,213 16,496 26,240 28,526 (3,656) 6,222 (6,493) (716) 5,817 (1,866) 25,548 922 3,807 (6,075) (74) 5,400 8,917 41,423 $ 48,383 $ 32,494 $ 46,888 $ 116,371 $ 111,571 $ 96,356 82 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) ______ (1) Before REIT dividend paid deduction. Characterization of Distributions (unaudited) Distributions in excess of earnings and profits generally constitute a return of capital. The following table gives the characterization of the distributions on the Company’s common stock for the three years ended December 31, 2014. For the three years ended December 31, 2014, there were no preferred shares outstanding. As such, no dividends were distributed related to preferred shares for those periods. 2014 2013 2012 Per Share % Per Share % Per Share % Common stock: Ordinary income Return of capital Unrecaptured section 1250 gain $ 0.50 0.70 — 42.0% $ 58.0% —% Common stock distributions $ 1.20 100.0% $ 0.27 0.80 0.13 1.20 22.2% $ 66.3% 11.5% 100.0% $ 0.63 0.56 0.01 1.20 52.3% 47.1% 0.6% 100.0% State Income Taxes The Company must pay certain state income taxes, which are included in general and administrative expense on the Company’s Consolidated Statements of Operations. The State of Texas gross margins tax on gross receipts from operations is disclosed in the table below as an income tax because it is considered such by the Securities and Exchange Commission. State income tax expense and state income tax payments for the three years ended December 31, 2014 are detailed in the table below: (Dollars in thousands) State income tax expense: Texas gross margins tax (1) Other Total state income tax expense State income tax payments, net of refunds and collections Year Ended December 31, 2014 2013 2012 $ $ $ 694 $ 649 $ 843 58 752 593 23 3 $ 672 $ 846 $ 768 $ 627 ______ (1) In the table above, income tax expense for 2014 and 2012 includes approximately $0.1 million that was recorded to the gain on sale of real estate properties sold, which is included in discontinued operations rather than general and administrative expenses on the Company’s Consolidated Statements of Operations. 17. Fair Value of Financial Instruments The carrying amounts of cash and cash equivalents, receivables and payables are a reasonable estimate of their fair value as of December 31, 2014 and 2013 due to their short-term nature. The fair value of notes and bonds payable is estimated using cash flow analyses as of December 31, 2014 and 2013, based on the Company’s current interest rates for similar types of borrowing arrangements. The fair value of the mortgage notes and notes receivable is estimated based either on cash flow analyses at an assumed market rate of interest or at a rate consistent with the rates on mortgage notes acquired by the Company or notes receivable entered into by the Company recently. 83 The table below details the fair value and carrying values for notes and bonds payable, mortgage notes receivable and notes receivable as of December 31, 2014 and 2013. (Dollars in millions) Notes and bonds payable (1) Mortgage notes receivable (2) December 31, 2014 December 31, 2013 Carrying Value Fair Value 1,403.7 $ 1,438.8 1.9 $ 1.9 $ $ Carrying Value Fair Value 1,348.5 $ 1,380.6 125.5 $ 124.5 $ $ ______ (1) Level 3 - Fair value derived from valuation techniques in which one of more significant inputs or significant value drivers are unobservable. (2) Level 2 - Fair value based on quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-driven valuations in which significant inputs and significant value drivers are observable in active markets. 84 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 18. Selected Quarterly Financial Data (unaudited) Quarterly financial information for the year ended December 31, 2014 is summarized below. The results of operations have been restated, as applicable, to show the effect of reclassifying properties sold or to be sold as discontinued operations. (Dollars in thousands, except per share data) 2014 Revenues from continuing operations Income from continuing operations Discontinued operations Net income Less: (Income) from noncontrolling interests Net income attributable to common stockholders Net income attributable to common stockholders per share: Basic earnings per common share Diluted earnings per common share ______ March 31 (1) June 30 (2) September 30 (3) December 31 (4) Quarter Ended $ 90,571 $ 91,671 $ 93,612 $ 95,001 7,477 (3,514) 3,963 (111) 9,005 (2,994) 6,011 (40) 8,437 (4,284) 4,153 (162) 9,060 9,013 18,073 — 3,852 $ 5,971 $ 3,991 $ 18,073 0.04 0.04 $ $ 0.06 0.06 $ $ 0.04 0.04 $ $ 0.19 0.18 $ $ $ (1) The decreases in net income and amounts per share for the first quarter of 2014 are primarily attributable to impairment charges of $3.4 million. (2) The increases in net income and amounts per share for the second quarter of 2014 are primarily attributable to a $1.9 million cash reimbursement received by the Company for certain operating expenses paid by the Company for years 2006 through 2013. (3) The decreases in net income and amounts per share for the third quarter of 2014 are primarily attributable to impairment charges of $4.5 million. (4) The increases in net income and amounts per share for the fourth quarter of 2014 are primarily attributable to gains on sales of real estate totaling $9.3 million, partially offset by impairment charges of $1.0 million. Quarterly financial information for the year ended December 31, 2013 is summarized below. The results of operations have been restated, as applicable, to show the effect of reclassifying properties sold or to be sold as discontinued operations. (Dollars in thousands, except per share data) 2013 Revenues from continuing operations Income (loss) from continuing operations Discontinued operations Net income (loss) Less: (Income) loss from noncontrolling interests Net income (loss) attributable to common stockholders Net income attributable to common stockholders per share: Basic earnings (loss) per common share Diluted earnings (loss) per common share $ $ $ ______ March 31 (1) June 30 (2) September 30 (3) December 31 (4) Quarter Ended $ 78,970 $ 80,552 $ 82,805 $ 88,622 602 (27,861) (1,620) (1,018) 19 3,623 (24,238) 33 4,511 15,272 19,783 (17) 9,656 2,800 12,456 (72) (999) $ (24,205) $ 19,766 $ 12,384 (0.01) $ (0.01) $ (0.27) $ (0.27) $ 0.21 0.21 $ $ 0.13 0.13 (1) The decreases in net income and amounts per share for the first quarter of 2013 are primarily attributable to impairment charges of $3.6 million. (2) The decreases in net income and amounts per share for the second quarter of 2013 are primarily attributable to losses of extinguishment of debt of $29.9 million, of which $0.3 million is included in discontinued operations. This amount is partially offset by gains on sales of real estate totaling $1.8 million. (3) The increases in net income and amounts per share for the third quarter of 2013 are primarily attributable to gains on sales of real estate totaling $20.2 million, partially offset by impairment charges of $6.3 million. (4) The increases in net income and amounts per share for the fourth quarter of 2013 are primarily attributable to gains on sales of real estate totaling $2.7 million. 85 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures Disclosure Controls and Procedures The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in the Company’s reports under the Securities Exchange Act of 1934, as amended (the “Securities Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that the information required to be disclosed is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow for timely decisions regarding required disclosure. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act) as of the end of the period covered by this Annual Report on Form 10-K. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act. Changes in the Company’s Internal Control over Financial Reporting There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the year to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Management’s Annual Report on Internal Control Over Financial Reporting The management of Healthcare Realty Trust Incorporated is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2014 using the principles and other criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on that assessment, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2014. The Company’s independent registered public accounting firm, BDO USA, LLP, has also issued an attestation report on the effectiveness of the Company’s internal control over financial reporting included herein. 86Report of INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders Healthcare Realty Trust Incorporated Nashville, Tennessee We have audited Healthcare Realty Trust Incorporated’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Healthcare Realty Trust Incorporated’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Healthcare Realty Trust Incorporated maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Healthcare Realty Trust Incorporated as of December 31, 2014 and 2013 and the related consolidated statements of operations, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2014 and our report dated February 17, 2015 expressed an unqualified opinion thereon. /s/ BDO USA, LLP Nashville, Tennessee February 17, 2015 87 PART III Item 10. Directors, Executive Officers and Corporate Governance Directors Information with respect to the Company’s directors, set forth in the Company’s Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 12, 2015 under the caption “Election of Directors,” is incorporated herein by reference. Executive Officers The executive officers of the Company are: Name David R. Emery Scott W. Holmes John M. Bryant, Jr. B. Douglas Whitman, II Todd J. Meredith Age 70 60 48 46 40 Position Chairman of the Board & Chief Executive Officer Executive Vice President & Chief Financial Officer Executive Vice President & General Counsel Executive Vice President - Corporate Finance Executive Vice President - Investments Mr. Emery formed the Company and has held his current positions since May 1992. Prior to 1992, Mr. Emery was engaged in the development and management of commercial real estate in Nashville, Tennessee. Mr. Emery has been active in the real estate industry for over 45 years. Mr. Holmes has served as the Chief Financial Officer since January 2003 and was the Senior Vice President – Financial Reporting from October 1998 until January 2003. Mr. Holmes is a Certified Public Accountant. Prior to joining the Company in October 1998, he was with Ernst & Young LLP for more than 13 years. Mr. Holmes has previously served in a management capacity with two other public companies. Mr. Bryant became the Company’s General Counsel in November 2003. From April 2002 until November 2003, Mr. Bryant was Vice President and Assistant General Counsel. Prior to joining the Company, Mr. Bryant was a shareholder with the law firm of Baker Donelson Bearman & Caldwell in Nashville, Tennessee. Mr. Whitman joined the Company in 1998 and became the Executive Vice President – Corporate Finance in February 2011 and is responsible for all aspects of the Company’s financing activities, including capital raises, debt compliance, banking relationships and investor relations. Previously, Mr. Whitman led the Company's investment group and later served as the Company’s Chief Operating Officer from March 2007 until February 2011. Prior to joining the Company, Mr. Whitman worked for the University of Michigan Health System and HCA Inc. Mr. Meredith was appointed Executive Vice President – Investments in February 2011 and is responsible for overseeing the Company’s investment activities, including the acquisition, financing and development of medical office and other primarily outpatient medical facilities. Prior to February 2011, he led the Company’s development activities as a Senior Vice President. Before joining the Company in 2001, Mr. Meredith worked in corporate finance, most recently with Robert W. Baird & Co. Code of Ethics The Company has adopted a Code of Business Conduct and Ethics (the “Code of Ethics”) that applies to its principal executive officer, principal financial officer, principal accounting officer and controller, or persons performing similar functions, as well as all directors, officers and employees of the Company. The Code of Ethics is posted on the Company’s website (www.healthcarerealty.com) and is available in print free of charge to any stockholder who requests a copy. Interested parties may address a written request for a printed copy of the Code of Ethics to: Investor Relations: Healthcare Realty Trust Incorporated, 3310 West End Avenue, Suite 700, Nashville, Tennessee 37203. The Company intends to satisfy the disclosure requirement regarding any amendment to, or a waiver of, a provision of the Code of Ethics for the Company’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions by posting such information on the Company’s website. 88Section 16(a) Compliance Information with respect to compliance with Section 16(a) of the Securities Exchange Act set forth in the Company’s Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 12, 2015 under the caption “Security Ownership of Certain Beneficial Owners and Management – Section 16(a) Beneficial Ownership Reporting Compliance,” is incorporated herein by reference. Stockholder Recommendation of Director Candidates There have been no material changes with respect to the Company’s policy relating to stockholder recommendations of director candidates. Such information is set forth in the Company’s Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 12, 2015 under the caption “Shareholder Recommendation or Nomination of Director Candidates,” and is incorporated herein by reference. Audit Committee Information relating to the Company’s Audit Committee, its members and the Audit Committee’s financial experts, set forth in the Company’s Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 12, 2015 under the caption “Committee Membership,” is incorporated herein by reference. Item 11. Executive Compensation Information relating to executive compensation, set forth in the Company’s Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 12, 2015 under the captions “Compensation Discussion and Analysis,” “Executive Compensation,” “Compensation Committee Interlocks and Insider Participation,” “Compensation Committee Report” and “Director Compensation,” is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information relating to the security ownership of management and certain beneficial owners, set forth in the Company’s Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 12, 2015 under the caption “Security Ownership of Certain Beneficial Owners and Management,” is incorporated herein by reference. Information relating to securities authorized for issuance under the Company’s equity compensation plans, set forth in Item 5 of this report under the caption “Equity Compensation Plan Information,” is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions, and Director Independence Information relating to certain relationships and related transactions, and director independence, set forth in the Company’s Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 12, 2015 under the captions “Certain Relationships and Related Transactions” and “Corporate Governance – Independence of Directors,” is incorporated herein by reference. Item 14. Principal Accountant Fees and Services Information relating to the fees paid to the Company’s accountants, set forth in the Company’s Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 12, 2015 under the caption “Ratification of Appointment of Independent Registered Public Accounting Firm,” is incorporated herein by reference. 89Item 15. Exhibits and Financial Statement Schedules (a) Index to Historical Financial Statements, Financial Statement Schedules and Exhibits (1) Financial Statements: The following financial statements of Healthcare Realty Trust Incorporated are included in Item 8 of this Annual Report on Form 10-K. • Consolidated Balance Sheets – December 31, 2014 and December 31, 2013. • Consolidated Statements of Operations for the years ended December 31, 2014, December 31, 2013 and December 31, 2012. • Consolidated Statements of Comprehensive Income for the years ended December 31, 2014, December 31, 2013 and December 31, 2012. • Consolidated Statements of Equity for the years ended December 31, 2014, December 31, 2013 and December 31, 2012. • Consolidated Statements of Cash Flows for the years ended December 31, 2014, December 31, 2013 and December 31, 2012. • Notes to Consolidated Financial Statements. (2) Financial Statement Schedules: Schedule II — Valuation and Qualifying Accounts for the years ended December 31, 2014, 2013, and 2012 Schedule III — Real Estate and Accumulated Depreciation as of December 31, 2014 Schedule IV — Mortgage Loans on Real Estate as of December 31, 2014 95 96 97 All other schedules are omitted because they are either not applicable, not required or because the information is included in the consolidated financial statements or notes thereto. (3) Exhibits: Exhibit Number 1.1 1.2 1.3 1.4 3.1 3.2 4.1 4.2 4.3 4.4 4.5 Description of Exhibits — Controlled Equity Offering Sales Agreement, dated as of March 29, 2013, between the Company and Cantor Fitzgerald & Co. (1) — Equity Distribution Agreement, dated as of March 29, 2013, between the Company and RBC Capital Markets, LLC. (1) — At The Market Equity Offering Sales Agreement, dated as of March 29, 2013, between the Company and Merrill Lynch, Pierce, Fenner and Smith Incorporated. (1) — Sales Agency Financing Agreement, dated March 29, 2013, between the Company and Scotia Capital (USA) Inc. (1) — Second Articles of Amendment and Restatement of the Company. (2) — Amended and Restated Bylaws of the Company. (3) — Specimen stock certificate. (2) — Indenture, dated as of May 15, 2001 by and between the Company and Regions Bank, or trustee (as successor to the trustee named therein). (4) — Third Supplemental Indenture, dated December 4, 2009, by and between the Company and Regions Bank as Trustee. (5) — Form of 6.50% Senior Note due 2017 (set forth in Exhibit B to the Third Supplemental Indenture filed as Exhibit 4.2 thereto). (5) — Fourth Supplemental Indenture, dated December 13, 2010, by and between the Company and Regions Bank as Trustee. (6) 90 4.6 4.7 4.80 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 10.10 10.11 10.12 10.13 10.14 10.15 10.16 10.17 10.18 10.19 10.20 — Form of 5.750% Senior Note due 2021 (set forth in Exhibit B to the Fourth Supplemental Indenture filed as Exhibit 4.2 thereto). (6) — Fifth Supplemental Indenture, dated March 26, 2013, by and between the Company and Regions Bank, as Trustee. (7) — Form of 3.75% Senior Note due 2023 (set forth in Exhibit B to the Fifth Supplemental Indenture filed as Exhibit (4.8) hereto). (7) — 1995 Restricted Stock Plan for Non-Employee Directors of the Company. (8) — Amendment to 1995 Restricted Stock Plan for Non-Employee Directors of the Company. (9) — Second Amended and Restated Executive Retirement Plan. (10) — Amendment to Second Amended and Restated Executive Retirement Plan, dated as of October 30, 2012. (11) — 2000 Employee Stock Purchase Plan. (12) — Dividend Reinvestment Plan, as Amended. (13) — Second Amended and Restated Employment Agreement, dated July 31, 2012, between David R. Emery and the Company. (14) — Second Amended and Restated Employment Agreement, dated July 31, 2012, between Scott W. Holmes and the Company. (14) — Second Amended and Restated Employment Agreement, dated July 31, 2012, between John M. Bryant and the Company. (14) — Second Amended and Restated Employment Agreement, dated July 31, 2012, between Todd J. Meredith and the Company. (14) — Second Amended and Restated Employment Agreement, dated July 31, 2012, between B. Douglas Whitman, II and the Company. (14) — Healthcare Realty Trust Incorporated Executive Incentive Program. (14) — The Company's Long-Term Incentive Program. (15) — Amendment to Long-Term Incentive Program, dated July 31, 2012. (14) — 2010 Restricted Stock Implementation for Non-Employee Directors, dated May 4, 2010. (16) — Healthcare Realty Trust Incorporated Form of Restricted Stock Agreement for Non-Employee Directors. (14) — Healthcare Realty Trust Incorporated Form of Restricted Stock Agreement for Officers. (14) — 2007 Employees Stock Incentive Plan. (17) — Amendment, dated December 21, 2007, to 2007 Employees Stock Incentive Plan. (18) — Credit Agreement, dated as of October 14, 2011, by and among the Company, as Borrower, Wells Fargo Bank National Association, as Administrative Agent, JP Morgan Chase Bank, N.A., as Syndication Agent, Barclays Bank PLC, Credit Agricole Corporate and Investment Bank and Bank of America, N.A., as Co-Documentation Agents, and the other Lenders named therein. (19) 10.21 — Amendment to Credit Agreement, dated as of February 15, 2013, by and among the Company, as Borrower, Wells Fargo Bank National Association, as Administrative Agent, JP Morgan Chase Bank, N.A., as Syndication Agent, Barclays Bank PLC, Credit Agricole Corporate and Investment Bank and Bank of American, N.A., as Co-Documentation Agents, and the other Lenders named therein. (20) 10.22 __ 10.23 10.24 11 21 23 31.1 Amendment No. 2 to Credit Agreement, dated as of February 27, 2014, among the Company, Wells Fargo Bank, National Association, as Administrative Agent, and the other lenders that are party thereto. (21) __ Term Loan Agreement, dated as of February 27, 2014, among the Company, Wells Fargo Bank, National Association, as Administrative Agent, and the other lenders that are party thereto. (21) — Amendment No. 1 to Restricted Stock Implementation for Non-Employee Directors, dated December 11, 2013. (22) — Statement re: computation of per share earnings (contained in Note 14 to the Notes to the Consolidated Financial Statements for the year ended December 31, 2013 in Item 8 to this Annual Report on Form 10- K). — Subsidiaries of the Registrant. (filed herewith) — Consent of BDO USA, LLP, independent registered public accounting firm. (filed herewith) — Certification of the Chief Executive Officer of the Company pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (filed herewith) 9131.2 32 101.INS 101.SCH 101.CAL 101.LAB 101.DEF 101.PRE — Certification of the Chief Financial Officer of the Company pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (filed herewith) — Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- — — — — — — Oxley Act of 2002. (filed herewith) XBRL Instance Document. (filed herewith) XBRL Taxonomy Extension Schema Document. (filed herewith) XBRL Taxonomy Extension Calculation Linkbase Document. (filed herewith) XBRL Taxonomy Extension Labels Linkbase Document. (filed herewith) XBRL Taxonomy Extension Definition Linkbase Document. (filed herewith) XBRL Taxonomy Extension Presentation Linkbase Document. (filed herewith) (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16) (17) (18) (19) (20) (21) (22) Filed as an exhibit to the Company’s Form 8-K filed March 29, 2013 and hereby incorporated by reference. Filed as an exhibit to the Company’s Registration Statement on Form S-11 (Registration No. 33-60506) previously filed pursuant to the Securities Act of 1933 and hereby incorporated by reference. Filed as an exhibit to the Company’s Form 10-Q for the quarter ended September 30, 2007 and hereby incorporated by reference. Filed as an exhibit to the Company's Form 8-K filed May 17, 2001 and hereby incorporated by reference. Filed as an exhibit to the Company’s Form 8-K filed December 4, 2009 and hereby incorporated by reference. Filed as an exhibit to the Company’s Form 8-K filed December 13, 2010 and hereby incorporated by reference. Filed as an exhibit to the Company's Form 8-K filed March 26, 2013 and hereby incorporated by reference. Filed as an exhibit to the Company’s Form 10-K for the year ended December 31, 1995 and hereby incorporated by reference. Filed as an exhibit to the Company’s Form 8-K filed December 31, 2008 and hereby incorporated by reference. Filed as an exhibit to the Company's Form 8-K filed December 31, 2008 and hereby incorporated by reference. Filed as an exhibit to the Company's Form 10-Q for the quarter ended September 30, 2012 and hereby incorporated by reference. Filed as an exhibit to the Company’s Form 10-K for the year ended December 31, 1999 and hereby incorporated by reference. Filed as an exhibit to the Company’s Registration Statement on Form S-3 (Registration No. 33-79452) previously filed on September 26, 2003 pursuant to the Securities Act of 1933 and hereby incorporated by reference. Filed as an exhibit to the Company's Form 10-Q for the quarter ended June 30, 2012 and hereby incorporated by reference. Filed as an exhibit to the Company's Form 8-K filed December 14, 2007 and hereby incorporated by reference. Filed as an exhibit to the Company's Form 10-Q for the quarter ended March 31, 2010 and hereby incorporated by reference. Filed as an exhibit to the Company’s Form 8-K filed May 21, 2007 and hereby incorporated by reference. Filed as an exhibit to the Company’s Form 10-K for the year ended December 31, 2007 and hereby incorporated by reference. Filed as an exhibit to the Company’s Form 8-K filed October 19, 2011 and hereby incorporated by reference. Filed as an exhibit to the Company's Form 10-K for the year ended December 31, 2012 and hereby incorporated by reference. Filed as an exhibit to the Company's Form 8-K filed February 28, 2014 and hereby incorporated by reference. Filed as an exhibit to the Company's Form 10-K for the year ended December 31, 2013 and hereby incorporated by reference. 92Executive Compensation Plans and Arrangements The following is a list of all executive compensation plans and arrangements filed as exhibits to this Annual Report on Form 10-K: 1. 1995 Restricted Stock Plan for Non-Employee Directors of the Company (filed as Exhibit 10.1) 2. Amendment to 1995 Restricted Stock Plan for Non-Employee Directors of the Company (filed as Exhibit 10.2) 3. Second Amended and Restated Executive Retirement Plan (filed as Exhibit 10.3) 4. Amendment to Second Amended and Restated Executive Retirement Plan, dated as of October 30, 2012 (filed as Exhibit 10.4) 5. 2000 Employee Stock Purchase Plan (filed as Exhibit 10.5) 6. Second Amended and Restated Employment Agreement, dated July 31, 2012, between David R. Emery and the Company (filed as Exhibit 10.7) 7. Second Amended and Restated Employment Agreement, dated July 31, 2012, between Scott W. Holmes and the Company (filed as Exhibit 10.8) 8. Second Amended and Restated Employment Agreement, dated July 31, 2012, between John M. Bryant and the Company (filed as Exhibit 10.9) 9. Second Amended and Restated Employment Agreement, dated July 31, 2012, between Todd J. Meredith and the Company (filed as Exhibit 10.10) 10. Second Amended and Restated Employment Agreement, dated July 31, 2012, between B. Douglas Whitman, II and the Company (filed as Exhibit 10.11) 11. Healthcare Realty Trust Incorporated Executive Incentive Program (filed as Exhibit 10.12) 12. The Company's Long-Term Incentive Program (filed as Exhibit 10.13) 13. Amendment to Long-Term Incentive Program, dated July 31, 2012 (filed as Exhibit 10.14) 14. 2010 Restricted Stock Implementation for Non-Employee Directors, dated May 4, 2010 (filed as Exhibit 10.15) 15. Amendment No. 1 to Restricted Stock Implementation for Non-Employee Directors (filed as Exhibit 10.22) 16. Healthcare Realty Trust Incorporated Form of Restricted Stock Agreement for Non-Employee Directors (filed as Exhibit 10.16) 17. Healthcare Realty Trust Incorporated Form of Restricted Stock Agreement for Officers (filed as Exhibit 10.17) 18. 2007 Employees Stock Incentive Plan (filed as Exhibit 10.18) 19. Amendment, dated December 21, 2007, to 2007 Employees Stock Incentive Plan (filed as Exhibit 10.19) 93SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Nashville, State of Tennessee, on February 17, 2015. HEALTHCARE REALTY TRUST INCORPORATED By: /s/ David R. Emery David R. Emery Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Company and in the capacities and on the date indicated. Signature Title Date /s/ David R. Emery David R. Emery /s/ Scott W. Holmes Scott W. Holmes /s/ Amanda L. Callaway Amanda L. Callaway /s/ Errol L. Biggs, Ph.D. Errol L. Biggs, Ph.D. Chairman of the Board and Chief Executive Officer (Principal Executive Officer) February 17, 2015 Executive Vice President and Chief Financial February 17, 2015 Officer (Principal Financial Officer) Vice President, Accounting Officer (Principal Accounting Officer) February 17, 2015 Director February 17, 2015 /s/ Charles Raymond Fernandez, M.D. Charles Raymond Fernandez, M.D. Director February 17, 2015 /s/ Edwin B. Morris, III Edwin B. Morris, III /s/ John Knox Singleton John Knox Singleton /s/ Bruce D. Sullivan Bruce D. Sullivan /s/ Roger O. West Roger O. West /s/ Dan S. Wilford Dan S. Wilford Director February 17, 2015 Director February 17, 2015 Director February 17, 2015 Director February 17, 2015 Director February 17, 2015 94 Schedule II – Valuation and Qualifying Accounts for the years ended December 31, 2014, 2013 and 2012 (Dollars in thousands) Description Additions Balance at Beginning of Period Charged to Costs and Expenses Charged to Other Accounts Uncollectible Accounts Written-off Balance at End of Period 2014 2013 2012 Accounts and notes receivable allowance Accounts and notes receivable allowance Accounts and notes receivable allowance $ $ $ 541 740 583 $ $ $ 34 185 240 $ $ $ — $ — $ — $ 110 384 83 $ $ $ 465 541 740 95 Schedule III – Real Estate and Accumulated Depreciation as of December 31, 2014 (Dollars in thousands) Land Buildings, Improvements, Lease Intangibles and CIP Initial Investment Cost Capitalized Subsequent to Acquisition Total Initial Investment Cost Capitalized Subsequent to Acquisition Total Personal Property (2) (3) (5) Total Property (1) (3) (5) Accumulated Depreciation (4) Encumbrances Date Acquired Date Constructed $ 155,470 $ 2,725 $158,195 $ 2,200,146 $ 356,836 $2,556,982 $ 3,507 $ 2,718,684 $ 589,686 $ 171,796 1993-2014 1905 -2014 23,236 150 23,386 406,108 14,161 420,269 265 443,920 84,285 — 1994-2013 1983 -2013 1,828 73 1,901 76,014 7,808 83,822 679 86,402 27,330 1,471 1993-2014 1906 - 2008 180,534 2,948 183,482 2,682,268 378,805 3,061,073 4,451 3,249,006 701,301 173,267 17,054 — 17,054 — — — — — — — — — — 17,054 115 5,476 5,476 3,719 — — Property Type Medical office/ outpatient Number of Properties 175 Inpatient 14 State AL, AZ, CA, CO, DC, FL, GA, HI, IA, IL, IN, KS, LA, MD, MI, MN, MO, MS, NC, NV, OH, OK, OR, SC, SD, TN, TX, VA, WA AZ, CA, CO, IN, MO, PA, TX 11 AL, IA, IN, MI TN, VA 200 — — Other Total Real Estate Land Held for Develop. Corporate Property Total Properties 200 $ 197,588 $ 2,948 $200,536 $ 2,682,268 $ 378,805 $3,061,073 $ 9,927 $ 3,271,536 $ 705,135 $ 173,267 (1) Includes two assets held for sale as of December 31, 2014 of approximately $13.3 million (gross) and accumulated depreciation of $4.5 million, three asset held for sale as of December 31, 2013 of approximately $17.0 million (gross) and accumulated depreciation of $10.2 million; and one assets held for sale as of December 31, 2012 of $9.6 million (gross) and accumulated depreciation of $6.3 million. (2) Total assets as of December 31, 2014 have an estimated aggregate total cost of $3.3 billion for federal income tax purposes. (3) Depreciation is provided for on a straight-line basis on buildings and improvements over 3.3 to 39.0 years, lease intangibles over 1.0 to 93.1 years, personal property over 1.9 to 15.8 years, and land improvements over 15.0 to 38.1 years. Includes unamortized premium of $3.2 million and unaccreted discount of $2.5 million as of December 31, 2014. (4) (5) A reconciliation of Total Property and Accumulated Depreciation for the twelve months ended December 31, 2014, 2013 and 2012 follows: (Dollars in thousands) Beginning Balance Additions during the period: Real Estate acquired Other improvements Acquisition through Foreclosure Land held for development Construction in Progress Retirement/dispositions: Real Estate Disposal of previously consolidated VIE Land held for development Year Ended December 31, 2014 (1) Year Ended December 31, 2013 (1) Year Ended December 31, 2012 (1) Total Property Accumulated Depreciation Total Property Accumulated Depreciation Total Property Accumulated Depreciation $ 3,084,166 $ 642,320 $ 2,830,931 $ 586,920 $ 2,831,732 $ 536,682 166,290 55,340 40,247 — — 2,272 105,257 1,536 26 — 314,159 58,849 — — — 1,046 97,255 — 26 — 104,810 55,299 — — 5,608 1,079 94,250 — 26 — (74,507) (46,276) (111,656) (42,927) (128,325) (45,117) — — — — — (8,117) — — (38,193) — — — Ending Balance $ 3,271,536 $ 705,135 $ 3,084,166 $ 642,320 $ 2,830,931 $ 586,920 96 Schedule IV – Mortgage Loans on Real Estate as of December 31, 2014 (Dollars in thousands) Description Permanent Mortgage Loans: Medical office building in Nevada (1) Total Mortgage Loans Interest Rate Maturity Date Periodic Payment Terms Original Face Amount Carrying Amount (2) Balloon 6.50 % 9/30/2017 (1) $ 1,900 $ $ 1,900 $ 1,650 1,900 ______ (1) Interest only until maturity. The borrower is required to make a $0.3 million principal reduction in 2015. Principal payments may be made during term without penalty with remaining principal balance due at maturity. (2) A rollforward of Mortgage loans on real estate for the three years ended December 31, 2014 follows: (Dollars in thousands) Balance at beginning of period Additions during period: New or acquired mortgages Increased funding on existing mortgages Deductions during period: Scheduled principal payments Principal repayments and reductions (3) Principal reductions due to acquisitions (4) (5) Foreclosed mortgage note receivable (6) Balance at end of period (7) Year Ended December 31, 2014 2013 2012 $ 125,547 $ 162,191 $ 97,381 1,900 1,244 3,144 4,241 58,731 62,972 11,200 78,297 89,497 — (5,605) (81,213) (39,973) — (16) (2,413) (14,812) (97,203) (9,859) — — (126,791) (99,616) (24,687) $ 1,900 $ 125,547 $ 162,191 (3) Principal repayments for the years ended December 31, 2014, 2013 and 2012 include unscheduled principal reductions on mortgage (4) (5) (6) notes of $5.6 million, $2.4 million and $14.8 million, respectively. In September, 2013, the Company acquired an orthopedic facility in Missouri for $102.6 million, including the elimination of the construction mortgage note receivable totaling $97.2 million. In May 2012, the Company purchased a medical office building in Texas. Concurrent with the acquisition, the Company's construction mortgage note receivable totaling $9.9 million, which secured the building, was repaid. In May 2014, the Company acquired a medical office building in Oklahoma for $85.4 million, including the elimination of the construction mortgage note receivable totaling $81.2 million and cash consideration of approximately $4.2 million. In March 2014, the Company acquired a medical office building in Iowa in satisfaction of a $40.0 million mortgage note receivable that matured on January 10, 2014. The cash flows from the operations of the property were sufficient to pay the Company interest from the maturity date through the date of the transfer of ownership to the Company at the 7.7% fixed interest rate plus an additional 3% of interest for the default interest rate. The Company did not recognize any of the $1.5 million exit fee receivable that was due upon maturity of the mortgage note receivable. (7) Total mortgage loans as of December 31, 2014 had an aggregate total cost of $1.9 million for federal income tax purposes. 97

Continue reading text version or see original annual report in PDF format above