2017
Healthcare Realty Trust
Annual Report to Shareholders
2017
Annual Report to Shareholders
2017 Letter to Shareholders
off-campus, single-tenant assets and reinvest proceeds
in the acquisition, development and redevelopment of
on-campus, multi-tenant outpatient properties. At the
end of 2017, medical office properties represented 94%
of the Company’s total square footage, versus 82% in
2007; with 87% of these properties located on or adja-
cent to hospital campuses compared to 78% ten years
ago. And, multi-tenant properties now comprise 90%
of the portfolio, versus 70% in 2007. These purposeful
changes better align our portfolio with leading health
systems, ensure long-term demand for space through
multiple lease cycles, foster durable growth and reduce
dependency on individual tenants.
The Company’s net investment activity in 2017 reflected
another step forward in our strategy, incrementally
lowering the risk profile of the portfolio and positioning
it for long-term value-creation. The Company sold 10
properties for $122.7 million, including four inpatient
rehabilitation facilities, and re-invested those proceeds
in properties with better risk-adjusted returns and
higher growth prospects. Acquisitions for 2017 totaled
$327.2 million in 15 medical office buildings, strategi-
cally located on or near the hospital campuses of
investment grade-rated systems such as Fairview in St.
Paul, Sutter in the Bay Area, Trinity in D.C., WellStar
in Atlanta, Ascension in Chicago, and UW Medicine in
Seattle. Through decades of investing in medical office
buildings, we have learned that affiliated health systems
and the specific hospital campus determine, in large
measure, the profitability and longevity of an invest-
ment, as well as the potential for follow-on investment
opportunities, including higher-returning developments
and redevelopments. At year-end, approximately 82%
of the Company’s 13.7 million square feet of medical
office properties were associated with investment grade
health systems.
The Company funded $32.3 million toward the devel-
opment and redevelopment of properties throughout
the year. In the first quarter, we completed the redevel-
opment and expansion of one of the Company’s medical
office buildings on an Ascension Health hospital campus
HEALTHCARE REALTY ANNUAL REPORT TO SHAREHOLDERS | 1
Healthcare Realty completed another successful year in
2017, with steady growth derived from a focused strat-
egy of investing in medical office and outpatient facili-
ties. This growth has been cultivated over three decades
of a firm commitment to owning a distinct portfolio of
hospital-centric outpatient facilities that are affiliated
with respected healthcare providers in strong demo-
graphic markets. The Company’s strategy remains on
point with the current trends in the healthcare industry,
and is differentiated by our selective investment criteria,
low business-risk profile and conservative balance sheet.
The Company’s operational performance in 2017 con-
tinued to surpass expectations with same store NOI
growth of 4%, led by the multi-tenant properties at
nearly 5% growth. This internal growth is built on
strong leasing fundamentals, including key drivers such
as cash leasing spreads, tenant retention, contractual
rent increases and expense controls. The consistent per-
formance of the Company’s multi-tenant medical office
buildings year to year exemplifies our commitment to
the pursuit of lasting value from on-campus medical of-
fice properties.
Over the past ten years, the Company has refined its
portfolio to focus on properties with a higher propen-
sity to deliver meaningful internal growth, while also
reducing portfolio risk. We continue to selectively divest
2017 Letter to Shareholders
in Nashville, Tennessee and started the redevelopment of
a medical office building on an Atrium Health campus in
Charlotte, North Carolina. We also finished construction
of a 100,000 square foot medical office building on a
Catholic Health Initiatives campus in Denver, Colorado
in the second quarter and began a new development on
a UW Medicine campus in Seattle, Washington in the
fourth quarter.
In 2017, we looked to bolster Healthcare Realty’s con-
servative balance sheet with both equity and debt of-
ferings, further reducing leverage, lowering interest
expense and extending debt maturities. In August, the
Company issued 8.3 million shares in a follow-on eq-
uity offering which generated $247.1 million in net pro-
ceeds. Healthcare Realty applied the proceeds to fund
the acquisition of medical office buildings and reduce
debt. In the fourth quarter, Healthcare Realty issued
$300 million of Senior Notes due in January 2028 with
a coupon rate of 3.625% and redeemed its $400 mil-
lion, 5.750% Senior Notes due 2021. In addition, the
Company extended the maturity date of its $150 mil-
lion unsecured term loan to December 2022 and re-
duced the spread over LIBOR by 10 basis points, based
on the Company’s current unsecured debt ratings. These
refinancing activities extended the maturities of our
debt obligations by approximately one year and reduced
the effective interest rate by 57 basis points. With debt-
to-EBITDA below five times – well below its peers – and
no near term maturities, the Company can afford to be
patient and confidently invest in properties that fit our
long-term objectives, while steadily producing superior
operational performance.
In 2018, the Company’s outlook remains bright. The
heightened shift of healthcare delivery toward outpa-
tient settings points to steady performance and rising
demand for Healthcare Realty’s medical office build-
ings. Healthcare spending nationwide accounted for
17.9% of the nation’s gross domestic product (GDP) in
2016 and is projected to reach 19.7% of GDP by 2026.
Healthcare Realty’s investments should benefit from
this sustained rise in the nation’s demand for more phy-
sicians and outpatient facilities to meet its healthcare
needs, in particular for the expanding number of elderly
patients that require more frequent care. The popula-
tion cohort over the age of 65 is expected to surge from
14.9% of the population in 2016 to 18.8% by 2026;
and those over 65 years of age visit physician offices
three times as often as those under 45 years old.
Despite the political turmoil surrounding the Affordable
Care Act (or “ACA”) in 2017 and its troubled health
insurance exchanges, health systems generally have very
limited exposure to revenue from patients on the ACA
exchanges, with total enrollment comprising only 5% of
the nation’s insured population. In the post-ACA envi-
ronment, we have intentionally narrowed Healthcare
Realty’s focus to avoid softer markets and weaker op-
erators; and instead, have selected investments with top
health systems in large MSAs with high market share
and forward-looking innovative healthcare delivery.
Health systems are looking to capitalize more on growth
from outpatient services, with an integrated approach
that can utilize their capital-intensive infrastructure.
Hospitals now generate more than half of their revenue
HEALTHCARE REALTY ANNUAL REPORT TO SHAREHOLDERS | 2
2017 Letter to Shareholders
deliver lasting value to Healthcare Realty’s shareholders,
providing the foundation for continued success in the
years to come.
Sincerely yours,
David R. Emery
Executive Chairman of the Board of Directors
Todd J. Meredith
President and Chief Executive Officer
from outpatient care. These trends are evident in health-
care employment which comprises 10.8% of all non-
farm employment in the U.S. The pace of job creation
in healthcare services remained strong in 2017, add-
ing 299,700 jobs, or 1.9%, which compares to a rise of
1.4% for total nonfarm employment. The largest gains in
healthcare employment were in outpatient settings, with
205,000 new jobs.
The importance of physicians to the healthcare industry
– specifically to the direction of patients, promotion of
outpatient services and revenue generated for health sys-
tems – demonstrates the critical nature of a strong physi-
cian presence on hospital campuses. Healthcare Realty’s
portfolio of medical office buildings, and its development
of new facilities, should position the Company seam-
lessly within deep-rooted healthcare trends and prevail-
ing strategies for growth.
We continue to see opportunities in 2018 for investment
in properties that meet our discerning criteria and en-
hance the Company’s growth objectives, while main-
taining a low business-risk profile. Having more robust
internal growth than most peers reduces our need for
outsized external growth, making the Company less de-
pendent on favorable capital markets and the availability
of desirable properties at reasonable prices. We view op-
erational performance at the property level as arguably
the most controllable and reliable component of total
shareholder return, year-in and year-out. In a sector with
ample opportunity, we remain centered on expanding the
compounding growth potential of the Company’s prop-
erties, steadfast in our commitment to investments that
HEALTHCARE REALTY ANNUAL REPORT TO SHAREHOLDERS | 3
2017 Review
As of December 31, 2017, Healthcare Realty owned 201 real estate properties in 27 states totaling
14.6 million square feet and was valued at approximately $5.3 billion. The Company provided leas-
ing and property management services to 11.5 million square feet nationwide. Over the past ten years,
Healthcare Realty has purposefully shifted its portfolio, focusing on multi-tenanted medical office
buildings located on the campuses of leading health systems in sizable markets.
(CHI)
(Ascension)
(CHI)
(Ascension)
HEALTHCARE REALTY ANNUAL REPORT TO SHAREHOLDERS | 4
Portfolio
PORTFOLIO EVO LUTI O N ( S F)
2007
82
% MOB
94
78
% MOB
ON/ADJACENT
TO CAMPUS
87
70
% MULTI-TENANT
90
2017
TOP HEALTH SYSTEM S
ASSOCIATED
MOB SF
%
TOP MA RKETS
SF
%
1 Baylor Scott & White Health
2,127,323
15.5%
1 Dallas
2,306,184
15.8%
2 Ascension Health
3 Catholic Health Initiatives
4 Atrium Health
5 Tenet Healthcare Corporation
6 Bon Secours Health System
7 WellStar Health System
8 Baptist Memorial Health Care
9 HCA
10
Indiana University Health
1,222,126
1,082,793
765,116
718,963
548,801
476,054
463,651
432,800
382,695
Other (30 credit rated systems)
4,441,589
Non-credit rated
1,078,978
8.9%
7.9%
5.6%
5.2%
4.0%
3.4%
3.4%
3.1%
2.8%
32.3%
7.9%
Total
13,740,889
100.0%
2
Seattle
3 Charlotte
4 Nashville
5
Los Angeles
6 Houston
7 Richmond
8 Des Moines
9 Memphis
10 Atlanta
1,016,905
820,457
766,523
657,163
591,027
548,801
532,610
515,876
495,786
6.9%
5.6%
5.2%
4.5%
4.0%
3.8%
3.6%
3.5%
3.4%
Other (37 markets)
6,381,200
43.7%
Total
14,632,532
100.0%
HEALTHCARE REALTY ANNUAL REPORT TO SHAREHOLDERS | 5
Selected Properties
Forest Glen Medical Office Building
Washington, D.C.
St. Thomas Midtown Medical Plaza (expansion)
Nashville, Tennessee
The Doctors Building Three
Chicago, Illinois
Irving Medical Office Building
Dallas, Texas
St. Anthony Medical Plaza 3
Denver, Colorado
Hale Pawa‘a
Honolulu, Hawai‘i
Paulding Physicians Center (left)
Paulding Outpatient Pavilion (right)
Atlanta, Georgia
HEALTHCARE REALTY ANNUAL REPORT TO SHAREHOLDERS | 6
Management Team
BOARD OF DIR ECTOR S
LEFT TO RIGHT, STANDING
Christann M. Vasquez
President, Dell Seton Medical Center at University of
Texas, Seton Medical Center Austin and Seton Shoal
Creek Hospital
Todd J. Meredith
President and Chief Executive Officer, Healthcare
Realty Trust Incorporated
David R. Emery
Executive Chairman of the Board of Directors,
Healthcare Realty Trust Incorporated
John Knox Singleton
Chief Executive Officer, Inova Health System
LEFT TO RIGHT, SEATED
Edwin B. Morris III
Retired Managing Director, Morris & Morse
Company, Inc.
C. Raymond Fernandez, M.D.
Retired Chief Executive Officer, Piedmont Clinic
Bruce D. Sullivan
Retired Audit Partner, Ernst & Young LLP
Peter F. Lyle
Vice President of Health Systems, Pharma and
Medical Practice Services, Medical Management
Associates, Inc.
Nancy H. Agee
President and Chief Executive Officer, Carilion Clinic
EXECUTIVE OFFI CER S
LEFT TO RIGHT, STANDING
Todd J. Meredith
President and Chief Executive Officer
David R. Emery
Executive Chairman of the Board of Directors
Robert E. Hull
Executive Vice President, Investments
LEFT TO RIGHT, SEATED
B. Douglas Whitman, II
Executive Vice President, Corporate Finance
John M. Bryant, Jr.
Executive Vice President and General Counsel
J. Christopher Douglas
Executive Vice President and Chief Financial Officer
MANAGEM ENT T EAM
Marc Albright Vice President, Taxes and Risk Management
Cory McLeod Associate Vice President, Management
Anne Barbour Vice President, Leasing
Amy Byrd Vice President, Management
Revell Michael Vice President, Marketing
Becca Oberlander Vice President, Human Resources
Amanda Callaway Senior Vice President, Chief Accounting Officer
Ivy Parry Associate Vice President, Management
Steve Cox Senior Vice President and Assistant General Counsel
Amy Poley Vice President, Leasing
Ryan Crowley Vice President, Acquisitions
Burney Dawkins Vice President, Dispositions
Joe Fogarty Vice President, Development
Sushil Puria Vice President, Acquisitions
Billy Rainey Associate Vice President, Technology Services
Nancy Redden Associate Vice President, Management
Glenn Herndon Vice President and Corporate Controller
Connie Seal Vice President, Tax
Scott Holmes Senior Vice President
Tressa Shiplett Associate Vice President, Management
Jessica King Vice President, Asset Management
Greg Smith Vice President, Design and Construction
Rick Langreck Senior Vice President and Treasurer
Tim Staggs Vice President, Internal Audit and Compliance
Matt Lederer Vice President, Development
Steve Standifer Vice President, Design and Construction
Gilbert Lewis Associate Vice President, Design and Construction
Kim Sullivan Associate Vice President, Taxes and Risk Management
Andrew Loope Senior Vice President, Corporate Counsel and Secretary
Julie Wilson Senior Vice President, Leasing and Management
HEALTHCARE REALTY ANNUAL REPORT TO SHAREHOLDERS | 7
Corporate Information
COR PORATE AD DR ESS
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
INDEPE NDENT REG I ST ERE D P U B LI C
ACCOUNTING F IRM
BDO USA, LLP
414 Union Street, Suite 1800
Nashville, Tennessee 37219
TRANSFE R AG EN T
EQ Shareowner Services
1110 Centre Pointe Curve, Suite 101
Mendota Heights, Minnesota 55120-4100
1.800.468.9716
www.equiniti.com
CUSIP NUMB ER S
Common Shares: 421946104
Senior Notes Due 2023: 421946AH7
Senior Notes Due 2025: 421946AJ3
Senior Notes Due 2028: 421946AK0
COMPARATIVE P E RFO RM AN C E G RA P H
E
U
L
A
V
X
E
D
N
I
225
200
175
150
125
100
75
12.31.12
12.31.13
12.31.14
12.31.15
12.31.16
12.31.17
TOTAL RETURN PERFO R MANC E
Healthcare Realty Trust Incorporated
Russell 3000
NAREIT All Equity REIT Index
DI VID END REI NVE STMEN T PLA N
A Dividend Reinvestment Plan is offered as a conve-
nience 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 EQ 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 OSI T OF DIVI DE NDS
Direct deposit of dividends is offered as a convenience
to shareholders of record. For information, write
EQ 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, 2017, 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 CAT ION S
The Company’s chief executive officer and chief fi-
nancial officer have filed the certifications required by
Section 302 of the Sarbanes-Oxley Act of 2002 with
the Securities and Exchange Commission as exhib-
its to the Company’s Annual Report on Form 10-K. In
addition, the Company’s chief executive officer certi-
fied to the New York Stock Exchange in 2017 that he
was not aware of any violation by the Company of the
New York Stock Exchange’s corporate governance list-
ing standards.
A NN UA L SHA REH OLDER S MEET IN G
The annual meeting of shareholders will be held on
May 8, 2018, at 10:00 a.m. Central Time at 3310
West End Avenue, Suite 700, Nashville, Tennessee.
INDEX
PERIOD ENDING
Healthcare Realty Trust Incorporated
Russell 3000
NAREIT All Equity REIT Index
12/31/12
100.00
100.00
100.00
12/31/13
93.07
133.55
102.86
12/31/14
125.36
150.32
131.68
12/31/15
136.17
151.04
135.40
12/31/16
151.58
170.28
147.09
12/31/17
166.75
206.26
159.85
HEALTHCARE REALTY ANNUAL REPORT TO SHAREHOLDERS | 8
2017 Form 10-K
PART I
Item 1
Business
Item 1A
Risk Factors
Item 1B
Unresolved Staff Comments
Item 2
Properties
Item 3
Legal Proceedings
Item 4
Mine Safety Disclosures
PART I I
Item 5
Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
Item 6
Selected Financial Data
Item 7
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
Item 7A
Quantitative and Qualitative Disclosures About Market Risk
Item 8
Financial Statements and Supplementary Data
Item 9
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Item 9A
Controls and Procedures
PART I I I
Item 10
Directors, Executive Officers and Corporate Governance
Item 11
Executive Compensation
Item 12
Item 13
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and
Director Independence
Item 14
Principal Accountant Fees and Services
Item 15
Exhibits and Financial Statement Schedules
Item 16
Form 10-K Summary
S IG NATURES
1
6
15
16
16
16
17
19
20
46
48
91
91
93
94
94
94
94
95
101
102
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, 2017
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:
Title of Each Class
Name of Each Exchange on Which Registered
Common stock, $0.01 par value per share
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 of the Registrant (based upon the closing price of these shares on the New
York Stock Exchange on June 30, 2017) held by non-affiliates on June 30, 2017 was approximately $3,878,376,057.
As of January 26, 2018, there were 125,144,327 shares of the Registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 8, 2018 are
incorporated by reference into Part III of this Report.
PART I
Item 1. Business
Overview
Healthcare Realty Trust Incorporated (“Healthcare Realty” or the “Company”) is a self-managed and self-administered real
estate investment trust (“REIT”) that owns, leases, manages, acquires, finances, develops and redevelops income-producing real
estate properties associated primarily with the delivery of outpatient healthcare services throughout the United States. The
Company was incorporated in Maryland in 1992 and listed on the New York Stock Exchange in 1993.
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.
Real Estate Properties
The Company had gross investments of approximately $3.8 billion in 201 real estate properties, construction in progress, land
held for development and corporate property at December 31, 2017. The Company provided property management services for
160 healthcare-related properties nationwide, totaling approximately 11.5 million square feet as of December 31, 2017. The
Company’s real estate property investments by geographic area are detailed in Note 2 to the Consolidated Financial Statements.
The following table details the Company's owned properties by facility type as of December 31, 2017:
(Dollars and square feet in thousands)
Medical office/outpatient
Inpatient
Other
Sub-Total
Gross
Investment
Square Feet
Percentage of
Square Feet
Number of
Properties
Occupancy (1)
Number of
Properties
Occupancy (1)
$ 3,486,478
13,741
254,179
66,797
529
363
94.0%
3.6%
2.4%
3,807,454
14,633
100.0%
188
5
8
201
87.3%
100.0%
98.4%
88.1%
182
10
10
202
87.4%
100.0%
83.1%
87.9%
December 31, 2017
December 31, 2016
Construction in progress
Land held for development
Corporate property
Total
5,458
20,123
5,603
$ 3,838,638
______
(1) 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 (eight properties as of December 31, 2017 and two properties as of December 31, 2016).
Revenue Concentrations
The Company’s real estate portfolio is leased to a diverse tenant base. For the year ended December 31, 2017, the Company did
not have any tenants that accounted for 10% or more of the Company’s consolidated revenues, including revenues from
discontinued operations. The largest revenue concentration is with Baylor Scott & White Health and its affiliates, which
accounted for 9.7% of the Company's consolidated revenues, comprising 158 leases spread over 20 buildings.
1 Expiring Leases
As of December 31, 2017, the weighted average remaining years to maturity pursuant to the Company’s leases were
approximately 4.1 years, with expirations through 2036. The table below details the Company’s lease maturities as of
December 31, 2017, excluding eight properties classified as held for sale.
Expiration Year
2018 (1)
2019
2020
2021
2022
2023
2024
2025
2026
2027
Thereafter
Number of Leases
Leased Square Feet
Percentage of Leased
Square Feet
623
526
449
317
284
154
147
75
65
61
78
2,779
2,039,826
2,327,477
1,885,019
1,171,015
1,252,594
801,219
824,574
650,673
222,474
642,254
1,070,766
12,887,891
15.8%
18.1%
14.6%
9.1%
9.7%
6.2%
6.4%
5.1%
1.7%
5.0%
8.3%
100.0%
______
(1)
Includes 52 leases totaling 140,172 square feet that expired prior to December 31, 2017 and are currently on month-to-
month terms.
See "Trends and Matters Impacting Operating Results" as part of Management's Discussion and Analysis of Financial
Condition and Results of Operations included in Part II, Item 7 of this report for additional information regarding the
Company's leases and leasing efforts.
Liquidity
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, property dispositions, equity and debt
issuances in the public or private markets and borrowings under commercial credit facilities.
Business Strategy
The Company owns and operates properties that facilitate the delivery of healthcare in primarily outpatient settings. To execute
its strategy, the Company engages in a broad spectrum of integrated services including leasing, management, acquisition,
financing, development and redevelopment of such properties. The Company seeks to generate stable, growing income and
lower the long-term risk profile of its portfolio of properties by focusing on facilities located on or near the campuses of acute
care hospitals associated with leading health systems. The Company seeks to reduce financial and operational risk by owning
properties in diverse geographic locations with a broad tenant mix that includes over 30 physician specialties, as well as
surgery, imaging, cancer and diagnostic centers.
2017 Investment Activity
The Company acquired 15 medical office buildings and increased its ownership interest in an existing medical office building
during 2017 for a total purchase price of $327.2 million. This includes the assumption of mortgage notes payable of $45.8
million and the acquisition of equity interests in limited liability companies that own two parking garages in Atlanta, Georgia.
The weighted average capitalization rate for these investments was 5.4%. The Company calculates the capitalization rate for an
acquisition as the forecasted first year net operating income divided by the purchase price plus acquisition costs and expected
first year capital additions.
The Company disposed of 10 properties during 2017 for a total sales price of $122.7 million, including $84.0 million for four
inpatient rehabilitation facilities. The weighted average capitalization rate for these 10 properties was 7.0%. The Company
calculates the capitalization rate for dispositions as the next 12 months forecasted net operating income divided by the sales
price.
In 2017, the Company funded $32.3 million toward development and redevelopment of properties, with one redevelopment and
one development project underway at December 31, 2017.
2 See the Company's discussion regarding the 2017 acquisitions and dispositions activity in Note 4 to the Consolidated Financial
Statements and development activity in Note 15 to the Consolidated Financial Statements. Also, please refer to the Company's
discussion in "Trends and Matters Impacting Operating Results" as part of Management's Discussion and Analysis of Financial
Condition and Results of Operations included in Part II, Item 7 of this report.
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. 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 "Affordable Care Act") 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, including 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 could
have a material adverse effect on the tenant's ability to make lease payments 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 may cause the profitability of providing care to Medicare and Medicaid patients to decline, which
could adversely affect tenants' ability to make lease payments to the Company.
The Affordable Care Act was intended to provide for comprehensive reform of the United States' healthcare system and extend
health insurance benefits to the uninsured population, with a mandate for individuals to purchase health coverage, and the
potential to alleviate high uncompensated care expense to healthcare providers. However, the law also increased regulatory
scrutiny of providers and insurers by federal and state administrative authorities; lowered annual increases in Medicare payment
rates; and implemented cost-saving measures and shared risk-and-reward payment models to promote value and savings, rather
than payment based solely on volume of services. These initiatives may slow the growth of healthcare spending over time, but
also require providers to expand access and quality of care, presenting the industry and its individual participants with
uncertainty and greater financial risk.
In 2017, the Affordable Care Act was subject to numerous legal and legislative challenges. While efforts in Congress to repeal
the law were unsuccessful, President Trump's administration moved forward with an agenda to decrease the law's regulations,
eliminate the individual insurance mandate penalty starting in 2019, end cost-sharing reduction payments to insurers for lower-
income federal exchange enrollees, and increase states' flexibility to offer short-term, basic insurance plans. These initiatives
could affect the market for individual health insurance and, consequently, the demand for healthcare services. The Company
cannot predict the degree to which any changes may affect indirectly the economic performance of the Company, or its tenants,
positively or negatively.
The Centers for Medicare and Medicaid Services ("CMS") continued to monitor physician Medicare rates in 2017 for
reimbursement “site-neutrality,” or equalizing Medicare rates across different facility-type settings. Section 603 of the
Bipartisan Budget Act of 2015 lowered Medicare rates effective January 1, 2017 for services provided in off-campus, provider-
based outpatient departments to the same level of rates for physician-office settings for those facilities not grandfathered-in
under the current Medicare rates as of the law's date of enactment, November 2, 2015. While these changes are expected to
lessen reimbursement disparity between off-campus medical office and outpatient facilities, the Company’s medical office
3 buildings that are located on hospital campuses could become more valuable as hospital tenants will keep their higher Medicare
rates for on-campus outpatient services. However, the Company cannot predict the amount of benefit from these measures or if
other federal health policy or regulation will ultimately require cuts to reimbursement rates for services provided in other
facility-type settings. The Company cannot predict the degree to which these changes, or changes to federal healthcare
programs in general, may affect the economic performance of some or all of the Company's tenants, positively or negatively.
In 2018, physicians must begin reporting patient data on quality and performance measures that will affect their Medicare
payments for the year 2020. Implementation of the Medicare Access and CHIP Reauthorization Act of 2015 (“MACRA”),
unless amended in future legislation, will eventually replace the traditional fee-for-service payment model for physicians with a
new value-based payment initiative. The CMS exempted approximately two-thirds of physician practices from MACRA
compliance in 2018, citing high costs of implementation with minimal yield in savings, especially for smaller practices.
MACRA compliance, and the ongoing debate over the most effective payment system to use to promote value-based
reimbursement, present the industry and its individual participants with uncertainty and financial risk. The Company cannot
predict the degree to which any such changes may affect the economic performance of the Company's tenants or indirectly the
Company.
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 or regulatory
action recently enacted or in the process of implementation include:
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the legislation informally known as the Tax Cuts and Jobs Act of 2017, signed into law at the end of the year, affects
healthcare providers and health systems in a variety of ways, positively and negatively, including by limiting their
ability to deduct interest on debt, denying deductions for and imposing an excise tax on the compensation in excess of
$1 million of the five most highly-compensated employees of health systems, and eliminating, in 2019, the tax penalty
for the Affordable Care Act’s individual health insurance mandate;
the expansion of Medicaid benefits and the implementation of health insurance exchanges under the Affordable Care
Act, whether run by the state or by the federal government, whereby individuals and small businesses purchase health
insurance, including government-funded plans, many assisted by federal subsidies that are subject to ongoing legal and
legislative challenges;
quality control, cost containment, and value-based payment system reforms for Medicaid and Medicare, such as
expansion of pay-for-performance criteria, bundled provider payments, accountable care organizations, increased
patient cost-sharing, geographic payment variations, comparative effectiveness research, and lower payments for
hospital readmissions;
implementation of MACRA, which, if not amended in future legislation, will eventually replace the traditional fee-for-
service payment model for physicians with a new value-based payment initiative; the CMS exempted approximately
two-thirds of physician practices from MACRA compliance in 2018;
equalization of Medicare payment rates across different facility-type settings; Section 603 of the Bipartisan Budget Act
of 2015 lowered Medicare payment rates, effective January 1, 2017 for services provided in off-campus, provider-
based outpatient departments to the same level of rates for physician-office settings for those facilities not
grandfathered under the current Medicare rates as of the law’s date of enactment, November 2, 2015;
the continued adoption by providers of federal standards for the meaningful-use of electronic health records;
anti-trust scrutiny of health insurance company mergers; and
consideration of significant cost-saving overhauls of Medicare and Medicaid, including capped federal Medicaid
payments to states, premium-support models to provide for a fixed amount of Medicare benefits per enrollee, and an
increase in the eligibility age for Medicare.
The Company cannot predict whether any proposals will be fully implemented, adopted, repealed, or amended, or what effect,
whether positive or negative, such proposals might have on the Company's business.
4 Environmental 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 Company's 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 that it currently owns.
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
from tenants relating to environmental liabilities or conditions, even where leases do contain such provisions, there can be no
assurance that the tenant 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, 2017, the Company employed 273 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.
5 Corporate 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, Nominating and 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; increases in property taxes, 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 revenues depend on the ability of its tenants under its leases to generate sufficient income from their
operations to make rental payments to the Company.
The Company’s revenues are subject to the financial strength of its tenants and associated health systems. The Company has no
operational control over the business of these tenants and associated 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
impairment charges, which could decrease net income attributable to common stockholders and equity, and reduce cash flows
from operations.
6 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 sales at rates of return equal to the return received on the properties sold. Uncertain market
conditions could result in the Company selling properties at unfavorable rates or at losses in the future.
The Company had approximately $95.2 million, or 2.5% of the Company’s real estate property investments, that were subject
to purchase options held by lessees that were exercisable as of December 31, 2017. Other properties have purchase options that
will become exercisable in future periods. Properties with options exercisable in 2018 produced aggregate net operating income
of approximately $9.1 million in 2017. The exercise of these purchase options exposes the Company to reinvestment risk and a
reduction in investment return. Certain properties subject to purchase options may be purchased at rates of return 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 consolidated financial condition and results of
operations.
In October 2017, the Company received notice that a tenant is exercising a purchase option on seven properties, comprised of
five single-tenant net leased buildings and two multi-tenanted buildings, covered by one purchase option with a stated purchase
price of approximately $45.5 million, subject to certain contractual adjustments. Closing of the sale is expected to occur in
April 2018.
For more specific information concerning the Company’s purchase options, see “Purchase Options” in the “Trends and Matters
Impacting Operating Results” as a part of Management's Discuss and Analysis of Financial Condition and Results of
Operations included in Part II, Item 7 of this report.
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 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 or make significant leasing concessions 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 "Multi-Tenant Leases" and "Single-Tenant Net Leases" in the "Trends and Matters Impacting
Operating Results" as part of Management's Discussion and Analysis of Financial Condition and Results of Operations included
in Part II, Item 7 of this report. 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 or make
significant leasing concessions to attract new tenants. If 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.
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 consolidated
financial condition and results of operations.
The Company has, and in the future may have more, exposure to fixed rent escalators, which could lag behind inflation and the
growth in operating expenses such as real estate taxes, utilities, insurance, and maintenance expense.
The Company receives a significant portion of its revenues by leasing assets subject to fixed rent escalations. Eighty-seven
percent of leases have increases that are based upon fixed percentages, eleven percent of leases have increases based on the
7 Consumer Price Index and two percent have no increase. If the fixed percentage increases begin to lag behind inflation and
operating expense growth, the Company's performance, growth, and profitability would be negatively impacted.
The 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 and redevelopment 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;
• 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 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
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Favorable capital sources to fund the Company’s development and redevelopment activities may not be available when
needed.
The Company may make material acquisitions and undertake developments and redevelopments 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, develop or redevelop 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, redeveloped 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 may not occur at all, within expected time frames or at expected rental rates.
Further, the Company can give no assurance that acquisition, development and redevelopment opportunities that meet
management’s investment criteria will be available when needed or anticipated.
8 The Company is exposed to risks associated with geographic concentration.
As of December 31, 2017, the Company had investment concentrations of greater than 5% of its total investments in the Dallas,
Texas (12.4%) and Seattle, Washington (11.2%) markets. These concentrations increase the exposure to adverse conditions that
might affect these markets, including natural disasters, local economic conditions, local real estate market conditions, increased
competition, state and local regulation, including property taxes, and other localized events or conditions.
Many of the Company’s leases are dependent on the viability of associated health systems. Revenue concentrations relating to
these leases expose the Company to risks related to the financial condition of the associated health systems.
The Company’s revenue concentrations with tenants are diversified, with the largest revenue concentration relating to Baylor
Scott & White Health and its affiliates, which accounted for 9.7% of the Company's consolidated revenues.
Most of the Company’s properties on or adjacent to hospital campuses are largely dependent on the viability of the health
system’s campus where they are located, whether or not the hospital or health system is a tenant in such properties. The
viability of these health systems depends on factors such as the quality and mix of healthcare services provided, competition,
demographic trends in the surrounding community, market position and growth potential. If one of these hospitals is unable to
meet its financial obligations, is unable to compete successfully, or is forced to close or relocate, the Company’s properties on
or near such hospital campus could be adversely impacted.
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, 2017, the Company had 109 properties that were held under ground leases, including one property with
construction in progress, representing an aggregate gross investment of approximately $2.1 billion. The weighted average
remaining term of the Company's ground leases is approximately 68.7 years, including renewal options. 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 consolidated financial
condition and results of operations.
The Company may experience uninsured or underinsured losses.
The Company carries comprehensive liability insurance and property insurance covering its owned and managed properties. In
addition, tenants under single-tenant net leases are required to carry property insurance covering the Company’s interest in the
buildings. Some types of losses may be uninsurable or too expensive to insure against. Insurance companies limit or exclude
coverage against certain types of losses, such as losses due to named windstorms, terrorist acts, earthquakes, and toxic mold.
Accordingly, the Company may not have sufficient insurance coverage against certain types of losses and may experience
decreases in the insurance coverage available. 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. Further, if any of the Company's insurance carriers were to become insolvent, the Company would be forced to
replace the existing coverage with another suitable carrier, and any outstanding claims would be at risk for collection. In such
an event, the Company cannot be certain that the Company would be able to replace the coverage at similar or otherwise
favorable terms.
The Company has obtained title insurance policies for each of its properties, typically in an amount equal to its original price.
However, these policies may be for amounts less than the current or future values of our properties. In such an event, if there is
a title defect relating to any of the Company's properties, it could lose some of the capital invested in and anticipated profits
from such property. The Company cannot give assurance that material losses in excess of insurance proceeds will not occur in
the future.
9 The Company faces risks associated with security breaches through cyber attacks, cyber intrusions, or otherwise, as well as
other significant disruptions of its information technology networks and related systems.
The Company faces risks associated with security breaches, whether through cyber attacks or cyber intrusions over the Internet,
malware, computer viruses, attachments to emails, persons inside the Company, or persons with access to systems inside the
Company, and other significant disruptions of the Company's information technology ("IT") networks and related systems. The
risk of a security breach or disruption, particularly through cyber attack or cyber intrusion, including by computer hackers,
foreign governments and cyber terrorists, has generally increased as the number, intensity, and sophistication of attempted
attacks and intrusions from around the world have increased. The Company's IT networks and related systems are essential to
the operation of its business and its ability to perform day-to-day operations (including managing building systems) and, in
some cases, may be critical to the operations of certain of our tenants. Although the Company makes efforts to maintain the
security and integrity of these types of IT networks and related systems, and we have implemented various measures to manage
the risk of a security breach or disruption, there can be no assurance that these security measures will be effective or that
attempted security breaches or disruptions would not be successful or damaging. Even the most well protected information,
networks, systems, and facilities remain potentially vulnerable because the techniques used in such attempted security breaches
evolve and generally are not recognized until launched against a target, and in some cases are designed not to be detected and
may not be detected. Accordingly, we may be unable to anticipate these techniques or to implement adequate security barriers
or other preventative measures, and it is therefore impossible to entirely mitigate the risk.
A security breach or other significant disruption involving the Company's IT network and related systems could:
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disrupt the proper functioning of the Company's networks and systems and therefore the Company's operations and/or
those of certain tenants;
result in misstated financial reports, violations of loan covenants, missed reporting deadlines, and/or missed permitting
deadlines;
result in the Company's inability to properly monitor its compliance with the rules and regulations regarding the
Company's qualification as a REIT;
result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of proprietary,
confidential, sensitive, or otherwise valuable information of the Company or others, which others could use to compete
against the Company or which could expose it to damage claims by third-parties for disruption, destructive, or
otherwise harmful purposes or outcomes;
result in the Company's inability to maintain the building systems relied upon by the its tenants for the efficient use of
their leased space;
require significant management attention and resources to remedy any damages that result;
subject the Company to claims for breach of contract, damages, credits, penalties, or termination of leases or other
agreements; or
damage the Company's reputation among its tenants and investors generally.
Any or all of the foregoing could have a material adverse effect on the Company's consolidated financial condition and results
of operations.
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, 2017, the Company had approximately $1.3 billion of outstanding indebtedness and the Company’s
leverage ratio [debt divided by (debt plus stockholders’ equity less intangible assets plus accumulated depreciation)] was
32.3%. Covenants under the Credit Agreement, dated as of October 14, 2011, among the Company and Wells Fargo Bank,
National Association, as Administrative Agent, and the other lenders that are party thereto, as amended (“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, as amended (the “Unsecured Term Loan due
2022”) 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;
10 •
•
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.
In addition, from time to time, the Company secures or assumes mortgages to partially fund its investments. 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.
The Company generally does not intend to reserve funds to retire existing debt upon maturity. The Company may not be able to
repay, refinance, or extend any or all of our debt at maturity or upon any acceleration. If any refinancing is done at higher
interest rates, the increased interest expense could adversely affect the Company's financial condition and results of operations.
Any such refinancing could also impose tighter financial ratios and other covenants that restrict the Company's ability to take
actions that could otherwise be in its best interest, such as funding new development activity, making opportunistic acquisitions,
or paying dividends.
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 2022, 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, and 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 requires new capital to invest 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 development and redevelopment 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 satisfying 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.
11 Further, the Company obtains credit ratings from various credit-rating agencies based on their evaluation of the Company's
credit. These agencies' ratings are based on a number of factors, some of which are not within the Company's control. In
addition to factors specific to the Company's financial strength and performance, the rating agencies also consider conditions
affecting REITs generally. The Company cannot assure you that its credit ratings will not be downgraded. If the Company's
credit ratings are downgraded or other negative action is taken, the Company could be required, among other things, to pay
additional interest and fees on borrowings under the Unsecured Credit Facility and Unsecured Term Loan due 2022.
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 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 would increase the cost of borrowing under the Unsecured Credit Facility and the Unsecured
Term Loan due 2022, 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.
The Company's swap agreements may not effectively reduce its exposure to changes in interest rates.
The Company enters into swap 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 consolidated financial condition and results of
operations may be adversely affected. See Note 10 to the Consolidated Financial Statements for additional information on the
Company's interest rate swaps.
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 sponsoring health system because such tenant loses its license or certification, becomes unable
to provide healthcare services, cannot meet its financial obligations to the Company or otherwise vacates a facility, and the
Company 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;
consolidation of large health insurers;
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 Affordable Care Act and other healthcare
reform laws;
12 •
•
•
•
•
•
efforts to repeal, replace or modify the Affordable Care Act in whole or in part;
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;
federal court decisions on cases challenging the legality of certain aspects of the Affordable Care Act;
federal and state government plans to reduce budget deficits and address debt ceiling limits by lowering healthcare
provider Medicare and Medicaid payment rates;
equalizing Medicare payment rates across different settings;
heightened health information technology security standards and the meaningful use of electronic health records by
healthcare providers; and
•
potential tax law changes affecting providers.
These 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.
The costs of complying with governmental laws and regulations may adversely affect the Company's results of operations.
All real property and the operations conducted on real property are subject to federal, state, and local laws and regulations
relating to environmental protection and human health and safety. Some of these laws and regulations may impose joint and
several liability on tenants, owners, or operators for the costs to investigate or remediate contaminated properties, regardless of
fault or whether the acts causing the contamination were legal. In addition, the presence of hazardous substances, or the failure
to properly remediate these substances, may hinder the Company's ability to sell, rent, or pledge such property as collateral for
future borrowings.
Compliance with new laws or regulations or stricter interpretation of existing laws may require the Company to incur
significant expenditures. Future laws or regulations may impose significant environmental liability. Additionally, tenant or other
operations in the vicinity of the Company's properties, such as the presence of underground storage tanks, or activities of
unrelated third parties may affect the Company's properties. In addition, there are various local, state, and federal fire, health,
life-safety, and similar regulations with which the Company may be required to comply and that may subject us to liability in
the form of fines or damages for noncompliance. Any expenditures, fines, or damages that the Company must pay would
adversely affect its results of operations. Proposed legislation to address climate change could increase utility and other costs of
operating the Company's properties.
Discovery of previously undetected environmentally hazardous conditions may adversely affect the Company's financial
condition and results of operations. Under various federal, state, and local environmental laws and regulations, a current or
previous property owner or operator may be liable for the cost to remove or remediate hazardous or toxic substances on such
property. These costs could be significant. Such laws often impose liability whether or not the owner or operator knew of, or
was responsible for, the presence of such hazardous or toxic substances. Environmental laws also may impose restrictions on
the manner in which property may be used or businesses may be operated, and these restrictions may require significant
expenditures or prevent the Company from entering into leases with prospective tenants that may be impacted by such laws.
Environmental laws provide for sanctions for noncompliance and may be enforced by governmental agencies or private parties.
Certain environmental laws and common law principles could be used to impose liability for release of and exposure to
hazardous substances, including asbestos-containing materials. Third parties may seek recovery from real property owners or
operators for personal injury or property damage associated with exposure to released hazardous substances. The cost of
defending against claims of liability, of complying with environmental regulatory requirements, of remediating any
contaminated property, or of paying personal injury claims could adversely affect the Company's financial condition and results
of operations.
13 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, 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, as well as provisions of Maryland general corporation law, 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 would, after such transfer, own more than 9.9% either in number or
value of the outstanding stock of the Company. If, despite this prohibition, stock is acquired increasing a transferee’s ownership
to over 9.9% in value of the outstanding stock, 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.
In addition, provisions of Maryland general corporation law may have anti-takeover effects that delay, defer or prevent a
takeover attempt. These provisions include the following:
• Preferred Stock. The Company's charter authorizes the board of directors to issue preferred stock in one or more
classes and establish the preferences and rights of any class of preferred stock issued. These actions can be taken
without stockholder approval. The issuance of preferred stock could have the effect of delaying or preventing someone
from taking control of the Company.
• Business combinations. Pursuant to the Maryland law, the Company cannot merge into or consolidate with another
corporation or enter into a statutory share exchange transaction in which the Company is not the surviving entity or
sell all or substantially all of its assets unless the board of directors adopts a resolution declaring the proposed
transaction advisable and two-thirds of the stockholders voting together as a single class approve the transaction.
Maryland law prohibits stockholders from taking action by written consent unless all stockholders consent in writing.
The practical effect of this limitation is that any action required or permitted to be taken by the Company's
stockholders may only be taken if it is properly brought before an annual or special meeting of stockholders. The
Company's bylaws further provide that in order for a stockholder to properly bring any matter before a meeting, the
stockholder must comply with requirements regarding advance notice. The foregoing provisions could have the effect
of delaying until the next annual meeting stockholder actions that the holders of a majority of the Company's
outstanding voting securities favor. These provisions may also discourage another person from making a tender offer
14 for the Company's common stock, because such person or entity, even if it acquired a majority of the Company's
outstanding voting securities, would likely be able to take action as a stockholder, such as electing new directors or
approving a merger, only at a duly called stockholders meeting. Maryland law also establishes special requirements
with respect to business combinations between Maryland corporations and interested stockholders unless exemptions
apply. Among other things, the law prohibits for five years a merger and other similar transactions between a
corporation and an interested stockholder and requires a supermajority vote for such transactions after the end of the
five-year period.
• Control share acquisitions. Maryland general corporation law also provides that control shares of a Maryland
corporation acquired in a control share acquisition have no voting rights except to the extent approved by a vote of
two-thirds of the votes entitled to be cast on the matter, excluding shares owned by the acquirer or by officers or
employee directors. The control share acquisition statute does not apply to shares acquired in a merger, consolidation
or share exchange if the corporation is a party to the transaction, or to acquisitions approved or exempted by the
corporation's charter or bylaws.
• Maryland unsolicited takeover statute. Under Maryland law, the Company's board of directors could adopt various
anti-takeover provisions without the consent of stockholders. The adoption of such measures could discourage offers
for the Company or make an acquisition of the Company more difficult.
These restrictions on transfer of the Company’s shares could have adverse effects on the value of the Company’s common
stock.
Complying 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.
The prohibited transactions tax may limit the Company's ability to sell properties.
A REIT's net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other
dispositions of property held primarily for sale to customers in the ordinary course of business. The Company may be subject to
the prohibited transaction tax equal to 100% of net gain upon a disposition of real property. Although a safe harbor to the
characterization of the sale of real property by a REIT as a prohibited transaction is available, the Company cannot assure you
that it can in all cases comply with the safe harbor or that it will avoid owning property that may be characterized as held
primarily for sale to customers in the ordinary course of business. Consequently, the Company may choose not to engage in
certain sales of its properties or may conduct such sales through a taxable REIT subsidiary, which would be subject to federal
and state income taxation.
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.
15 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 unrelated third parties from
time to time, including 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. The
Company’s base rent for 2017 was approximately $1.0 million for office space leases.
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.
16 PART 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,
2017, there were 1,047 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.
2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter (Dividend payable on March 6, 2018)
2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
Dividends Declared
and Paid per Share
$ 32.50
$ 29.80
$
36.17
34.65
33.87
31.46
31.78
31.58
$ 31.09
$ 27.50
$
35.00
36.60
34.28
29.42
32.80
26.66
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, 2017 about the Company’s common stock that may be issued as
restricted stock and upon the exercise of options, warrants and rights under all of the Company’s existing compensation plans,
including the 2015 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)
318,100
—
318,100
—
—
—
2,087,307
—
2,087,307
______
(1) The outstanding options relate only to the 2000 Employee Stock Purchase Plan. The Company is unable to ascertain with
specificity the number of securities to be issued upon exercise of outstanding rights 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.
17
Issuer Purchases of Equity Securities
During the year ended December 31, 2017, 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
15,695 $
886
30.31
30.35
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
77,822
94,403
32.31
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
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
18 Item 6. Selected Financial Data
The following table sets forth financial information for the Company, which is derived from the Consolidated Financial
Statements:
(Amounts in thousands except per share data)
Statement of Income Data:
Total revenues
Total expenses
Other income (expense)
Income (loss) from continuing operations
Income (loss) from discontinued operations
Net income attributable to common
stockholders
Diluted earnings per common share:
Income (loss) from continuing operations
Income (loss) from 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 stockholders' equity
Other Data:
$
$
$
$
$
Year Ended December 31,
2017
2016
2015
2014
2013 (1)
424,499
335,046
(66,357)
23,096
(4)
$
$
411,630
309,932
(15,942)
85,756
(185)
$
$
388,471
283,541
(46,094)
58,836
10,600
$
$
370,855
267,100
(69,776)
33,979
(1,779)
$
$
330,949
243,331
(100,710)
(13,092)
20,075
23,092
$
85,571
$
69,436
$
31,887
$
6,946
$
0.18
0.00
$
0.78
0.00
$
0.59
0.11
$
0.35
(0.02)
(0.14)
0.22
0.18
$
0.78
$
0.70
$
0.33
$
0.08
118,017
109,387
99,880
96,759
90,941
$ 3,838,638
$ 2,941,208
$
$ 3,628,221
$ 2,787,382
$ 3,380,908
$ 2,618,982
— $
— $
— $
$ 3,258,279
$ 2,557,608
1,900
$ 3,067,187
$ 2,435,078
125,547
$
33,147
$
$ 3,193,585
$ 1,283,880
$ 1,789,883
3,092
$
$ 3,040,647
$ 1,264,370
$ 1,653,414
724
$
$ 2,810,224
$ 1,424,992
$ 1,242,747
9,146
$
$ 2,757,510
$ 1,403,692
$ 1,221,054
6,852
$
$ 2,729,662
$ 1,348,459
$ 1,245,286
Funds from operations (2)
$
Funds from operations per common share - Diluted (2) $
$
Cash flows from operations
Dividends paid
$
Dividends declared and paid per common share
$
134,274
1.13
179,766
142,327
1.20
$
$
$
$
$
174,420
1.59
151,272
131,759
1.20
$
$
$
$
$
124,571
1.25
160,375
120,266
1.20
$
$
$
$
$
146,493
1.51
125,370
116,371
1.20
$
$
$
$
$
92,166
1.00
120,797
111,571
1.20
______
(1) The Company did not have any dispositions that met the criteria for presentation as discontinued operations in 2015,
2016, or 2017. The year ended December 31, 2013 was restated to conform to the discontinued operations presentation
for 2014. See Note 5 to the Consolidated Financial Statements for more information on the Company’s discontinued
operations as of December 31, 2017.
(2) The Company adopted ASU No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs" and ASU No. 2015-15
"Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of -Credit Arrangements", as of
January 1, 2016. Balance Sheet data for the years ending December 31, 2017, 2016 and 2015 shown above reflect this
reclassification. Balance Sheet data for the years ending December 31, 2014 and 2013 have not been restated.
(3) 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.
19
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 as more fully discussed in Item 1A “Risk Factors” of this report and in other reports filed by the
Company with the SEC from time to time include, among other things, the following:
• The Company's expected results may not be achieved;
• The Company’s revenues depend on the ability of its tenants under its leases to generate sufficient income from their
operations to make rental 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.
Uncertain market conditions could result in the Company selling properties at unfavorable rates or at losses in the
future;
• 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, consolidated 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 lag behind
inflation and the growth in operating expenses such as real estate taxes, utilities, insurance, and maintenance expenses;
• 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 geographic concentration;
• Many of the Company’s leases are dependent on the viability of associated health systems. Revenue concentrations
relating to these leases expose the Company to risks related to the financial condition of the associated health systems;
• 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;
• The Company faces risks associated with security breaches through cyber attacks, cyber intrusions, or otherwise, as
well as other significant disruptions of its information technology networks and related systems;
• 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 consolidated financial condition and results of operations;
20 • 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;
• 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's swap agreements 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 values
of its investments;
• The costs of complying with governmental laws and regulations may adversely affect the Company's results of
operations;
•
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, as well as provisions of Maryland general corporation law, 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;
• Complying with the REIT requirements may cause the Company to forego otherwise attractive opportunities;
• The prohibited transactions tax may limit the Company's ability to sell properties;
• 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.
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 of Financial Condition and Results of Operations 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
• Results of Operations
• Non-GAAP Financial Measures and Key Performance Indicators
• Off-Balance Sheet Arrangements
• Contractual Obligations
• Application of Critical Accounting Policies to Accounting Estimates
21 Overview
The Company owns and operates properties that facilitate the delivery of healthcare in primarily outpatient settings. To execute
its strategy, the Company engages in a broad spectrum of integrated services including leasing, management, acquisition,
financing, development and redevelopment of such properties. The Company seeks to generate stable, growing income and
lower the long-term risk profile of its portfolio of properties by focusing on facilities located on or near the campuses of acute
care hospitals associated with leading health systems. The Company seeks to reduce financial and operational risk by owning
properties in diverse geographic locations with a broad tenant mix that includes over 30 physician specialties, as well as
surgery, imaging, cancer and diagnostic centers.
Liquidity 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 portfolio based on contractual arrangements with its tenants
and sponsoring health systems. 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, capital expenditures
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, property dispositions or through proceeds from the 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 flows from operations and the cash flow sources addressed above. The Company also had
unencumbered real estate assets, excluding assets held for sale, with a gross book value of approximately $3.4 billion at
December 31, 2017, 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 exposure to variable interest rates and its common stock price is 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, 2017, 2016 and 2015 were $179.8 million,
$151.3 million and $154.0 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 receipt of tenant rent.
The Company may sell additional properties and redeploy cash from property sales into new investments. To the extent
revenues related to the properties being sold 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.
22 Investing Activities
A summary of the significant transactions impacting investing activities for the year ended December 31, 2017 is listed below.
See Note 4 to the Consolidated Financial Statements for more detail on these activities.
Outflows
The Company acquired 15 medical office buildings and increased its ownership interest in an existing medical office building
during 2017 for a total purchase price of $327.2 million, including cash consideration of $283.1 million. This includes the
assumption of mortgage notes payable of $45.8 million (excluding fair value adjustments totaling $0.6 million recorded at
closing) and the acquisition of equity interests in limited liability companies that own two parking garages in Atlanta, Georgia.
The following table details the acquisitions for the year ended December 31, 2017:
(Dollars in millions)
St. Paul, Minnesota
San Francisco, California
Washington, D.C.
Los Angeles, California
Atlanta, Georgia
Atlanta, Georgia
Atlanta, Georgia
Atlanta, Georgia (2)
Seattle, Washington
Atlanta, Georgia
Atlanta, Georgia
Atlanta, Georgia
Atlanta, Georgia
Chicago, Illinois
Seattle, Washington
Austin, Texas (3)
Health System Affiliation
Fairview Health
Date
Acquired
Purchase Price
3/6/17
$
13.5
$
Sutter Health
Trinity Health
HCA
WellStar Health
WellStar Health
WellStar Health
Piedmont
Overlake Health
WellStar Health
WellStar Health
WellStar Health
WellStar Health
Ascension
UW Medicine
Ascension
6/12/17
6/13/17
7/31/17
11/1/17
11/1/17
11/1/17
11/1/17
11/1/17
12/13/17
12/13/17
12/18/17
12/18/17
12/18/17
12/18/17
12/21/17
26.8
24.0
16.3
25.5
30.3
49.7
6.7
12.7
25.8
15.4
26.3
14.2
28.7
8.8
2.5
Mortgage
Notes Payable
Assumed
—
—
Square
Footage
34,608
75,649
(12.1)
62,379
— 42,780
—
—
76,944
74,024
— 118,180
—
—
19,732
26,345
(10.5)
59,427
(4.7)
40,171
(11.8)
66,984
(6.7)
40,324
—
—
—
99,526
32,828
7,972
Hospital
Campus
Location (1)
On
On
On
On
On
On
On
ANC
ADJ
On
On
On
On
On
ADJ
ADJ
______
(1) On = Located on a hospital campus; ADJ = Adjacent to hospital campus; ANC = Anchored
(2) This building is not located on a hospital campus, but is 100% leased to a hospital system and is classified as anchored.
(3) The Company acquired additional ownership interest in an existing building bringing the Company's ownership to 69.4%.
$
327.2
$
(45.8)
877,873
In 2017, the Company funded $32.3 million toward development and redevelopment of properties. In addition, the Company
funded $44.6 million at its owned real estate properties, including first generation tenant improvement allowances and planned
capital expenditures for acquisitions. The following table details these expenditures for the year ended December 31, 2017:
(Dollars in millions)
1st generation tenant improvements & planned capital expenditures for acquisitions
2nd generation tenant improvements
Capital expenditures
Total capital funding
$
$
2017
5.4
20.4
18.8
44.6
23 Inflows
The Company disposed of 10 properties in 2017 for a total sales price of $122.7 million, including cash proceeds of $119.4
million and $3.3 million of closing costs and related adjustments. The following table details these dispositions for the year
ended December 31, 2017:
(Dollars in millions)
Evansville, Indiana
Columbus, Georgia (2)
Las Vegas, Nevada (2)
Texas (3 properties)
Chicago, Illinois
San Antonio, Texas
Roseburg, Oregon
St. Louis, Missouri
Total dispositions
Date Disposed
Sales Price
Square Footage
Property Type (1)
3/6/17
$
3/7/17
3/30/17
3/31/17
6/16/17
6/29/17
6/29/17
9/7/17
6.4
0.6
5.5
69.5
0.5
14.5
23.2
2.5
29,500
12,000
18,147
169,722
5,100
39,786
62,246
79,980
$
122.7
416,481
OTH
MOB
MOB
IRF
MOB
IRF
MOB
MOB
______
(1) MOB = medical office building; IRF = inpatient rehabilitation facility; OTH = other
(2) Previously classified as held for sale.
Financing Activities
Debt Activity
Below is a summary of the significant financing activity for the year ended December 31, 2017. See Notes 10 and 11 to the
Consolidated Financial Statements for more information on the capital markets and financing activities:
The Company had the following changes in debt structure:
• On December 11, 2017, the Company issued $300.0 million of unsecured senior notes due 2028 (the "Senior Notes
due 2028") in a registered public offering. The Senior Notes due 2028 bear interest at 3.625%, payable semi-annually
on January 15 and July 15, beginning July 15, 2018, and are due on January 15, 2028, unless redeemed earlier by the
Company. The notes were issued at a discount of approximately $2.5 million, and the Company incurred
approximately $2.7 million in debt issuance costs, resulting in an effective rate of 3.84%.
• The Company redeemed the outstanding principal of $400.0 million on the unsecured senior notes due 2021 (the
"Senior Notes due 2021") in two transactions. On November 1, 2017 and December 27, 2017, the Company redeemed
$100.0 million and $300.0 million, respectively. The aggregate redemption price was $452.3 million, consisting of
outstanding principal of $400.0 million, accrued interest of $9.5 million, and a "make-whole" amount of
approximately $42.8 million for the early extinguishment of debt. The aggregate unaccreted discount and unamortized
costs on these notes of $2.2 million was written off upon redemption. The Company recognized a loss on early
extinguishment of debt of approximately $45.0 million in the fourth quarter of 2017 related to these redemptions.
• On December 18, 2017, the Company entered into an amendment to its Unsecured Term Loan due 2022. The
amendment to the Term Loan extends the maturity date from January 2019 to December 2022 and reduces the spread
over LIBOR relating to the cost of borrowing by 10 basis points, based on the Company's unsecured debt ratings as of
December 31, 2017.
• On December 20, 2017, the Company entered into two interest rate swaps totaling $25.0 million to hedge the 1-month
LIBOR portion of the cost of borrowing under the Unsecured Term Loan due 2022 to a fixed rate of interest of 2.18%
(plus the applicable margin rate, currently 1.10%) through December 16, 2022.
24 • The following table details the mortgage note payable activity for the year ended December 31, 2017:
(Dollars in millions)
Debt assumptions:
Washington, D.C. (1)
Atlanta, Georgia (1)
Atlanta, Georgia (1)
Atlanta, Georgia (1)
Atlanta, Georgia (1)
Total borrowings
Repayments in full:
Minneapolis, Minnesota (2)
Kingsport, Tennessee
Columbus, Ohio
Total repayments
Transaction Date
Borrowing
(Repayment)
Encumbered
Square Footage
Contractual
Interest Rate
06/13/17
$
12/13/17
12/13/17
12/18/17
12/18/17
$
5/1/17
$
9/28/17
10/2/17
$
12.1
10.5
4.7
11.8
6.7
45.8
(0.2)
(1.3)
(0.2)
(1.7)
62,379
59,427
40,171
66,984
40,324
269,285
60,476
75,000
73,331
208,807
4.7%
3.5%
5.5%
3.3%
4.1%
4.1%
6.5%
5.6%
5.5%
5.7%
______
(1) Assumed upon acquisition and excluding fair value adjustments totaling $0.6 million in aggregate recorded at
closing.
(2) This property has three remaining notes that are secured by the property with maturity dates ranging from 2022 to
2040, but is repayable, without penalty, in 2020.
Subsequent Activity
On January 30, 2018, the Company entered into two interest rate swaps totaling $50.0 million to hedge the 1-month LIBOR
portion of the cost of borrowing under the Unsecured Term Loan due 2022 to a fixed rate of interest of 2.46% (plus the
applicable margin rate, currently 1.10%) through December 16, 2022.
The following table details the Company's debt balances as of December 31, 2017:
Senior Notes due 2023
Senior Notes due 2025
Senior Notes due 2028
Total Senior Notes Outstanding
Unsecured credit facility due 2020 (1)
Unsecured term loan due 2022 (2)
Mortgage notes payable
Total Outstanding Notes and Bonds Payable
Balance as of
December 31, 2017(3)
$247,703
248,044
294,757
$790,504
189,000
148,994
155,382
$1,283,880
Weighted Years to
Maturity
Effective
Interest Rate
5.3
7.3
10.0
7.7
2.6
5.0
5.6
6.4
3.95%
4.08%
3.84%
3.95%
2.56%
2.77%
4.82%
3.71%
______
(1) As of December 31, 2017, the Company had $189.0 million outstanding under the Unsecured Credit Facility with a
weighted average interest rate of approximately 2.56% and a remaining borrowing capacity of approximately $511.0
million.
(2) The effective interest rate includes the impact of two interest rate swaps totaling $25.0 million to hedge the 1-month
LIBOR portion of the cost of borrowing under the Term Loan to a fixed rate of interest of 2.18% (plus the applicable
margin rate, currently 1.10%) through December 16, 2022.
(3) Balances are reflected net of discounts and deferred financing costs and include premiums.
Debt Covenant Information
As of December 31, 2017, 99.2% of the Company’s debt balances were due after 2018. Also, as of December 31, 2017, the
Company’s stockholders’ equity totaled approximately $1.8 billion and its leverage ratio [debt divided by (debt plus
stockholders’ equity less intangible assets plus accumulated depreciation)] was approximately 32.3%. The Company’s fixed
25
charge ratio, calculated in accordance with Item 503 of Regulation S-K, includes only income from continuing operations
which is reduced by depreciation and amortization and the operating results of properties currently classified as held for sale.
In accordance with this definition, the Company’s earnings from continuing operations as of December 31, 2017 were sufficient
to cover its fixed charges with a ratio of 1.4 to 1.0. Calculated in accordance with the fixed charge covenant ratio under its
Unsecured Credit Facility, the Company’s earnings covered its fixed charges at a ratio of 3.8 to 1.0.
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 impose certain limits on the Company’s ability to incur indebtedness and create liens or encumbrances. As of
December 31, 2017, 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
On February 19, 2016, the Company entered into sales agreements with five investment banks to allow sales under its at-the-
market equity offering program of up to 10,000,000 shares of common stock. On May 5, 2017, the Company entered into a
sales agreement with a sixth investment bank in connection with the same allotment of shares. No shares were issued under
this program in 2017. The Company has 5,868,697 authorized shares remaining available to be sold under the current sales
agreements as of February 14, 2018.
On August 14, 2017, the Company issued 8,337,500 shares of common stock, par value $0.01 per share, at $30.90 per share in
an underwritten public offering pursuant to the Company's existing effective registration statement. The net proceeds of the
offering, after underwriting discount and offering expenses, were approximately $247.1 million. The proceeds were invested
into acquisitions and the repayment of indebtedness.
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 2017 are shown in the table below:
Quarter
4th Quarter 2016
1st Quarter 2017
2nd Quarter 2017
3rd Quarter 2017
4th Quarter 2017
Quarterly
Dividend
0.30
0.30
0.30
0.30
0.30
$
$
$
$
$
Date of Declaration
Date of Record
Date Paid/*Payable
January 31, 2017
February 14, 2017
February 28, 2017
May 2, 2017
May 16, 2017
May 31, 2017
August 1, 2017
August 11, 2017
August 31, 2017
October 31, 2017
November 16, 2017 November 30, 2017
February 13, 2018
February 23, 2018
* March 6, 2018
The ability of the Company to pay dividends is dependent upon its ability to generate funds from operations and cash flows and
to make accretive new investments.
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.
Acquisitions and Dispositions
The Company acquired 15 medical office buildings and increased its ownership interest in an existing medical office building
during 2017 for a total purchase price of $327.2 million, including cash consideration of $283.1 million. This includes the
assumption of mortgage notes payable of $45.8 million (excluding fair value adjustments totaling $0.6 million recorded upon
acquisition) and the acquisition of equity interests in limited liability companies that own two parking garages in Atlanta,
Georgia. The weighted average capitalization rate for these investments was 5.4%.
26
The Company disposed of 10 properties during 2017 for a total sales price of $122.7 million, including cash proceeds of $119.4
million and $3.3 million of closing costs and adjustments. The weighted average capitalization rate of the 2017 dispositions was
7.0%.
A component of the Company's strategy is to continually monitor its portfolio for opportunities to improve the overall quality.
Properties that are located off-campus, in smaller markets or not associated with the delivery of outpatient healthcare may be
sold for higher capitalization rates than properties acquired to replace them. Properties that meet the Company's investment
criteria sell for lower capitalization rates because of their lower-risk profile and higher internal growth potential.
See the Company's discussion regarding the 2017 acquisitions and dispositions activity in Note 4 to the Consolidated Financial
Statements.
Development and Redevelopment Activity
In 2017, the Company funded $32.3 million toward development and redevelopment of properties, including the following:
• The Company began a redevelopment project of a medical office building in Charlotte, North Carolina, which includes
a 38,000 square foot expansion. The Company funded $3.3 million during the year ended December 31, 2017. The
project is expected to be completed in the first quarter of 2019.
• The Company began development of a 151,000 square foot medical office building in Seattle, Washington. The
Company funded $1.8 million during the year ended December 31, 2017. The project is expected to be completed in
the second quarter of 2019.
• The Company received a certificate of occupancy for a 99,957 square foot medical office building in Denver,
Colorado. The Company spent $14.6 million during the year ended December 31, 2017 including approximately $2.8
million related to overages on tenant improvement projects that have been or will be reimbursed by the tenant. The
Company expects to continue to fund tenant improvements throughout 2018 and 2019.
• The Company completed the redevelopment and expansion of one of its medical office buildings in Nashville,
Tennessee. The Company spent approximately $12.6 million on the redevelopment of this property during the year
ended December 31, 2017, including approximately $3.2 million related to overages on tenant improvement projects
that have been or will be reimbursed by the tenant.
The Company is in the planning stages with several health systems and developers regarding new development and
redevelopment opportunities and expects one or more to begin in 2018. Total costs to develop or redevelop a typical medical
office building can vary depending on the scope of the project, market rental terms, parking configuration, building amenities,
asset type and geographic location.
The Company’s disclosures regarding projections or estimates of completion dates and leasing may not reflect actual results.
See Note 15 to the Consolidated Financial Statements for more information on the Company’s development and redevelopment
activities.
Security Deposits and Letters of Credit
As of December 31, 2017, the Company held approximately $10.0 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.
Multi-Tenant Leases
The Company expects that approximately 15% to 20% of the leases in its multi-tenant portfolio will expire each year. In-place
multi-tenant leases have a weighted average lease term of 7.9 years and a weighted average remaining lease term of 3.6 years.
During 2017, 599 leases totaling 2.0 million square feet in its multi-tenant portfolio expired, of which 459 leases totaling 1.6
million square feet 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 2017 quarterly tenant retention statistics
ranged from 76% to 90%. In 2018, the Company has 623 leases totaling 2.0 million square feet in its multi-tenant portfolio that
are scheduled to expire. Of those leases, 86% are in on-campus buildings, which tend to have a high tenant retention rate.
27 The Company continues to emphasize revenue growth for its in-place leases. In 2017, the Company experienced contractual
rental rate growth which averaged 2.7% for in-place leases compared to 2.5% in 2016. In addition, the Company continued to
see strong quarterly weighted average rental rate growth for renewing leases ("cash leasing spread") and expects the majority of
its renewals to increase between 3.0% and 4.0%. In 2017, quarterly cash leasing spreads ranged from 3.5% to 9.0% compared
to 3.3% to 6.6% in 2016 related to the Company's 201 properties. In the Company's same store portfolio, quarterly cash leasing
spreads ranged from 3.7% to 9.5% in 2017 compared to 3.9% to 7.2% in 2016.
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 13% of its lease portfolio. Modified gross or base year leases, in which the Company and tenant
both pay a share of operating expenses, comprise 31% of the Company's leased portfolio. Net leases, in which tenants pay all
allowable operating expenses, total 56% of the leased portfolio.
Capital Additions
As a part of the Company's leasing practice, the Company seeks to earn a return on capital additions when determining asking
lease rates for each property by considering gross investment, inclusive of any actual or expected capital additions. The
Company invested $18.8 million, or $1.28 per square foot, in capital additions in 2017, $17.1 million, or $1.17 per square foot,
in capital additions in 2016 and $16.0 million, or $1.12 per square foot in 2015.
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.
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.
Tenant improvements spending totaled approximately $25.8 million in 2017, of which $5.4 million pertained to first generation
space. Tenant improvements spending in 2016 totaled $39.8 million, of which $16.1 million pertained to first generation space.
If tenants spend more than the allowance, the Company generally offers the tenant the option to finance 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 Income and totaled approximately $0.4 million in 2017, $0.5 million in
2016, and $0.6 million in 2015. The tenant overage amount amortized to rent totaled approximately $4.6 million in 2017, $4.6
million in 2016, and $4.5 million in 2015.
Second generation, multi-tenant tenant improvement commitments in 2017 for renewals averaged $1.78 per square foot per
lease year, ranging quarterly from $1.38 to $2.30. In 2016, these commitments averaged $1.55 per square foot per lease year,
ranging quarterly from $1.04 to $1.84. In 2015, these commitments averaged $1.21 per square foot per lease year, ranging
quarterly from $0.78 to $1.80.
Second generation, multi-tenant tenant improvement commitments in 2017 for new leases averaged $3.60 per square foot per
lease year, ranging quarterly from $2.10 to $4.78. In 2016, these commitments averaged $4.74 per square foot per lease year,
ranging quarterly from $3.79 to $5.55. In 2015, these commitments averaged $3.41 per square foot per lease year, ranging
quarterly from $2.79 to $3.75.
Leasing Commissions
In certain markets, the Company may pay leasing commissions to real estate brokers who represent either the Company 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 2017, the Company paid leasing commissions of approximately $7.1 million, or
$0.49 per square foot, of which $1.3 million pertained to the leases for first generation space. In 2016, the Company paid
leasing commissions of approximately $5.2 million, or $0.36 per square foot, of which $0.6 million pertained to the leases for
28 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 Income totaled $4.5 million, $4.2 million and $3.4
million for the years ended December 31, 2017, 2016 and 2015, 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 2017 totaled approximately $3.0 million, or $0.20 per square foot, of
which $1.1 million pertained to leases for first generation space. Rent abatements for 2016 totaled approximately $3.5 million,
or $0.24 per square foot, of which $1.2 million pertained to leases for first generation space. Rent abatements for 2015 totaled
approximately $2.8 million, or $0.20 per square foot, of which $1.1 million pertained to leases for first generation space.
Single-Tenant Net Leases
No single-tenant net leases are scheduled to expire during 2018. The Company expects to sell five single-tenant net leased
properties in April 2018 pursuant to a purchase option. See "Purchase Options" below.
As of December 31, 2017, the Company has a total of 21 single-tenant net leases, excluding assets held for sale, with a
weighted average lease term of 12.3 years and a weighted average remaining lease term of 8.0 years.
Property Operating Agreement Expirations
One of the Company’s 201 owned real estate properties as of December 31, 2017 was covered under a property operating
agreement between the Company and a sponsoring health system. This agreement contractually obligates 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. This agreement expires in
February 2019. The Company recognized $0.7 million in property operating guaranty revenue during 2017 related to this
agreement.
Operating Leases
At December 31, 2017, the Company had 109 properties totaling 8.9 million square feet that were held under ground leases
with a remaining weighted average term of 68.7 years, including renewal options. These ground leases typically have initial
terms of 50 to 75 years with one to two renewal options extending the terms to 75 to 100 years, with expiration dates through
2117. As of December 31, 2017, the Company was obligated to make rental payments under operating lease agreements
consisting primarily of the Company’s corporate office lease and ground leases related to 61 real estate investments, excluding
those ground leases the Company has prepaid. Rental expense relating to the operating leases for the years ended December 31,
2017, 2016 and 2015 was $6.3 million, $5.7 million and $5.1 million, respectively.
29 Purchase Options
The Company had approximately $95.2 million in real estate properties as of December 31, 2017 that were subject to
exercisable purchase options. The Company has approximately $442.4 million in real estate properties that are subject to
purchase options that will become exercisable after 2018. Additional information about the amount and basis for determination
of the purchase price is detailed in the table below (dollars in thousands):
Gross Real Estate Investment as of December 31, 2017
Non Fair Market Value Method (2)
$
Year Exercisable
Current
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028 and thereafter
Total
_____
Number of Properties
4
—
2
—
1
—
—
—
5
—
—
5
17
Fair Market Value Method (1)
95,187
$
—
41,521
—
—
—
—
—
18,883
—
—
145,102
300,693
$
$
— $
—
—
—
14,984
—
—
—
221,929
—
—
—
236,913
$
Total
95,187
—
41,521
—
14,984
—
—
—
240,812
—
—
145,102
537,606
(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 18% greater than the Company's current gross investment.
In October 2017, the Company received notice that a tenant is exercising a purchase option on seven properties, comprised of
five single-tenant net leased buildings and two multi-tenanted buildings, covered by one purchase option with a stated purchase
price of approximately $45.5 million, subject to certain contractual adjustments. The Company's aggregate net book value for
these properties was $23.9 million at December 31, 2017. The Company recognized net operating income of approximately
$6.1 million for the twelve months ended December 31, 2017 from these properties. Closing of the sale is expected to occur in
April 2018.
Debt Management
The Company maintains a conservative and flexible capital structure that allows it to fund new investments and operate its
existing portfolio. The Company has approximately $154.9 million of mortgage notes payable, most of which were assumed
when the Company acquired properties. In 2018, approximately $5.9 million of these mortgage notes payable will mature. The
Company intends to repay the mortgage notes upon maturity. During 2017, the Company redeemed its Senior Notes due 2021,
issued its Senior Notes due 2028 and renewed its Term Loan due 2022. The result of this activity extended the Company's
maturities and reduced the Company's cost of borrowing from 4.28% at December 31, 2016 to 3.71% at December 31, 2017.
30 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. The following table shows the percentage of the Company's leases that provide
for fixed or CPI-based rent increases by type as of December 31, 2017:
Annual increase
CPI
Fixed
Non-annual increase
CPI
Fixed
No increase
Term > 1 year
% Increase
% of Base Rent
2.1%
2.9%
0.9%
1.9%
—%
10.0%
81.1%
1.5%
5.9%
1.5%
New Accounting Pronouncements
See Note 1 to the Consolidated Financial Statements for information on new accounting standards including both standards that
the Company adopted during the year and those that have not yet been adopted. The Company continues to evaluate the impact
of the new standards that have not yet been adopted.
Other Items Impacting Operations
General and administrative expenses will fluctuate quarter-to-quarter. The Company expects general and administrative
expenses to increase approximately $0.8 million in the first quarter of 2018 over the fourth quarter of 2017. The first quarter
administrative costs include customary increases in payroll taxes, non-cash ESPP expense and healthcare savings account
fundings. Approximately $0.6 million is not expected to recur in subsequent quarters in 2018.
31 Results of Operations
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
The Company’s consolidated results of operations for 2017 compared to 2016 were significantly impacted by acquisitions,
dispositions, extinguishments of debt, gain on sales and impairment charges recorded on real estate properties.
Revenues
Rental income increased $15.4 million, or 3.8%, to approximately $422.9 million compared to $407.5 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
$
$
2017
2016
363,907
$
336,409
$
52,873
6,072
63,871
7,201
422,852
$
407,481
$
Change
$
27,498
(10,998)
(1,129)
15,371
%
8.2 %
(17.2)%
(15.7)%
3.8 %
Property operating income increased $27.5 million, or 8.2%, from the prior year primarily as a result of the following activity:
• Acquisitions and developments in 2016 and 2017 resulted in an increase of $18.2 million.
• Net leasing activity including contractual rent increases and renewals contributed $13.7 million.
• Dispositions in 2016 and 2017 resulted in a decrease of $4.4 million.
Single-tenant net lease income decreased $11.0 million, or 17.2%, from the prior year primarily as a result of the following
activity:
• Dispositions in 2016 and 2017 resulted in a decrease of $10.1 million.
• Reduction in lease revenue of $2.1 million upon tenant vacate and reclassification to held for sale.
• Acquisitions in 2016 and 2017 resulted in an increase of $0.7 million.
• Contractual rent increases resulted in an increase of $0.5 million.
Straight-line rent income decreased $1.1 million, or 15.7%, from the prior year primarily as a result of the following activity:
• Acquisitions in 2016 and 2017 resulted in an increase of $0.8 million.
• Dispositions in 2016 and 2017 resulted in a decrease of $0.5 million.
• The effect of prior year rent abatements that expired and net leasing activity resulted in a decrease of $1.4 million.
Expenses
Property operating expenses increased $10.8 million, or 7.4%, for the year ended December 31, 2017 compared to the prior
year primarily as a result of the following activity:
• Acquisitions and developments in 2016 and 2017 resulted in an increase of $7.7 million.
•
Increases in portfolio operating expenses as follows:
property tax expense of $2.0 million;
maintenance and repair expense of $0.4 million;
ground lease straight-line rent expense of $0.8 million;
janitorial expense of $0.7 million;
utilities expense of $0.3 million;
compensation-related expense of $0.4 million; and
security expense of $0.1 million.
• Dispositions in 2016 and 2017 resulted in a decrease of $1.6 million.
32
General and administrative expenses increased approximately $1.7 million, or 5.4%, for the year ended December 31, 2017
compared to the prior year primarily as a result of the following activity:
•
•
Increase in non-cash performance-based compensation expense totaling $2.6 million.
Increase in payroll compensation of $0.4 million.
• Decrease in cash performance-based compensation expense totaling $0.8 million.
• Other net decreases, including professional fees and other administrative costs, of $0.5 million.
Depreciation expense increased $14.8 million, or 11.6%, for the year ended December 31, 2017 compared to the prior year
primarily as a result of the following activity:
• Acquisitions and developments in 2016 and 2017 resulted in increases of $11.1 million.
• Various building and tenant improvement expenditures caused increases of $11.9 million.
• Dispositions in 2016 and 2017 resulted in decreases of $5.2 million.
• Assets that became fully depreciated resulted in decreases of $3.0 million.
Other Income (Expense)
Other income (expense), a net expense, increased $50.4 million, or 316.2%, for the year ended December 31, 2017 compared to
the prior year mainly due to the following activity:
Gain on Sales of Real Estate Properties
Gain on sales of real estate properties, excluding those classified within discontinued operations, totaling approximately $39.5
million and $41.0 million are associated with the sales of eight and six real estate properties during 2017 and 2016, respectively.
Interest Expense
Interest expense decreased $0.9 million for the year ended December 31, 2017 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
Amortization of interest rate swap settlement
Interest cost capitalization
Total interest expense
2017
2016
Change
Percentage Change
$
54,435
$
55,666
$
(1,231)
187
2,476
175
(871)
(45)
2,820
168
(1,258)
$
56,402
$
57,351
$
232
(344)
7
387
(949)
(2.2)%
(515.6)%
(12.2)%
4.2%
(30.8)%
(1.7)%
Contractual interest decreased $1.2 million, or 2.2%, primarily as a result of the following activity:
• The Senior Notes due 2028 in an aggregate amount of $300.0 million were issued in the fourth quarter of 2017 and
accounted for an increase of $0.6 million.
• The Senior Notes due 2021 were repaid in the fourth quarter of 2017 and accounted for a decrease of $1.1 million.
• The Unsecured Credit Facility due 2020 and Unsecured Term Loan due 2022 accounted for a net decrease of $0.2
million.
• Mortgage notes assumed upon acquisition of real properties accounted for an increase of $0.3 million, and mortgage
notes repayments accounted for a decrease of $0.9 million.
•
Scheduled monthly interest payments related to the Company's mortgage notes payable increased $0.1 million.
Loss on Extinguishments of Debt
Loss on extinguishment of debt of approximately $45.0 million is associated with the 2017 redemption of the Senior Notes due
2021. See Note 9 to the Consolidated Financial Statements for more information.
33 Impairment of Real Estate Assets
Impairment of real estate assets, excluding those classified within discontinued operations, totaling approximately $5.4 million
is associated with the sale of two real estate properties during 2017.
Discontinued Operations
Loss from discontinued operations totaled approximately $0.2 million for the year ended December 31, 2016 and includes the
results of operations, impairments and gains on sale related to assets classified as held for sale as of December 31, 2014. None
of the Company's 2016 or 2017 dispositions met the definition of a discontinued operation as amended in Accounting Standards
Update No. 2014-08, which the Company adopted in 2015.
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
The Company’s consolidated results of operations for 2016 compared to 2015 were significantly impacted by acquisitions,
dispositions, extinguishments of debt, gains on sale and impairment charges recorded on real estate properties.
Revenues
Rental income increased $24.1 million, or 6.3%, to approximately $407.5 million compared to $383.3 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
$
$
2016
2015
336,409
$
306,550
$
63,871
7,201
67,238
9,545
407,481
$
383,333
$
Change
$
29,859
(3,367)
(2,344)
24,148
%
9.7 %
(5.0)%
(24.6)%
6.3 %
Property operating income increased $29.9 million, or 9.7%, from the prior year primarily as a result of the following activity:
• Acquisitions in 2015 and 2016 accounted for an increase of $19.3 million.
• Net leasing activity including contractual rent increases and renewals accounted for an increase of $13.4 million.
• Dispositions in 2015 accounted for a decrease of $2.9 million.
Single-tenant net lease income decreased $3.4 million, or 5.0%, from the prior year primarily as a result of the following
activity:
• Contractual rent increases accounted for an increase of $0.6 million.
• Reduction in lease revenue of $0.6 million upon expiration and execution of new leases and reserves (see Trends and
Matters Impacting Operating Results for additional information).
• Dispositions in 2015 and 2016 accounted for a decrease of $3.3 million.
Straight-line rent income decreased $2.3 million, or 24.6%, from the prior year primarily as a result of the following activity:
• Acquisitions in 2015 and 2016 accounted for an increase of $1.1 million.
• Dispositions in 2015 and 2016 accounted for a decrease of $0.4 million.
• The effect of prior year rent abatements that expired and net leasing activity caused a decrease of $3.0 million.
Expenses
Property operating expenses increased $6.3 million, or 4.5%, for the year ended December 31, 2016 compared to the prior year
primarily as a result of the following activity:
• Acquisitions in 2015 and 2016 accounted for an increase of $7.5 million.
• Dispositions in 2015 and 2016 accounted for a decrease of $2.3 million.
• The Company experienced overall increases in the following:
maintenance and repair expense of $0.4 million;
portfolio property taxes of $0.4 million;
34
leasing commission and legal fee expense of $0.2 million;
compensation-related expense of $0.7 million; and
janitorial expense of $0.2 million.
• The Company experienced an overall decrease in utility expense of $0.8 million.
General and administrative expenses increased approximately $6.6 million, or 26.7%, for the year ended December 31, 2016
compared to the prior year primarily as a result of the following activity:
•
Increase in performance-based compensation expense totaling $5.1 million, including $1.5 million of non-cash stock-
based award amortization.
• Other net increases, including telecommunication expense and compensation-related expense, of $1.5 million.
Depreciation and amortization expense increased $11.1 million, or 9.5%, for the year ended December 31, 2016 compared to
the prior year primarily as a result of the following activity:
•
Properties acquired in 2015 and 2016 and developments completed and commencing operations contributed a
combined increase of $8.4 million.
• Various building and tenant improvement expenditures caused an increases of $7.3 million.
• Dispositions in 2015 caused a decrease of $2.6 million.
• Assets that became fully depreciated resulted in a decrease of $2.0 million.
Other Income (Expense)
Other income (expense), a net expense, decreased $30.2 million, or 65.4%, for the year ended December 31, 2016 compared to
the prior year mainly due to the following activity:
Gain on Sales of Real Estate Properties
Gain on sales of real estate properties excluding those classified within discontinued operations, totaling approximately $41.0
million and $56.6 million are associated with the sales of six and seven real estate properties during 2016 and 2015,
respectively.
Interest Expense
Interest expense decreased $8.2 million for the year ended December 31, 2016 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
Amortization of interest rate swap settlement
Interest cost capitalization
Total interest expense
2016
2015
Change
Percentage Change
$
55,666
$
62,215
$
(6,549)
(45)
2,820
168
(1,258)
376
3,067
115
(239)
$
57,351
$
65,534
$
(421)
(247)
53
(1,019)
(8,183)
(10.5)%
(112.0)%
(8.1)%
46.1%
426.4 %
(12.5)%
Contractual interest decreased $6.5 million, or 10.5%, primarily as a result of the following activity:
• The Unsecured Credit Facility and Unsecured Term Loan due 2022 accounted for a net decrease of $1.0 million.
• Unsecured senior notes due 2025 in an aggregate amount of $250.0 million (the "Senior Notes due 2025") were issued
in the second quarter of 2015 and accounted for an increase of $3.0 million.
• The unsecured senior notes due 2017 (the "Senior Notes due 2017") were repaid in the second quarter of 2015 and
accounted for a decrease of $7.3 million.
• Mortgage notes assumed upon acquisition of real properties and mortgage notes refinanced accounted for an increase
of $1.7 million, and mortgage notes repayments accounted for a decrease of $3.1 million.
•
Scheduled monthly interest payments related to the Company's mortgage notes payable increased $0.2 million.
35
Loss on Extinguishments of Debt
Loss on extinguishment of debt of approximately $28.0 million is associated with the 2015 redemption of the Senior Notes due
2017. See Note 9 to the Consolidated Financial Statements for more information.
Pension Termination
Pension termination expense of approximately $5.3 million represents the effect of the Company's termination of the Executive
Retirement Plan in 2015.
Impairment of Real Estate Assets
Impairment of real estate assets excluding those classified within discontinued operations, totaling approximately $3.6 million
is associated with the sale of two real estate properties during 2015.
Impairment of Internally-Developed Software
The Company recognized an impairment of internally-developed software of approximately $0.7 million in 2015, which was
abandoned for a third party program that was previously unavailable.
Discontinued Operations
Loss from discontinued operations totaled $0.2 million and income from discontinued operations totaled $10.6 million,
respectively, for the years ended December 31, 2016 and 2015, which includes the results of operations, impairments and gains
on sale related to assets classified as held for sale as of December 31, 2014. None of the Company's 2015 or 2016 dispositions
met the definition of a discontinued operation as amended in Accounting Standards Update No. 2014-08, which the Company
adopted in 2015. The Company disposed of one real estate property in 2015 that was classified as held for sale at December 31,
2014 and one property remained classified as held for sale as of December 31, 2016.
Non-GAAP Financial Measures and Key Performance Indicators
Management considers certain non-GAAP financial measures and key performance indicators 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 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 and key performance indicators 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, as indicators of the Company's financial performance, or as
alternatives to cash flow from operating activities 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 ("FFO"), Normalized FFO and Funds Available for Distribution ("FAD")
FFO and FFO per share are operating performance measures adopted by the National Association of Real Estate Investment
Trusts (“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.”
In addition to FFO, the Company presents Normalized FFO and FAD. Normalized FFO is presented by adding to FFO
acquisition-related costs, acceleration of deferred financing costs, debt extinguishment costs and other Company-defined
normalizing items to evaluate operating performance. FAD is presented by adding to Normalized FFO non-real estate
depreciation and amortization, deferred financing fees amortization, share-based compensation expense and provision for bad
debts, net; and subtracting maintenance capital expenditures, including second generation tenant improvements and leasing
commissions paid and straight-line rent income, net of expense. The Company's definition of these terms may not be
comparable to that of other real estate companies as they may have different methodologies for computing these amounts.
Normalized FFO and FAD should not be considered as an alternative to net income as an indicator of the Company's financial
performance or to cash flow from operating activities as an indicator of the Company's liquidity. Normalized FFO and FAD
should be reviewed in connection with GAAP financial measures.
36 Management believes FFO, Normalized FFO, FFO per share, Normalized FFO per share and FAD ("Non-GAAP Measures")
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, impairments 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, Non-GAAP Measures can facilitate comparisons of operating
performance between periods. The Company reports Non-GAAP Measures 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. For
these reasons, management deems it appropriate to disclose and discuss these Non-GAAP Measures. However, none of these
measures represent cash generated from operating activities determined in accordance with GAAP and are not necessarily
indicative of cash available to fund cash needs. Further, these measures should not be considered as an alternative to net income
as an indicator of the Company’s operating performance or as an alternative to cash flow from operating activities as a measure
of liquidity.
37 The table below reconciles net income attributable to common stockholders to FFO, Normalized FFO and FAD for the years
ended December 31, 2017, 2016, and 2015.
(Amounts in thousands, except per share data)
Net income
Gain on sales of real estate properties
Impairments
Real estate depreciation and amortization
Total adjustments
Funds from Operations
Acquisition and pursuit costs
Write-off of deferred financing costs upon amendment of credit
facilities
Pension termination
Loss on extinguishment of debt
Impairment of internally-developed software
Interest incurred on the timing of issuance/redemption of senior
notes
Security deposit recognized upon sale
Reversal of restricted stock amortization upon director / officer
resignation
Revaluation of awards upon retirement
Normalized Funds from Operations
Non-real estate depreciation and amortization
Provision for bad debt, net
Straight-line rent receivable, net
Stock-based compensation
Provision for deferred post-retirement benefits
Non-cash items included in cash flows from operating activities
2nd Generation TI
Leasing commissions paid
Capital additions
Funds Available for Distribution
Funds from Operations per Common Share - Diluted
Normalized Funds from Operations per Common Share - Diluted
$
$
Year Ended December 31,
2017
2016
2015
23,092
$
85,571
$
69,436
(39,524)
5,385
145,321
111,182
(41,044)
(67,172)
121
129,772
88,849
4,325
117,982
55,135
134,274
$
174,420
$
124,571
2,180
3,414
1,394
21
—
44,985
—
767
—
—
—
81
4
—
—
—
—
—
89
—
5,260
27,998
654
—
141
(40)
—
$
182,227
$
178,008
$
159,978
5,551
159
(4,575)
10,027
—
11,162
(20,367)
(7,099)
(18,790)
147,133
1.13
1.53
$
$
$
5,475
(21)
(7,134)
7,509
—
5,829
(23,692)
(5,210)
(17,122)
137,813
1.59
1.63
$
$
$
5,830
(194)
(8,829)
6,069
385
3,261
(12,068)
(7,504)
(16,242)
127,425
1.25
1.60
$
$
$
Weighted average common shares outstanding - Diluted
118,877
109,387
99,880
38
Same Store NOI
Net operating income ("NOI") and same store NOI are key performance indicators. 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 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 also excludes non-cash items such as straight-line rent, above and below market lease intangibles, leasing commission
amortization, lease inducements, lease terminations and tenant improvement amortization. Same store NOI is historical and not
necessarily indicative of future results.
The following table reflects the Company's same store NOI for the years ended December 31, 2017 and 2016.
Same Store NOI for the
Year Ended December 31,
(Dollars in thousands)
Multi-tenant Properties
Number of Properties (1)
Gross Investment at
December 31, 2017
2017
2016
142
$
2,665,547
$
191,663
$
182,777
Single-tenant Net Lease Properties
19
486,602
44,090
43,770
Total
161
$
3,152,149
$
235,753
$
226,547
______
(1) Properties are based on the same store definition included below and exclude assets classified as held for sale.
Properties included in the same store analysis are stabilized properties. Stabilized properties are properties that have been
included in operations for the duration of the year-over-year comparison period presented and include redevelopment projects.
Accordingly, stabilized properties exclude properties that were recently acquired or disposed of, properties classified as held for
sale, and development conversions. In addition, the Company excludes properties that meet any of the following Company-
defined criteria to be included in the reposition property group:
•
•
•
Properties having less than 60% occupancy that is expected to last at least two quarters;
Properties that experience a loss of occupancy over 30% in a single quarter; or
Properties with negative net operating income that is expected to last at least two quarters.
Any recently acquired property will be included in the same store pool once the Company has owned the property for eight full
quarters. Development properties will be included in the same store pool eight full quarters after substantial completion. Any
additional square footage created by redevelopment projects at a same store property is included in the same store pool
immediately upon completion. Any property included in the reposition property group will be included in the same store
analysis once occupancy has increased to 60% or greater with positive net operating income and has remained at that level for
eight full quarters.
39 The following tables reconcile same store NOI to the respective line items in the Consolidated Statements of Income and the
same store property count to the total owned real estate portfolio:
Reconciliation of Same Store NOI:
(Dollars in thousands)
Net income
Loss from discontinued operations
Income from continuing operations
Other income (expense)
General and administrative expense
Depreciation and amortization expense
Other expenses (1)
Straight-line rent revenue
Other revenue (2)
NOI
NOI not included in same store
Same store NOI
______
Year Ended December 31,
2017
2016
$
23,092
$
4
23,096
66,357
32,992
85,571
185
85,756
15,942
31,309
142,472
127,690
8,636
(6,072)
(4,690)
262,791
(27,038)
$
235,753
$
8,967
(7,201)
(5,531)
256,932
(30,385)
226,547
(1) Includes acquisition and pursuit costs, bad debt, above and below market ground lease intangible amortization, leasing
commission amortization and ground lease straight-line rent.
(2) Includes management fee income, storage income, interest, mortgage interest income, above and below market lease
intangible amortization, lease inducement amortization, lease terminations and tenant improvement overage amortization.
Reconciliation of Same Store Property Count:
Same store properties
Acquisitions
Development Completions
Reposition
Total owned real estate properties
Property Count as of
December 31, 2017
161
25
2
13
201
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.
40 Contractual 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, 2017, 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, 2017, 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)
Construction in progress (3)
Tenant improvements (4)
Total
Less than
1 Year
1 -3
Years
3 - 5
Years
More than 5
Years
$ 1,559,843
$
48,326
$ 306,523
$ 247,387
$
957,607
313,422
72,170
27,796
6,456
40,260
27,796
12,886
31,910
—
11,024
283,056
—
—
—
—
Total contractual obligations
$ 1,973,231
$
122,838
$ 351,319
$ 258,411
$ 1,240,663
______
(1) The amounts shown include estimated interest on total debt other than the Unsecured Credit Facility due 2020 and
Unsecured Term Loan due 2022, 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 $3.9 million, net premiums totaling
approximately $1.3 million on 18 mortgage notes payable, and deferred financing costs totaling approximately $7.5
million which are included in notes and bonds payable on the Company’s Consolidated Balance Sheet as of December 31,
2017. 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 due 2022
Senior Notes due 2021
Senior Notes due 2023
Senior Notes due 2025
Senior Notes due 2028
Mortgage notes payable
Principal Balance
at Dec. 31, 2017
Principal Balance
at Dec. 31, 2016
Maturity
Date
Contractual Interest
Rates at
December 31, 2017
Principal
Payments
Interest
Payments
$
189.0
$
150.0
—
250.0
250.0
300.0
154.9
107.0
150.0
400.0
250.0
250.0
—
7/20
12/22
1/21
4/23
5/25
1/28
LIBOR + 1.00% At maturity
LIBOR + 1.10% At maturity
Monthly
Monthly
5.75% At maturity
Semi-Annual
3.75% At maturity
Semi-Annual
3.88% At maturity
Semi-Annual
3.63% At maturity
Semi-Annual
114.9
12/18-5/40
3.31%-6.88%
Monthly
Monthly
$
1,293.9
$
1,271.9
(2)
(3)
Includes primarily the corporate office and ground leases, with expiration dates through 2117, related to various real estate
investments for which the Company is currently making payments.
Includes cash flow projections related to the construction of one building in Seattle, Washington and the redevelopment of
a building in Charlotte, North Carolina. This amount includes $1.8 million of invoices that were accrued and included in
construction in progress on the Company's Consolidated Balance Sheet as of December 31, 2017.
(4) The Company has remaining tenant improvement allowances, excluding construction in progress, of approximately $27.8
million. The Company expects to fund these improvements in 2018.
41
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 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, 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 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.
42 Management’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 acquisition and
pursuit costs on the Consolidated Statements of Income. All pursuit costs will ultimately be written off to expense or capitalized
as part of the constructed real estate asset.
As of December 31, 2017 and 2016, the Company's Consolidated Balance Sheets include capitalized pursuit costs relating to
potential developments totaling $2.0 million and $2.1 million respectively. The Company expensed costs related to acquisitions
totaling $2.0 million, $4.2 million and $1.7 million for the years ended December 31, 2017, 2016 and 2015, respectively. In
addition, the Company expensed costs related to the pursuit of developments totaling $0.2 million, $0.3 million and $0.7
million for the years ended December 31, 2017, 2016 and 2015, 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.
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.
43 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.
The Company also performs an annual goodwill impairment review. The Company's reviews are performed as of December 31
of each year. The Company's 2017 and 2016 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 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 $5.4 million, $0.1 million, and $4.3 million, respectively, for the years
ended December 31, 2017, 2016, and 2015 related to real estate properties and other long-lived assets. The impairment charges
in 2017 related to two properties sold. The impairment charges in 2016 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.
The impairment charges in 2015 related to two properties sold and one property previously classified as held for sale, reducing
the Company's carrying value on the properties 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, 2017, the Company had investments of approximately $3.6 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
44 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
period 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 any 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 any 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.
45 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
expected 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.
46 Item 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, 2017, $0.9 billion of the Company’s $1.3 billion of outstanding debt bore interest at fixed rates, excluding
the Company’s interest rate swaps which convert a portion of the Unsecured Term Loan due 2022 from variable interest to a
fixed interest rate.
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
Unsecured Term Loan due 2022 (1)
Outstanding
Principal Balance as of
December 31, 2017
Calculated
Annual
Interest
Assuming 10%
Increase in Market
Interest Rates
Assuming 10%
Decrease in Market Interest
Rates
Impact on Earnings and Cash Flows
$
$
189,000
$
4,846
$
150,000
4,155
339,000
$
9,001
$
(296) $
(416)
(712) $
296
416
712
______
(1) As of December 31, 2017 the Company had interest rate swaps that fix the interest rate of $25.0 million of the Unsecured
Term Loan due 2022.
(Dollars in thousands)
Fixed Rate Debt:
Senior Notes due 2021 (2)
Senior Notes due 2023 (2)
Senior Notes due 2025 (2)
Senior Notes due 2028 (2)
Mortgage Notes Payable (2)
Carrying Value
as of December 31,
2017
December 31, 2017
Assuming 10%
Increase in
Market Interest
Rates
Assuming 10%
Decrease in
Market Interest
Rates
December 31,
2016 (1)
Fair Value
$
— $
— $
— $
— $
414,837
247,703
248,044
294,757
155,382
240,281
241,324
294,848
155,301
235,297
234,856
286,034
153,134
245,368
248,148
304,526
157,519
238,150
239,563
—
115,504
$
945,886
$
931,754
$
909,321
$
955,561
$ 1,008,054
______
(1) Fair values as of December 31, 2016 represent fair values of obligations 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) Balances are presented net of discounts. Level 2 – model-derived valuations in which significant inputs and significant
value drivers are observable in active markets.
47
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
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Healthcare Realty Trust Incorporated (the "Company") and
subsidiaries as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, equity,
and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and financial statement
schedules listed in the accompanying index (collectively referred to as the "consolidated financial statements"). In our opinion,
the consolidated financial statements present fairly, in all material respects, the financial position of the Company and
subsidiaries at December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of
America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the Company's internal control over financial reporting as of December 31, 2017, 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 14, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with
the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws
and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2005.
Nashville, Tennessee
February 14, 2018
48 Healthcare 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
Construction in progress
Land held for development
Less accumulated depreciation
Total real estate properties, net
Cash and cash equivalents
Restricted cash
Assets held for sale and discontinued operations, net
Other assets, net
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes and bonds payable
Accounts payable and accrued liabilities
Liabilities of assets held for sale and discontinued operations
Other liabilities
Total liabilities
Commitments and contingencies
Stockholders' Equity:
December 31,
2017
2016
$
201,283
$
199,672
3,601,460
3,386,480
10,314
5,458
20,123
10,291
11,655
20,123
3,838,638
3,628,221
(897,430)
(840,839)
2,941,208
2,787,382
6,215
—
33,147
213,015
5,409
49,098
3,092
195,666
$
3,193,585
$
3,040,647
$
1,283,880
$
1,264,370
70,995
93
48,734
78,266
614
43,983
1,403,702
1,387,233
Preferred stock, $.01 par value; 50,000 shares authorized; none issued and outstanding
—
—
Common stock, $.01 par value; 300,000 and 150,000 shares authorized; 125,132 and
116,417 shares issued and outstanding at December 31, 2017 and 2016, respectively.
Additional paid-in capital
Accumulated other comprehensive loss
Cumulative net income attributable to common stockholders
Cumulative dividends
Total stockholders’ equity
Total liabilities and stockholders' equity
See accompanying notes.
1,251
1,164
3,173,429
2,917,914
(1,299)
(1,401)
1,018,348
995,256
(2,401,846)
(2,259,519)
1,789,883
1,653,414
$
3,193,585
$
3,040,647
49
Healthcare Realty Trust Incorporated
Consolidated Statements of Income
(Amounts in thousands, except per share data)
REVENUES
Rental income
Mortgage interest
Other operating
EXPENSES
Property operating
General and administrative
Acquisition and pursuit costs
Depreciation and amortization
Bad debt, net of recoveries
OTHER INCOME (EXPENSE)
Gain on sales of real estate assets
Interest expense
Loss on extinguishment of debt
Pension termination
Impairment of real estate assets
Impairment of internally-developed software
Interest and other income, net
INCOME FROM CONTINUING OPERATIONS
DISCONTINUED OPERATIONS
Income (loss) from discontinued operations
Impairments of real estate assets
Gain on sales of real estate properties
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
NET INCOME
BASIC EARNINGS PER COMMON SHARE:
Income from continuing operations
Discontinued operations
Net income
DILUTED EARNINGS PER COMMON SHARE:
Income from continuing operations
Discontinued operations
Net income
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - DILUTED
See accompanying notes.
Year Ended December 31,
2017
2016
2015
$
$
$
$
$
$
422,852
—
1,647
424,499
157,233
32,992
2,180
142,472
169
335,046
39,519
(56,402)
(44,985)
—
(5,385)
—
896
(66,357)
23,096
(9)
—
5
(4)
23,092
0.18
0.00
0.18
0.18
0.00
0.18
117,926
118,017
$
$
407,481
—
4,149
411,630
383,333
91
5,047
388,471
146,458
31,309
4,496
127,690
(21)
309,932
41,038
(57,351)
—
(4)
—
—
375
(15,942)
85,756
(71)
(121)
7
(185)
85,571
0.79
0.00
0.79
0.78
0.00
0.78
108,572
109,387
$
$
$
$
$
140,195
24,716
2,209
116,614
(193)
283,541
56,602
(65,534)
(27,998)
(5,260)
(3,639)
(654)
389
(46,094)
58,836
715
(686)
10,571
10,600
69,436
0.59
0.11
0.70
0.59
0.11
0.70
99,171
99,880
$
$
$
$
$
50
Healthcare Realty Trust Incorporated
Consolidated Statements of Comprehensive Income
(Amounts in thousands)
NET INCOME
Other comprehensive income:
Defined benefit plans:
Year Ended December 31,
2017
2016
2015
$ 23,092
$ 85,571
$ 69,436
Reclassification adjustment for losses included in net income (Pension termination)
—
—
2,519
Interest rate swaps:
Reclassification adjustment for losses included in net income (Interest expense)
Losses arising during the period
Losses on settlement of swaps arising during the period
Other comprehensive income
COMPREHENSIVE INCOME
See accompanying notes.
176
(74)
—
102
168
—
—
168
115
—
(1,684)
950
$ 23,194
$ 85,739
$ 70,386
51
Healthcare Realty Trust Incorporated
Consolidated Statements of Equity
(Amounts in thousands, except per share data)
Balance at December 31, 2014
Issuance of stock, net of costs
Common stock redemption
Stock-based compensation
Net income
Amounts reclassified from accumulated other
comprehensive loss arising from loss on defined
benefit pension plan
Dividends to common stockholders ($1.20 per share)
Loss on forward starting interest rate swaps
Balance at December 31, 2015
Issuance of stock, net of costs
Common stock redemption
Stock-based compensation
Net income
Loss on forward starting interest rate swaps
Dividends to common stockholders ($1.20 per share)
Balance at December 31, 2016
Issuance of stock, net of costs
Common stock redemption
Stock-based compensation
Net income
Loss on interest rate swaps
Dividends to common stockholders ($1.20 per share)
Preferred
Stock
Common
Stock
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Cumulative
Net Income
Cumulative
Dividends
Total
Stockholders’
Equity
$
— $
988
$2,389,830
$
(2,519) $
840,249
$ (2,007,494) $ 1,221,054
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
25
—
2
—
—
—
—
66,886
(1,367)
6,027
—
—
—
—
—
—
—
—
2,519
—
(1,569)
—
—
—
69,436
—
—
—
—
—
—
—
—
66,911
(1,367)
6,029
69,436
2,519
(120,266)
(120,266)
—
(1,569)
1,015
2,461,376
(1,569)
909,685
(2,127,760)
1,242,747
140
450,409
—
9
—
—
—
(1,460)
7,589
—
—
—
—
—
—
—
168
—
—
—
—
85,571
—
—
—
—
—
—
—
450,549
(1,460)
7,598
85,571
168
(131,759)
(131,759)
1,164
2,917,914
(1,401)
995,256
(2,259,519)
1,653,414
84
(1)
4
—
—
—
248,508
(3,017)
10,024
—
—
—
—
—
—
—
102
—
—
—
—
23,092
—
—
—
—
—
—
—
248,592
(3,018)
10,028
23,092
102
(142,327)
(142,327)
Balance at December 31, 2017
$
— $ 1,251
$3,173,429
$
(1,299) $ 1,018,348
$ (2,401,846) $ 1,789,883
See accompanying notes.
52 Healthcare 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 operating activities:
Depreciation and amortization
Other amortization
Stock-based compensation
Amortization of straight-line rent receivable
Amortization of straight-line rent liability
Gain on sales of real estate assets
Loss on extinguishment of debt
Impairment of real estate assets
Pension termination
Impairment of internally-developed software
Equity income from unconsolidated joint ventures
Provision for bad debts, 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
Additional long-lived assets
Investment in unconsolidated joint ventures
Proceeds from sales of real estate
Proceeds from mortgages and notes receivable repayments
Net cash used in investing activities
FINANCING ACTIVITIES
Net borrowings (repayments) on unsecured credit facility
Repayment on term loan
Borrowings of 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
Settlement of swaps
Debt issuance and assumption costs
Net cash provided by (used in) financing activities
Increase (decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of period
Cash, cash equivalents and restricted cash at end of period
Supplemental Cash Flow Information:
Interest paid
Mortgage notes payable assumed upon acquisition (adjusted to fair value)
Invoices accrued for construction, tenant improvements and other capitalized costs
Capitalized interest
See accompanying notes.
Year Ended December 31,
2017
2016
2015
$
23,092
$
85,571
$
69,436
142,472
3,879
10,028
(6,072)
1,497
(39,524)
44,985
5,385
—
—
(7)
159
(2,156)
(7,307)
3,335
179,766
(274,668)
(14,911)
(80,613)
(8,701)
119,426
19
(259,448)
82,000
—
297,459
(5,829)
(442,774)
(142,327)
248,554
(1,686)
—
(4,007)
31,390
(48,292)
54,507
6,215
64,395
46,374
8,303
871
127,690
3,351
7,598
(7,201)
67
(41,044)
—
121
—
—
—
(21)
(1,332)
449
(23,977)
151,272
(224,944)
(34,719)
(71,433)
—
93,253
19
(237,824)
(99,000)
(50,000)
11,500
(37,910)
—
(131,759)
450,503
(1,756)
—
(4,621)
136,957
50,405
4,102
54,507
55,878
13,951
11,734
1,258
116,614
3,749
6,029
(9,600)
771
(67,229)
27,998
4,325
5,260
654
—
(194)
(2,932)
(2,202)
1,304
153,983
(154,858)
(17,354)
(48,769)
—
153,281
1,918
(65,782)
121,000
—
249,793
(72,724)
(326,830)
(120,266)
66,942
(1,367)
(1,684)
(2,482)
(87,618)
583
3,519
4,102
69,773
28,783
10,431
239
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
53
NOTES TO THE 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, leases, manages,
acquires, finances, develops and redevelops income-producing real estate properties associated primarily with the delivery of
outpatient healthcare services throughout the United States of America. The Company had gross investments of approximately
$3.8 billion in 201 real estate properties, construction in progress, land held for development and corporate property as of
December 31, 2017. The Company’s 201 owned real estate properties are located in 27 states and total approximately 14.6
million square feet. The Company provided property management services to approximately 11.5 million square feet
nationwide. Square footage and property count 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 if the Company is the
primary beneficiary. 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
no VIEs as of December 31, 2017 and 2016.
The Company's investments in its unconsolidated joint ventures are included in other assets and the related equity income is
recognized in other income (expense) on the Company's Consolidated Financial Statements. See Note 7 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, leases, acquires, manages, finances, develops and redevelops 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.
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 $3.8 billion as of December 31, 2017 and $3.6
billion as of December 31, 2016.
During 2017 and 2016, the Company eliminated against accumulated depreciation approximately $10.2 million and $6.7
million, respectively, of fully amortized real estate intangibles that were initially recorded as a component of certain real estate
acquisitions. Also during 2017 and 2016, approximately $2.6 million and $0.1 million of fully depreciated tenant and capital
improvements that were no longer in service were eliminated against accumulated depreciation.
54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Depreciation expense for the three years ended December 31, 2017, 2016 and 2015 was $129.4 million, $116.5 million and
$106.5 million, respectively. Depreciation and amortization of real estate assets and liabilities in place as of December 31,
2017, 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
5.0 to 39.0 years
3.3 to 39.0 years
2.1 to 99.0 years
2.8 to 20.0 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 six parcels of land held for development located adjacent to
certain of the Company's existing medical office buildings in Texas, Iowa and Tennessee totaled approximately $20.1 million as
of December 31, 2017 and 2016.
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 with in-place leases are accounted for at relative 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 over the remaining term of the leases upon acquisition to rental income where the Company is
the lessor and 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.
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, leasing 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.
55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 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 Income. See Note 8 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 2017, in connection with the sale of a medical office building, the Company recorded an impairment charge in
continuing operations of approximately $5.1 million based on the contractual sales price, a level one input. The Company used
level one inputs to record an impairment charge in continuing operations of approximately $0.3 million related to another
property sold during 2017, reducing the Company's carrying value to the estimated fair value of the property less costs to sell
prior to sale.
Fair Value of Derivative Financial Instruments
Derivative financial instruments are recorded at fair value on the Company's Consolidated Balance Sheets as other assets or
other liabilities. The valuation of derivative instruments requires the Company to make estimates and judgments that affect the
fair value of the instruments. Fair values of derivatives are estimated by pricing models that consider the forward yield curves
and discount rates. The fair value of the Company's forward starting interest rate swap contracts are estimated by pricing
models that consider foreign trade rates and discount rates. Such amounts and the recognition of such amounts are subject to
significant estimates that may change in the future. For derivatives designated in qualifying cash flow hedging relationships,
the change in fair value of the effective portion of the derivatives is recognized in accumulated other comprehensive income
(loss). Gains and losses are reclassified from accumulated other comprehensive income (loss) into earnings once the
underlying hedged transaction is recognized in earnings. As of December 31, 2017 and 2016, the Company had $1.3 million
and $1.4 million, respectively recorded in accumulated other comprehensive loss related to forward starting interest rate swaps
entered into and settled during 2015 and a hedge of the Company's variable rate debt. See Note 10 for additional information.
56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents includes short-term investments with original maturities of three months or less when purchased.
Restricted cash includes cash held in escrow in connection with proceeds from the sales of certain real estate properties. The
carrying amount approximates fair value due to the short term maturity of these investments. The following table provides a
reconciliation of cash, cash equivalents and restricted cash reported within the Company's Consolidated Balance Sheets with
the same amounts shown on the Company's Consolidated Statements of Cash Flows:
(Dollars in thousands)
Cash and cash equivalents
Restricted cash
Total cash, cash equivalents and restricted cash
December 31,
2017
2016
$
$
6,215
$
—
6,215
$
5,409
49,098
54,507
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 no mortgage notes receivable outstanding as of December 31, 2017 and 2016 and no allowances were
recorded on mortgage notes receivables during 2017 or 2016. The Company evaluates collectibility of any 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.
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
2017 and 2016 impairment evaluations indicated that no impairment had occurred with respect to the $3.5 million goodwill
asset. See Note 8 for more detail on the Company’s intangible assets.
57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
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.
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 2015 Stock Incentive Plan and its
predecessor plans (the “2015 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 Income
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, 2017, 2016 and 2015, the Company recognized in general and administrative expenses
approximately $0.2 million 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, derivative instruments and unrealized gains or losses on available-for-sale securities.
The Company’s accumulated other comprehensive income (loss) as of December 31, 2017 consists of the loss for changes in
the fair value of active derivatives designated as cash flow hedges and the loss on the unamortized settlement of four forward
starting swaps. As of December 31, 2016, the Company's accumulated other comprehensive income (loss) consisted only of the
loss on the unamortized settlement of four forward starting swaps. See Note 10 for more details on the Company's derivative
financial instruments.
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 $36.0 million and
$32.4 million, respectively, as of December 31, 2017 and 2016 which includes deferred tenant improvement reimbursements of
$20.1 million and $20.6 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 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
Income, based on the type of contractual agreement.
58 NOTES 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 Income. 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,
2017
2016
2015
363,907
$
336,409
$
306,550
52,873
6,072
63,871
7,201
67,238
9,545
422,852
$
407,481
$
383,333
$
$
Operating expense recoveries, included in property operating income, were approximately $73.4 million, $66.0 million and
$58.9 million, respectively, for the years ended December 31, 2017, 2016 and 2015.
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 Company has no outstanding mortgage notes receivable as
of December 31, 2017, 2016 and 2015. 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 Income was comprised of the following:
(Dollars in thousands)
Property lease guaranty revenue
Interest income
Management fee income
Other
$
Year Ended December 31,
2017
726
361
276
284
2016
$
3,058
$
473
369
249
2015
3,890
579
370
208
$
1,647
$
4,149
$
5,047
One, two and five of the Company’s owned real estate properties as of December 31, 2017, 2016 and 2015, respectively, 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.
Internal management fee income, where the Company manages its owned properties, is eliminated in consolidation.
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. 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.
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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, 2017.
Federal tax returns for the years 2014, 2015, 2016 and 2017 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 Income. 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 Income.
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 Company does not expect these dispositions to meet the amended definition of
a discontinued operation as defined in Accounting Standards Update ("ASU") No. 2014-08, "Reporting Discontinued
Operations and Disclosures of Disposals of Components of an Entity." The Company adopted ASU No. 2014-08 on a
prospective basis beginning January 1, 2015 which excluded properties previously in discontinued operations prior to adoption.
However, if a sale were to meet the amended definition representing a strategic shift that has or will have a major effect on the
Company's operations and financial results, the operating results of the properties that have been sold or are held for sale will be
reported as discontinued operations in the Company’s Consolidated Statements of Income for all periods presented.
Assets Held for Sale
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 held for sale. Losses resulting from the sale of
such properties are characterized as impairment losses in the Consolidated Statements of Income. See Note 5 for more detail on
discontinued operations and assets held for sale.
Earnings per Share
The Company uses the two-class method of computing net earnings per common share. Earnings per common share is
calculated by considering share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents as
participating securities. Undistributed earnings (excess net income over dividend payments) are allocated on a prorata basis to
common shareholders and restricted shareholders. Undistributed losses (dividends in excess of net income) do not get allocated
to restricted stockholders as they do not have the contractual obligation to share in losses. The amount of undistributed losses
that applies to the restricted stockholders is allocated to the common stockholder.
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 using the treasury stock
method and the average stock price during the period. See Note 14 for the calculations of earnings per share.
60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Reclassifications
Condensed Consolidated Statements of Income
Certain reclassifications have been made on the Company's Condensed Consolidated Statements of Income. The Company
reclassified acquisition and pursuit costs from the general and administrative line item to a separate line item. The acquisition
and pursuit costs line item includes direct third party and travel costs related to the Company's pursuit of acquisitions and
developments. In addition, the Company combined the line items labeled depreciation and amortization into one line item.
These reclassifications are as follows:
Year Ended December 31,
2016
2015
(in thousands)
As Previously Reported
As Reclassified
As Previously Reported
As Reclassified
General and administrative
Acquisition and pursuit costs
Total
Depreciation
Amortization
Depreciation and amortization
Total
$
$
$
$
35,805
$
31,309
$
26,925
$
$
$
—
35,805
116,483
11,207
—
4,496
35,805
$
— $
—
127,690
$
$
—
26,925
106,530
10,084
—
127,690
$
127,690
$
116,614
$
24,716
2,209
26,925
—
—
116,614
116,614
New Accounting Pronouncements
Accounting Standards Update No. 2014-09 and No. 2015-14
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-09, "Revenue from Contracts with
Customers," a comprehensive new revenue recognition standard that supersedes most 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 other standards.
In August 2015, the FASB issued ASU No. 2015-14, "Revenue from Contracts with Customers (Topic 606); Deferral of the
Effective Date." This standard is effective for the Company for annual and interim periods beginning after December 15, 2017.
The Company adopted this standard by using the full retrospective adoption method beginning on January 1, 2018. The
Company's revenue-producing contracts are primarily leases that are not within the scope of this standard. As a result, the
adoption of this standard did not have a material impact on the timing and measurement of the Company's leasing revenues.
The Company has identified that parking income, rental lease guaranty income and management fee income will be within the
scope of Topic 606. However, these items were determined to have the same pattern of revenue recognition that the Company
had historically recognized. The Company reclassified these amounts along with all other items that are accounted for within
the scope of Topic 606 into the Other operating line item on the Company's Consolidated Statements of Income. This line item
historically contained the revenue associated with rental lease guaranty income, management fee income and other non-lease
revenue. The Company reclassified parking income from rental income to other operating income.
61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table represents the impact of the adoption of this standard on the Company's Consolidated Statements of Income
for the years ended December 31, 2017 and 2016:
(in thousands)
REVENUES
Rental income
Other operating
OTHER INCOME (EXPENSE)
Interest and other income, net
INCOME FROM CONTINUING
OPERATIONS
$
$
$
$
Year Ended December 31,
2017
2016
As Reported
As Reclassified
As Previously Reported
As Reclassified
422,852
$
416,727
$
407,481
$
1,647
8,011
4,149
424,499
$
424,738
$
411,630
$
401,989
9,966
411,955
896
$
658
$
375
$
50
23,096
$
23,096
$
85,756
$
85,756
Accounting Standards Update No. 2016-02
In February 2016, the FASB issued ASU No. 2016-02, "Leases." For lessees, the new standard establishes a right-of-use
("ROU") model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms
longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of
expense recognition in the income statement. The Company expects that all of the leases where the Company is the lessee will
be recorded on the Company's balance sheet. See Note 15 for a discussion of leases where the Company is the lessee. For
lessors, the new standard requires a lessor to classify leases as either sales-type, finance or operating. A lease will be treated as
a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are
conveyed without the transfer of control, the lease is treated as financing. If the lessor doesn't convey risks and rewards or
control, then the lease would be classified as an operating lease. The Company has historically only entered into operating
leases.
The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal
years with early adoption permitted. A modified retrospective transition approach is required for lessors for sales-type, direct
financing, and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in
the financial statements, with certain practical expedients available. The Company is evaluating the impact from the adoption
of this new standard on the Consolidated Financial Statements and related notes.
Accounting Standards Update No. 2016-13
In June 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments." This update is
intended to improve financial reporting by requiring timelier recognition of credit losses on loans and other financial
instruments that are not accounted for at fair value through net income, including loans held for investment, held-to-maturity
debt securities, trade and other receivables, net investment in leases and other such commitments. This update requires that
financial statement assets measured at an amortized cost and certain other financial instruments be presented at the net amount
expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. This standard is
effective for annual and interim periods beginning after December 15, 2019 with early adoption permitted. The Company is in
the initial stages of evaluating the impact from the adoption of this new standard on the Consolidated Financial Statements and
related notes.
62 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Accounting Standards Update No. 2016-15
In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows: Classification of Certain Cash Receipts and
Cash Payments." This update clarifies whether the following items should be classified as operating, investing or financing in
the statement of cash flows: (i) debt prepayments and extinguishment costs, (ii) settlement of zero-coupon debt, (iii) settlement
of contingent consideration, (iv) insurance proceeds, (v) settlement of corporate-owned life insurance and bank-owned life
insurance policies, (vi) distributions from equity method investees, (vii) beneficial interest in securitization transactions and
(viii) receipts and payments with aspects of more than one class of cash flows.
This standard is effective for the Company for annual and interim periods beginning on January 1, 2018 with early adoption
permitted on a retrospective transition method to each period presented. The Company adopted this standard effective January
1, 2017. In connection with the adoption of this update, the Company elected to use the cumulative earnings approach to
classify distributions when received related to the Company's equity method investments. There was not a material impact on
the Company's Consolidated Financial Statements and related notes resulting from the adoption of this standard. However, the
Company made the following reclassification of accrued interest related to the early extinguishment of debt on its Statements of
Cash Flows for the year ended December 31, 2015:
(in thousands)
Cash flows used in financing activities
Cash flows provided by operating activities
Year Ended December 31, 2015
As Previously Reported
As Reclassified
$
$
(94,010) $
160,375
$
(87,618)
153,983
Accounting Standards Update No. 2017-01
In January 2017, the FASB issued ASU No. 2017-01, "Business Combinations: Clarifying the Definition of a Business." This
update modifies the requirements to meet the definition of a business under Topic 805, "Business Combinations." The
amendments provide a screen to determine when an integrated set of assets and activities is not a business. The screen requires
that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable
asset or group of similar identifiable assets, the set is not a business. The Company believes that this amendment will result in
most of its real estate acquisitions being accounted for as asset acquisitions rather than business combinations. This standard is
effective for the Company for annual and interim periods beginning after December 15, 2017 with early adoption permitted.
The Company adopted this standard effective January 1, 2017 and has accounted for acquisitions that occurred during the year
as asset acquisitions. The impact to the Consolidated Financial Statements and related notes as a result of the adoption of this
standard is primarily related to the difference in the accounting of acquisition costs. When accounting for these costs as a part
of an asset acquisition, the Company will be permitted to capitalize the costs. The adoption of this standard did not have a
material impact on the Consolidated Financial Statements and related notes.
Accounting Standards Update No. 2017-04
In January 2017, the FASB issued ASU 2017-04, "Simplifying the Test for Goodwill Impairment." This update eliminates Step
2 of the goodwill impairment test. As such, an entity will perform its annual, or interim, goodwill impairment test by
comparing the fair value of a reporting unit with its carrying amount. An entity should recognize a goodwill impairment charge
for the amount by which the reporting unit's carrying amount exceeds its fair value. This standard is effective for the Company
for annual and interim periods beginning after December 15, 2019. The Company does not expect a material impact on the
Consolidated Financial Statements and related notes from the adoption of this standard.
Accounting Standards Update No. 2017-05
In February 2017, the FASB issued ASU 2017-05, "Other Income - Gains and Losses from the Derecognition of Nonfinancial
Assets." This update defines an in-substance nonfinancial asset, unifies guidance related to partial sales of nonfinancial assets,
eliminates rules specifically addressing the sales of real estate, removes exception to the financial asset derecognition model
and clarifies the accounting for contributions of nonfinancial assets to joint ventures. This standard is effective for the
Company for annual and interim periods beginning after December 15, 2017 with early adoption permitted. The Company
adopted this standard as of January 1, 2018 on the full retrospective adoption method. However, there was no impact to the
Company's Consolidated Financial Statements from the adoption of this standard.
Accounting Standards Update No. 2017-09
In May 2017, the FASB issued ASU 2017-09, "Compensation - Stock Compensation - Scope of Modification Accounting."
This update provides guidance about which changes to the terms and conditions of share-based awards require an entity to
apply modification accounting in Topic 718. This standard is effective for the Company for the annual and interim periods
beginning after December 15, 2017 with early adoption permitted. The Company adopted this standard on January 1, 2018.
The Company does not expect a material impact to the Consolidated Financial Statements from the adoption of this standard.
63 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Accounting Standards Update No. 2017-12
In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging - Targeted Improvements to Accounting for
Hedging Activities." The purpose of this updated guidance is to better align a company’s financial reporting for hedging
activities with the economic objectives of those activities. The transition guidance allows for early adoption of the new standard
using a modified retrospective transition method in any interim period after issuance of the update, or alternatively requires
adoption for fiscal years beginning after December 15, 2018. The modified retrospective transition method will require the
Company to recognize the cumulative effect of initially applying this standard as an adjustment to accumulated other
comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the
fiscal year that an entity adopts the update. The Company adopted this standard in the fourth quarter of 2017. The Company
entered into two interest rate swaps in December 2017 in which the Company elected hedge accounting in compliance with this
standard. The Company had no active hedging relationships upon the adoption of this standard and therefore, the adoption of
the standard did not have an impact on the Company's Consolidated Financial Statements.
64 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. Property Investments
The Company invests in healthcare-related properties located throughout the United States. The Company provides
management, leasing, development and redevelopment services, and capital for the construction of new facilities as well as for
the acquisition of existing properties. The Company had gross investments of approximately $3.8 billion in 201 real estate
properties, land held for development and corporate property as of December 31, 2017. The following table summarizes the
Company’s investments at December 31, 2017.
(Dollars in thousands)
Medical office/outpatient:
Seattle, Washington
Dallas, Texas
Atlanta, Georgia
Los Angeles, California
Charlotte, North Carolina
Nashville, Tennessee
Richmond, Virginia
Honolulu, Hawaii
Denver, Colorado
San Francisco, California
Oklahoma City, Oklahoma
Washington, D.C.
Austin, Texas
San Antonio, Texas
Memphis, Tennessee
Des Moines, Iowa
Chicago, Illinois
Indianapolis, Indiana
Other (22 markets)
Inpatient:
Springfield, Missouri
Dallas, Texas
Erie, Pennsylvania
Los Angeles, California
Denver, Colorado
Other:
Des Moines, Iowa
Johnson City, Tennessee
Austin, Texas
Fenton, Michigan
Ovid, Michigan
Fremont, Michigan
St. Louis, Michigan
Detroit, Michigan
Land Held for Development
Construction in Progress
Corporate Property
Total real estate investments
Number of
Facilities
Buildings,
Improvements,and
Lease Intangibles
Land
Personal
Property
Total
Accumulated
Depreciation
17
24
8
11
16
5
7
3
6
3
2
4
4
7
7
6
3
3
52
188
1
1
1
1
1
5
1
1
1
1
1
1
1
1
8
—
—
—
—
201
$ 24,560
12,472
1,015
27,709
4,200
3,143
—
8,327
4,086
14,054
7,673
—
12,756
6,647
5,241
12,665
5,859
3,299
38,598
192,304
1,989
4,442
—
—
623
7,054
—
253
1,480
40
62
7
31
52
1,925
20,123
—
—
20,123
$221,406
$
$
403,614
365,657
187,042
141,681
163,603
149,859
146,176
132,847
122,689
103,938
101,432
100,570
85,961
88,129
88,517
79,214
79,295
71,641
678,196
3,290,061
109,304
92,990
21,355
12,688
10,788
247,125
40,354
7,319
3,872
3,468
3,188
3,242
1,735
1,096
64,274
—
5,458
—
5,458
3,606,918
$
378
416
—
277
95
278
98
159
271
43
6
—
105
370
160
94
200
—
1,163
4,113
—
—
—
—
—
—
$
428,552
378,545
188,057
169,667
167,898
153,280
146,274
141,333
127,046
118,035
109,111
100,570
98,822
95,146
93,918
91,973
85,354
74,940
717,957
3,486,478
111,293
97,432
21,355
12,688
11,411
254,179
$
(52,457)
(128,557)
(1,203)
(71,808)
(56,355)
(43,000)
(32,299)
(30,066)
(18,736)
(12,223)
(10,890)
(15,826)
(17,498)
(34,514)
(31,675)
(18,263)
(15,476)
(18,742)
(206,844)
(816,432)
(12,046)
(19,538)
(15,152)
(7,606)
(1,781)
(56,123)
5
408
2
32
49
35
33
34
598
—
—
5,603
5,603
$ 10,314
40,359
7,980
5,354
3,540
3,299
3,284
1,799
1,182
66,797
20,123
5,458
5,603
31,184
$ 3,838,638
(7,704)
(2,798)
(164)
(2,738)
(2,096)
(2,565)
(1,341)
(829)
(20,235)
(239)
—
(4,401)
(4,640)
$ (897,430)
65 NOTES 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 with expiration dates
through 2036. 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 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 payable to the Company
under property operating agreements as of December 31, 2017 are as follows (in thousands):
2018
2019
2020
2021
2022
2023 and thereafter
$
$
330,526
282,910
236,454
196,346
168,183
544,677
1,759,096
Revenue Concentrations
The Company’s real estate portfolio is leased to a diverse tenant base. The Company's largest revenue concentration is with
Baylor Scott & White Health and its affiliates which accounted for 9.7%, 9.8% and 9.8% of the Company's consolidated
revenues for the years ended December 31, 2017, 2016 and 2015, respectively.
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 by the lessee. The Company had approximately $95.2 million in four real estate
properties as of December 31, 2017 that were subject to purchase options that were exercisable.
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
4. Acquisitions, Dispositions and Mortgage Repayments
2017 Real Estate Acquisitions
The following table details the Company's acquisitions for the year ended December 31, 2017:
(Dollars in millions)
Real estate acquisitions
St. Paul, Minnesota
San Francisco, California
Washington, D.C.
Los Angeles, California
Atlanta, Georgia
Atlanta, Georgia
Atlanta, Georgia (5)
Atlanta, Georgia
Seattle, Washington
Atlanta, Georgia (5)
Atlanta, Georgia
Atlanta, Georgia (5)
Atlanta, Georgia
Chicago, Illinois
Seattle, Washington
Austin, Texas (6)
Type (1)
Date
Acquired
Purchase
Price
Mortgage
Notes
Payable
Assumed (2)
Cash
Consideration(3)
Real
Estate
Other (4)
Square
Footage
(Unaudited)
3/6/17
$ 13.5
$
— $
MOB
MOB
MOB
MOB
MOB
MOB
MOB
MOB
MOB
6/12/17
6/13/17
7/31/17
11/1/17
11/1/17
11/1/17
11/1/17
11/1/17
MOB 12/13/17
MOB 12/13/17
MOB 12/18/17
MOB 12/18/17
MOB 12/18/17
MOB 12/18/17
MOB 12/21/17
26.8
24.0
16.3
25.5
30.3
49.7
6.7
12.7
25.8
15.4
26.3
14.2
28.7
8.8
2.5
—
(12.1)
—
—
—
—
—
—
(10.5)
(4.7)
(11.8)
(6.7)
—
—
—
13.5
26.8
12.5
16.7
25.5
30.7
50.9
6.7
12.6
15.3
10.8
14.5
7.6
27.7
8.8
2.5
$ 13.3
$
26.8
24.8
16.9
26.3
30.7
47.5
6.7
12.8
22.0
15.7
24.6
14.5
28.5
9.0
2.5
0.2
—
(0.2)
(0.2)
(0.8)
—
3.4
—
(0.2)
3.8
(0.2)
1.7
(0.2)
(0.8)
(0.2)
—
6.3
34,608
75,649
62,379
42,780
76,944
74,024
118,180
19,732
26,345
59,427
40,171
66,984
40,324
99,526
32,828
7,972
877,873
$ 327.2
$
(45.8) $
283.1
$322.6
$
______
(1) MOB = medical office building
(2) The mortgage notes payable assumed in the acquisitions do not reflect the fair value adjustments totaling $0.6 million in
aggregate recorded by the Company upon acquisition (included in Other).
(3) Cash consideration excludes prorations of revenue and expense due to/from seller at the time of the acquisition.
(4) Includes other assets acquired, liabilities assumed, intangibles recognized at acquisition and fair value adjustments on debt
assumed.
(5) The "Other" column includes the equity investment in limited liability companies that own two parking garages.
(6) The Company acquired additional ownership interests in an existing building bringing the Company's ownership to 69.4%.
67 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes the estimated relative fair values of the assets acquired and liabilities assumed in the real estate
acquisitions for 2017 as of the acquisition date:
Estimated Fair Value
Estimated Useful Life
(In millions)
(In years)
Building
Land
Land Improvements
Intangibles:
At-market lease intangibles
Below-market lease intangibles
Below-market ground lease intangibles
Total intangibles
Mortgage notes payable assumed, including fair value adjustments
Other assets acquired
Equity investment in joint ventures
Accounts payable, accrued liabilities and other liabilities assumed
Total cash paid
$
$
272.1
11.7
1.6
37.2
(0.9)
0.4
36.7
(46.4)
0.4
8.7
(1.7)
283.1
2016 Real Estate Acquisitions
The following table details the Company's acquisitions for the year ended December 31, 2016:
(Dollars in millions)
Real estate acquisitions
Seattle, Washington
Seattle, Washington
Los Angeles, California
Seattle, Washington
Washington, D.C. (5)
Baltimore, Maryland (6)
Seattle, Washington
Seattle, Washington
St. Paul, Minnesota
______
(1) MOB = medical office building
Type (1)
Date
Acquired
Purchase
Price
Mortgage
Notes
Payable
Assumed (2)
Cash
Consideration (3)
Real
Estate Other (4)
3/31/16
$ 38.3
$
— $
$ 37.7
$ —
MOB
MOB
MOB
MOB
MOB
4/29/16
5/13/16
9/12/16
9/26/16
MOB 10/11/16
MOB 10/17/16
MOB 12/21/16
MOB 12/21/16
21.6
20.0
53.1
45.2
36.2
9.8
5.1
12.6
—
(13.2)
—
—
—
—
—
—
37.7
18.8
6.5
53.0
45.1
36.4
9.8
5.1
12.5
20.1
20.4
54.6
43.7
36.4
9.9
5.2
11.3
(1.3)
(0.7)
(1.6)
1.4
103,783
— 113,631
(0.1)
(0.1)
1.2
29,753
20,740
48,281
$ 241.9
$
(13.2) $
224.9
$ 239.3
$ (1.2)
583,011
(2) The mortgage notes payable assumed in the acquisitions do not reflect the fair value adjustments totaling $0.8 million
recorded by the Company upon acquisition (included in Other).
(3) Excludes prorations of revenue and expense due to/from seller at the time of the acquisition.
(4) Includes other assets acquired, liabilities assumed, intangibles recognized at acquisition and fair value adjustments on debt
assumed.
(5) A director of the Company serves as the Chief Executive Officer of the Inova Health System. As part of this transaction,
the Company assumed a ground lease and tenant leases with Loudon Hospital Center, an affiliate of Inova Health System.
(6) Includes two properties.
15.0-37.0
—
5.0-12.0
2.1-12.6
8.5-15.0
36.8-99.0
Square
Footage
(unaudited)
69,712
46,637
63,012
87,462
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes the estimated relative fair values of the assets acquired and liabilities assumed in the real estate
acquisitions for 2016 as of the acquisition date:
Building
Land
Intangibles:
At-market lease intangibles
Above-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
Other assets acquired
Accounts payable, accrued liabilities and other liabilities assumed
Total cash paid
Estimated Fair Value
Estimated Useful Life
(In millions)
(In years)
20.0-35.0
—
2.7-10.3
0.7-3.8
1.4-9.4
99.0
36.8-99.0
$
$
216.8
9.7
12.8
0.9
(0.4)
(1.6)
2.0
13.7
(14.0)
0.5
(1.8)
224.9
2017 Real Estate Asset Dispositions
The following table details the Company's dispositions for the year ended December 31, 2017:
Date
Disposed
Sales
Price
Closing
Adjustments
Net
Proceeds
Net Real
Estate
Investment
Other
(including
receivables) (3)
Gain/
(Impairment)
Square
Footage
(Unaudited)
(Dollars in millions)
Real estate dispositions
Type (1)
Evansville, Indiana
OTH
Columbus, Georgia (2) MOB
Las Vegas, Nevada (2)
MOB
3/7/17
3/30/17
Texas (3 properties)
Chicago, Illinois (4)
San Antonio, Texas
Roseburg, Oregon
St. Louis, Missouri
Total dispositions
IRF
3/31/17
MOB
6/16/17
IRF
6/29/17
MOB
MOB
6/29/17
9/7/17
3/6/17
$ 6.4
$
— $
$
— $
0.6
5.5
69.5
0.5
14.5
23.2
2.5
—
(0.7)
(1.6)
(0.1)
(0.2)
(0.6)
(0.1)
$
6.4
0.6
4.8
67.9
0.4
14.3
22.6
2.4
1.1
0.6
2.2
46.9
0.4
5.1
14.5
7.4
$122.7
$
(3.3) $ 119.4
$
78.2
$
5.3
—
2.3
29,500
12,000
18,147
15.8
169,722
—
8.3
7.8
5,100
39,786
62,246
(5.1)
79,980
$
34.4
416,481
—
0.3
5.2
—
0.9
0.3
0.1
6.8
______
(1) MOB = medical office building; IRF = inpatient rehabilitation facility; OTH = other
(2) Previously classified as held for sale.
(3) Includes straight-line rent receivables, leasing commissions and lease inducements.
(4) The Company recorded an impairment of approximately $0.3 million in the first quarter of 2017 upon management's decision
to sell.
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2016 Real Estate Asset Dispositions
The following table details the Company's dispositions for the year ended December 31, 2016:
(Dollars in millions)
Real estate dispositions
Kansas City, Kansas
Nashville, Tennessee
Altoona, Pennsylvania
Harrisburg, Pennsylvania
Phoenix, Arizona
Atlanta, Georgia
Total dispositions
______
Type (1)
Date
Disposed
Sales
Price
Closing
Adjustments
Net
Proceeds
Net Real
Estate
Investment
Other
(including
receivables) (2)
10/14/16
$ 15.1
$
— $ 15.1
$
MOB
MOB
IRF
IRF
IRF
10/28/16
12/20/16
12/20/16
12/20/16
MOB
12/22/16
8.8
21.5
24.2
22.3
2.8
(0.2)
(0.4)
(0.6)
—
(0.2)
8.6
21.1
23.6
22.3
2.6
$
7.2
6.3
12.4
8.2
13.5
1.8
0.3
0.2
0.6
0.4
1.4
—
Square
Footage
(Unaudited)
70,908
45,274
64,032
79,836
51,903
8,749
Gain
$ 7.6
2.1
8.1
15.0
7.4
0.8
$ 94.7
$
(1.4) $ 93.3
$
49.4
$
2.9
$ 41.0
320,702
(1) MOB = medical office building; IRF = inpatient rehabilitation facility
(2) Includes straight-line rent receivables, leasing commissions and lease inducements.
Potential Dispositions
In October 2017, the Company received notice that a tenant is exercising a purchase option on seven properties, comprised of
five single-tenant net leased buildings and two multi-tenanted buildings, covered by one purchase option with a stated purchase
price of approximately $45.5 million, subject to certain contractual adjustments. The Company's aggregate net book value for
these properties, which were classified as held for sale upon receiving notice of the purchase option exercise, was $23.9 million
at December 31, 2017.
5. Held for Sale and Discontinued Operations
Assets and liabilities of properties sold or classified as held for sale are separately identified on the Company’s Consolidated
Balance Sheets in the current period. During 2017, the Company reclassified eight properties to held for sale. See "Potential
Dispositions" in Note 4 for more information regarding seven of these properties. As of December 31, 2017 and 2016, the
Company had eight and two properties, respectively, classified as held for sale.
During 2017, the Company sold the property remaining in assets held for sale that was classified as discontinued operations
prior to the adoption of Accounting Standards Update No. 2014-08, “Reporting Discontinued Operations and Disclosures of
Disposals of Components of an Entity”. None of the Company's 2016 or 2017 dispositions or assets classified as held for sale
represented a strategic shift that had or will have a major effect on the Company's operations and financial results. Therefore,
the 2016 and 2017 dispositions were not classified as discontinued operations. The table below reflects the assets and liabilities
of the properties classified as held for sale and discontinued operations as of December 31, 2017 and 2016.
(Dollars in thousands)
Balance Sheet data
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 assets held for sale and discontinued operations
December 31,
2017
4,636
63,654
82
68,372
(35,790)
32,582
565
565
33,147
38
55
93
$
$
$
$
2016
1,362
4,410
—
5,772
(2,977)
2,795
297
297
3,092
22
592
614
$
$
$
$
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The table below reflects the results of operations of the properties included in discontinued operations on the Company’s
Consolidated Statements of Income for the years ended December 31, 2017, 2016 and 2015.
(Dollars in thousands, except per share data)
Statements of Income data:
Revenues (1)
Rental income
Other operating
Expenses (2)
Property operating
Bad debt, net of recoveries
Other Income (Expense) (3)
Interest and other income, net
Income (Loss) 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,
2017
2016
2015
— $
—
—
— $
—
—
19
(10)
9
—
—
(9)
—
5
71
—
71
—
—
(71)
(121)
7
(4) $
(185) $
0.00
0.00
$
$
0.00
0.00
$
$
752
—
752
58
(1)
57
20
20
715
(686)
10,571
10,600
0.11
0.11
$
$
$
$
(1) Total revenues for the year ended December 31, 2015 included $0.8 million related to properties sold.
(2) Total expenses for the year ended December 31, 2016 included $0.1 million related to a property that is held for sale.
Total expenses for the year ended December 31, 2015 included $0.1 million related to properties sold.
(3) Other income (expense) for the year ended December 31, 2015 included income (expense) related to properties sold.
Impairments for the years ended December 31, 2016 and 2015 included $0.1 million and $0.7 million, respectively,
(4)
related to one property sold.
(5) Gain on sales of real estate properties for the year ended December 31, 2017 included a gain on the sale of one property
sold in 2017. Gain on sales of real estate properties for the year ended December 31, 2016 included a gain on the sale of
one property sold in 2015. Gains on the sales of real estate properties for the year ended December 31, 2015 included
gains on the sale of one property.
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
6. 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, included in discontinued
operations, for the years ended December 31, 2016 and 2015 totaling $0.1 million and $0.7 million, respectively. The
Company recorded impairment charges on two properties sold in 2017 and two properties sold in 2015, included in continuing
operations, for the years ended December 31, 2017 and 2015 totaling $5.4 million and $3.6 million, respectively. Both level 1
and level 3 fair value techniques were used to derive these impairment charges.
7. Other Assets
Other assets consist primarily of straight-line rent receivables, prepaids, intangible assets, deferred financing costs and accounts
receivable. Items included in "Other assets, net" on the Company’s Consolidated Balance Sheets as of December 31, 2017 and
2016 are detailed in the table below:
(Dollars in millions)
Prepaid assets
Equity investment in joint ventures
Straight-line rent receivables
Above-market intangible assets, net
Additional long-lived assets, net
Ground lease modification, net
Accounts receivable
Allowance for uncollectible accounts
Credit facility deferred financing costs
Goodwill
Customer relationship intangible assets, net
Other
Unconsolidated Joint Ventures
December 31,
2017
65.2
$
$
8.7
67.0
17.9
24.9
10.3
7.4
(0.3)
3.5
3.5
1.7
3.2
2016
64.8
—
64.6
19.1
14.5
10.8
8.1
(0.1)
4.9
3.5
1.8
3.7
$
213.0
$
195.7
During the fourth quarter of 2017, the Company purchased a non-managing membership interest in LLCs that own two parking
garages in Atlanta, Georgia for $8.7 million which is included in the equity investment in joint ventures line in the table above.
The parking garage interests were purchased in connection with three buildings that were acquired in the fourth quarter of 2017.
The Company's investment in and income (loss) recognized for the year ended December 31, 2017 related to its LLCs
accounted for under the equity method are shown in the table below:
(Dollars in millions)
Net LLC investment, beginning of period
New investments during the period
Equity income (loss) recognized during the period
Net LLC investments, end of period
December 31, 2017
$
$
—
8.7
—
8.7
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
8. 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, 2017 and 2016 consisted of the following:
(Dollars in millions)
Goodwill
Credit facility deferred financing costs
Above-market lease intangibles
Customer relationship intangibles
Below-market lease intangibles
Deferred financing costs
At-market lease intangibles
Gross Balance at
December 31,
2017
$ 3.5
5.4
22.9
2.6
(9.5)
9.3
$
2016
3.5
5.4
24.5
2.6
(8.8)
9.4
Accumulated
Amortization
at December 31,
2017
2016
$ — $ —
0.5
5.4
0.8
(3.2)
4.0
1.9
5.0
0.9
(3.5)
1.8
110.0
$144.2
84.1
$120.7
41.6
$ 47.7
39.0
$ 46.5
Weighted
Avg.
Remaining
Life
(Years)
N/A
2.6
57.8
25.6
36.5
4.5
5.6
15.2
Balance Sheet
Classification
Other assets
Other assets
Other assets
Other assets
Other liabilities
Notes and Bonds Payable
Real estate properties
The following table represents expected amortization over the next five years of the Company’s intangible assets and liabilities
in place as of December 31, 2017:
(Dollars in millions)
Future Amortization of Intangibles, net
2018
2019
2020
2021
2022
9. Notes and Bonds Payable
$
(Dollars in thousands)
Unsecured Credit Facility
Unsecured Term Loan due 2022 (1)
Senior Notes due 2021 (1)
Senior Notes due 2023 (1)
Senior Notes due 2025 (1)
Senior Notes due 2028 (1)
Mortgage notes payable (2)
______
December 31,
2017
2016
Maturity
Dates
Contractual
Interest Rates
Principal
Payments
$ 189,000
$ 107,000
7/20
LIBOR + 1.00% At maturity
148,994
—
247,703
248,044
294,757
155,382
149,491
397,147
247,296
247,819
—
12/22
LIBOR + 1.10% At maturity
1/21
4/23
5/25
1/28
5.75% At maturity
Semi-Annual
3.75% At maturity
Semi-Annual
3.88% At maturity
Semi-Annual
3.63% At maturity
Semi-Annual
115,617 12/18-5/40
3.31%-6.88%
Monthly
Monthly
$ 1,283,880
$ 1,264,370
(1) Balances are shown net of discounts and unamortized issuance costs.
(2) Balances are shown net of discounts and unamortized issuance costs and including premiums.
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 impose certain limits on the Company’s ability to incur indebtedness and create liens or encumbrances. As of
December 31, 2017, the Company was in compliance with its financial covenant provisions under its various debt instruments.
19.8
17.6
12.0
6.8
5.8
Interest
Payments
Monthly
Monthly
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Unsecured Credit Facility due 2020
On October 14, 2011, the Company entered into a $700.0 million unsecured credit facility with a syndicate of lenders (the
"Unsecured Credit Facility"). On July 29, 2016, the Company entered into the third amendment to the Unsecured Credit
Facility to extend the maturity date to July 2020. The credit facility agreement provides the Company with two six-month
extension options that could extend the maturity date to July 2021. 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 0.83% to 1.55% (1.00% as of
December 31, 2017). In addition, the Company pays a facility fee per annum on the aggregate amount of commitments ranging
from 0.13% to 0.30% (0.20% as of December 31, 2017). As of December 31, 2017, the Company had $189.0 million
outstanding under the Unsecured Credit Facility with an effective interest rate of approximately 2.56% and had a remaining
borrowing capacity of approximately $511.0 million.
Unsecured Term Loan due 2022
In February 2014, the Company entered into a $200.0 million unsecured term loan with a syndicate of nine lenders. On July 5,
2016, the Company repaid $50.0 million of the outstanding principal. On December 18, 2017, the Company entered into an
amendment to the unsecured term loan due 2022 (the "Unsecured Term Loan due 2022") with a syndicate of nine lenders to
extend the maturity date to December 2022. The Unsecured Term Loan due 2022 bears interest at a rate equal to (x) LIBOR
plus (y) a margin ranging from 0.90% to 1.75% (1.10% as of December 31, 2017) based upon the Company's unsecured debt
ratings. Payments under the Unsecured Term Loan due 2022 are interest only, with the full amount of the principal due at
maturity. The Unsecured Term Loan due 2022 may be prepaid at any time, without penalty. The proceeds from the Unsecured
Term Loan due 2022 were used by the Company to repay borrowings on the Unsecured Credit Facility. The Unsecured Term
Loan due 2022 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. On December 20, 2017, the Company entered into two interest rate swaps
totaling $25.0 million to hedge the 1-month LIBOR portion of the cost of borrowing under the Unsecured Term Loan due 2022
to a fixed interest rate of 2.18% (plus the applicable margin rate) through December 2022. On January 30, 2018, the Company
entered into two additional interest rate swaps totaling $50.0 million to hedge the 1-month LIBOR portion of the cost of
borrowing under the Unsecured Term Loan due 2022 to a fixed interest rate of 2.46% (plus the applicable margin rate) through
December 2022. The outstanding balance on the Unsecured Term Loan due 2022 was $150.0 million as of December 31, 2017
with an effective interest rate of approximately 2.77% including the impact of the interest rate swaps.
Senior Notes due 2021 Redemption
During the fourth quarter of 2017, the Company redeemed the outstanding principal of $400.0 million on its Senior Notes due
2021 in two transactions. On November 1, 2017 and December 27, 2017, the Company redeemed $100.0 million and $300.0
million, respectively. The aggregate redemption price of $452.3 million, consisting of outstanding principal of $400.0 million,
accrued interest of $9.5 million, and a "make-whole" amount of approximately $42.8 million for the early extinguishment of
debt. The unaccreted discount and unamortized costs on these notes of $2.2 million was written off upon redemption. The
Company recognized a loss on early extinguishment of debt of approximately $45.0 million related to this redemption.
74 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table reconciles the balance of the Senior Notes due 2021 on the Company’s Consolidated Balance Sheets as of
December 31, 2017 and 2016:
(Dollars in thousands)
Senior Notes due 2021 face value
Unaccreted discount
Issuance costs
Senior Notes due 2021 carrying amount
$
$
December 31,
2017
— $
—
—
— $
2016
400,000
(1,510)
(1,343)
397,147
Senior Notes due 2023
On March 26, 2013, the Company issued $250.0 million of unsecured senior notes due 2023 (the "Senior Notes due 2023") in a
registered public offering. 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 and the Company incurred debt issuance cost of $2.1 million, which
yielded a 3.95% interest rate per annum upon issuance. For each of the years ended December 31, 2017, 2016 and 2015, the
Company amortized approximately $0.2 million of the discount and $0.2 million of the debt issuance cost which are included in
interest expense on the Company’s Consolidated Statements of Income. The following table reconciles the balance of the
Senior Notes due 2023 on the Company’s Consolidated Balance Sheets as of December 31, 2017 and 2016:
(Dollars in thousands)
Senior Notes due 2023 face value
Unaccreted discount
Issuance costs
Senior Notes due 2023 carrying amount
December 31,
2017
250,000
$
(1,178)
(1,119)
247,703
$
2016
250,000
(1,375)
(1,329)
247,296
$
$
Senior Notes due 2025
On April 24, 2015, the Company issued $250.0 million of unsecured senior notes due 2025 (the "Senior Notes due 2025") in a
registered public offering. The Senior Notes due 2025 bear interest at 3.875%, payable semi-annually on May 1 and
November 1, beginning November 1, 2015, and are due on May 1, 2025, unless redeemed earlier by the Company. The notes
were issued at a discount of approximately $0.2 million and the Company incurred approximately $2.3 million in debt issuance
costs which yielded a 4.08% interest rate per annum upon issuance. For the years ended December 31, 2017 , 2016, and 2015
the Company amortized approximately $0.2 million, $0.2 million, and $0.1 million, respectively, of the debt issuance costs
which is included in interest expense on the Company's Consolidated Statements of Income. Concurrent with this transaction,
the Company settled four forward starting swap agreements for $1.7 million. The Senior Notes due 2025 have various financial
covenants that are required to be met on a quarterly and annual basis. The following table reconciles the balance of the Senior
Notes due 2025 on the Company’s Consolidated Balance Sheets as of December 31, 2017 and 2016:
(Dollars in thousands)
Senior Notes due 2025 face value
Unaccreted discount
Issuance costs
Senior Notes due 2025 carrying amount
December 31,
2017
250,000
$
(160)
(1,796)
248,044
$
2016
250,000
(178)
(2,003)
247,819
$
$
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Senior Notes due 2028
On December 11, 2017, the Company issued $300.0 million of unsecured Senior Notes due 2028 (the "Senior Notes due 2028")
in a registered public offering. The Senior Notes due 2028 bear interest at 3.625%, payable semi-annually on January 15 and
July 15, beginning July 15, 2018, and are due on January 15, 2028, unless redeemed earlier by the Company. The notes were
issued at a discount of approximately $2.5 million and the Company incurred approximately $2.7 million in debt issuance costs
which yielded a 3.84% interest rate per annum upon issuance. The Senior Notes due 2028 have various financial covenants that
are required to be met on a quarterly and annual basis. The following table reconciles the balance of the Senior Notes due 2028
on the Company’s Consolidated Balance Sheets as of December 31, 2017:
(Dollars in thousands)
Senior Notes due 2028 face value
Unaccreted discount
Issuance costs
Senior Notes due 2028 carrying amount
December 31, 2017
300,000
(2,529)
(2,714)
294,757
$
$
$
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, 2017 and 2016. For the years ended December 31, 2017, 2016 and 2015, the Company
amortized approximately $0.3 million, $0.3 million and $0.8 million of the discount and $0.7 million, $0.9 million, and $1.0
million of the premium. For the years ended December 31, 2017, 2016 and 2015, the Company also amortized approximately
$0.1 million, $0.2 million, and $0.2 million of the debt issuance costs, respectively, on the mortgage notes payable which is
included in interest expense on the Company’s Consolidated Statements of Income.
(Dollars in thousands)
Mortgage notes payable principal balance
Unamortized premium
Unaccreted discount
Issuance costs
Mortgage notes payable carrying amount
December 31,
2017
154,916
2,651
(1,332)
(853)
155,382
$
$
2016
114,934
2,569
(1,450)
(436)
115,617
$
$
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table details the Company’s mortgage notes payable, with related collateral.
(Dollars in millions)
Life Insurance Co. (1)
Commercial Bank (2)
Insurance Co. (3)
Commercial Bank (4)
Commercial Bank (5)
Commercial Bank (6)
Life Insurance Co. (7)
Life Insurance Co. (8)
Life Insurance Co. (9)
Commercial Bank (10)
Life Insurance Co. (11)
Life Insurance Co. (12)
Financial Services (13)
Life Insurance Co. (14)
Life Insurance Co. (15)
Financial Services (16)
Commercial Bank
Commercial Bank (17)
Municipal Government (18) (19)
7.0
1.8
7.3
9.5
9.4
15.2
7.9
7.3
5.6
12.9
11.0
12.3
12.4
13.3
6.8
9.7
11.5
15.0
11.0
Original
Balance
Effective
Interest
Rate (23)
Maturity
Date
Collateral (24)
Principal and Interest
Payments (22)
Investment in
Collateral at
December 31,
2017
Balance at December 31,
2017
2016
5.53%
1/18
MOB Monthly/15-yr amort.
$
— $
— $
5.55%
10/30
OTH Monthly/27-yr amort.
5.54%
12/18
MOB Monthly/25-yr amort.
5.07%
4.55%
7.65%
4.00%
5.25%
4.27%
6.43%
3/19
7/19
7/20
8/20
8/20
1/21
2/21
MOB Monthly/5-yr amort.
MOB Monthly/8-yr amort
MOB (21)
MOB Monthly/15-yr amort.
MOB Monthly/27-yr amort.
MOB Monthly/10-yr amort.
MOB Monthly/12-yr amort.
3.85%
11/22
MOB Monthly/7-yr amort.
3.85%
8/23
MOB Monthly/7-yr amort.
4.27%
10/23
MOB Monthly/10-yr amort.
4.13%
3.94%
4.32%
3.71%
5.25%
4.79%
1/24
2/24
9/24
1/26
4/27
(20)
MOB Monthly/10-yr amort.
MOB Monthly/7-yr amort.
MOB Monthly/10-yr amort.
MOB Monthly/10-yr amort.
MOB Monthly/20-yr amort.
MOB Semi-Annual (20)
—
14.3
13.9
27.8
20.2
20.7
17.9
15.7
54.9
22.0
24.6
24.7
21.1
14.5
16.4
37.9
33.4
20.9
—
6.0
9.3
9.2
0.7
1.3
6.2
9.5
9.3
12.7
12.7
2.0
6.5
4.8
10.5
10.4
11.5
12.2
13.3
6.7
8.8
10.5
9.6
11.4
2.7
6.7
—
10.7
—
—
—
13.6
—
9.1
11.0
10.4
11.7
$
400.9
$
155.4
$
115.6
______
(1) The Company repaid this mortgage note in October 2017. The Company's unencumbered gross investment was $14.3 million at
December 31, 2017.
(2) The Company repaid this mortgage note in September 2017. The Company's unencumbered gross investment was $8.0 million at
December 31, 2017.
(3) The unamortized portion of the $0.6 million premium recorded on this note upon acquisition is included in the balance above.
(4) The unamortized portion of the $0.2 million premium recorded on this note upon acquisition is included in the balance above.
(5) The unamortized portion of the $0.3 million premium recorded on this note upon acquisition is included in the balance above.
(6) The unaccreted portion of the $2.4 million discount recorded on this note upon acquisition is included in the balance above.
(7) The unamortized portion of the $0.3 million premium recorded on this note upon acquisition is included in the balance above.
(8) The unamortized portion of the $0.4 million premium recorded on this note upon acquisition is included in the balance above.
(9) The unamortized portion of the $0.2 million premium recorded on this note upon acquisition is included in the balance above.
(10) The unaccreted portion of the $1.0 million discount recorded on this note upon acquisition is included in the balance above.
(11) The unaccreted portion of the $0.1 million discount recorded on this note upon acquisition is included in the balance above.
(12) The unaccreted portion of the $0.2 million discount recorded on this note upon acquisition is included in the balance above.
(13) The unamortized portion of the $0.4 million premium recorded upon acquisition is included in the balance above.
(14) The unamortized portion of the $0.8 million premium recorded on this note upon acquisition is included in the balance above.
(15) The unamortized portion of the $0.2 million premium recorded on this note upon acquisition is included in the balance above.
(16) The unamortized portion of the $0.1 million premium recorded on this note upon acquisition is included in the balance above.
(17) The unamortized portion of the $0.7 million premium recorded on this note upon acquisition is included in the balance above.
(18) Balance consists of three notes secured by the same building.
(19) The unamortized portion of the $1.0 million premium recorded on the three notes upon acquisition is included in the balance above.
(20) These three mortgage notes payable are series municipal bonds that have maturity dates ranging from from May 2022 to May 2040.
One of the four original notes payable was repaid upon maturity in May 2017. The remaining three require interest only payments and
have future maturity dates but allow repayment after May 2020 without penalty. The Company intends on repaying all three notes
payable at that time.
(21) 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.
(22) Payable in monthly installments of principal and interest with the final payment due at maturity (unless otherwise noted).
(23) The contractual interest rates for the 19 outstanding mortgage notes ranged from 3.3% to 6.9% as of December 31, 2017.
(24) MOB-Medical office building; OTH-Other.
77
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, 2017 were as follows:
(Dollars in thousands)
Principal
Maturities
Net Accretion/
Amortization (1)
Debt Issuance
Costs (2)
Notes and
Bonds Payable
2018
2019
2020
2021
2022
2023 and thereafter
$
10,605
$
(18) $
22,711
211,803
17,321
162,692
868,784
$
1,293,916
$
(224)
(382)
(312)
(328)
(1,284)
(2,548) $
(1,051)
(1,044)
(1,039)
(1,025)
(1,037)
(2,292)
(7,488)
9,536
21,443
210,382
15,984
161,327
865,208
%
0.7%
1.7%
16.4%
1.2%
12.6%
67.4%
1,283,880
100.0%
______
(1)
Includes discount accretion and premium amortization related to the Company’s Senior Notes due 2023, Senior Notes due
2025, Senior Notes due 2028 and 18 mortgage notes payable.
(2) Excludes approximately $3.5 million in debt issuance costs related to the Company's Unsecured Credit Facility due 2020
included in other assets.
Note 10. Derivative Financial Instruments
Risk Management Objective of Using Derivatives
The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally
manages its exposures to a wide variety of business and operational risks through management of its core business activities. The
Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources,
and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into
derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of
future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial
instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts
and its known or expected cash payments principally related to the Company’s borrowings.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to
interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate
risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a
counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the
underlying notional amount. During 2017, such derivatives were used to hedge the variable cash flows associated with existing
variable-rate debt.
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded
in Accumulated Other Comprehensive Income (Loss) and subsequently reclassified into interest expense in the same period(s)
during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income related to
derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt.
During the year ended December 31, 2017, the Company entered into two outstanding interest rate derivatives that were
designated as cash flow hedges of interest rate risk:
Interest Rate Derivative
Interest rate swaps
Number of Instruments
2
Notional
(in millions)
$25.0
During the year ended December 31, 2015, the Company entered into four forward starting interest rate swaps with a total
notional value of $225.0 million to hedge the risk of changes in the interest-related cash flows associated with the potential
issuance of long-term debt. That debt was issued in April 2015, as discussed in Note 9, and the forward starting interest rate
swaps were terminated. As a result, the Company realized a loss at the termination date which was deferred and is being
amortized over the term of the Senior Notes due 2025.
78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Tabular Disclosure of Fair Values of Derivative Instruments on the Balance Sheet
The table below presents the fair value of the Company's derivative financial instruments, as well as, their classification on the
Consolidated Balance Sheets as of December 31, 2017.
Liability Derivatives
As of December 31, 2017
(Dollars in thousands)
Balance Sheet Location
Fair Value
Derivatives designated as hedging instruments
Interest rate swaps
Total derivatives designated as hedging instruments
Other liabilities
$
$
67
67
Tabular Disclosure of the Effect of Fair Value and Cash Flow Hedge Accounting on Accumulated Other
Comprehensive Income (Loss)
The table below presents the effect of cash flow hedge accounting on Accumulated Other Comprehensive Income (Loss) as of
December 31, 2017 related to the Company's outstanding interest rate swaps.
(Dollars in thousands)
Interest rate products
Settled interest rate swaps
Amount of Loss Recognized
in OCI on Derivative
2017
$
$
74 Interest expense
— Interest expense
74 Total interest expense $
$
Amount of Loss Reclassified from OCI into Income
2017
7 $
169
176 $
2016
—
168
168
Credit-risk-related Contingent Features
The Company has agreements with each of its derivative counterparties that contain a provision where the Company could be
declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to
the Company's default on the indebtedness.
As of December 31, 2017, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any
adjustment for nonperformance risk, related to these agreements was $0.1 million. If the Company had breached any of these
provisions at December 31, 2017, it could have been required to settle its obligations under the agreements at their termination
value of $0.1 million.
The Company estimates that an additional $0.3 million will be reclassified from accumulated other comprehensive loss as an
increase to interest expense over the next 12 months.
Subsequent Activity
On January 30, 2018, the Company entered into two interest rate derivatives that were designated as cash flow hedges of
interest rate risk totaling $50.0 million. These derivatives were used to hedge variable cash flows associated with variable-rate
debt.
11. Stockholders’ Equity
Common Stock
The Company had no preferred shares outstanding and had common shares outstanding for the three years ended December 31,
2017 as follows:
Balance, beginning of year
Issuance of common stock
Year Ended December 31,
2017
2016
2015
116,416,900
101,517,009
98,828,098
8,395,607
14,063,100
2,493,171
Non-vested stock-based awards, net of withheld shares and forfeitures
319,086
836,791
195,740
Balance, end of year
125,131,593
116,416,900
101,517,009
79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Equity Offering
On August 14, 2017, the Company issued 8,337,500 shares of common stock par value $0.01 per share, at $30.90 per share in
an underwritten public offering pursuant to the Company's existing effective registration statement. The net proceeds of the
offering, after underwriting discount and offering expenses, were approximately $247.1 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.
2017
2016
2015
Shares Sold
Sales Price Per Share
—
NA $
4,795,601
$28.31 - $33.66
2,434,239
$25.00 - $29.15
$
$
Net Proceeds
(in millions)
—
144.6
65.8
On February 19, 2016, the Company entered into sales agreements with five investment banks to allow sales under its at-the-
market equity offering program of up to 10,000,000 shares of common stock. A previous sales agreement with one investment
bank was terminated effective February 17, 2016. No shares were sold related to this program during 2017. On May 5, 2017,
the Company entered into a sales agreement with a sixth investment bank in connection with the same allotment of shares. The
Company has 5,868,697 authorized shares remaining available to be sold under the current sales agreements as of February 14,
2018.
Dividends Declared
During 2017, the Company declared and paid common stock dividends aggregating $1.20 per share ($0.30 per share per
quarter).
On February 13, 2018, the Company declared a quarterly common stock dividend in the amount of $0.30 per share payable on
March 6, 2018 to stockholders of record on February 23, 2018.
Common Stock Authorization
On May 2, 2017, the Company's shareholders approved an amendment to the Company's Articles of Incorporation to increase
the number of authorized shares of common stock from 150,000,000 to 300,000,000.
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, 2017, 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.
Accumulated Other Comprehensive Income (Loss)
During the year ended December 31, 2017, the Company entered into two interest rate swaps to hedge the variable cash flows
associated with existing variable-rate debt. The Company recorded a loss in accumulated other comprehensive loss of
approximately $0.1 million as of December 31, 2017. The Company continues to amortize the 2015 settlement of forward-
starting interest rate swaps. This amount will be reclassified out of accumulated other comprehensive loss impacting net
income over the 10-year term of the associated senior note issuance. See Note 10 for more information regarding the
Company's derivative instruments.
The following table represents the changes in accumulated other comprehensive loss during the year ended December 31, 2017:
(Dollars in thousands)
Beginning balance
Other comprehensive loss before reclassifications
Amounts reclassified from accumulated other comprehensive income (loss)
Net current-period other comprehensive income
Ending balance
Interest Rate Swaps
$
$
(1,401)
176
(74)
102
(1,299)
80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table represents the details regarding the reclassifications from Accumulated other comprehensive income (loss)
during the year ended December 31, 2017:
Details about accumulated other comprehensive income (loss) components
(Dollars in thousands)
Amounts reclassified from accumulated other comprehensive
income (loss) related to settled interest rate swaps
Amounts reclassified from accumulated other comprehensive
income (loss) related to current interest rate swaps
Amount reclassified from
accumulated other
comprehensive income (loss)
Affected line item in the
statement where net income is
presented
$
$
169
7
176
Interest Expense
Interest Expense
12. Benefit Plans
Executive Retirement Plan
Effective May 5, 2015, the Company terminated its Executive Retirement Plan and recorded a charge of approximately $5.3
million, inclusive of the acceleration of $2.5 million recorded in accumulated other comprehensive loss on the Company's
Consolidated Balance Sheet that was being amortized resulting in a total benefit obligation of $19.6 million in connection with
the termination of the Executive Retirement Plan. The charge includes amounts resulting from assumed additional years of
service for two plan participants who had not reached age 65 and payments associated with FICA and other tax obligations.
On May 6, 2016, the Company paid the total benefit obligation of $19.6 million which reduced Other liabilities on the
Company's Consolidated Balance Sheets. As a result of the termination of the plan, and included in the payment of the total
benefit obligation, Mr. Emery received a lump sum amount equal to his accrued benefit under the plan of approximately $14.4
million in May 2016.
Net periodic benefit cost for the Executive Retirement Plan for the three years in the period ended December 31, 2017 is
comprised of the following:
(Dollars in thousands)
Service cost
Interest cost
Amortization of prior service cost (benefit)
Amortization of net gain
Net loss recognized in Accumulated other comprehensive income (loss)
Total recognized in net periodic benefit gain and Accumulated other comprehensive income (1) $
_____
(1) 2015 is a partial year due to the termination of the Executive Retirement Plan during the year.
The Company had no benefit obligations as of December 31, 2017 and 2016.
Year Ended December 31,
2017
2016
$
— $
— $
—
—
—
—
—
—
—
—
—
—
— $
— $
2015
29
225
(198)
343
399
—
399
81 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
13. Stock and Other Incentive Plans
Stock Incentive Plan
In May 2015, the Company's stockholders approved the 2015 Stock Incentive Plan (the "2015 Incentive Plan") which
authorizes the Company to issue 3,500,000 shares of common stock to its employees and directors. The 2015 Incentive Plan,
which superseded the 2007 Employee Stock Incentive Plan (the "Predecessor Plan"), will continue until terminated by the
Company’s Board of Directors. As of December 31, 2017 and 2016, the Company had issued a total of 1,438,228 and 1,024,739
restricted shares, respectively, under the 2015 Incentive Plan for compensation-related awards to employees and directors, with
a total of 2,061,772 and 2,475,261, respectively, remaining which had not been issued. Under the Predecessor Plan for
compensation-related awards to employees and directors, the Company had issued, net of forfeitures, a total of 1,878,637
restricted shares for the year ended December 31, 2015. Non-vested shares issued under the 2015 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. The Company recognizes the impact of forfeitures as they occur. 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, 2017, 2016 and 2015 from the amortization of the value of shares over the vesting period
issued to employees and directors was $9.8 million, $7.4 million and $5.9 million, respectively. The following table represents
expected amortization of the Company's non-vested shares issued:
(Dollars in millions)
2018
2019
2020
2021
2022
2023 and thereafter
Total
Future Amortization of
Non-Vested Shares
$
$
9.4
7.0
6.7
5.7
3.2
3.6
35.6
Executive Incentive Plan
On July 31, 2012, the Company adopted an Executive Incentive Plan, which was amended and restated on February 16, 2016
("Executive Incentive Plan"), to provide specific award criteria with respect to incentive awards made under the 2015 Incentive
Plan subject to the discretion of the Compensation Committee. No new shares of common stock were authorized in connection
with the Executive Incentive Plan. Under the terms of the Executive Incentive Plan, the Company's named executive officers,
and certain other members of senior management, 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
awards are based on the Company's relative total shareholder return ("TSR") performance over one-year and three-year periods,
measured against the Company's peer group. For 2017, 2016 and 2015, compensation expense resulting from the amortization
of non-vested share grants to officers was approximately $5.0 million, $4.0 million, and $2.7 million, respectively. Details of
the awards that have been earned from this plan are as follows:
• On December 11, 2017, the Company granted non-vested stock awards for TSR performance to its five named
executive officers and four senior vice presidents with a grant date fair value totaling $10.1 million, which were
granted in the form of 309,874 non-vested shares, with a five-year vesting period, which will result in annual
compensation expense of $2.0 million for the each of 2018, 2019, 2020, and 2021, and $1.9 million for 2022,
respectively.
• On December 16, 2016, the Company granted non-vested stock awards for TSR performance to its five named
executive officers and five senior vice presidents with a grant date fair value totaling $6.3 million, which were granted
in the form of 213,639 non-vested shares, with a five-year vesting period, which will result in annual compensation
expense of $1.3 million each of 2018, 2019, and 2020, and $1.2 million for 2021, respectively.
• On February 16, 2016, the Company granted cash incentive and non-vested performance-based awards totaling $5.8
million to its five named executive officers and five senior vice presidents. The officers could elect cash based awards
or non-vested stock awards. Cash awards totaled $1.1 million. The non-vested awards, which the officers elected to
82 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
receive in lieu of cash, had a grant date fair value totaling $4.7 million, which were granted in the form of 163,788
non-vested shares, with either a three- or five-year vesting period, resulting in annual compensation expense of $1.1
million for the year 2018 and $0.7 million for each of 2019 and 2020, respectively.
• On December 18, 2015, the Company granted non-vested stock awards for TSR performance to its five named
executive officers and five senior vice presidents with a grant date fair value totaling $3.9 million. The awards were
granted in the form of 139,000 non-vested shares, with a three-year vesting period, which will result in annual
compensation expense of $1.3 million for 2018.
Long-Term Incentive Program
In the first quarter of 2017 and 2016, the Company granted a performance-based award to officers, excluding the five named
executive officers and four senior vice presidents, under the Long-term Incentive Program adopted under the 2015 Incentive
Plan (the "LTIP") totaling approximately $1.3 million per award, which was granted in the form of 41,368 non-vested shares
and 44,162 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. 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.
For 2017, 2016 and 2015, compensation expense resulting from the amortization of non-vested share grants to officers was
approximately $1.1 million.
Salary Deferral Plan
The Company's salary deferral plan allows certain of its officers to elect to defer up to 50% of their base salary in the form of
non-vested shares issued under the 2015 Incentive Plan subject to long-term vesting. 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 2017, 2016
and 2015, the Company issued 39,016 shares, 42,256 shares and 55,923 shares, respectively, to its officers through the salary
deferral plan. For 2017, 2016 and 2015, compensation expense resulting from the amortization of non-vested share grants to
officers was approximately $1.2 million, $1.2 million, and $1.1 million, respectively.
Non-employee Directors Incentive Plan
The Company issues non-vested shares to its non-employee directors under the 2015 Incentive Plan. The directors’ shares
issued have a one-year vesting period beginning with the May 2015 grant (previously 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 2017, 2016
and 2015, the Company issued 23,231 shares, 21,374 shares, and 23,201 shares, respectively, to its non-employee directors
through the 2015 Incentive Plan. For 2017, 2016 and 2015, compensation expense resulting from the amortization of non-
vested share grants to directors was approximately $0.8 million, $1.0 million, and $1.0 million, respectively.
Other Grants
The Company issued three one-time non-vested share grants related to executive management transition in 2016. For 2017 and
2016, compensation expense resulting from the amortization of these non-vested share grants to officers was approximately
$1.7 million and $0.1 million, respectively. The following information provides information about each grant:
• On March 1, 2016, the Company issued 50,000 shares to the Chief Financial Officer with a 10-year vesting period,
resulting in compensation expense of $0.2 million per year.
• On December 30, 2016, the Company issued 200,000 shares to the President and Chief Executive Officer with a 10-
year vesting period, resulting in compensation expense of $0.6 million per year.
• On December 30, 2016, the Company issued 150,000 shares to the Executive Chairman with a 5-year vesting period,
resulting in compensation expense of $0.9 million per year.
83 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
A summary of the activity under the 2015 Incentive Plan and related information for the three years in the period ended
December 31, 2017 follows:
(Dollars in thousands, except per share data)
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
Grant date fair value of shares granted during the year
Year Ended December 31,
2017
2016
2015
1,786,497
1,092,262
1,057,732
413,489
885,219
251,789
(292,341)
(190,984)
(210,955)
—
—
(6,304)
1,907,645
1,786,497
1,092,262
$
$
$
$
$
$
27.18
32.05
25.88
$
$
$
24.72
29.60
24.34
$
$
$
— $
— $
28.44
13,254
$
$
27.18
26,204
$
$
24.01
27.70
25.05
24.80
24.72
6,975
The vesting periods for the non-vested shares granted during 2017 ranged from one to eight years with a weighted-average
amortization period remaining as of December 31, 2017 of approximately 5.1 years.
During 2017, 2016 and 2015, the Company withheld 94,403 shares, 48,248 shares and 49,225 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 Internal Revenue 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 for each year during
2017, 2016 and 2015.
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, 2017, the Company had issued 581,627 shares under the plan of which 26,031 shares were issued in 2017,
9,575 shares were issued in 2016 and 13,950 shares were issued in 2015.
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, 2017, 2016 and 2015, the Company had a total of 25,535 shares, 63,690 shares and 96,977 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 $0.8 million for the year ended December 31,
2017, $1.2 million for the year ended December 31, 2016, and $0.9 million for the year ended December 31, 2015.
84 NOTES 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, 2017 is as follows:
(Dollars in thousands, except per share data)
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)
$
$
$
$
$
$
$
Intrinsic value of options exercised during the year
$
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)
Year Ended December 31,
2017
316,321
206,824
(32,076)
(40,659)
2016
340,958
198,450
(57,924)
(22,081)
2015
393,902
197,640
(44,462)
(47,176)
(132,310)
(143,082)
(158,946)
318,100
316,321
340,958
23.69
25.77
24.31
25.01
23.22
25.00
6.31
271
2,683
25.00
$
$
$
$
$
$
$
$
$
$
20.70
24.07
21.40
23.16
18.11
23.69
5.37
634
2,098
23.69
$
$
$
$
$
$
$
$
$
$
19.17
23.22
19.41
19.90
20.41
20.70
5.39
381
2,597
20.70
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
2017
1.20%
3.70%
1.45
20.4%
85%
2016
1.06%
4.64%
1.42
17.6%
85%
2015
0.67%
4.79%
1.38
21.0%
80%
85 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
14. Earnings Per Share
The Company uses the two-class method of computing net earnings per common shares. Non-vested share-based awards
containing non-forfeitable rights to dividends are considered participating securities pursuant to the two-class method. 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, 2017.
(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
Year Ended December 31,
2017
2016
2015
119,739,216
109,861,580
100,280,059
(1,813,058)
(1,289,478)
(1,108,707)
117,926,158
108,572,102
99,171,352
117,926,158
108,572,102
99,171,352
—
91,007
709,559
105,336
623,212
85,738
Weighted average Common Shares - Diluted
118,017,165
109,386,997
99,880,302
Net Income
Income from continuing operations
$
23,096
$
85,756
$
58,836
Dividends paid on nonvested share-based awards
Income from continuing operations applicable to common stockholders
Discontinued operations
Net income applicable to common stockholders
Basic Earnings Per Common Share
Income from continuing operations
Income from discontinued operations
Net income
Diluted Earnings Per Common Share
Income from continuing operations
Income from discontinued operations
Net income
(2,149)
20,947
(4)
20,943
0.18
0.00
0.18
0.18
0.00
0.18
$
$
$
$
$
—
85,756
(185)
85,571
0.79
0.00
0.79
0.78
0.00
0.78
$
$
$
$
$
—
58,836
10,600
69,436
0.59
0.11
0.70
0.59
0.11
0.70
$
$
$
$
$
15. Commitments and Contingencies
Redevelopment Activity
The Company completed the redevelopment and expansion of one medical office building in Nashville, Tennessee in 2017. The
Company spent approximately $12.6 million on the redevelopment of this property during the year ended December 31, 2017,
including approximately $3.2 million related to overages on tenant improvement projects that have been or will be reimbursed by
the tenant.
During 2017, the Company began the redevelopment of a medical office building in Charlotte, North Carolina, which includes a
38,000 square foot vertical expansion. The Company spent approximately $3.3 million on the redevelopment during the year
ended December 31, 2017.
Development Activity
The Company completed the development of a 99,957 square foot medical office building in Denver, Colorado. The Company
spent approximately $14.6 million during the year ended December 31, 2017, including approximately $2.8 million related to
overages on tenant improvement projects that have been or will be reimbursed by the tenant. The Company anticipates funding
additional tenant improvements throughout 2018 and 2019.
86
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company began the development of a 151,000 square foot medical office building in Seattle, Washington during 2017.
The Company spent approximately $1.8 million on the development during the year ended December 31, 2017. The Company
expects the project to be completed in the second quarter of 2019.
The table below details the Company’s construction activity as of December 31, 2017. The information included in the table
below represents management’s estimates and expectations at December 31, 2017, which are subject to change. The
Company’s disclosures regarding certain projections or estimates of completion dates may not reflect actual results.
(Dollars in thousands)
Number of
Properties
Estimated
Completion
Date
Construction in
Progress
Balance
Total Funded
During the Year
Total
Amount
Funded
Estimated
Remaining
Fundings
(unaudited)
Estimated
Total
Investment
(unaudited)
Approximate
Square Feet
(unaudited)
December 31, 2017
Construction Activity
Charlotte, NC
Seattle, WA
Total
1
1
Q1 2019
Q2 2019
$
$
3,487
$
3,264
$
3,487
8,513
$ 12,000
1,971
1,809
2,272
61,848
64,120
204,000
151,000
5,458
$
5,073
$
5,759
$ 70,361
$ 76,120
355,000
Tenant Improvements
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, 2017, the Company had commitments of approximately $27.8 million that is
expected to be spent on tenant improvements throughout the portfolio, excluding development properties currently under
construction.
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 six parcels of land held for development located adjacent to
certain of the Company's existing medical office buildings in Texas, Iowa and Tennessee totaled approximately $20.1 million as
of December 31, 2017 and 2016.
Operating Leases
As of December 31, 2017, the Company was obligated under operating lease agreements consisting primarily of the Company’s
corporate office lease and ground leases. At December 31, 2017, the Company had 109 properties totaling 8.9 million square
feet that were held under ground leases with a remaining weighted average term of 68.7 years, including renewal options.
These ground leases typically have initial terms of 50 to 75 years with one to two renewal options extending the terms to 75 to
100 years, with expiration dates through 2117.
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, 2017, 2016 and 2015 was $6.3 million, $5.7 million and $5.1
million, respectively. The Company prepaid 48 ground leases, which represented approximately $0.5 million of the Company’s
rental expense for the years ended December 31, 2017, 2016, and 2015.
The Company’s corporate office lease currently covers approximately 36,653 square feet of rented space and expires on
October 31, 2020. The Company’s future minimum lease payments for its corporate office lease and 61 ground leases,
excluding leases that the Company has prepaid and leases in which an operator pays or fully reimburses the Company, as of
December 31, 2017 were as follows (in thousands):
2018
2019
2020
2021
2022
2023 and thereafter
$
5,341
5,420
5,459
5,488
5,516
283,056
$ 310,280
87
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 $4.0 billion, $3.7 billion, and $3.4 billion as of
December 31, 2017, 2016 and 2015, respectively.
The following table reconciles the Company’s consolidated net income attributable to common stockholders to taxable income
for the three years ended December 31, 2017:
(Dollars in thousands)
Net income
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
______
(1) Before REIT dividend paid deduction.
Year Ended December 31,
2017
2016
2015
$ 23,092
$ 85,571
$ 69,436
46,426
1,570
—
38,260
30,457
(32,103)
121
1,659
687
(4,551)
(7,101)
(8,833)
1,680
1,855
6,552
53,532
2,067
1,301
2,236
4,781
571
7,518
4,304
36,363
$ 76,624
$ 90,352
$ 105,799
$ 142,327
$ 131,759
$ 120,266
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, 2017.
For the three years ended December 31, 2017, there were no preferred shares outstanding. As such, no dividends were
distributed related to preferred shares for those periods.
Common stock:
Ordinary income
Return of capital
Unrecaptured section 1250 gain
Common stock distributions
2017
2016
2015
Per Share
%
Per Share
%
Per Share
%
$
$
0.42
0.50
0.28
1.20
34.5% $
42.0%
23.5%
100.0% $
0.78
0.35
0.07
1.20
65.0% $
29.5%
5.5%
100.0% $
0.61
0.08
0.51
1.20
51.0%
6.7%
42.3%
100.0%
88
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 Income.
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, 2017 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,
2017
2016
2015
$
$
$
608
$
562
$
—
608
555
$
$
2
564
544
$
$
528
37
565
758
______
(1)
In the table above, income tax expense for 2015 includes approximately $50 thousand 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 Income.
17. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is
practical to estimate that value.
Cash, cash equivalents and restricted cash - The carrying amount approximates fair value.
Mortgage notes receivable - The fair value of mortgage 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 recently, if
any.
Borrowings under the Unsecured Credit Facility due 2020 and Unsecured Term Loan due 2022 - The carrying amount
approximates fair value because the borrowings are based on variable market interest rates.
Senior unsecured notes payable - The fair value of notes and bonds payable is estimated using cash flow analyses, based on
the Company’s current interest rates for similar types of borrowing arrangements.
Mortgage notes payable - The fair value is estimated using cash flow analyses, based on the Company’s current interest rates
for similar types of borrowing arrangements.
Interest rate swap agreements - Interest rate swap agreements are recorded in other liabilities on the Company's Consolidated
Balance Sheets at fair value. Fair value is estimated by utilizing pricing models that consider forward yield curves and discount
rates.
The table below details the fair value and carrying values for notes and bonds payable as of December 31, 2017 and 2016.
(Dollars in millions)
Notes and bonds payable (1)
December 31, 2017
December 31, 2016
Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
$
1,283.9
$ 1,269.7
$
1,264.4
$ 1,265.1
______
(1) Level 2 – model-derived valuations in which significant inputs and significant value drivers are observable in active markets.
89
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
18. Selected Quarterly Financial Data (unaudited)
Quarterly financial information for the year ended December 31, 2017 is summarized below.
(Dollars in thousands, except per share data)
2017
Revenues from continuing operations
Income (loss) from continuing operations
Income (loss) from discontinued operations
Net income (loss) 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
$
104,569
$
105,245
$
106,953
$
107,731
31,858
(13)
25,224
—
3,165
8
(37,151)
—
31,845
$
25,224
$
3,173
$
(37,151)
0.28
0.28
$
$
0.22
0.22
$
$
0.02
0.02
$
$
(0.31)
(0.31)
(1) The increases in net income and amounts per share for the first quarter of 2017 are primarily attributable to gains of $23.4
million on the sale of six properties.
(2) The increases in net income and amounts per share for the second quarter of 2017 are primarily attributable to gains of
$16.1 million on the sale of three properties.
(3) The decreases in net income and amounts per share for the third quarter of 2017 are primarily attributable to impairment
charges of $5.1 million.
(4) The decreases in net income and amounts per share for the fourth quarter of 2017 are primarily attributable to a loss on the
extinguishment of debt of $45.0 million.
Quarterly financial information for the year ended December 31, 2016 is summarized below.
(Dollars in thousands, except per share data)
2016
Revenues from continuing operations
Income from continuing operations
Loss from discontinued operations
Net income attributable to common stockholders
Net income attributable to common stockholders per share:
Basic earnings per common share
Diluted earnings per common share
______
Quarter Ended
March 31
June 30
September 30
December 31 (1)
$
100,021
$
102,642
$
103,659
$
105,309
9,163
(7)
12,157
(12)
11,857
(23)
52,580
(143)
9,156
$
12,145
$
11,834
$
52,437
0.09
0.09
$
$
0.12
0.12
$
$
0.10
0.10
$
$
0.46
0.45
$
$
$
(1) The increases in net income and amounts per share for the fourth quarter of 2016 are primarily attributable to gains of
$41.0 million on the sale of six properties.
90
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 fiscal quarter 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, 2017
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, 2017. 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.
91 Report of
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Healthcare Realty Trust Incorporated
Nashville, Tennessee
Opinion on Internal Control over Financial Reporting
We have audited Healthcare Realty Trust Incorporated’s (the “Company’s”) internal control over financial reporting as of
December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the consolidated balance sheets of the Company and subsidiaries as of December 31, 2017 and 2016, the related
consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended
December 31, 2017, and the related notes and financial statement schedules and our report dated February 14, 2018 expressed an
unqualified opinion thereon.
Basis for Opinion
The Company’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 are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations
of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control over Financial Reporting
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.
/s/ BDO USA, LLP
Nashville, Tennessee
February 14, 2018
92 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 8, 2018 under the caption “Election of Directors,” is incorporated herein by
reference.
Executive Officers
The executive officers of the Company are:
Name
David R. Emery
Todd J. Meredith
J. Christopher Douglas
John M. Bryant, Jr.
B. Douglas Whitman, II
Robert E. Hull
Age
73
43
42
51
49
45
Position
Executive Chairman of the Board
President & 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 was appointed Executive Chairman of the Board on December 30, 2016. Mr. Emery founded the Company and
served as President and Chief Executive Officer from its founding in May 1992 until December 30, 2016. 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. Meredith was appointed President and Chief Executive Officer effective December 30, 2016. He served as the Company's
Executive Vice President – Investments from February 2011 until December 30, 2016 and was 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 investment banking.
Mr. Douglas was appointed the Company's Chief Financial Officer effective March 1, 2016 and has been employed by the
Company since 2003. He served as the Company’s Senior Vice President, Acquisitions and Dispositions managing the
Company’s acquisition and disposition team from 2011 until March 1, 2016. Prior to that, Mr. Douglas served as Senior Vice
President, Asset Administration, administering the Company’s master lease portfolio and led a major disposition strategy in
2007. Mr. Douglas has a background in commercial and investment banking.
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. He
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. Hull was appointed Executive Vice President - Investments effective January 1, 2017 and has been employed by the
Company since 2004. He served as Senior Vice President - Investments from March 2011 until January 2017, managing the
Company's development and acquisition activity. Prior to that, Mr. Hull served in various capacities on the Company's
investments team. Before joining the Company, Mr. Hull worked in the senior living and commercial banking industries.
93 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.
Section 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 8, 2018 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 8, 2018 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 8, 2018 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 8, 2018 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 8, 2018 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 8, 2018 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 8, 2018 under the caption “Ratification of Appointment of Independent
Registered Public Accounting Firm,” is incorporated herein by reference.
94 Item 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, 2017 and December 31, 2016.
• Consolidated Statements of Income for the years ended December 31, 2017, December 31, 2016 and December 31,
2015.
• Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, December 31, 2016 and
December 31, 2015.
• Consolidated Statements of Equity for the years ended December 31, 2017, December 31, 2016 and December 31,
2015.
• Consolidated Statements of Cash Flows for the years ended December 31, 2017, December 31, 2016 and
December 31, 2015.
• Notes to Consolidated Financial Statements.
(2) Financial Statement Schedules:
Schedule II — Valuation and Qualifying Accounts for the years ended December 31, 2017, 2016, and 2015
Schedule III — Real Estate and Accumulated Depreciation as of December 31, 2017
Schedule IV — Mortgage Loans on Real Estate as of December 31, 2017
103
104
105
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
1.5
1.6
1.7
1.8
1.9
1.10
1.11
Description of Exhibits
— Sales Agreement, dated February 19, 2016, between the Company and Barclays Capital Inc. (1)
— Amendment to Sales Agreement, dated May 5, 2017, by and between the Company and Barclays Capital
Inc. (2)
— Equity Distribution Agreement, dated February 19, 2016, between the Company and BB&T Capital
Markets, a division of BB&T Securities, LLC (1)
— Amendment to Equity Distribution Agreement, dated May 5, 2017, by and between the Company and
BB&T Capital Markets, a division of BB&T Securities, LLC(2)
— Sales Agreement, dated February 19, 2016, between the Company and BMO Capital Markets Corp. (1)
— Amendment to Sales Agreement, dated May 5, 2017, by and between the Company and BMO Capital
Markets Corp. (2)
— Controlled Equity Offering Sales Agreement, dated February 19, 2016, between the Company and Cantor
Fitzgerald & Co. (1)
— Amendment to Controlled Equity Offering Sales Agreement, dated May 5, 2017, by and between the
Company and Cantor Fitzgerald & Co. (2)
— Sales Agreement, dated February 19, 2016, between the Company and Credit Agricole Securities (USA)
Inc. (1)
— Amendment to Sales Agreement, dated May 5, 2017, by and between the Company and Credit Agricole
Securities (USA) Inc. (2)
— Sales Agreement, dated May 5, 2017, by and between the Company and Fifth Third Securities, Inc. (2)
95
2.1
2.2
2.3
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.1
4.1
4.1
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
— Master Transaction Agreement, dated as of August 8, 2017, by and among the Company, as purchaser,
and Meadows & Ohly, LLC and its affiliated entities listed in the Agreement as sellers. (3)
— That certain Purchase and Sale Agreement, dated as of August 8, 2017, by and among the Company, as
purchaser, and Kennestone Outpatient Pavilion, L.P., as seller (terminated on September 27, 2017). (3)
— Amended and Restated Master Transaction Agreement and Omnibus Amendment to Property
Agreements, dated as of September 27, 2017, by and among the Company and Meadows & Ohly, LLC
and its affiliated entities listed therein. (4)
— Second Articles of Amendment and Restatement of the Company, as amended. (2)
— Amended and Restated Bylaws of the Company, as amended. (5)
— Specimen stock certificate. (6)
— Indenture, dated as of May 15, 2001 by and between the Company and Branch Banking and Trust
Company, as Trustee (as successor to the trustee named therein). (7)
— Third Supplemental Indenture, dated December 4, 2009, by and between the Company and Branch
Banking and Trust Company, as Trustee (as successor to the trustee named therein). (8)
— Form of 6.50% Senior Note due 2017 (set forth in Exhibit B to the Third Supplemental Indenture filed as
Exhibit 4.2 thereto). (8)
— Fourth Supplemental Indenture, dated December 13, 2010, by and between the Company and Branch
Banking and Trust Company, as Trustee (as successor to the trustee named therein). (9)
— Form of 5.750% Senior Note due 2021 (set forth in Exhibit B to the Fourth Supplemental Indenture filed
as Exhibit 4.2 thereto). (9)
— Fifth Supplemental Indenture, dated March 26, 2013, by and between the Company and Branch Banking
and Trust Company, as Trustee (as successor to the trustee named therein). (10)
— Form of 3.75% Senior Note due 2023 (set forth in Exhibit B to the Fifth Supplemental Indenture filed as
Exhibit (4.8) hereto). (10)
__ Sixth Supplemental Indenture, dated April 24, 2015, by and between the Company and Branch Banking
and Trust Company, as Trustee (as successor to the trustee named therein). (11)
__ Form of 3.875% Senior Notes due 2025 (set forth in Exhibit B to the Sixth Supplemental Indenture filed
as Exhibit 4.9 hereto). (11)
__ Seventh Supplemental Indenture, dated December 11, 2017, by and between the Company and Branch
Banking and Trust Company, as Trustee. (12)
__ Form of 3.625% Senior Note due 2028 (set forth in Exhibit B to the Seventh Supplemental Indenture
filed as Exhibit 4.11 hereto). (12)
— 2000 Employee Stock Purchase Plan. (13)
— Dividend Reinvestment Plan, as Amended. (14)
— Third Amended and Restated Employment Agreement, dated February 16, 2016, between David R.
Emery and the Company. (15)
— Third Amended and Restated Employment Agreement, dated February 16, 2016, between Todd J.
Meredith and the Company. (15)
— Third Amended and Restated Employment Agreement, dated February 15, 2017, between John M.
Bryant, Jr. and the Company. (16)
— Amended and Restated Employment Agreement, dated January 1, 2017, between Robert E. Hull and the
Company. (16)
— Third Amended and Restated Employment Agreement, dated February 15, 2017, between B. Douglas
Whitman, II and the Company. (16)
— Amended and Restated Employment Agreement, dated February 2, 2016, between J. Christopher Douglas
and the Company. (17)
— Healthcare Realty Trust Incorporated Amended and Restated Executive Incentive Plan. (15)
— 2010 Restricted Stock Implementation for Non-Employee Directors, dated May 4, 2010. (18)
— Amendment No. 1 to 2010 Restricted Stock Implementation for Non-Employee Directors, dated
December 11, 2013. (19)
— Amendment No. 2 to 2010 Restricted Stock Implementation for Non-Employee Directors, dated August
4, 2015. (20)
— Healthcare Realty Trust Incorporated Form of Restricted Stock Agreement for Non-Employee Directors.
(21)
— Healthcare Realty Trust Incorporated Form of Restricted Stock Agreement for Officers. (21)
96 10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
11
21
23
31.1
31.2
32
— Healthcare Realty Trust Incorporated 2015 Stock Incentive Plan. (22)
— Amendment No. 1 to Healthcare Realty Trust Incorporated 2015 Stock Incentive Plan. (20)
— 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. (23)
— 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. (24)
— 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. (25)
— Third Amendment to Credit Agreement, dated as of July 29, 2016, among the Company, Wells Fargo
Bank, National Association, as Administrative Agent, and the other lenders that are party thereto. (26)
— 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. (25)
— First Amendment to Term Loan, dated July 29, 2016, among the Company, Wells Fargo Bank, National
Association, as Administrative Agent, and the other lenders that are party thereto. (26)
— Second Amendment to Term Loan, dated as of December 18, 2017, by and among the Company, as
Borrower, Wells Fargo Bank, National Association, as Administrative Agent, and the other Lenders
named therein. (27)
— 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)
— 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)
101.INS
101.SCH
101.CAL
101.LAB
101.DEF
101.PRE
— 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)
Filed as an exhibit to the Company’s Form 8-K filed February 19, 2016 and hereby incorporated by reference.
Filed as an exhibit to the Company's Form 8-K filed May 5, 2017 and hereby incorporated by reference.
Filed as an exhibit to the Company's Form 8-K filed August 8, 2017 and hereby incorporated by reference.
Filed as an exhibit to the Company's Form 8-K filed September 28, 2017 and hereby incorporated by reference.
Filed as an exhibit to the Company’s Form 10-Q for the quarter ended June 30, 2015 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 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 8-K filed April 24, 2015 and hereby incorporated by reference.
Filed as an exhibit to the Company’s Form 8-K filed December 11, 2017 and hereby incorporated by reference.
97 (13)
(14)
(15)
(16)
(17)
(18)
(19)
(20)
(21)
(22)
(23)
(24)
(25)
(26)
(27)
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-K for the year ended December 31, 2015 and hereby incorporated by
reference.
Filed as an exhibit to the Company's Form 10-K for the year ended December 31, 2016 and hereby incorporated by
reference.
Filed as an exhibit to the Company's Form 8-K filed February 3, 2016 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 10-K for the year ended December 31, 2013 and hereby incorporated by
reference.
Filed as an exhibit to the Company’s Form 10-Q for the quarter ended June 30, 2015 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 proxy statement filed March 30, 2015 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-Q for the quarter ended June 30, 2016 and hereby incorporated by
reference.
Filed as an exhibit to the Company's Form 8-K filed December 22, 2017 and hereby incorporated by reference.
98 Schedule of Omitted Exhibits
The following exhibits are omitted from this filing in accordance with Item 601 of Regulation S-K. The agreements in this
schedule are substantially identical to Exhibit 2.2 in all material respects. Further, exhibits 8, 9, 10, 12, 13, and 14 listed in this
table were terminated pursuant to the Amended and Restated Master Transaction Agreement and Omnibus Amendment to
Property Agreements, dated as of September 27, 2017, by and among the Company and Meadows & Ohly, LLC and its
affiliated entities listed therein, a copy of which is filed as Exhibit 2.3 to this Form 10-K.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
— Purchase and Sale Agreement, dated as of August 8, 2017, by and between the
Company and Kennestone Cancer Center, L.P.
Purchase and Sale Agreement, dated as of August 8, 2017, by and between the
Company and Kennestone Physicians Center I, L.P.
Purchase and Sale Agreement, dated as of August 8, 2017, by and between the
Company and Kennestone Physicians Center II, L.P.
Purchase and Sale Agreement, dated as of August 8, 2017, by and between the
Company and Douglas Physicians Center, L.P.
Purchase and Sale Agreement, dated as of August 8, 2017, by and between the
Company and Douglas Physicians Center II, L.P.
Purchase and Sale Agreement, dated as of August 8, 2017, by and between the
Company and Paulding Physicians Center, L.P.
Purchase and Sale Agreement, dated as of August 8, 2017, by and between the
Company and Paulding Outpatient Pavilion, L.P.
Purchase and Sale Agreement, dated as of August 8, 2017, by and between the
Company and Vinings Health Park, L.P. (terminated September 27, 2017)
Purchase and Sale Agreement, dated as of August 8, 2017, by and between the
Company and Piedmont Physicians Plaza, L.P. (terminated September 27, 2017)
Purchase and Sale Agreement, dated as of August 8, 2017, by and between the
Company and Piedmont Medical Plaza, L.P. (terminated September 27, 2017)
Purchase and Sale Agreement, dated as of August 8, 2017, by and between the
Company and 340 Exchange Boulevard, L.P.
Purchase and Sale Agreement, dated as of August 8, 2017, by and between the
Company and Gwinnett 500 Building, L.P. (terminated September 27, 2017)
Purchase and Sale Agreement, dated as of August 8, 2017, by and between the
Company and Gwinnett Physicians Center, L.P. (terminated September 27, 2017)
Purchase and Sale Agreement, dated as of August 8, 2017, by and between the
Company and Hudgens Professional Building, L.P. (terminated September 27, 2017)
—
—
—
—
—
—
—
—
—
—
—
—
—
99 Executive 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. 2000 Employee Stock Purchase Plan (filed as Exhibit 10.1)
2. Third Amended and Restated Employment Agreement, dated February 16, 2016, between David R. Emery and the
Company (filed as Exhibit 10.3)
3. Third Amended and Restated Employment Agreement, dated February 16, 2016, between Todd J. Meredith and the
Company (filed as Exhibit 10.4)
4. Third Amended and Restated Employment Agreement, dated February 15, 2017, between John M. Bryant, Jr. and the
Company (filed as Exhibit 10.5)
5. Amended and Restated Employment Agreement, dated January 1, 2017, between Robert E. Hull and the Company
(filed as Exhibit 10.6)
6. Third Amended and Restated Employment Agreement, dated February 15, 2017, between B. Douglas Whitman, II and
the Company (filed as Exhibit 10.7)
7. Amended and Restated Employment Agreement, dated February 2, 2016, between J. Christopher Douglas and the
Company (filed as Exhibit 10.8)
8. Healthcare Realty Trust Incorporated Amended and Restated Executive Incentive Plan (filed as Exhibit 10.9)
9. 2010 Restricted Stock Implementation for Non-Employee Directors, dated May 4, 2010 (filed as Exhibit 10.10)
10. Amendment No. 1 to Restricted Stock Implementation for Non-Employee Directors (filed as Exhibit 10.11)
11. Amendment No. 2 to Restricted Stock Implementation for Non-Employee Directors (filed as Exhibit 10.12)
12. Healthcare Realty Trust Incorporated Form of Restricted Stock Agreement for Non-Employee Directors (filed as
Exhibit 10.13)
13. Healthcare Realty Trust Incorporated Form of Restricted Stock Agreement for Officers (filed as Exhibit 10.14)
14. Healthcare Realty Trust Incorporated 2015 Stock Incentive Plan (filed as Exhibit 10.15)
15. Amendment No. 1 to Healthcare Realty Trust Incorporated 2015 Stock Incentive Plan (filed as Exhibit 10.16)
100 Item 16. Form 10-K Summary
None.
101 SIGNATURES
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 14, 2018.
HEALTHCARE REALTY TRUST INCORPORATED
By:
/s/ TODD J. MEREDITH
Todd J. Meredith
President 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/ Todd J. Meredith
Todd J. Meredith
President and Chief Executive Officer
(Principal Executive Officer)
February 14, 2018
/s/ J. Christopher Douglas
J. Christopher Douglas
Executive Vice President and Chief Financial
Officer (Principal Financial Officer)
February 14, 2018
/s/ Amanda L. Callaway
Amanda L. Callaway
Senior Vice President and Chief Accounting February 14, 2018
Officer (Principal Accounting Officer)
/s/ David R. Emery
David R. Emery
/s/ Nancy H. Agee
Nancy H. Agee
Executive Chairman of the Board
February 14, 2018
Director
February 14, 2018
/s/ Charles Raymond Fernandez, M.D.
Charles Raymond Fernandez, M.D.
Director
February 14, 2018
/s/ Peter F. Lyle
Peter F. Lyle
/s/ Edwin B. Morris, III
Edwin B. Morris, III
/s/ John Knox Singleton
John Knox Singleton
/s/ Bruce D. Sullivan
Bruce D. Sullivan
/s/ Christann M. Vasquez
Christann M. Vasquez
Director
February 14, 2018
Director
February 14, 2018
Director
February 14, 2018
Director
February 14, 2018
Director
February 14, 2018
102
Schedule II – Valuation and Qualifying Accounts for the years ended
December 31, 2017, 2016 and 2015
(Dollars in thousands)
Additions and Deductions
Description
2017
2016
2015
Accounts and notes receivable allowance
Accounts and notes receivable allowance
Accounts and notes receivable allowance
Balance at
Beginning
of Period
$
$
$
148
179
465
$
$
$
Charged /
(Credited)
to Costs and
Expenses
Charged to
Other
Accounts
Uncollectible
Accounts
Written-off
Balance
at End of
Period
159
(21)
(194)
$
$
$
— $
— $
— $
51
10
92
$
$
$
256
148
179
103
Schedule III – Real Estate and Accumulated Depreciation as of December 31,
2017
(Dollars in thousands)
Land (1)
Buildings, Improvements, Lease
Intangibles and CIP (1)
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)
Accumulated
Depreciation
(4)
Encumbrances
Date
Acquired
Date
Constructed
$
190,813
$
3,862
$194,675
$ 2,823,611
$
502,564
$3,326,175
$
4,193
$ 3,525,043
$
835,768
$
154,916
1993-2017
1906 -2015
Number
of
Properties
193
Property
Type
Medical
office/
outpatient
State
AL, AZ,
CA,
CO, DC,
FL, GA,
HI, IA,
IL, IN,
LA, MD,
MI, MN,
MO, MS,
NC,
OH, OK,
SC, SD,
TN,
TX, VA,
WA
Inpatient
Other
Total Real
Estate
Land Held
for Develop.
Construction
in Progress
(5)
Corporate
Property
Total
Properties
6
10
CA, CO,
MO, PA,
TX
IA, MI,
TN, TX,
VA
8,179
—
8,179
255,495
9,861
265,356
—
273,535
66,780
—
1994-2013
1986 -2013
2,992
73
3,065
66,440
7,143
73,583
600
77,248
26,032
—
1993-2015
1964 - 2015
209
201,984
3,935
205,919
3,145,546
519,568
3,665,114
4,793
3,875,826
928,580
154,916
—
—
—
20,123
—
20,123
—
—
—
—
—
—
—
—
—
—
—
—
—
5,458
—
—
20,123
5,458
239
—
—
5,603
5,603
4,401
—
—
—
209
$
222,107
$
3,935
$226,042
$ 3,145,546
$
519,568
$3,670,572
$ 10,396
$ 3,907,010
$
933,220
$
154,916
Includes eight assets held for sale as of December 31, 2017 of approximately $68.4 million (gross) and accumulated depreciation of $35.8 million.
(1)
(2) Total properties as of December 31, 2017 have an estimated aggregate total cost of $4.0 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 to 2.1 to 99.0 years, personal property over
2.8 to 20.0 years, and land improvements over 5.0 to 39.0 years.
Includes unamortized premium of $2.7 million and unaccreted discount of $1.3 million and issuance costs of $0.9 million as of December 31, 2017.
(4)
(5) Rollforward of Total Property and Accumulated Depreciation for the year ended December 31, 2017, 2016 and 2015 follows:
(Dollars in thousands)
Beginning Balance
Additions during the period:
Real Estate acquired
Other improvements
Land held for development
Construction in Progress
Retirement/dispositions:
Real Estate
Land held for development
Ending Balance
Year Ended
December 31, 2017
Year Ended
December 31, 2016
Year Ended
December 31, 2015
Total Property
Accumulated
Depreciation
Total Property
Accumulated
Depreciation
Total Property
Accumulated
Depreciation
$
3,633,993
$
843,816
$
3,382,680
$
762,996
$
3,271,536
$
705,135
322,616
59,442
—
14,598
4,206
135,807
74
—
239,265
70,595
—
35,596
3,898
121,592
26
—
183,478
47,985
500
19,024
3,048
111,625
26
—
(123,639)
(50,683)
(94,143)
(44,696)
(139,741)
(56,838)
—
—
—
—
(102)
—
$
3,907,010
$
933,220
$
3,633,993
$
843,816
$
3,382,680
$
762,996
104
Schedule IV – Mortgage Loans on Real Estate as of December 31, 2017
The Company had no mortgage notes receivable outstanding as of December 31, 2017.
A rollforward of mortgage loans on real estate for the three years ended December 31, 2017 follows:
(Dollars in thousands)
Balance at beginning of period
Deductions during period:
Principal repayments and reductions (1)
Balance at end of period
Year Ended December 31,
2017
2016
2015
— $
— $
1,900
—
—
—
—
(1,900)
(1,900)
— $
— $
—
$
$
(1) Principal repayments for the year ended December 31, 2015 includes unscheduled principal reductions on the mortgage note of $1.9
million.
105