2019
Annual Report to Shareholders
Letter to Shareholders
Healthcare Realty’s steady progress in 2019 marked
another successful year for the Company, centered on the
growth of our medical office and outpatient facilities.
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. Our relationships are driving increased
acquisition and development opportunities as health
systems evolve to meet greater demand from an aging
population. Our strategy remains on point, differenti-
ated by our selective investment criteria, low business
risk profile and conservative balance sheet.
Healthcare Realty remains committed to building on the
foundation and vision of our founder David R. Emery,
Chairman Emeritus and Director, who passed away on
September 30, 2019. Over the past few years, Mr. Emery
adeptly managed the transition of the Company’s lead-
ership, including executive management and the board of
directors. Mr. Emery’s contribution to the sector and to
Healthcare Realty will not be forgotten. An expression of
our gratitude is included herein.
2019 was defined by the continued strong performance of
the Company’s same store properties, complemented by an
increased acquisition pace. Combined, these factors con-
tributed to a normalized FFO per share increase of 1.7%.
FFO per share gained momentum in the second half of
the year, with fourth quarter FFO per share increasing
4.0% year-over-year to $0.41, built on solid fundamentals
and sustainable internal and external growth.
spreads. We also contained expenses well below revenue
growth which magnified the pace of NOI improvement.
The steady internal growth of our multi-tenant medical
office buildings, year to year, demonstrates our commit-
ment to the pursuit of consistent, long-term cash flows
and increasing shareholder value.
External growth in 2019 was led by robust acquisition
volume of $381 million. The Company’s new investments
focused on our well-established network of health system
and industry relationships and growing our presence
in existing markets. As part of this effort, we also made
considerable progress on development, funding $29
million during the year, including two redevelopments.
With fewer dispositions than in recent years, our net
investment activity totaled $355 million, more than double
our historic pace.
Healthcare Realty is well-positioned to fund its capital
needs with a conservative balance sheet and access to
multiple forms of capital. Debt to EBITDA at the end of
the year was healthy at 4.9 times. The FAD payout ratio
for 2019 was 95%, an improvement of 500 basis points
over 2018. With ample liquidity, a solid outlook for in-
ternal and external growth, disciplined capital spending
and fewer dispositions, we expect to generate positive
FFO per share growth and improved dividend coverage
in 2020. While the environment for medical office
investments is competitive, our established relationships,
financial strength and access to capital give us confidence
that we can invest in attractive outpatient properties
at a steady pace.
Healthcare Realty’s operations continued to generate
positive same store NOI growth of approximately 3%, led
by the reliably strong leasing fundamentals of our multi-
tenant properties, including steady contractual rent
increases, solid tenant retention, and robust cash leasing
Health systems continue to shift care to lower-cost out-
patient settings and enhance their physician networks to
benefit from favorable demographic shifts and capture
market demand. On average, hospitals generate 49% of
their revenue from outpatient care, compared to 38%
ANNUAL REPORT TO SHAREHOLDERS | 1
ten years ago. Demand for healthcare services is evident
in healthcare employment trends, which added approxi-
mately 399,000 jobs to the sector in 2019, more than
two-thirds of which were jobs in ambulatory-outpatient
settings. Healthcare comprises an increasing percentage
of the nation’s total overall employment – nearly 19%
of all nonfarm job growth last year.
Healthcare spending accounted for 17.7% of the nation’s
gross domestic product (GDP) in 2018 and is projected
to reach 19.4% of GDP by 2027. The composition of the
nation’s healthcare spending reflects the growing im-
portance of hospital and physician services, comprising
approximately 53% of the $3.6 trillion in annual US
healthcare expenditures. Healthcare Realty’s portfolio
will benefit from rising outpatient demand, especially the
expanding number of elderly patients who require more
frequent care. The population cohort over the age of 65
is expected to surge from 15.4% of the population in
2017 to 19.3% by 2027; and those over 65 years of age
visit physician offices 5 times on average each year, com-
pared to 2 times for those under 45 years old.
Healthcare Realty remains committed to investing in
medical office and outpatient facilities aligned with top
health systems. Hospitals and physicians are increasingly
providing outpatient services across a range of settings
to achieve market share and revenue growth, while bal-
ancing value and efficiency – critical in today’s healthcare
environment. Health systems are focusing their hospital
campuses on higher-acuity inpatient and outpatient care.
At the same time, providers value having a symbiotic re-
lationship with, and close proximity to, leading health
systems in their markets. These factors attract hospital-
based outpatient services and physician specialists,
which differentiates our portfolio and drives the stable
occupancy and steady growth of our properties.
We see investment opportunities correlate to positive
outpatient expansion trends; and, what is most gratifying,
it is being initiated widely across our well-established
network of health system relationships. These new in-
vestments play an important role in delivering value
over time, especially when they are additive to internal
growth and reinforce the safety investors expect from
medical office buildings.
In 2019, the Board of Directors and management
collaborated to establish Healthcare Realty’s Corporate
Sustainability Principles and Policies and published
its inaugural Corporate Responsibility Report, both
of which are available on the Company’s website,
www.healthcarerealty.com/sustainability. Sustainability
practices are fundamental to the Company’s long-term
success and are incorporated in the Company’s high-
level strategic planning, as well as day-to-day operations.
In 2020, Healthcare Realty’s efforts will remain fo-
cused on the key buildings blocks of robust investment
volume, strong same store growth and disciplined capital
management that provide a foundation for reliable
performance and increasing value to shareholders in
the years ahead.
Sincerely yours,
Todd J. Meredith
President and Chief Executive Officer
ANNUAL REPORT TO SHAREHOLDERS | 2
David R. Emery
1944 - 2019
Founding CEO and Chairman Emeritus
Healthcare Realty Trust
it – paring it down to the simplest, most elegant form.
Whatever the pursuit, when David set his mind to under-
take something, he marshaled every resource and engaged
every person to make it happen. He shared his achieve-
ments generously with family, friends and colleagues. He
set high expectations for those around him, and, in
return, he was fiercely loyal and supportive.
David was a student of naval history and especially fond of
British naval officer Vice Admiral Horatio Nelson, who
valiantly fought Napoleon. Traveling abroad, David came
across a commemorative plaque celebrating the 200th
anniversary of the Battle of Waterloo in 1815, where
Nelson’s successors finally defeated Napoleon. Honoring
the victory and those who fought, the plaque cited “four
great virtues that draw forth the best in Man.” David
truly embodied these four virtues on a daily basis, from
which he, and Healthcare Realty, derived much success.
Leadership - To set such an example that others in
freedom follow.
Respect - To recognize all that is noblest and best in
another, and aspire to emulate it by example.
Enterprise - Imagination in vision, inspiration in
thought, and intuition in deed.
Cooperation - To commit oneself to the needs of the
other in recognition of a common purpose.
David’s legacy of leadership, courageous enterprise,
extraordinary character and dear friendship will not be
forgotten. In recognition of his founding of Healthcare
Realty and meritorious leadership since its inception,
the board of directors bestowed on Mr. Emery the title
of Chairman Emeritus.
ANNUAL REPORT TO SHAREHOLDERS | 3
David R. Emery, Chairman Emeritus and Director, passed
away on September 30, 2019 at the age of 75. David led
the team that founded Healthcare Realty in 1992 and
oversaw its initial public offering on the New York Stock
Exchange in 1993, raising $117 million to fund an initial
portfolio of 21 properties. As Chairman and CEO, and
later, Executive Chairman, David guided the Company’s
steady growth for 25 years, from the first MOB-focused
REIT in the early 1990s, to a leader among its strong peer
group today, with 297 employees and 204 properties,
valued at over $5.9 billion at year-end.
David was truly a visionary. He inspired everyone around
him with his intellectual curiosity, intuition, infectious
charm and perpetual optimism. He confidently, yet hum-
bly, pursued knowledge and excellence in many interests,
both personal and professional – from building well-
crafted structures, to mindfully selecting the trees that
surrounded them; from sailing in Maine, to traveling the
world with his beloved wife, Glenda, and family.
David had a particular passion for the built environment –
for great architecture and proper construction methods.
David was never quite satisfied unless he was in the middle
of a major design and construction project – including
office buildings, houses, botanical gardens, or boats. He
immersed himself in every detail, tirelessly researching
and revising, eliminating the “detritus,” as he would call
Management Team
BOA RD O F DIR ECTOR S
LEFT TO RIGHT, STANDING
John V. Abbott Retired Chief Executive
Officer, Aviation Asset Management Group,
General Electric Company Edward H. Braman
Retired Audit Partner, Ernst & Young LLP
Todd J. Meredith President and Chief Executive
Officer, Healthcare Realty Trust Incorporated
David R. Emery (1944-2019) Chairman
Emeritus, Healthcare Realty Trust Incorporated
John Knox Singleton Chairman, Healthcare
Realty Trust Incorporated, Retired Chief
Executive Officer, Inova Health System
LEFT TO RIGHT, SEATED
Christann M. Vasquez Executive Vice President
and Chief Operating Officer, Ascension Texas
Peter F. Lyle Executive Vice President, Medical
Management Associates, Inc. Bruce D. Sullivan
Retired Audit Partner, Ernst & Young LLP
Nancy H. Agee President and Chief Executive
Officer, Carilion Clinic
EXE CUT IVE O FFI CER S
LEFT TO RIGHT, STANDING
Robert E. Hull Executive Vice President,
Investments Todd J. Meredith President and
Chief Executive Officer David R. Emery
(1944-2019) Chairman Emeritus
LEFT TO RIGHT, SEATED
J. Christopher Douglas Executive Vice
President and Chief Financial Officer John M.
Bryant, Jr. Executive Vice President and
General Counsel
ANNUAL REPORT TO SHAREHOLDERS | 4
Company Overview
As of December 31, 2019, Healthcare Realty owned 204 properties in 25 states totaling 15.4 million
square feet and was valued at $5.9 billion. The Company’s portfolio is comprised primarily of multi-
tenanted medical office buildings located on the campuses of leading health systems in sizable markets.
SELECTED PROP E RTIES
Fair Oaks Medical Office Building I
Washington, DC
University Medical Park
Charlotte, North Carolina
Mercy Edmond
Oklahoma City, Oklahoma
Highline Medical Pavilion
Seattle, Washington
Plano Medical Pavilion
Dallas, Texas
ANNUAL REPORT TO SHAREHOLDERS | 5
(CHI)
(Ascension)
(CHI)
(Ascension)
TOP MARKETS
SF
%
TOP HE ALTH SYSTEMS
ASSOCIATED
MOB SF
%
1 Dallas
2 Seattle
3 Nashville
4 Charlotte
5 Los Angeles
2,374,808
15.5%
1 Baylor Scott & White Health
2,278,385
15.8%
1,373,199
875,214
860,735
772,797
8.9%
5.7%
5.6%
5.0%
2 Ascension Health
3 CommonSpirit Health
4 Atrium Health
5 Tenet Healthcare
1,237,009
1,213,978
805,394
638,054
8.6%
8.4%
5.7%
4.4%
Other (32 markets)
9,099,664
59.3%
Other (39 credit rated systems)
7,757,755
53.9%
Total
15,356,417
100.0%
Non-credit rated
462,847
3.2%
Total
14,393,422
100.0%
ANNUAL REPORT TO SHAREHOLDERS | 6
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 NUMBER 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
12.31.14
12.31.15
12.31.16
12.31.17
12.31.18
12.31.19
TOTAL RETURN PERFORMANCE
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, 2019, 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
financial officer have filed the certifications required by
Section 302 of the Sarbanes-Oxley Act of 2002 with the
Securities and Exchange Commission as exhibits to the
Company’s Annual Report on Form 10-K. In addition,
the Company’s chief executive officer certified to the New
York Stock Exchange in 2019 that he was not aware of
any violation by the Company of the New York Stock
Exchange’s corporate governance listing standards.
A NN UA L SHA REH OLDER S MEET IN G
The annual meeting of shareholders will be held on
May 12, 2020, 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
12/31/14
100.00
100.00
100.00
12/31/15
108.62
100.48
102.83
12/31/16
120.91
113.27
111.70
12/31/17
133.02
137.21
121.39
12/31/18
122.89
130.02
116.48
12/31/19
149.69
170.35
149.86
ANNUAL REPORT TO SHAREHOLDERS | 7
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
Form 10-K
(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, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period to
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
Trading Symbol
Name of Each Exchange on Which Registered
Common stock, $0.01 par value per share
HR
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 every Interactive Data File required to be submitted
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 such files). Yes
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller
reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting
company,” and "emerging growth company" in Rule 12b -2 of the Exchange Act. (Check one):
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the 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 28, 2019) held by non-affiliates on June 28, 2019 was $3,953,733,413.
As of February 7, 2020, there were 134,703,119 shares of the Registrant’s common stock outstanding.
Portions of the Registrant’s definitive Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 12, 2020 are
incorporated by reference into Part III of this Report.
DOCUMENTS INCORPORATED BY REFERENCE
HEALTHCARE REALTY TRUST INCORPORATED
FORM 10-K
December 31, 2019
Table of Contents
PAR T 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
PAR T II
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
PAR T III
Item 10
Directors, Executive Officers and Corporate Governance
Item 11
Executive Compensation
Item 12
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Item 13
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
SIGNATURES AND SCHEDULE S
1
7
19
19
19
19
20
21
22
45
46
87
87
89
90
90
90
90
91
93
94
PART I
Item 1. Business
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 $4.4 billion in 204 real estate properties, construction in
progress, a redevelopment in Memphis, Tennessee (the "Memphis Redevelopment"), land held for development and
corporate property as of December 31, 2019. The Company provided property management services for 155
healthcare-related properties nationwide, totaling approximately 11.4 million square feet as of December 31, 2019.
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,
2019:
Dollars and square feet in thousands
GROSS
INVESTMENT
SQUARE
FEET
PERCENTAGE OF
SQUARE FEET
NUMBER OF
PROPERTIES
OCCUPANCY 1
Medical office/outpatient
$
3,913,649
14,393
Inpatient
Office
221,478
136,956
405
558
93.8%
2.6%
3.6%
4,272,083
15,356
100.0%
196
3
5
204
87.1%
100.0%
92.8%
87.7%
DECEMBER 31, 2019
Construction in progress
Land held for development
Memphis Redevelopment
Corporate property
48,731
24,647
9,032
5,500
Total
$ 4,359,993
1
The occupancy column represents the percentage of total rentable square feet leased (including month-to-month and holdover leases). The Company
had no properties classified as held for sale as of December 31, 2019.
Financial Concentrations
The Company’s real estate portfolio is leased to a diverse tenant base. For the year ended December 31, 2019, the
Company did not have any tenants that accounted for 10% or more of the Company’s consolidated revenues. See Note
2 to the Consolidated Financial Statements for additional information regarding the Company's gross investments by
geographic market.
1 Expiring Leases
As of December 31, 2019, the weighted average remaining years to expiration pursuant to the Company’s leases was
approximately 3.9 years, with expirations through 2035. The table below details the Company’s lease expirations as
of December 31, 2019.
EXPIRATION
YEAR
2020 1
2021
2022
2023
2024
2025
2026
2027
2028
2029
Thereafter
NUMBER
OF LEASES
LEASED
SQUARE FEET
PERCENTAGE
OF LEASED
SQUARE FEET
736
481
473
334
404
129
113
91
90
97
67
2,685,057
1,707,938
1,725,329
1,478,025
1,932,217
827,185
427,655
735,677
748,753
755,856
438,750
19.9%
12.7%
12.8%
11.0%
14.4%
6.1%
3.2%
5.5%
5.6%
5.6%
3.2%
3,015
13,462,442
100.0%
1
Includes 59 leases totaling 142,705 square feet that expired prior to December 31, 2019 and were 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 services in primarily outpatient
settings. To execute its strategy, the Company engages in a broad spectrum of integrated services including leasing,
management, acquisition, 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 primarily
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 high-growth markets with a broad tenant mix that
includes over 30 physician specialties, as well as surgery, imaging, cancer, and diagnostic centers.
2019 Investment Activity
During 2019, the Company acquired 18 medical office buildings for purchase prices totaling $381.3 million, including
the Memphis Redevelopment. The weighted average capitalization rate for these investments, excluding the
Memphis Redevelopment, was 5.5%. The Company calculates the capitalization rate for an acquisition as the
forecasted first year cash net operating income divided by the purchase price.
The Company disposed of 13 properties during 2019 for sales prices totaling $54.9 million. The weighted average
capitalization rate for these properties was 7.6%. The Company calculates the capitalization rate for dispositions as
the in-place cash net operating income divided by the sales price.
In 2019, the Company funded $28.6 million toward development and redevelopment of properties. The Company had
the Memphis Redevelopment and one development under construction at December 31, 2019.
2 See the Company's discussion regarding the 2019 acquisitions and dispositions activity in Note 4 to the Consolidated
Financial Statements and development activity in Note 14 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 and legislation at the federal, state and local levels, including, but not limited to, the Patient Protection
and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, the "Affordable
Care Act"), the Bipartisan Budget Act of 2015, the Medicare Access and CHIP Modernization Act of 2015, 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 and covers a significant percentage of the U.S. population’s
health insurance benefits. 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. 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.
The Tax Cuts and Jobs Act of 2017 eliminated the health insurance mandate penalty included in the Affordable Care
Act. Subsequently, in 2018, a federal judge in Texas determined the Affordable Care Act could not be separated from
the individual mandate and declared the Affordable Care Act no longer enforceable. In 2019, a federal appeals court
ruled the exclusion of the individual mandate did not invalidate the Affordable Care Act in its entirety, and remanded
the case back to the lower district court in Texas to reconsider the mandate’s severability from the remainder of the
law. The appeals process will ultimately determine the standing of the Affordable Care Act and its impact on
3 healthcare providers, insurers and the uninsured population. While the Affordable Care Act remains in effect pending
the outcome of the appeals process, the ruling to overturn the law presents the industry and its individual
participants with uncertainty and greater financial risk.
The Centers for Medicare and Medicaid Services ("CMS") continued to adjust Medicare payment rates in 2019 for
reimbursement “site-neutrality,” or the equalization of Medicare rates for the same services provided 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 Medicare rates
for physician-office settings. While certain of these payments specific to 2019 Medicare claims were ruled by the
courts to be outside the regulatory purview of CMS and, subsequently, refunded to hospitals, CMS continues to
implement site-neutral policies in 2020. These changes are expected to lower Medicare payments for services
delivered in off-campus hospital outpatient departments in an effort to lessen reimbursement disparity in off-campus
medical office and outpatient facilities. The Company’s medical office 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 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.
Since 2018, physicians have been required to report patient data on quality and performance measures that will
affect their Medicare payments beginning in 2020. Implementation of the Medicare Access and CHIP Reauthorization
Act of 2015 (“MACRA”), 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
Taxation of Dividends
The Tax Cuts and Jobs Act of 2017 generally allows a deduction for individuals equal to 20% of certain income from
pass-through entities, including ordinary dividends distributed by a REIT (excluding capital gain dividends and
qualified dividend income). In addition, the deduction for ordinary REIT dividends is not subject to the wage and tax
basis limitations applicable to the deduction for other qualifying pass-through income. The Tax Cuts and Jobs Act of
2017 was a far-reaching and complex revision to the existing U.S. federal income tax laws and will require
subsequent rulemaking and interpretation in a number of areas. As a result, the long-term impact of the Tax Reform
Legislation cannot be reliably predicted. Further, many of the provisions of this act will expire in 2025, unless
extended by legislative action.
Healthcare
Each year, legislative proposals for health policy are introduced in Congress and state legislatures, and regulatory
changes are proposed and 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 proposed, enacted, or in the process of
implementation include:
•
the Tax Cuts and Jobs Act of 2017, 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 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
4 purchase health insurance, many assisted by federal subsidies that are subject to ongoing legal and legislative
challenges;
•
•
various state legislature proposals for state-funded single-payer health insurance and a limit on allowable rates
of reimbursement to healthcare providers;
the implementation of 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, comparative effectiveness research, and lower payments for hospital readmissions;
• MACRA, which requires quality reporting and a transition toward value-based reimbursement models for
Medicare payments to physicians;
•
•
•
•
•
•
•
equalization of Medicare payment rates across different facility-type settings, according to Section 603 of the
Bipartisan Budget Act of 2015, which 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; the CMS rule for hospital outpatient department Medicare payments in 2020 expanded site-neutral
payments for clinic visits in previously-grandfathered off-campus facilities, although this regulation is subject to
ongoing legal challenges;
the continued adoption by providers of federal standards for the meaningful-use of electronic health records;
reforms to the physician self-referral laws, commonly referred to as the Stark Law, that prohibit physician
referral of a Medicare or Medicaid patient to an entity with which the physician has a financial relationship;
without reform, both the laws and the regulations stemming from them could impede the transition toward
value-based, coordinated care among providers;
consideration of broad reforms to 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 a significant
expansion of Medicare coverage to the greater U.S. population;
regulation requiring the publication of hospital prices for certain services, as well as hospitals’ negotiated rates
with insurers for these services, beginning 2021, although this regulation is subject to ongoing legal challenges;
limits on price increases in pharmaceutical drugs and the cost to Medicare beneficiaries; and
legislation to prohibit “surprise billing,” or high payment rates charged to consumers for out-of-network
physician services.
California - Proposition 13 Reform
In California, pursuant to an existing state law commonly referred to as Proposition 13, all or portions of a property
are reassessed to market value only at the time of "change in ownership" or completion of "new construction," and
thereafter, annual property tax increases are limited to 2% of previously assessed values. As a result, Proposition 13
generally results in significant below-market assessed values over time. From time to time, lawmakers and political
coalitions have initiated efforts to repeal or amend Proposition 13. One such proposal is included in a proposed ballot
measure for 2020 that would, if passed, eliminate the applicability of Proposition 13 to commercial properties. If
successful, these proposals could substantially increase the assessed values and property taxes for some of the
Company's properties in California. Some tenant leases permit the Company to pass through such tax increases to
tenants for payment. However, there can be no assurance that the Company will be able to maintain such provisions
in future leases or renewals. Tax increases that are not passed through to tenants could have a material adverse
effect on the Company's business, financial condition, results of operations, cash flow, or ability to maintain current
levels of distributions. As of December 31, 2019, 8.6% of the Company's total portfolio NOI was generated by
properties located in California and approximately half of that is from properties acquired in the last five years.
The Company cannot predict whether any proposals, rulings, or legislation will be fully implemented, adopted,
repealed, or amended, or what effect, whether positive or negative, such developments might have on the Company's
business.
5 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 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, 2019, the Company employed 297 people. The employees are not members of any labor union, and
the Company considers its relations with its employees to be excellent.
6 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.
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.
Sustainability Reporting
Information regarding the Company's sustainability principles and policies and the 2019 Corporate Responsibility
Report are posted on the Company's website (www.healthcarerealty.com).
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 relating to government regulations.
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, utilities and other operating expenses; 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; the Company's ability to reposition or sell facilities with profitable results; the Company's
7 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 is an active seller of properties and 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 $96.0 million, or 2.2% of the Company’s real estate property investments, that were
subject to purchase options held by lessees that were exercisable as of December 31, 2019. The Company does not
have any additional purchase options that will become exercisable in 2020. Other properties have purchase options
that will become exercisable after 2020. Properties with purchase options that are currently exercisable produced
aggregate net operating income of approximately $8.6 million in 2019. 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.
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 Discussion and Analysis of Financial Condition and
Results of Operations included in Part II, Item 7 of this report.
The Company’s revenues depend on the ability of its tenants under its leases to generate sufficient income from their
operations to make 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.
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.
8 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.
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. Ninety
percent of leases have increases that are based upon fixed percentages, nine percent of leases have increases based on
the Consumer Price Index and one 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, or pay dividends.
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;
9 • Occupancy rates and rents of a completed development property may not be sufficient to make the property
profitable to the Company; and
• Favorable capital sources to fund the Company’s development 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.
The Company is exposed to risks associated with geographic concentration.
As of December 31, 2019, the Company had investment concentrations of greater than 5% of its total investments in
the Seattle, Washington (13.6%), Dallas, Texas (11.8%) and Los Angeles, California (5.7%) 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 8.6% of the Company's consolidated revenues
in 2019.
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, 2019, the Company had 108 properties that were held under ground leases, including one
property with construction in progress, representing an aggregate gross investment of approximately $2.2 billion. The
weighted average remaining term of the Company's ground leases is approximately 71.1 years, including renewal
options. The Company’s ground lease agreements with hospitals and health systems typically contain restrictions
10 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.
Damage from catastrophic weather and other natural events, whether caused by climate change or otherwise, could result in
losses to the Company.
Many of our properties are located in areas susceptible to revenue loss, cost increase, or damage caused by severe
weather conditions or natural disasters such as wildfires, hurricanes, earthquakes, tornadoes and floods. The
Company could experience losses to the extent that such damages exceed insurance coverage, cause an increase in
insurance premiums, and/or a decrease in demand for properties located in such areas. In the event that climate
change causes such catastrophic weather or other natural events to increase broadly or in localized areas, such costs
and damages could increase above historic expectations. In addition, changes in federal and state legislation and
regulation on climate change could result in increased capital expenditures to improve energy efficiency of our
existing properties and could require the Company to spend more on development and redevelopment properties
without a corresponding increase in revenue.
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
11 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:
• 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.
Government tenants may not receive annual budget appropriations, which could adversely affect their ability to pay the
Company.
The Company may lease to federal, state, and/or local government tenants from time to time. Such tenants may be
subject to annual budget appropriations. If a government tenant fails to receive its annual budget appropriation, it
might not be able to make its lease payments to the Company. In addition, defaults under leases with federal
government tenants are governed by federal statute and not by state eviction or rent deficiency laws. Leases with
government tenants typically provide that the government tenant may terminate the lease under certain
circumstances.
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, 2019, the Company had approximately $1.4 billion of outstanding indebtedness, excluding
discounts, premiums and debt issuance costs. 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 2024” and "Unsecured Term Loan due 2026") and
the indentures governing the Company’s senior notes permit the Company to incur substantial, additional debt, and
12 the Company may borrow additional funds, which may include secured borrowings. A high level of indebtedness
would require the Company to dedicate a substantial portion of its cash flows from operations to service the debt,
thereby reducing the funds available to implement the Company’s business strategy and to make distributions to
stockholders. A high level of indebtedness could also:
•
•
•
limit the Company’s ability to adjust rapidly to changing market conditions in the event of a downturn in general
economic conditions or in the real estate and/or healthcare industries;
impair the Company’s ability to obtain additional debt financing or require potentially dilutive equity to fund
obligations and carry out its business strategy; and
result in a downgrade of the rating of the Company’s debt securities by one or more rating agencies, which would
increase the costs of borrowing under the Unsecured Credit Facility and the cost of issuance of new debt
securities, among other things.
In addition, from time to time, the Company secures mortgage financing 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 2024 and the Unsecured Term Loan due
2026, 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
13 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 or 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.
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's credit ratings could 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, Unsecured Term
Loan due 2024 and the Unsecured Term Loan due 2026.
The Company is exposed to increases in interest rates, changes to the method that LIBOR rates are determined, and the
potential phasing out of LIBOR. Such changes could adversely impact the Company's ability to refinance existing debt, sell
assets or engage in acquisition and development activity.
A significant portion of the Company’s debt is subject to floating rates, based on LIBOR or other indices. LIBOR and
other interest benchmarks may be subject to regulatory reform that could cause fluctuations in interest rates under
the Company's debt agreements that are unanticipated. The United Kingdom's Financial Conduct Authority, which
regulates LIBOR, has announced that it intends to stop encouraging or requiring banks to submit rates for the
calculation of LIBOR rates after 2021. It is unclear whether LIBOR will cease to exist or if new methods of
calculating it will develop. The Company's existing and future debt agreements that are based on LIBOR could be
adversely affected by such changes. The Unsecured Credit Facility, the Unsecured Term Loan due 2024, and the
Unsecured Term Loan due 2026 contain provisions addressing the transition away from LIBOR that are intended to
provide a mechanism for determining an alternate benchmark rate in the event that LIBOR becomes unavailable
during the term of these loans. However, as there is yet to be a widely accepted alternate benchmark, these
transitional provisions provide that the alternate benchmark will be selected by the parties in the future, subject to a
determinative framework. There can be no certainty as of the date of this report as to the specific alternate
benchmark that would be used.
In addition, 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,
the Unsecured Term Loan due 2024, and the Unsecured Term Loan due 2026, 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
14 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.
The Company may enter into joint venture agreements that would limit its flexibility with respect to jointly owned properties.
The Company may from time to time acquire, develop, or redevelop properties in joint ventures with unrelated third
parties. In such event, the Company would be subject to risks that may not be present in its other forms of
ownership, including:
• potential joint venture partners could have financing and investment goals or strategies that are different than
those of the Company, including terms and strategies for such investment and what levels of debt place on the
venture;
•
•
•
•
•
the parties to a joint venture could reach an impasse on certain decisions, which could result in unexpected costs,
including costs associated with litigation or arbitration;
joint venture partners could have investments that are competitive with the Company's properties in certain
markets;
interests in joint ventures are often illiquid and the Company may have difficulty exiting such in investment, or
may have to exit at less than fair market value;
joint venture partners may be structured differently than the Company for tax purposes and their could be
conflicts relating to the Company's REIT status; and
joint venture partners could become insolvent, fail to fund capital contributions, or otherwise fail to fulfill their
obligations as a partner, which could require the Company to invest more capital into such ventures than
anticipated.
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 a 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.
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;
transition to value-based care and reimbursement of providers;
competition among healthcare providers;
consolidation among healthcare providers, health insurers, hospitals and health systems;
15 •
a rise in government-funded health insurance coverage;
• pressure on providers' operating profit margins from lower reimbursement rates, lower admissions growth, and
higher expense growth;
availability of capital;
credit downgrades;
liability insurance expense;
rising pharmaceutical drug expense;
regulatory and government reimbursement uncertainty related to the Medicare and Medicaid programs;
a trend toward government regulation of hospital, physician and pharmaceutical pricing;
federal court decisions on cases challenging the legality of the Affordable Care Act, in whole or in part;
site-neutral rate-setting for Medicare services across different care 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 trends, among others, can adversely affect the economic performance of some or all of the tenants 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. For example, proposed legislation to address climate change could increase utility and other
costs of operating the Company's properties. 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. 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.
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.
16 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 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 15 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's 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 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
17 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 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 following the most recent date on which the interested stockholder became an interested stockholder, 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. On February 12, 2019, the
Company opted out of the provision of this statute that permits the board to classify without shareholder vote. As
such, the Company's board could not classify into multiple classes without stockholders' approval.
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, there can be no assurance that the Company can comply in all cases 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
18 could jeopardize the Company’s REIT qualification. The Company’s continued qualification as a REIT will depend on
the Company’s satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other
requirements on a continuing basis. In addition, the Company’s ability to satisfy the requirements to qualify as a
REIT depends in part on the actions of third parties over which the Company has no control or only limited influence,
including in cases where the Company owns an equity interest in an entity that is classified as a partnership for U.S.
federal income tax purposes.
New legislation or administrative or judicial action, in each instance potentially with retroactive effect, could make it more
difficult or impossible for the Company to qualify as a REIT.
The present federal income tax treatment of REITs may be modified, possibly with retroactive effect, by legislative,
judicial or administrative action at any time, which could affect the federal income tax treatment of an investment in
the Company. The federal income tax rules that affect REITs are constantly under review by persons involved in the
legislative process, the IRS and the U.S. Treasury Department, which results in statutory changes as well as frequent
revisions to regulations and interpretations. Revisions in federal tax laws and interpretations thereof could cause the
Company to change its investments and commitments and affect the tax considerations of an investment in the
Company. There can be no assurance that new legislation, regulations, administrative interpretations or court
decisions will not change the tax laws significantly with respect to the Company’s qualification as a REIT or with
respect to the federal income tax consequences of qualification.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
In addition to the properties described in Item 1. “Business,” in Note 2 to the Consolidated Financial Statements, and
in Schedule III of Item 15 of this Annual Report on Form 10-K, the Company leases office space from unrelated third
parties from time to time. The Company owns its corporate headquarters located at 3310 West End Avenue in
Nashville, Tennessee.
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.
19 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, 2019, there were 954 stockholders of record.
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, 2019 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)
332,659
—
332,659
—
—
—
1,511,921
—
1,511,921
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.
Issuer Purchases of Equity Securities
During the year ended December 31, 2019, the Company withheld and canceled shares of Company common stock to
satisfy employee tax withholding obligations payable upon the vesting of non-vested shares, as follows:
TOTAL NUMBER
OF SHARES
PURCHASED
AVERAGE
PRICE PAID
per share
TOTAL NUMBER OF SHARES
purchased as part of publicly
announced plans or programs
MAXIMUM NUMBER OF SHARES
that may yet be purchased
under the plans or programs
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
10,947 $
7,649
950
—
—
—
—
—
28.28
31.69
31.60
—
—
—
—
—
September 1 - September 30
80,490
33.50
October 1 - October 31
November 1 - November 30
December 1 - December 31
Total
—
—
1,544
101,580
—
—
33.37
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
20 Authorization to Repurchase Common Stock
On April 30, 2019, the Company’s Board of Directors authorized the repurchase of up to $50 million of outstanding
shares of the Company’s common stock either in the open market or through privately negotiated transactions,
subject to market conditions, regulatory constraints, and other customary conditions. The Company is not obligated
under this authorization to repurchase any specific number of shares. This authorization supersedes all previous
stock repurchase authorizations. As of the date of this report, the Company has not repurchased any shares of its
common stock under this authorization.
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
2019
2018
2017
2016
2015
YEAR ENDED DECEMBER 31,
Statement of Income Data
Total revenues
Total expenses
Other income (expense)
Income from continuing operations
Income from discontinued operations
Net income attributable to common stockholders
Diluted earnings per common share
Income from continuing operations
Income 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
Assets held for sale, net
Total assets
Notes and bonds payable, net
Total stockholders' equity
Other Data
Funds from operations 1
Funds from operations per common share - diluted 1
Cash flows from operations
Dividends paid
Dividends declared and paid per common share
$
470,298 $
450,389 $
424,737 $
411,955 $
388,471
394,432
370,016
335,055
310,003
283,541
(36,681)
(10,602)
(66,590)
(16,381)
(46,094)
39,185 $
69,771 $
23,092 $
85,571 $
58,836
—
—
—
—
10,600
39,185 $
69,771 $
23,092 $
85,571 $
69,436
0.29 $
0.55 $
0.18 $
0.78 $
—
—
—
—
0.29 $
0.55 $
0.18 $
0.78 $
0.59
0.11
0.70
128,084
123,351
118,017
109,387
99,880
4,359,993 $
3,974,071 $
3,838,638 $
3,628,221 $
3,380,908
3,238,891 $
2,958,897 $
2,941,208 $
2,787,382 $
2,618,982
37 $
9,272 $
33,147 $
3,092 $
724
3,563,855 $
3,191,247 $
3,193,585 $
3,040,647 $
2,810,224
1,414,069 $
1,345,984 $
1,283,880 $
1,264,370 $
1,424,992
1,900,009 $
1,716,642 $
1,789,883 $
1,653,414 $
1,242,747
200,737 $
194,960 $
134,274 $
174,420 $
124,571
1.56 $
1.57 $
1.13 $
1.59 $
1.25
213,138 $
208,355 $
179,766 $
151,272 $
153,983
155,358 $
150,266 $
142,327 $
131,759 $
120,266
1.20 $
1.20 $
1.20 $
1.20 $
1.20
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1
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.
21 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 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:
Risks relating to our business and operations
• 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;
• 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 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;
• Certain of the Company’s properties are special purpose healthcare facilities and may not be easily adaptable to
other uses;
• 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’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 and redevelopments 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;
• Damage from catastrophic weather and other natural events, whether caused by climate change or otherwise,
could result in losses to the Company;
• 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;
• Government tenants may not receive annual budget appropriations, which could adversely affect their ability to
pay the Company;
22 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;
• 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;
• 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, changes to the method that LIBOR rates are determined,
and the potential phasing out of LIBOR. Such changes could adversely impact the Company's 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;
• The Company may enter into joint venture agreements that would limit its flexibility with respect to jointly
owned properties;
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;
• 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.
Overview
The Company owns and operates properties that facilitate the delivery of healthcare services 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
23 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 high-growth markets with a broad
tenant mix that includes over 30 physician specialties, as well as surgery, imaging, cancer, and diagnostic centers.
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:
• 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
Liquidity and Capital Resources
The Company monitors its liquidity and capital resources and considers several indicators in its assessment of capital
markets for financing acquisitions and other operating activities. The Company considers, among other factors, its
leverage ratios and lending covenants, dividend payout percentages, interest rates, underlying treasury rate, debt
market spreads and cost of equity capital 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. 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 with a gross book value of approximately $4.0 billion at
December 31, 2019, 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, 2019, 2018 and 2017 were $213.1
million, $208.4 million and $179.8 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.
24 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.
Investing Activities
A summary of the significant transactions impacting investing activities for the year ended December 31, 2019 is
listed below. See Note 4 to the Consolidated Financial Statements for more detail on these activities.
Outflows
The following table details the acquisitions for the year ended December 31, 2019:
Dollars in millions
Washington, D.C. 2
HEALTH SYSTEM AFFILIATION
Inova Health
Indianapolis, IN
Indiana University Health
Atlanta, GA
Dallas, TX
Seattle, WA
Seattle, WA
Seattle, WA
Houston, TX
Oklahoma City, OK
Los Angeles, CA 2
Raleigh, NC
Dallas, TX 3
Seattle, WA
Seattle, WA
Memphis, TN 4
Seattle, WA
Total acquisitions
Piedmont Healthcare
Baylor Scott & White Health
MultiCare Health System
UW Medicine
UW Medicine
Houston Methodist
Integris Health
Huntington Hospital
WakeMed Health
Baylor Scott & White Health
EvergreenHealth
UW Medicine
Baptist Memorial Health Care
CommonSpirit Health
MILES TO
CAMPUS
DATE
ACQUIRED
PURCHASE
PRICE
SQUARE
FOOTAGE
CAP
RATE 1
0.00
0.00
0.14
0.01
0.20
0.27
0.35
0.00
0.02
0.05
0.11
0.04
0.30
3.50
0.26
0.15
3/28/19 $
3/28/2019
4/2/2019
6/10/2019
6/11/2019
6/14/2019
6/28/2019
8/1/2019
9/26/2019
9/30/2019
10/31/2019
10/31/2019
11/18/2019
12/10/2019
12/13/2019
12/18/2019
46.0
47.0
28.0
17.0
7.7
19.0
30.5
13.5
4.1
61.1
21.6
20.1
22.8
24.2
8.7
10.0
158,338
143,499
47,963
89,990
29,870
47,255
78,288
29,903
28,542
115,634
57,730
48,192
36,350
44,166
110,883
20,109
$
381.3
1,086,712
5.2%
5.1%
5.7%
6.2%
6.9%
5.8%
5.7%
5.7%
6.3%
5.2%
5.5%
5.3%
5.5%
6.1%
NA
6.3%
5.5%
1
2
3
4
The cap rate represents the forecasted first year net operating income ("NOI") divided by purchase price.
Includes two properties.
Represents the cap rate when tenant build out for existing leases is complete and all tenants are occupying and paying full rent.
The Company acquired this property as part of a redevelopment project. During the construction period, the property is expected to be 44% occupied
and NOI is expected to break-even.
In 2019, the Company funded the following tenant improvements and capital expenditures:
•
•
•
•
$28.6 million toward development and redevelopment of properties;
$19.8 million toward first generation tenant improvements and planned capital expenditures for acquisitions;
$28.7 million toward second generation tenant improvements; and
$17.2 million toward capital expenditures. See the Trends and Matters Impacting Operating Results - Capital
Expenditures for more detail.
Subsequent Acquisition
On January 3, 2020, the Company acquired an 86,986 square foot medical office building in Los Angeles, California
for a purchase price of $42.0 million, including assumed debt of $19.3 million.
25 Inflows
The following table details the dispositions for the year ended December 31, 2019:
Dollars in millions
Tucson, AZ 3
Virginia Beach, VA
San Antonio, TX
Erie, PA 4
New Orleans, LA 5
Kingsport, TN
Pittsburgh, PA 4
Dallas, TX 5
Total dispositions
Total MOB dispositions
DATE
DISPOSED
PROPERTY
TYPE 1
SALES
PRICE
SQUARE
FOOTAGE
DISPOSITION
CAP RATE 2
4/9/19 MOB
$
13.0
8/1/19 MOB
8/28/19 MOB
10/25/19
IRF
11/25/19 MOB
11/27/19
SNF
12/18/19
IRF
12/30/19 MOB
1.3
0.9
14.0
3.7
9.5
3.8
8.7
$
$
54.9
27.6
67,345
10,000
10,138
90,123
136,155
75,000
78,731
69,558
537,050
293,196
6.2 %
12.2 %
3.0 %
15.6 %
3.3 %
8.7 %
(9.0)%
4.5 %
7.6 %
5.5 %
1
2
3
4
5
MOB = medical office building; SNF = skilled nursing facility; IRF = inpatient rehabilitation facility
Cap rate represents the in-place cash NOI divided by sales price.
Includes four properties sold to a single purchaser.
Previously classified as held for sale.
Includes two properties.
Financing Activities
Common Stock Issuances
On March 19, 2019, the Company issued 3,737,500 shares of common stock, par value $0.01 per share, at $31.40 per
share in an underwritten public offering pursuant to the Company's existing effective registration statement. The net
proceeds of the offering, after underwriting discounts and offering expenses, were approximately $115.8 million.
The Company sold 5,470,673 shares under the Company's at-the-market equity offering program from January 1,
2019 through December 31, 2019. The sales generated $179.1 million in net proceeds at prices to the public ranging
from $32.01 to $33.77 per share (weighted average of $33.22 per share). The sales occurred during the following time
periods:
• During the first quarter of 2019, the Company sold 135,265 shares generating $4.3 million in net proceeds at
prices to the public ranging from $32.01 to $32.86 per share (weighted average of $32.36 per share).
• No shares were sold in the second quarter of 2019.
• During the third quarter of 2019, the Company sold 2,191,522 shares generating $71.6 million in net proceeds at
prices to the public ranging from $32.62 to $33.77 per share (weighted average of $33.15 per share).
• During the fourth quarter of 2019, the Company sold 3,143,886 shares generating $103.2 million in net proceeds
at prices to the public ranging from $32.02 to $33.74 per share (weighted average of $33.30 per share).
On or about February 14, 2020, the Company plans to enter into equity distribution agreements with six investment
banks to renew its at-the-market equity program and to introduce forward sale transactions into the program. These
agreements will replace the prior sales agreements under the Company's at-the-market equity program.
Debt Activity
On April 10, 2019, the Company repaid in full a mortgage note payable bearing interest at a rate of 5.00% per annum
with an outstanding principal of $8.9 million. The mortgage note encumbered a 52,813 square foot property in the
state of Washington.
On May 31, 2019, the Company amended and restated its Unsecured Credit Facility to extend the maturity date from
July 2020 to May 2023 and improved the credit spread by 10 basis points at current ratings. Amounts outstanding
under the Unsecured Credit Facility bear interest at LIBOR plus an applicable margin, which depends on the
26 Company's credit ratings ranging from 0.775% to 1.45% (0.90% at December 31, 2019). In addition, the Company
pays a facility fee per annum on the aggregate amount of commitments ranging from 0.125% to 0.30% (0.20% at
December 31, 2019). In connection with the amendment, the Company paid up front fees to the lenders and other
costs of approximately $3.5 million, which were capitalized and will be amortized over the term of the Unsecured
Credit Facility.
Also, on May 31, 2019, the Company amended and restated its Term Loan with a syndicate of lenders and improved
the credit spread on the Unsecured Term Loan due 2024 by 10 basis points at current ratings. The amended
agreement extended the maturity date of the Company's unsecured term loan due 2022 to May 2024 and increased
the loan amount from $150.0 million to $200.0 million. In addition, the amended agreement added a $150.0 million
seven-year term loan facility due June 2026. The Term Loan due 2024 bears interest at LIBOR plus an applicable
margin ranging from 0.85% to 1.65% (1.00% at December 31, 2019) based upon the Company's unsecured debt
ratings. The Term Loan due 2026 has a delayed draw feature that allows the Company up to nine months to draw
against the commitments. As of December 31, 2019, no loans were outstanding under the Term Loan due 2026. Loans
outstanding under the Term Loan due 2026 will bear interest at a rate equal to LIBOR plus a margin ranging from
1.45% to 2.40% (1.60% at December 31, 2019). Committed amounts that remain undrawn are subject to a ticking fee
ranging from 0.125% to 0.30% per annum (0.20% at December 31, 2019). In connection with the amendment, the
Company paid up front fees to the lenders of approximately $1.8 million, of which $1.0 million were capitalized and
will be amortized over the respective term of the Term Loans and $0.8 million were expensed during the second
quarter of 2019.
As of December 31, 2019, the Company has outstanding interest rate swaps totaling $175.0 million to hedge one-
month LIBOR. The Company pays the rate in the table below and receives one-month LIBOR from the counterparty.
The following details the amount and rate of each swap (dollars in thousands):
EFFECTIVE DATE
AMOUNT
December 18, 2017
$
25,000
February 1, 2018
May 1, 2019
June 3, 2019
50,000
50,000
50,000
$ 175,000
WEIGHTED
AVERAGE RATE
2.18%
2.46%
2.33%
2.13%
2.29%
EXPIRATION DATE
December 16, 2022
December 16, 2022
May 1, 2026
May 1, 2026
27 The following table details the Company's debt balances as of December 31, 2019:
PRINCIPAL
BALANCE
CARRYING
BALANCE 1
WEIGHTED YEARS
TO MATURITY
CONTRACTUAL
RATE
EFFECTIVE
RATE
Senior Notes due 2023
Senior Notes due 2025 2
Senior Notes due 2028
Total Senior Notes Outstanding
$700 million unsecured credit facility due 2023 3
$200 million unsecured term loan due 2024 4
$150 million unsecured term loan due 2026 5
Mortgage notes payable
$
250,000 $
248,540
250,000
300,000
248,522
295,651
800,000
792,713
293,000
200,000
—
293,000
199,013
—
129,258
129,343
Total Outstanding Notes and Bonds Payable
$ 1,422,258 $ 1,414,069
3.3
5.3
8.0
5.7
3.4
4.4
6.4
4.4
4.9
3.75%
3.88%
3.63%
3.74%
LIBOR+0.90%
LIBOR+1.00%
LIBOR+1.60%
4.95%
3.56%
3.95%
4.08%
3.84%
3.95%
2.66%
3.27%
NA
4.81%
3.67%
1
2
3
4
5
Balances are reflected net of discounts and debt issuance costs and include premiums.
The effective interest rate includes the impact of the $1.7 million settlement of a forward-starting interest rate swap that is included in accumulated
other comprehensive income on the Company's Consolidated Balance Sheets.
As of December 31, 2019, the Company had $293.0 million outstanding under the Unsecured Credit Facility with a weighted average interest rate of
approximately 2.66% and a remaining borrowing capacity of approximately $407.0 million. As of December 31, 2018, the Company had $262.0 million
outstanding with a weighted average interest rate of approximately 3.50%
The effective interest rate includes the impact of interest rate swaps totaling $175.0 million to hedge the 1-month LIBOR portion of the cost of borrowing
under the Unsecured Term Loan due 2026 at a weighted average interest rate of 2.29% (plus the applicable margin rate, currently 1.00%).
As of December 31, 2019, there are no outstanding loans under the $150 million Unsecured Term Loan due 2026. This term loan has a delayed draw
feature that allows the Company until February 28, 2020 to draw against the commitments.
Subsequent Mortgage Note Payable Payoff
On February 3, 2020, the Company repaid in full a mortgage note payable bearing interest at a rate of 6.10% per
annum with an outstanding principal of $5.9 million. The mortgage note encumbered a 68,860 square foot property in
Oklahoma.
Debt Covenant Information
As of December 31, 2019, 98.4% of the Company’s principal balances were due after 2020. Also, as of December 31,
2019, the Company's incurrence of total debt covenant as defined in the senior notes due 2025 and 2028 [debt divided
by (total assets less intangibles and accounts receivable)] was approximately 33.5% (cannot be greater than 60%) and
debt service coverage [interest expense divided by (net income plus interest expense, taxes, deprecation and
amortization, gains and impairments)] was approximately 4.8 times (cannot be less than 1.5x).
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, 2019, 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.
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.
28 Acquisitions and Dispositions
During 2019, the Company acquired 18 medical office buildings for purchase prices totaling $381.3 million, resulting
in cash consideration paid of $378.5 million. The weighted average capitalization rate for these investments,
excluding the Memphis Redevelopment, was 5.5%.
The Company disposed of 13 properties in 2019 for sales prices totaling $54.9 million, yielding net cash proceeds of
$52.4 million net of $2.5 million of closing costs and related adjustments. The weighted average capitalization rate for
these investments was 7.6%.
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 may be purchased for lower capitalization rates because of their lower-risk profile
and higher internal growth potential. In addition, the volume and timing of such acquisitions and dispositions could
have a material impact on operating results.
See the Company's discussion of the 2019 acquisitions and dispositions activity in Note 4 to the Consolidated
Financial Statements.
Development and Redevelopment Activity
In 2019, the Company funded $28.6 million toward development and redevelopment of properties, including the
following:
• The Company completed the redevelopment of a medical office building in Charlotte, North Carolina, which
included a 40,278 square foot vertical expansion. The Company funded approximately $1.5 million during the
year ended December 31, 2019. The first tenant took occupancy during the second quarter of 2019.
• The Company continued development of a 151,000 square foot medical office building in Seattle, Washington.
The Company funded $25.2 million during the year ended December 31, 2019. The Company expects initial
occupancy to occur in the first quarter of 2020.
• The Company began the redevelopment of a 110,883 square foot medical office building in Memphis, Tennessee.
The Company funded approximately $0.3 million, excluding $8.7 million for the acquisition of building and land,
during the year ended December 31, 2019.
• The Company funded an additional $1.0 million on a previously completed redevelopment in Nashville,
Tennessee and $0.6 million on a previously completed development project in Denver, Colorado.
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 2020. 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 be indicative
of actual results. See Note 14 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, 2019, the Company held approximately $9.6 million in letters of credit and security deposits for
the benefit of the Company in the event the obligated tenant fails to perform under the terms of its respective lease.
Generally, the Company may, at its discretion and upon notification to the tenant, draw upon these instruments if
there are any defaults under the leases.
Multi-Tenant Leases
The Company expects that approximately 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 7.2 years and a weighted average remaining lease
29 term of 3.6 years. Demand for well-located real estate with complementary practice types and services remains
consistent, and the Company's 2019 quarterly tenant retention statistics ranged from 84% to 86%. In 2020, the
Company has 735 leases totaling 2.6 million square feet in its multi-tenant portfolio that are scheduled to expire. Of
those leases, 85% are in on-campus buildings, which tend to have a high tenant retention rate.
Included in the 2020 lease expirations is a 111,000 square foot fitness center leased by Baylor Scott & White Health.
The lease has been extended from June 30, 2019 to March 31, 2020. The fitness center is located in a 217,000 square
foot on-campus medical office building. The Company is in lease negotiations with an independent fitness center operator
for approximately half of the space. The Company expects to convert the remaining space for clinical use.
Also included in the 2020 lease expirations is the July 31 expiration of a 62,000 square foot office lease. A
telecommunication company occupies three floors of a 145,000 square foot office building and is expected to vacate.
The Company has begun marketing the space, and anticipates that releasing efforts will include subdividing the
space for multiple users. The Company recognized revenue of approximately $1.5 million related to this lease in 2019.
The Company continues to emphasize improving its multi-tenant contractual rent increases for its in-place leases. As
of December 31, 2019 and 2018, the Company's contractual rental rate growth averaged 2.89% and 2.86%,
respectively, for in-place leases. 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 2019, cash leasing spreads averaged 4.0%.
In a further effort to maximize revenue growth and reduce its exposure to key 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 12% 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 57% of the leased portfolio.
Capital Expenditures
Capital expenditures 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 expenditures
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 expenditures 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.
The Company invested $17.2 million, or $1.12 per square foot, in capital expenditures in 2019 and $20.3 million, or
$1.37 per square foot, in capital expenditures in 2018. As a percentage of cash net operating income, 2019 and 2018
capital expenditures were 5.9% and 7.3%, respectively. For a reconciliation of cash net operating income, see "Same
Store Cash NOI" in the "Non-GAAP Measures and Key Performance Indicators" section as part of Management's
Discussion and Analysis of Financial Condition and Results of Operations included in Part II, Item 7 of this report.
Tenant Improvements
The Company may invest in tenant improvements for the purpose of refurbishing or renovating tenant space. The
Company categorizes these expenditures into first and second generation tenant improvements.
First Generation Tenant Improvements & Planned Capital Expenditures for Acquisitions
First generation tenant improvements and planned capital expenditures for acquisition spending totaled $19.8
million and $13.1 million for the years ended December 31, 2019 and 2018, respectively. First generation tenant
30 improvements include build out costs related to suite space in shell condition. Planned capital expenditures for
acquisitions include expected near-term fundings that were contemplated as part of the acquisition.
Second Generation Tenant Improvements
Second generation tenant improvements spending totaled $28.7 million in 2019, or 9.9% of total cash net operating
income. In 2018, this spending totaled $30.9 million, or 11.2% of total cash net operating income.
If the cost of a tenant improvement project exceeds a tenant improvement allowance, the Company generally offers
the tenant the option to finance the excess over the lease term with interest or to 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 $0.2 million in 2019, $0.3 million in 2018, and $0.4 million in 2017.
The first and second generation tenant overage amount amortized to rent totaled approximately $5.7 million in 2019,
$4.8 million in 2018, and $5.0 million in 2017.
Second generation, multi-tenant tenant improvement commitments in 2019 for renewals averaged $2.26 per square
foot per lease year, ranging quarterly from $1.75 to $3.15. In 2018, these commitments averaged $1.94 per square foot
per lease year, ranging quarterly from $1.50 to $2.48. In 2017, these commitments averaged $1.78 per square foot per
lease year, ranging quarterly from $1.38 to $2.30.
Second generation, multi-tenant tenant improvement commitments in 2019 for new leases averaged $5.02 per square
foot per lease year, ranging quarterly from $4.79 to $5.18. In 2018, these commitments averaged $4.82 per square foot
per lease year, ranging quarterly from $4.04 to $5.42. In 2017, these commitments averaged $3.60 per square foot per
lease year, ranging quarterly from $2.10 to $4.78.
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 addition, the Company may pay internal
employees commissions when leases are executed and meet certain leasing thresholds. External leasing commissions
are amortized to Rental income and internal leasing costs are amortized to General and administrative expense in
the Company's Consolidated Statements of Income. In 2019, the Company paid leasing commissions of approximately
$11.3 million, or $0.74 per square foot. In 2018, the Company paid leasing commissions of approximately $7.1 million,
or $0.48 per square foot. As a percentage of total cash net operating income, leasing commissions paid for 2019 and
2018 were 3.9% and 2.6%, respectively. The amount of leasing commissions amortized over the term of the applicable
leases totaled $6.1 million, $5.2 million and $4.5 million for the years ended December 31, 2019, 2018 and 2017,
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 2019 totaled approximately $2.1
million, or $0.13 per square foot. Rent abatements for 2018 totaled approximately $3.1 million, or $0.21 per square
foot. Rent abatements for 2017 totaled approximately $3.0 million, or $0.20 per square foot.
Single-Tenant Net Leases
The Company has one single-tenant net leased, on-campus medical office building with a lease term scheduled to
expire in the second quarter of 2020. The Company expects the tenant to renew.
As of December 31, 2019, the Company had a total of 14 single-tenant net leases, with a weighted average lease term
of 13.8 years and a weighted average remaining lease term of 7.2 years.
31 Operating Leases
As of December 31, 2019, the Company was obligated to make rental payments under operating lease agreements
consisting primarily of ground leases related to 62 real estate investments, excluding those ground leases the
Company has prepaid. At December 31, 2019, the Company had 108 properties totaling 8.9 million square feet that
were held under ground leases with a remaining weighted average term of 71.1 years, including renewal options.
These ground leases typically have initial terms of 50 to 75 years with one or more renewal options extending the
terms to 75 to 100 years, with expiration dates through 2117. The Company adopted Accounting Standards
Codification 842, "Leases" as of January 1, 2019. See Note 1 and Note 3 to the Consolidated Financial Statements for
additional information regarding the impact of the adoption of this accounting standard.
Purchase Options
The Company had approximately $96.0 million in real estate properties as of December 31, 2019 that were subject to
exercisable purchase options. The Company has approximately $455.2 million in real estate properties that are
subject to purchase options that will become exercisable after 2020. Additional information about the amount and
basis for determination of the purchase price is detailed in the table below (dollars in thousands):
YEAR EXERCISABLE
Current 3
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030 and thereafter
Total
NUMBER OF PROPERTIES
GROSS REAL ESTATE INVESTMENT AS OF DECEMBER 31, 2019
MOB
INPATIENT
FAIR MARKET
VALUE METHOD 1
NON FAIR MARKET
VALUE METHOD 2
TOTAL
3
—
1
—
—
—
5
—
—
1
1
4
15
1
—
—
—
—
—
1
—
—
—
—
—
2
$
96,039 $
—
—
—
—
—
— $
96,039
—
—
14,984
14,984
—
—
—
—
—
—
48,138
221,929
270,067
—
—
43,925
26,413
99,785
—
—
—
—
—
—
—
43,925
26,413
99,785
$
314,300 $
236,913 $
551,213
1
2
The purchase option price includes a fair market value component that is determined by an appraisal process.
Includes properties with stated purchase prices or prices based on fixed capitalization rates. These properties have purchase prices that are on average
17% greater than the Company's current gross investment.
3
These purchase options have been exercisable for an average of 11.4 years.
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 $129.3 million of mortgage notes payable, most of
which were assumed when the Company acquired properties. In 2020, the Company has approximately $44.3 million
of mortgage notes payable that will mature or are able to be repaid without penalty. The Company will repay
mortgage notes with cash on hand or borrowings under the Unsecured Credit Facility.
32 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 Company's leases have a weighted
average lease term remaining of approximately 3.9 years. 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, 2019:
% INCREASE
% OF BASE RENT
Annual increase
CPI
Fixed
Non-annual increase
CPI
Fixed
No increase
Term > 1 year
2.0%
3.0%
1.4%
1.9%
—%
7.7%
84.8%
1.0%
5.7%
0.8%
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. In the first quarter of each year, general and
administrative expense includes increases for certain expenses such as payroll taxes, non-cash Employee Stock
Purchase Plan expense and healthcare savings account fundings. The Company expects these customary expenses to
increase by approximately $0.8 million in the first quarter of 2020. Approximately $0.7 million is not expected to
recur in subsequent quarters in 2020.
Results of Operations
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
The Company’s consolidated results of operations for 2019 compared to 2018 were significantly impacted by
acquisitions, dispositions, gain on sales and impairment charges recorded on real estate properties.
Revenues
Rental income increased $19.8 million, or 4.5%, to approximately $462.2 million compared to $442.4 million in the
prior year and is comprised of the following:
Dollars in thousands
2019
2018
$
%
Property operating
$ 415,142 $ 390,256
$
24,886
6.4 %
Single-tenant net lease
Straight-line rent
44,083
3,000
47,860
4,281
(3,777)
(7.9)%
(1,281)
(29.9)%
Total rental income
$ 462,225 $ 442,397
$
19,828
4.5 %
CHANGE
33 Property operating income increased $24.9 million, or 6.4%, from the prior year primarily as a result of the following
activity:
• Acquisitions and developments in 2018 and 2019 contributed $19.7 million.
• Leasing activity, including contractual rent increases, contributed $9.7 million.
• Dispositions in 2018 and 2019 resulted in a decrease of $4.5 million.
Single-tenant net lease income decreased $3.8 million, or 7.9%, from the prior year primarily as a result of the
following activity:
• Dispositions in 2018 and 2019 resulted in a decrease of $4.7 million.
• Leasing activity, including contractual rent increases, contributed $0.9 million.
Straight-line rent income decreased $1.3 million, or 29.9%, from the prior year primarily as a result of the following
activity:
• Acquisitions and developments in 2018 and 2019 resulted in an increase of $1.1 million.
• Dispositions in 2018 and 2019 resulted in a decrease of $0.2 million.
• Reduced rent abatements along with net leasing activity and contractual rent increases resulted in a decrease of
$2.2 million.
Expenses
Property operating expenses increased $9.5 million, or 5.6%, from the prior year primarily as a result of the following
activity:
• Acquisitions and developments in 2018 and 2019 resulted in an increase of $8.7 million.
•
Increases in portfolio operating expenses as follows:
Property tax expense of $1.1 million;
Maintenance and repair expense of $1.6 million;
Leasing commission amortization of $0.9 million;
Insurance expense of $0.6 million; and
Janitorial expense of $0.2 million.
• Utilities expense decreased $0.9 million.
• Dispositions in 2018 and 2019 resulted in a decrease of $2.7 million.
General and administrative expenses increased approximately $0.3 million, or 0.9%, from the prior year primarily as
a result of the following activity:
• The Company's former Executive Chairman, David R. Emery, died on September 30, 2019 resulting in a $2.9
million charge for the acceleration of his outstanding nonvested share-based awards and associated taxes. This
amount was partially offset by $0.3 reduction in non-cash compensation expense.
• Non-cash compensation expense decreased $0.8 million mainly due to an officer retirement.
• Office rent decreased $0.8 million due to the 2018 acquisition of the Company's headquarters.
• Other net decreases, including professional fees and other administrative costs, of $0.7 million.
Depreciation and amortization expense increased $13.7 million, or 8.3%, from the prior year primarily as a result of
the following activity:
• Acquisitions and developments in 2018 and 2019 resulted in increases of $13.4 million.
• Various building and tenant improvement expenditures caused increases of $10.5 million.
• Dispositions in 2018 and 2019 resulted in decreases of $5.4 million.
• Assets that became fully depreciated resulted in decreases of $4.8 million.
34
Other Income (Expense)
Other income (expense), a net expense, increased $26.1 million, or 246.0%, from the prior year mainly due to the
following activity:
Gain on Sales of Real Estate Properties
Gain on sales of real estate properties totaling approximately $25.1 million and $41.7 million are associated with the
sales of eleven and sixteen real estate properties during 2019 and 2018, respectively.
Interest Expense
Interest expense increased $2.6 million for the year ended December 31, 2019 compared to the prior year. The
components of interest expense are as follows:
Dollars in thousands
Contractual interest
Net discount/premium accretion
Debt issuance costs amortization
Amortization of interest rate swap settlement
Interest cost capitalization
Right-of-use assets financing amortization
2019
2018
CHANGE
$
$
53,364 $
51,147
$
2,217
%
4.3%
250
2,448
168
(1,411)
616
5
2,435
168
(951)
—
245 4,900.0%
13
—
0.5%
—%
(460)
48.4%
616
—%
5.0%
Total interest expense
$ 55,435 $ 52,804
$
2,631
Contractual interest increased $2.2 million, or 4.3%, primarily as a result of the following activity:
• The Unsecured Credit Facility accounted for a net increase of $1.9 million.
• The Unsecured Term Loan due 2024 accounted for a net increase of $1.3 million.
• The ticking fee on committed amounts that remain undrawn associated with the Unsecured Term Loan due 2026
accounted for an increase of $0.2 million.
• Mortgage notes repayments accounted for a decrease of $1.2 million.
Impairment of Real Estate Assets
Impairment of real estate assets totaling approximately $5.6 million is associated with the sales of two real estate
properties during 2019.
Interest and other income (expense), net
In 2019, the Company expensed approximately $0.8 million of debt issuance costs as a result of the Term Loan
modification. See Note 9 to the Company's Consolidated Financial Statements for additional information regarding
the Term Loan modification.
In 2018, the Company recorded $0.5 million of other income related to the termination fee of a purchase and sale
agreement.
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
The Company's discussion regarding the comparison of the year ended December 31, 2018 compared to the year
ended December 31, 2017 was previously disclosed beginning on page 30 in the Company's 2018 Form 10-K filed on
February 13, 2019 and is hereby incorporated by reference.
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 GAAP. Set
35 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, impairment, 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 debt issuance 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 straight-line rent income, net of expense, and maintenance capital
expenditures, including second generation tenant improvements, capital expenditures and leasing commissions paid.
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.
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.
36 The table below reconciles net income attributable to common stockholders to FFO, Normalized FFO and FAD for the
years ended December 31, 2019, 2018, and 2017.
Amounts in thousands, except per share data
2019
2018
2017
Net income
$
39,185 $
69,771 $
23,092
Gain on sales of real estate properties
(25,101)
(41,665)
(39,524)
YEAR ENDED DECEMBER 31,
Impairments
Real estate depreciation and amortization
FFO
Acquisition and pursuit costs 1
Lease intangible amortization 2
Accelerated stock awards 3
Forfeited earnest money received
Debt financing costs
Normalized FFO
Non-real estate depreciation and amortization
Non-cash interest expense amortization 4
Provision for bad debt, net
Straight-line rent income, net
Share-based compensation
5,617
181,036
200,737
1,742
147
2,854
—
760
—
166,854
194,960
738
—
70
(466)
—
5,385
145,321
134,274
2,180
—
—
—
45,773
206,240
195,302
182,227
3,269
2,866
167
(1,431)
9,519
3,284
2,608
60
(2,728)
10,621
2,757
2,832
159
(4,575)
10,027
Normalized FFO adjusted for non-cash items
220,630
209,147
193,427
2nd Generation tenant improvements
Leasing commissions paid
Capital expenditures
FAD
FFO per common share - diluted
Normalized FFO per common share - diluted
Weighted average common shares outstanding - diluted 5
(28,690)
(11,329)
(17,158)
(30,939)
(7,119)
(20,347)
(20,367)
(7,099)
(18,790)
163,453 $
150,742 $
147,171
1.56 $
1.60 $
1.57 $
1.57 $
1.13
1.53
128,863
124,104
118,877
$
$
$
1
2
3
4
5
Acquisition and pursuit costs include third party and travel costs related to the pursuit of acquisitions and developments.
The Company adopted the 2018 NAREIT FFO White Paper Restatement during the first quarter of 2019. This amended definition specifically includes
the impact of acquisition related market lease intangible amortization in the calculation of NAREIT FFO. The Company historically included this
amortization in the real estate depreciation and amortization line item which is added back in the calculation of NAREIT FFO. Prior periods were not
restated for the adoption.
The Company's former Executive Chairman, David R. Emery, died on September 30, 2019 resulting in a $2.9 million charge for the acceleration of his
outstanding nonvested share-based awards and associated taxes.
Includes the amortization of deferred financing costs, discounts and premiums.
The Company utilizes the treasury stock method which includes the dilutive effect of nonvested share-based awards outstanding of 779,081, 753,121 and
860,145, respectively, for the twelve months ended December 31, 2019, 2018, and 2017.
Same Store Cash NOI
Cash NOI and same store cash NOI are key performance indicators. Management considers same store cash NOI a
supplemental measure because it allows investors, analysts and Company management to measure unlevered
property-level operating results. Cash 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. Cash NOI also excludes non-cash items such as
straight-line rent, above and below market lease intangibles, leasing commission amortization, lease inducements,
and tenant improvement amortization. The Company also excludes cash lease termination fees. Same store NOI is
historical and not necessarily indicative of future results.
Same Store Cash NOI compares Cash NOI for 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
37 redevelopment projects of existing same store properties. Accordingly, stabilized properties exclude properties that
were recently acquired or disposed of, properties classified as held for sale, reposition properties and newly developed
properties. The Company utilizes the reposition classification for properties experiencing a shift in strategic direction.
Such a shift can occur for a variety of reasons, including a substantial change in the use of the asset, a change in
strategy or closure of a neighboring hospital, or significant property damage. Such properties may require enhanced
management, leasing, capital needs or a disposition strategy that differs from the rest of the portfolio. To identify
properties exhibiting these reposition characteristics, the Company applies the following Company-defined criteria:
• 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. Newly developed properties and properties acquired as a redevelopment project will be included in
the same store pool eight full quarters after substantial completion or eight full quarters after initial occupancy, if
different. 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. The following table reflects the Company's same store
cash NOI for the years ended December 31, 2019 and 2018.
Dollars in thousands
Multi-tenant properties
Single-tenant net lease properties
Total
NUMBER OF
PROPERTIES 1
GROSS INVESTMENT
at December 31, 2019
2019
2018
PERCENTAGE
GROWTH
157 $
14
171 $
3,240,598
$
229,214 $
222,210
460,415
41,432
40,702
3,701,013
$
270,646 $
262,912
3.2%
1.8%
2.9%
1
Properties are based on the same store definition included above and exclude assets classified as held for sale, if any.
SAME STORE CASH NOI
for the year ended December 31,
The following tables reconcile same store cash 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 Cash NOI
Dollars in thousands
Net income
Other income (expense)
General and administrative expense
Depreciation and amortization expense
Other expenses 1
Straight-line rent revenue
Other revenue 2
Cash NOI
PERCENTAGE
GROWTH
YEAR ENDED DECEMBER 31,
2019
$
39,185 $
36,681
34,826
2018
69,771
10,602
34,511
177,859
164,201
9,551
(3,000)
(6,070)
7,849
(4,281)
(5,745)
289,032
276,908
4.4 %
Cash NOI not included in same store
(17,297)
(12,378)
Same store and reposition cash NOI
271,735
264,530
Reposition NOI
Same store cash NOI
(1,089)
(1,618)
$
270,646 $
262,912
2.7 %
(32.7)%
2.9 %
1
2
Includes acquisition and pursuit costs, bad debt, above and below market ground lease intangible amortization, leasing commission amortization and
ground lease straight-line rent.
Includes management fee income, interest, above and below market lease intangible amortization, lease inducement amortization, lease terminations
and tenant improvement overage amortization.
38 Reconciliation of Same Store Property Count
Same store properties
Acquisitions
Reposition
Total owned real estate properties
AS OF DECEMBER 31, 2019
PROPERTY
COUNT
GROSS
INVESTMENT
SQUARE
FEET
OCCUPANCY
171
24
9
204
3,701,013
13,440
500,063
71,007
1,487
429
4,272,083
15,356
89.3%
86.1%
41.9%
87.7%
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.
39 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, 2019, 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, 2019, the Company had no long-term capital lease obligations.
Dollars in thousands
Long-term debt obligations, including interest 1
Operating lease commitments 2
Finance lease commitments 3
Construction in progress 4
Tenant improvements 5
Redevelopment 6
PAYMENTS DUE BY PERIOD
TOTAL
LESS THAN 1
YEAR
1-3
YEARS
3-5
YEARS
MORE THAN
5 YEARS
$
1,645,487 $
62,905 $
106,529 $
854,166 $
621,887
348,186
87,283
18,683
46,588
8,190
5,483
745
16,088
46,588
8,190
10,715
1,516
2,595
—
10,671
1,566
—
—
321,317
83,456
—
—
Total contractual obligations
$
2,154,417 $
139,999 $
121,355 $
866,403 $
1,026,660
1
The amounts shown include estimated interest on total debt other than the Unsecured Credit Facility and a portion of the Unsecured Term Loan due
2024, whose balance and interest rate may fluctuate from day to day. The fixed rate interest resulting from the Company's outstanding swaps on $175.0
million of the Unsecured Term Loan due 2024 are reflected in the table above. As of December 31, 2019, there are no outstanding loans under the
Unsecured Term Loan 2026. This term loan has a delayed draw feature that allows the Company up to February 2020 to draw against the $150 million
commitments. Excluded from the table above are the discounts on the Company's outstanding senior notes of approximately $3.0 million, net premiums
totaling approximately $0.6 million on 16 mortgage notes payable, and debt issuance costs totaling approximately $5.8 million which are included in
notes and bonds payable on the Company’s Consolidated Balance Sheet as of December 31, 2019. The Company’s long-term debt principal obligations
are presented in more detail in the table below.
In millions
PRINCIPAL
BALANCE
at Dec. 31, 2019
PRINCIPAL
BALANCE
at Dec. 31, 2018
MATURITY
DATE
CONTRACTUAL
INTEREST RATES
at Dec. 31, 2018
PRINCIPAL
PAYMENTS
INTEREST
PAYMENTS
Unsecured Credit Facility
$
293.0 $
Unsecured Term Loan due 2024
Unsecured Term Loan due 2026
Senior Notes due 2023
Senior Notes due 2025
Senior Notes due 2028
Mortgage notes payable
200.0
—
250.0
250.0
300.0
129.3
262.0
150.0
—
250.0
250.0
300.0
5/23
5/24
6/26
4/23
5/25
1/28
LIBOR + 0.90% At maturity
Monthly
LIBOR + 1.00% At maturity
Monthly
LIBOR + 1.60% At maturity
Monthly
3.75% At maturity
Semi-Annual
3.88% At maturity
Semi-Annual
3.63% At maturity
Semi-Annual
143.1
7/20-5/40
3.31%-6.88% Monthly
Monthly
$
1,422.3 $
1,355.1
2
3
4
5
6
Includes primarily ground leases, with expiration dates through 2117, related to various real estate investments for which the Company is currently
making payments.
Includes three ground leases, with expiration dates through 2091, related to 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. This amount includes $3.6 million of invoices that were
accrued and included in construction in progress on the Company's Consolidated Balance Sheet as of December 31, 2019.
The Company has remaining tenant improvement allowances, excluding construction in progress, of approximately $46.6 million. This amount includes
$9.7 million of invoices that were accrued as of December 31, 2019.
Includes the Memphis Redevelopment tenant improvement obligations of $8.2 million. The Company executed the contract for the redevelopment of
the core and shell in January 2020.
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
40 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, and partnerships where the Company controls the operating activities. All material
intercompany accounts and transactions have been eliminated.
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 property is ready for its intended use. 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.
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.
41 As of December 31, 2019 and 2018, the Company's Consolidated Balance Sheets include capitalized pursuit costs
relating to potential developments totaling $4.6 million and $2.2 million respectively. The Company expensed costs
related to the pursuit of acquisitions totaling $1.0 million, $0.6 million and $2.0 million for the years ended December
31, 2019, 2018 and 2017, respectively. In addition, the Company expensed costs related to the pursuit of
developments totaling $0.7 million, $0.1 million and $0.2 million for the years ended December 31, 2019, 2018 and
2017, 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
of 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.
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 2019 and 2018 reviews indicated that no impairment had occurred with
respect to the Company's $3.5 million goodwill asset.
42 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 $5.6 million and $5.4 million, respectively, for the years ended
December 31, 2019, and 2017 related to real estate properties and other long-lived assets. The Company did not
record any impairment charges in 2018. The impairment charges related to two properties sold in 2019 and 2017.
Depreciation of Real Estate Assets and Amortization of Related Intangible Assets
As of December 31, 2019, the Company had gross investments of approximately $4.0 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, leasing
commissions and customer relationship assets. With regard to the elements of estimating the “as if vacant” values of
the property and the intangible assets, including the absorption period, occupancy increases during the absorption
period, tenant improvement amounts, and leasing commission percentages, the Company uses the same absorption
period and occupancy assumptions for similar property types. Any remaining excess purchase price is then allocated
43 to the tangible and intangible assets based on their relative fair values. The identifiable tangible and intangible
assets are then subject to depreciation and amortization.
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.
Revenue Recognition
The Company's primary source of revenue is derived by non-cancelable leases. When a lease is executed, the terms
and conditions of the lease are assessed to determine the appropriate accounting classification. All of the Company's
leases are classified as operating leases. Operating leases are recognized on the straight-line basis over the term of
the related lease, including periods where a tenant is provided a rent concession. Operating expense recoveries, which
includes reimbursements for building specific operating expenses, are recognized as revenue in the period in which
the related expenses are incurred. The Company generally expects that collectibility is probable at lease
commencement. If the assessment of collectibility changes after the lease commencement date and Rental income is
not considered probable, Rental income is recognized on a cash basis and all previously recognized uncollectible
Rental income is reversed in the period in which it is determined not to be probable of collection. In addition to the
lease-specific collectibility assessment performed under Topic 842, the Company may also apply a general reserve
("provision for bad debt"), as a reduction to Rental income, for its portfolio of operating lease receivables.
The Company also recognizes certain revenue based on the guidance in Topic 606 and is based on the five-step model
to account for revenue arising from contracts with customers. The Company's primary source of revenue associated
with Topic 606 relates to parking revenue and management fee income.
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.
44 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. Management uses regular
monitoring of market conditions and analysis techniques to manage this risk.
As of December 31, 2019, $0.9 billion of the Company’s $1.4 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 2024 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 2024 1
Unsecured Term Loan due 2026 2
OUTSTANDING
PRINCIPAL BALANCE
as of Dec. 31, 2019
CALCULATED
ANNUAL INTEREST
ASSUMING 10%
INCREASE
in market interest rates
ASSUMING 10%
DECREASE
in market interest rates
IMPACT ON EARNINGS AND CASH FLOW
$
$
293,000 $
200,000
—
7,801 $
6,540
—
493,000 $
14,341 $
(780) $
(79)
—
(859) $
780
79
—
859
1
2
As of December 31, 2019 the Company had interest rate swaps that fix the interest rate of $175.0 million of the Unsecured Term Loan due 2024.
As of December 31, 2019, there are no outstanding loans under the Unsecured Term Loan due 2026. This term loan has a delayed draw feature that
allows the Company up to February 2020 to draw against the $150 million commitment.
Dollars in thousands
Fixed Rate Debt
Senior Notes due 2023
Senior Notes due 2025
Senior Notes due 2028
Mortgage Notes Payable
CARRYING VALUE
as of Dec. 31, 2019 2
DEC. 31, 2019
ASSUMING 10%
INCREASE
in market interest rates
ASSUMING 10%
DECREASE
in market interest rates
DEC. 31, 2018 1
FAIR VALUE
$
$
248,540 $
247,105 $
244,136 $
250,090 $
248,522
295,651
129,343
248,981
306,783
130,895
244,466
300,269
129,752
253,685
313,649
132,060
239,377
238,811
294,662
142,474
922,056 $
933,764 $
918,623 $
949,484 $
915,324
1
2
Fair values as of December 31, 2018 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.
Balances are presented net of discounts and debt issuance costs and including premiums. The fair value presented is based on Level 2 inputs defined as
model-derived valuations in which significant inputs and significant value drivers are observable in active markets.
45 Item 8. Financial Statements and Supplementary Data
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Report of
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") as of
December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, equity, and cash flows for
each of the three years in the period ended December 31, 2019, 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 at December 31, 2019 and
2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, 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, 2019, 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 12, 2020 expressed an unqualified opinion thereon.
Adoption of New Accounting Standard
As discussed in Notes 1 and 3 to the consolidated financial statements, the Company changed its method of accounting for
leases during the year ended December 31, 2019 due to the adoption of ASU No. 2016-02, Leases.
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.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial
statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or
disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or
complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated
financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate
opinions on the critical audit matters or on the accounts or disclosures to which they relate.
46 Adoption of ASC 842, Leases - Determination of Incremental Borrowing Rate for Ground Leases
As described in Note 1 to the Company's consolidated financial statements, the Company adopted ASU 2016-02, Leases (Topic
842) ("ASC 842") effective January 1, 2019 which resulted in the recognition of a right-of-use asset and related lease liability.
The Company utilized a third-party to assist in determining its estimated incremental borrowing rate for ground leases. The
terms of the Company’s ground leases range from 40 to 99 years. The incremental borrowing rates utilized were determined
considering the general economic environment and factored in various financing and asset specific adjustments so that the
discount rate is appropriate for the intended use of the underlying lease. Changes in management’s estimate of incremental
borrowing rates could have a material impact on the right-of-use assets and the corresponding liabilities recorded at lease
inception.
We identified the determination of the appropriate incremental borrowing rates for ground leases as a critical audit matter. The
Company's ground leases typically include terms that extend beyond 40 years. Borrowing rates for instruments of this duration
are not readily available to the Company. The Company utilized a third-party specialist to assist in the determination of the
Company's incremental borrowing rates using the various terms of the ground leases. Auditing these incremental borrowing
rates involved especially challenging auditor judgment due to the nature and extent of audit effort required to address these
matters, including the degree of auditor judgment and the extent of specialized skills or knowledge needed.
The primary procedures we performed to address this critical audit matter included:
• Utilizing professionals with specialized skills and knowledge to assist in: (i) evaluating the reasonableness of the
methodology used to determine the appropriate discount rates that approximated the incremental borrowing rates for
the underlying leased asset, (ii) performing sensitivity analyses to evaluate the impact of changes in the estimated
incremental borrowing rates on the right-of-use assets and lease liabilities recorded, and (iii) evaluating the
reasonableness of certain assumptions and inputs used to determine the incremental borrowing rates including the
unsecured credit rating based on the Company's credit profile as compared to market data.
Asset Impairment - Identification of Triggering Events for Real Estate Properties
As described in Notes 1, 2 and 6 to the Company's consolidated financial statements, the Company recorded total real estate
properties, net of accumulated depreciation and amortization of approximately $3.2 billion as of December 31, 2019. The
Company assesses the potential for impairment of long-lived assets, including real estate properties, whenever events occur, or a
change in circumstances, that indicate that the carrying value might not be fully recoverable ("triggering events"). A property
value is impaired when 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.
We identified management’s assessment of qualitative indicators of potential impairment triggering events for real estate
properties as a critical audit matter. Qualitative 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, or negative economic or industry trends for the
Company or its tenants. Auditing these elements involved especially challenging auditor judgment due to the nature and extent
of audit effort required to address these matters, including the degree of auditor judgment and the extent of specialized
knowledge needed.
The primary procedures we performed to address this critical audit matter included:
• Assessing the reasonableness of management’s key assumptions and inputs, including certain qualitative factors such
as acquisition dates of properties, terms of current leases, anticipated new leases and renewals of existing leases,
potential sales of properties based on offers received, and market considerations such as closures of nearby hospitals,
used to determine that no triggering events had occurred for properties and verifying that forecasted cash flows were
sufficient such that no triggering event had occurred.
•
Testing the completeness and accuracy of the underlying real estate property data including validating the number of
properties and certain financial results to the general ledger.
• Reviewing internal documentation including Board of Director minutes, letters of intent for properties held for sale,
and operation department communications for properties including those at or near breakeven, properties with lower
occupancy and properties with leases expiring in the near term, to assess whether additional triggering factors were
present.
47 Acquisitions of Real Estate Properties - Valuation of Land Acquired
As described in Notes 1 and 4 to the Company's consolidated financial statements, the Company acquired a total of $384.7
million of real estate properties during the year ended December 31, 2019, including a total land value of approximately $59.1
million. The current period acquisitions were accounted for as asset acquisitions which require the total purchase price to be
allocated among land, buildings, tenant improvements, lease and other intangible assets, and personal property, as applicable,
based on relative fair value. Management’s judgment is required in allocating the purchase price to tangible real estate assets,
including land, “as if vacant” and any acquired intangible assets. Changes to the inputs and assumptions used by management to
determine the relative fair value of land could have a material impact on the amount of the assets recorded.
We identified management’s determination of the relative fair value of land acquired in the Company’s asset acquisitions as a
critical audit matter. Significant judgment is involved in making a determination of the estimated fair value of the land acquired
in acquisitions of real estate properties including assessment of comparable transactions, intended use of property, proximity of
comparable transactions to the acquired property, and other relevant information. Auditing these elements involved especially
challenging auditor judgment due to the nature and extent of audit effort required to address these matters, including the degree
of auditor judgment and the extent of specialized skill or knowledge needed.
The primary procedures we performed to address this critical audit matter included:
• Utilizing professionals with specialized skills and knowledge to assist in: (i) evaluating the reasonableness of the
purchase price allocation methodology used by management for a sample of transactions to determine the relative fair
value of the tangible and intangible assets acquired, and (ii) obtaining independent comparable sale transactions for
land and evaluating the reasonableness of the market inputs and assumptions utilized by management.
•
Evaluating the appropriateness of the comparable transactions utilized by management by reviewing the underlying
assumptions and inputs including location of land acquired and other relevant information.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2005.
Nashville, Tennessee
February 12, 2020
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
Total real estate properties
Less accumulated depreciation
Total real estate properties, net
Cash and cash equivalents
Assets held for sale, net
Operating lease right-of-use assets
Financing lease right-of-use assets
Other assets, net
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Notes and bonds payable
Accounts payable and accrued liabilities
Liabilities of properties held for sale
Operating lease liabilities
Financing lease liabilities
Other liabilities
Total liabilities
Commitments and contingencies
Stockholders' equity
DECEMBER 31,
2019
2018
$
289,751 $
230,206
3,986,326
3,675,415
10,538
48,731
24,647
10,696
33,107
24,647
4,359,993
3,974,071
(1,121,102)
(1,015,174)
3,238,891
2,958,897
657
37
126,177
12,667
185,426
8,381
9,272
—
—
214,697
$ 3,563,855 $ 3,191,247
DECEMBER 31,
2019
2018
$
1,414,069 $
1,345,984
78,517
145
91,574
18,037
61,504
80,411
587
—
—
47,623
1,663,846
1,474,605
Preferred stock, $.01 par value; 50,000 shares authorized;
none issued and outstanding
Common stock, $.01 par value; 300,000 shares authorized;
134,706 and 125,279 shares issued and outstanding at
December 31, 2019 and 2018, respectively.
Additional paid-in capital
Accumulated other comprehensive loss
—
—
1,347
1,253
3,485,003
3,180,284
(6,175)
(902)
Cumulative net income attributable to common stockholders
1,127,304
1,088,119
Cumulative dividends
Total stockholders’ equity
(2,707,470)
(2,552,112)
1,900,009
1,716,642
Total liabilities and stockholders' equity
$ 3,563,855 $ 3,191,247
See accompanying notes.
49 Healthcare Realty Trust Incorporated
Consolidated Statements of Income
Amounts in thousands, except per share data
Revenues
Rental income
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
Impairment of real estate assets
Interest and other income (expense), net
Net income
Basic earnings per common share
Diluted earnings per common share
Weighted average common shares
outstanding - basic
Weighted average common shares
outstanding - diluted
See accompanying notes.
YEAR ENDED DECEMBER 31,
2019
2018
2017
$
462,225 $
442,397 $
416,978
8,073
7,992
7,759
470,298
450,389
424,737
180,005
34,826
1,742
170,506
34,511
738
157,252
32,992
2,180
177,859
164,201
142,472
—
60
159
394,432
370,016
335,055
25,101
41,665
(55,435)
(52,804)
—
(5,617)
(730)
—
—
537
39,524
(56,402)
(44,985)
(5,385)
658
(36,681)
(10,602)
(66,590)
39,185 $
69,771 $
23,092
0.29 $
0.29 $
0.55 $
0.55 $
0.18
0.18
$
$
$
128,000
123,292
117,926
128,084
123,351
118,017
50 Healthcare Realty Trust Incorporated
Consolidated Statements of Comprehensive Income
Amounts in thousands
Net income
$
39,185 $
69,771 $
23,092
YEAR ENDED DECEMBER 31,
2019
2018
2017
Other comprehensive income (loss)
Interest rate swaps
Reclassification adjustment for losses
included in net income (interest expense)
Losses arising during the period
319
(5,592)
(5,273)
424
(27)
397
176
(74)
102
Comprehensive income
$
33,912 $
70,168 $
23,194
See accompanying notes.
51 Healthcare Realty Trust Incorporated
Consolidated Statements of Equity
Amounts in thousands, except per share data
Balance at December 31, 2016
$
— $ 1,164 $ 2,917,914 $
(1,401) $ 995,256 $ (2,259,519) $ 1,653,414
Preferred
Stock
Common
Stock
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Cumulative
Net Income
Cumulative
Dividends
Total
Stockholders’
Equity
Issuance of stock, net of costs
Common stock redemption
Share-based compensation
Net income
Gain on forward starting interest rate swaps
Dividends to common stockholders
($1.20 per share)
Balance at December 31, 2017
Issuance of stock, net of costs
Common stock redemption
Share-based compensation
Net income
Gain on forward starting interest rate swaps
Dividends to common stockholders
($1.20 per share)
Balance at December 31, 2018
Issuance of stock, net of costs
Common stock redemption
Share-based compensation
Net income
Loss on interest rate swaps
Dividends to common stockholders
($1.20 per share)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
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)
1,251
3,173,429
(1,299) 1,018,348
(2,401,846)
1,789,883
—
(1)
3
—
—
—
616
(4,449)
10,688
—
—
—
—
—
—
—
397
—
—
—
—
69,771
—
—
—
—
—
—
—
616
(4,450)
10,691
69,771
397
(150,266)
(150,266)
1,253
3,180,284
(902) 1,088,119
(2,552,112)
1,716,642
92
(1)
3
—
—
—
295,764
(3,317)
12,272
—
—
—
—
—
—
—
(5,273)
—
—
—
—
39,185
—
—
—
—
—
—
—
295,856
(3,318)
12,275
39,185
(5,273)
(155,358)
(155,358)
Balance at December 31, 2019
$
— $ 1,347 $ 3,485,003 $
(6,175) $1,127,304 $ (2,707,470) $ 1,900,009
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
Share-based compensation
Amortization of straight-line rent receivable (lessor)
Amortization of straight-line rent on operating leases (lessee)
Gain on sales of real estate assets
Loss on extinguishment of debt
Impairment of real estate assets
Loss (income) from unconsolidated joint ventures
Distributions from unconsolidated joint ventures
Provision for bad debts, net
Changes in operating assets and liabilities:
Other assets, including right-of-use-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 assets
Proceeds from notes receivable repayments
Net cash used in investing activities
FINANCING ACTIVITIES
Net borrowings on unsecured credit facility
Borrowings on term loan
Borrowings of notes and bonds payable
Repayments of notes and bonds payable
Redemption of notes and bonds payable
Dividends paid
Net proceeds from issuance of common stock
Common stock redemptions
Debt issuance and assumption costs
Payments made on finance leases
Net cash provided by (used in) financing activities
(Decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents 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,
2019
2018
2017
$
39,185 $
69,771 $
23,092
177,859
3,013
12,275
(3,000)
1,537
(25,101)
—
5,617
19
381
—
(8,573)
2,752
7,174
213,138
(380,274)
(25,985)
(64,670)
—
52,401
—
(418,528)
31,000
50,000
—
(13,857)
—
(155,358)
295,946
(5,097)
(4,589)
(379)
197,666
164,201
3,000
10,691
(4,281)
1,519
(41,665)
—
—
(4)
182
60
(3,998)
4,731
4,148
208,355
(104,312)
(26,728)
(70,807)
—
96,812
8
(105,027)
73,000
—
—
(19,850)
—
(150,266)
611
(4,532)
(125)
—
(101,162)
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
(7,724)
8,381
657 $
2,166
6,215
8,381 $
(48,292)
54,507
6,215
53,978 $
— $
17,294 $
1,411 $
45,752 $
7,995 $
12,682 $
951 $
64,395
43,674
8,303
871
$
$
$
$
$
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 $4.4 billion in 204 real estate properties, construction in progress, the Memphis
Redevelopment, land held for development and corporate property as of December 31, 2019. The Company’s 204
owned real estate properties are located in 25 states and total approximately 15.4 million square feet. The Company
provided property management services to approximately 11.4 million square feet nationwide. Square footage and
property count disclosures in these Notes to the Company's Consolidated Financial Statements are unaudited.
Principles of Consolidation
The Company’s Consolidated Financial Statements include the accounts of the Company, its wholly owned
subsidiaries, joint ventures, and partnerships where the Company controls the operating activities.
The Company's investments in its unconsolidated joint ventures are included in other assets and the related equity
income is recognized within interest and other income (expense), net 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
$4.4 billion as of December 31, 2019 and $4.0 billion as of December 31, 2018.
During 2019 and 2018, the Company eliminated against accumulated depreciation approximately $17.2 million and
$9.9 million, respectively, of fully amortized real estate intangibles that were initially recorded as a component of
certain real estate acquisitions. Also during 2019 and 2018, approximately $1.3 million and $0.5 million of fully
depreciated tenant and capital improvements that were no longer in service were eliminated against accumulated
depreciation.
54 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
Depreciation expense of real estate properties for the three years ended December 31, 2019, 2018 and 2017 was
$152.6 million, $143.8 million and $129.4 million, respectively. Depreciation and amortization of real estate assets
and liabilities in place as of December 31, 2019, is provided for on a straight-line basis over the asset’s estimated
useful life:
Land improvements
Buildings and improvements
3.0 to 39.0 years
3.3 to 39.0 years
Lease intangibles (including ground lease intangibles)
2.1 to 99.0 years
Personal property
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 seven parcels of land held for
development located adjacent to certain of the Company's existing medical office buildings in Texas, Iowa, Tennessee
and Colorado totaled approximately $24.6 million as of December 31, 2019 and December 31, 2018.
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
The Company's acquisitions of real estate properties typically do not meet the definition of a business and are
accounted for as asset acquisitions. 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. Land fair value is estimated by using an assessment of comparable transactions
and other relevant data. 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.
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 estimated market rate. If an in-place lease is identified as a below-market rental rate, the
55 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
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.
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. Any goodwill
recorded through a business combination would be reviewed for impairment at least annually and is not amortized.
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.
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
56 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
from accumulated other comprehensive income (loss) into earnings once the underlying hedged transaction is
recognized in earnings. As of December 31, 2019 and 2018, the Company had $6.2 million and $0.9 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.
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 Company did not have any restricted cash for the year ended December 31, 2019. The
Company had restricted cash during the year ended December 31, 2018, however it was reinvested for real estate
acquisitions prior to the ending balance sheet date.
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 debt issuance costs. In-place lease and customer relationship intangible
assets are amortized on a straight-line basis over the applicable lives of the assets. Debt issuance costs are amortized
over the term of the debt instrument on the effective interest method or the straight-line method when the effective
interest method is not applicable. Goodwill is not amortized but is evaluated annually as of December 31 for
impairment. Both the 2019 and 2018 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.
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.
Share-Based Compensation
The Company has various employee and director share-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. See Note 12 for details on the Company’s share-based awards.
57 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
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. As of December 31, 2019, the Company’s accumulated other comprehensive income (loss)
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. See Note 10 for more details on the Company's derivative
financial instruments.
Revenue from Contracts with Customers (Topic 606)
The Company recognizes certain revenue under the core principle of Topic 606. This requires an entity to recognize
revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. Lease revenue is not within the
scope of Topic 606. To achieve the core principle, the Company applies the five step model specified in the guidance.
See the New Accounting Pronouncements section below for additional information.
Revenue that is accounted for under Topic 606 is segregated on the Company’s Consolidated Statements of Income in
the Other operating line item. This line item includes parking income, property lease guaranty income, management
fee income and other miscellaneous income. Below is a detail of the amounts by category:
In thousands
Type of Revenue
Parking income
YEAR ENDED DECEMBER 31,
2019
2018
2017
$
7,520 $
6,930 $
6,611
Property lease guaranty income
Management fee income
Miscellaneous
128
270
155
675
273
114
726
308
114
$
8,073 $
7,992 $
7,759
The Company’s three major types of revenue that are accounted for under Topic 606 that are listed above are all
accounted for as the performance obligation is satisfied. The performance obligations that are identified for each of
these items are satisfied over time and the Company recognizes revenue monthly based on this principle.
One of the Company’s owned real estate properties as of December 31, 2018 and 2017 respectively, was 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. The
agreement expired February 28, 2019. If the minimum return was not achieved through normal operations of the
property, the Company calculated and accrued to property lease guaranty revenue, each quarter, any shortfalls due
from the sponsoring health systems under the terms of the property operating agreement.
Management fee income 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.
58 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
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:
YEAR ENDED DECEMBER 31,
(Dollars in thousands)
2019
2018
2017
Property operating income
$
415,142 $
390,256 $
358,009
Single-tenant net lease
Straight-line rent
Rental income
44,083
3,000
47,860
4,281
52,897
6,072
$ 462,225 $ 442,397 $ 416,978
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 15 for further discussion.
The Company classifies interest and penalties related to uncertain tax positions, if any, in the Consolidated Financial
Statements as a component of general and administrative expenses. No such amounts were recognized during the
three years ended December 31, 2019.
Federal tax returns for the years 2016, 2017, 2018 and 2019 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 15 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.
Assets Held for Sale
Long-lived assets held for sale are reported at the lower of their carrying amount or their fair value less estimated
cost to sell. 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 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 pro rata 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 stockholders.
59 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
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 13 for the
calculations of earnings per share.
New Accounting Pronouncements
Accounting Standards Update No. 2016-02, No. 2018-01 and No. 2018-11
In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02, "Leases." In January
2018, the FASB issued ASU 2018-01, "Leases - Land Easement Practical Expedient for Transition to Topic 842," in
July 2018, the FASB issued ASU 2018-10, "Codification Improvements to Topic 842, Leases" and ASU 2018-11,
"Leases - Targeted Improvements," and in December 2018, the FASB issued ASU 2018-20, “Narrow-Scope
Improvements for Lessors.” These accounting standard updates are collectively referred to as "Topic 842."
Topic 842 provides several practical expedients that the Company elected. These are (a) the package of practical
expedients offered that allows an entity not to reassess upon adoption (i) whether an expired or existing contract
contains a lease, (ii) lease classification related to expired or existing lease arrangements, and (iii) whether costs
incurred on expired or existing leases qualify as initial direct costs, (b) the lessor practical expedient not to separate
certain non-lease components, such as common area maintenance, from the lease component if (i) the timing and
pattern of transfer are the same for the non-lease component and associated lease component, and (ii) the lease
component would be classified as an operating lease if accounted for separately and (c) the lessee practical expedient
not to separate certain non-lease components from the associated lease component.
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 are classified as
either finance or operating, with the classification affecting the pattern of expense recognition in the income
statement. The Company's ground leases executed or assumed prior to the adoption of Topic 842 continue to be
accounted for as operating leases and will not result in a materially different ground lease expense. However, each
ground lease executed by the Company after the adoption of Topic 842 will be evaluated to determine if it is an
operating or finance lease. If the lease is to be accounted for as a finance lease, ground lease expense would be
accounted for using the effective interest method instead of the straight-line method over the term of the lease, which
would result in higher ground lease expense in the earlier years of a ground lease when compared to the straight-line
method. Leases in which the Company is the lessee are primarily ground leases, but also includes management office
leases in third party buildings and certain copier and postage machine leases. The terms of the ground leases
generally range from 40 to 99 years with a weighted average remaining lease term remaining of 52.1 years, excluding
renewal options. The Company's discount rates, which approximates the Company's incremental borrowing rate,
ranged from 3.8% for leases expiring in 2021 to 6.2% for leases expiring in 2115. The Company utilized a third party
to assist in determining the discount rates for its ground leases. The discount rates consider the general economic
environment and factor in various financing and asset specific adjustments so that the discount rate is appropriate
for the intended use of the underlying lease. As of January 1, 2019, the Company recognized the present value of its
lease payments and a corresponding lease liability of $91.7 million. In addition, the Company reclassified $45.0
million of prepaid ground leases and below-market lease intangibles from the Other assets line item, $1.9 million of
above-market lease intangibles from the Other liabilities line and $8.4 million of straight-line rent from the Accounts
payable and accrued liabilities line item to the Operating lease right-of-use assets line item on the Consolidated
Balance Sheet.
For lessors, the new standard requires a lessor to classify leases as either sales-type, direct-financing or operating. A
lease will be treated as a sale if it is considered to transfer control of the underlying asset to the lessee. A lease will be
classified as direct-financing if risks and rewards are conveyed without the transfer of control. Otherwise, the lease is
treated as an operating lease. Lessor accounting remains largely unchanged with some exceptions including the
concept of separating lease and nonlease components. Nonlease components, such as common area maintenance, are
generally accounted for under Topic 606 and separated from the lease payments. However, the Company elected the
60 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
lessor practical expedient allowing the Company to not separate these components when certain conditions are met.
The combined component is accounted for under Topic 842.
The adoption of Topic 842, where the Company is the lessor, did not have a material impact on the Company's
Consolidated Financial Statements for the twelve months ended months ended December 31, 2019.
The new standard was effective for the Company on January 1, 2019. Topic 842 provides two transition alternatives.
The Company elected the prospective optional transition method available to apply Topic 842 in the year of adoption
and the guidance in Accounting Standards Codification Topic 840 in the comparative periods. Topic 842 includes
extensive quantitative and qualitative disclosures as compared to Topic 840, Leases, for both lessees and lessors. See
Note 3 to the Company's Consolidated Financial Statements for additional disclosures.
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. Operating lease receivables, representing the majority of the
Company's receivables, are not within the scope of the new standard. The Company adopted this standard as of
January 1, 2020. There was a not material impact to the Consolidated Financial Statements from the adoption of this
standard.
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 adopted this standard as of January 1, 2020. There was not a material impact to the Consolidated
Financial Statements from the adoption of this standard.
61 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
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 following table summarizes the Company’s investments at
December 31, 2019.
NUMBER OF
PROPERTIES
LAND
BUILDINGS,
IMPROVEMENTS, AND
LEASE INTANGIBLES
PERSONAL
PROPERTY
TOTAL
ACCUMULATED
DEPRECIATION
25 $
58,565 $
532,767 $
421 $
591,753 $
Dollars in thousands
Seattle, WA
Dallas, TX
Los Angeles, CA
Atlanta, GA
Nashville, TN
Charlotte, NC
Denver, CO
Washington, D.C.
Richmond, VA
Houston, TX
Honolulu, HI
Des Moines, IA
Oklahoma City, OK
Indianapolis, IN
San Francisco, CA
Springfield, MO
Austin, TX
Memphis, TN
San Antonio, TX
Chicago, IL
Minneapolis, MN
Other (16 markets)
25
14
9
6
16
9
6
7
9
3
7
4
4
3
1
5
7
6
3
4
19,194
44,386
3,679
20,053
4,200
16,514
—
—
16,211
8,327
12,665
10,401
3,299
14,054
1,989
14,236
5,241
6,487
5,859
2,090
496,683
205,829
212,509
180,463
176,261
134,004
150,304
149,132
132,013
135,641
126,401
115,706
118,847
107,396
109,304
92,809
92,508
88,583
87,588
62,359
31
204
17,079
284,529
475,409
3,982,516
442
347
84
1,109
105
271
21
106
78
159
99
15
—
43
—
123
194
404
211
—
806
516,319
250,562
216,272
201,625
180,566
150,789
150,325
149,238
148,302
144,127
139,165
126,122
122,146
121,493
111,293
107,168
97,943
95,474
93,658
64,449
(88,890)
(181,556)
(95,979)
(20,040)
(64,038)
(67,040)
(25,265)
(25,097)
(44,204)
(44,229)
(39,165)
(34,725)
(19,351)
(26,082)
(20,906)
(17,740)
(24,048)
(37,582)
(40,573)
(23,540)
(10,486)
493,294
(165,159)
5,038
4,272,083
(1,115,695)
Construction in progress
Land held for development
Memphis Redevelopment
Corporate property
—
—
—
—
—
24,647
5,222
—
48,731
—
3,810
—
—
—
—
5,500
48,731
24,647
9,032
5,500
—
(671)
(50)
(4,686)
Total real estate investments
204 $ 314,398 $
4,035,057 $
10,538 $ 4,359,993 $
(1,121,102)
3. Leases
Lessor Accounting Under ASC 842
The Company’s properties generally are leased pursuant to non-cancelable, fixed-term operating leases with
expiration dates through 2035. Some leases provide for fixed rent renewal terms in addition to market rent renewal
terms. Some leases provide the lessee, during the term of the lease, with an option or 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. The Company records these expenses on a net basis, with the exception of property taxes. Property
taxes are recorded on a gross basis as a lessor cost in which the tenant reimburses the Company. The Company
generally expects that collectibility is probable at lease commencement. If the assessment of collectibility changes
after the lease commencement date and Rental income is not considered probable, Rental income is recognized on a
cash basis and all previously recognized uncollectible Rental income is reversed in the period in which the it is
62 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
determined not to be probable of collection. In addition to the lease-specific collectibility assessment performed under
Topic 842, the Company may also apply a general reserve ("provision for bad debt"), as a reduction to Rental income,
for its portfolio of operating lease receivables.
The Company's leases typically have escalators that are either based on a stated percentage or an index such as CPI
(consumer price index). In addition, most of the Company's leases include nonlease components such as
reimbursement of operating expenses as additional rent or include the reimbursement of expected operating expenses
as part of the lease payment. The Company adopted an accounting policy to combine lease and nonlease components.
Rent escalators based on indices and reimbursements of operating expenses that are not included in the lease rate
are considered variable lease payments. Variable payments are recognized in the period earned. Lease income for the
Company's operating leases recognized for the twelve months ended December 31, 2019 was $462.2 million.
Future minimum lease payments under the non-cancelable operating leases, excluding any reimbursements, as of
December 31, 2019 are as follows:
In thousands
2020
2021
2022
2023
2024
2025 and thereafter
$
360,340
315,426
275,798
233,424
177,738
501,849
$ 1,864,575
Revenue Concentrations
The Company’s real estate portfolio is leased to a diverse tenant base. The Company did not have any customers that
account for 10% or more of the Company's revenues for the years ended December 31, 2019, 2018 and 2017.
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
investments of approximately $96.0 million in four real estate properties as of December 31, 2019 that were subject to
purchase options that were exercisable.
Lessor Accounting Under ASC 840
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.
63 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
Future minimum lease payments under the non-cancelable operating leases, excluding any reimbursements, as of
December 31, 2018 were as follows:
In thousands
2019
2020
2021
2022
2023
2024 and thereafter
$
326,441
279,211
235,660
201,072
163,978
476,673
$
1,683,035
Lessee Accounting Under ASC 842
As of December 31, 2019, the Company was obligated, as the lessee, under operating lease agreements consisting
primarily of the Company’s ground leases. As of December 31, 2019, the Company had 108 properties totaling 8.9
million square feet that were held under ground leases. Some of the ground leases renewal terms are based on fixed
rent renewal terms and others have market rent renewal terms. These ground leases typically have initial terms of
40 to 99 years with expiration dates through 2117. Any rental increases related to the Company’s ground leases are
generally either stated or based on the Consumer Price Index. The Company had 46 prepaid ground leases as of
December 31, 2019. The amortization of the prepaid rent, included in the operating lease right-of-use asset,
represented approximately $0.6 million for the twelve months ended December 31, 2019, 2018 and 2017 respectively.
The Company’s future lease payments (primarily for its 62 non-prepaid ground leases) as of December 31, 2019 were
as follows:
In thousands
OPERATING
FINANCING
2020
2021
2022
2023
2024
2025 and thereafter
$
4,814 $
4,844
4,875
4,913
4,969
307,665
Total undiscounted lease payments
332,080
746
754
763
774
795
83,404
87,236
Discount
Lease liabilities
(240,506)
(69,199)
$
91,574 $
18,037
Lessee Accounting Under ASC 840
As of December 31, 2018, the Company was obligated under operating lease agreements consisting primarily of the
Company’s ground leases. At December 31, 2018 the Company had 107 properties totaling 8.8 million square feet that
were held under ground leases with a remaining weighted average term of 53.9 years, excluding renewal options.
These ground leases typically have initial terms of 50 to 75 years with one or more renewal options extending the
terms to 75 to 100 years, with expiration dates through 2117. Any rental increases related to the Company’s ground
leases are generally either stated or based on the Consumer Price Index.
64 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
The Company’s future minimum lease payments (primarily for its 60 non-prepaid ground leases) as of December 31,
2018 were as follows:
In thousands
2019
2020
2021
2022
2023
$
5,288
5,260
5,238
5,207
5,224
2024 and thereafter
323,533
$
349,750
The following table provides details of the Company's total lease expense for the year ended December 31, 2019:
In thousands
Operating lease cost
Operating lease expense
Variable lease expense
Finance lease cost
Amortization of right-of-use assets
Interest on lease liabilities
Total lease expense
Other information
YEAR ENDED
Dec. 31, 2019
$
4,623
3,161
165
616
$
8,565
Operating cash flows outflows related to operating leases
Financing cash flows outflows related to financing leases
Right-of-use assets obtained in exchange for new finance
lease liabilities
$
$
$
6,972
379
17,800
Weighted-average remaining lease term (excluding renewal
options) - operating leases
Weighted-average remaining lease term (excluding renewal
options) -finance leases
Weighted-average discount rate - operating leases
Weighted-average discount rate - finance leases
49.5
65.2
5.7%
5.4%
65 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
4. Acquisitions, Dispositions and Mortgage Repayments
2019 Acquisitions
The following table details the Company's acquisitions for the year ended December 31, 2019:
Dollars in millions
Washington, D.C. 4
Indianapolis, IN 5
Atlanta, GA
Dallas, TX
Seattle, WA
Seattle, WA
Seattle, WA
Houston, TX
Oklahoma City, OK
Los Angeles, CA 6
Raleigh, NC
Dallas, TX 7
Seattle, WA
Seattle, WA
Memphis, TN
Seattle, WA
TYPE 1
MOB
MOB
MOB
MOB
MOB
MOB
MOB
MOB
MOB
MOB
MOB
MOB
MOB
MOB
MOB
MOB
DATE
ACQUIRED
PURCHASE
PRICE
CASH
CONSIDERATION 2
REAL
ESTATE
OTHER 3
SQUARE FOOTAGE
unaudited
3/28/19 $
46.0 $
45.9 $
50.2 $
3/28/19
4/2/19
6/10/19
6/11/19
6/14/19
6/28/19
8/1/19
9/26/19
9/30/19
10/31/19
10/31/19
11/18/19
12/10/19
12/13/19
12/18/19
47.0
28.0
17.0
7.7
19.0
30.5
13.5
4.1
61.1
21.6
20.1
22.8
24.2
8.7
10.0
44.8
28.0
16.7
7.8
19.1
30.4
13.5
4.1
60.9
22.0
19.5
23.1
24.5
8.9
9.3
43.7
28.0
17.0
7.8
19.5
30.6
13.5
4.1
61.8
21.7
20.2
23.2
24.6
8.9
9.9
(4.3)
1.1
—
(0.3)
—
(0.4)
(0.2)
—
—
(0.9)
0.3
(0.7)
(0.1)
(0.1)
—
(0.6)
(6.2)
158,338
143,499
47,963
89,990
29,870
47,255
78,288
29,903
28,542
115,634
57,730
48,192
36,350
44,166
110,883
20,109
1,086,712
MOB = medical office building.
Cash consideration excludes prorations of revenue and expense due to/from seller at the time of the acquisition.
Includes other assets acquired, liabilities assumed, and intangibles recognized at acquisition.
$
381.3 $
378.5 $
384.7 $
Includes two properties. The Company assumed two ground leases in connection with this acquisition that are classified as financing leases. The present
value of future lease payments totaling $14.3 million was recorded on the Company's Consolidated Balance Sheets under the caption Finance lease
liabilities. In addition, the right-of-use assets were partially offset by $5.2 million of above-market lease intangibles included in Other.
The Company assumed a prepaid ground lease totaling $0.8 million and recorded a below-market lease intangible totaling $0.9 million in connection
with this acquisition that is classified as an operating lease that is included in Other.
Includes two properties.
The Company assumed a ground lease in connection with this acquisition that is classified as a financing lease. The present value of future lease
payments totaling $3.6 million was recorded on the Company's Consolidated Balance Sheets under the caption Finance lease liabilities.
1
2
3
4
5
6
7
The following table summarizes the estimated relative fair values of the assets acquired and liabilities assumed in
the real estate acquisitions for 2019 as of the acquisition date:
Building
Land
Land Improvements
Intangibles
At-market lease intangibles
Above-market lease intangibles (lessor)
Below-market lease intangibles (lessor)
Above-market lease intangibles (lessee)
Below-market lease intangibles (lessee)
Other assets acquired
Accounts payable, accrued liabilities
and other liabilities assumed
ESTIMATED
FAIR VALUE
in millions
ESTIMATED
USEFUL LIFE
in years
$
270.7
8.0 - 37.0
59.1
4.2
—
3.0 - 12.0
3.3 - 9.2
2.4 - 9.9
1.2 - 8.6
69.1 - 72.3
65.1
50.7
0.7
(0.7)
(5.1)
0.9
2.3
(4.3)
Total cash paid
$
378.5
66 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
Subsequent Acquisition
On January 3, 2020, the Company acquired an 86,986 square foot medical office building in Los Angeles, California
for a purchase price of $42.0 million.
2018 Real Estate Acquisitions
The following table details the Company's acquisitions for the year ended December 31, 2018:
Dollars in millions
Seattle, WA
Denver, CO 5
Denver, CO 5
Oklahoma City, OK
Seattle, WA
Denver, CO
Nashville, TN
Chicago, IL 6
TYPE 1
MOB
MOB
OFC
MOB
MOB
MOB
OFC
MOB
DATE
ACQUIRED
PURCHASE
PRICE
5/4/18 $
7.8 $
5/18/18
5/18/18
5/21/18
6/29/18
8/24/18
12/4/18
12/19/18
12.1
12.9
11.4
26.2
4.1
31.9
5.1
MORTGAGE
NOTES PAYABLE
ASSUMED 2
CASH
CONSIDERATION 3
REAL
ESTATE
OTHER 4
— $
(8.0)
—
—
—
—
—
—
7.8 $
7.8 $
3.8
12.8
11.4
26.2
4.2
32.0
4.9
12.1
13.0
11.5
26.7
4.2
32.0
5.1
SQUARE
FOOTAGE
unaudited
13,314
93,992
93,869
82,647
86,942
17,084
108,691
14,883
511,422
—
(0.2)
(0.2)
(0.1)
(0.5)
—
—
(0.2)
(1.2)
$
111.5 $
(8.0) $
103.1 $
112.4 $
1
2
3
4
5
6
MOB = medical office building; OFC = office
The mortgage note payable assumed in the acquisition does not reflect the fair value premium totaling $0.1 million recorded by the Company upon
acquisition (included in Other).
Cash consideration excludes prorations of revenue and expense due to/from seller at the time of the acquisition.
Includes other assets acquired, liabilities assumed, intangibles recognized at acquisition and fair value adjustments on debt assumed.
The mortgage note payable assumed at acquisition encumbers both buildings.
The Company acquired an additional suite in a previously acquired medical office building.
The following table summarizes the estimated relative fair values of the assets acquired and liabilities assumed in
the real estate acquisitions for 2018 as of the acquisition date:
ESTIMATED
FAIR VALUE
in millions
ESTIMATED
USEFUL LIFE
in years
$
64.0
31.4
2.7
20.0 - 30.0
—
5.0 - 13.5
Building
Land
Land Improvements
Intangibles
At-market lease intangibles (lessor)
Below-market lease intangibles (lessor)
14.3
(0.1)
1.3 - 4.2
3.8
Mortgage notes payable assumed,
including fair value adjustments
Other assets acquired
Accounts payable, accrued liabilities
and other liabilities assumed
(8.0)
0.2
(1.4)
Total cash paid
$
103.1
Non-monetary Exchange
On June 29, 2018, the Company completed the swap of a non-revenue producing garage that was built by the
Company in 2012 located in Denver, Colorado for 20.5 acres of land adjacent to the CommonSpirit Health's St.
Anthony Hospital campus. A portion of this land, approximately 4.6 acres, has been allocated to an existing medical
office building that was developed by the Company in 2017. This building is located on land previously ground leased
67 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
from the hospital. The remaining land has been recorded in land held for development. The land acquired was
appraised for $5.8 million. The Company had a net investment of $3.9 million in the parking garage and recognized a
gain of $1.9 million in connection with this transaction.
2019 Real Estate Asset Dispositions
The following table details the Company's dispositions for the year ended December 31, 2019:
Dollars in millions
Tucson, AZ 3
Virginia Beach, VA 4
San Antonio, TX
Erie, PA
New Orleans, LA 5
Kingsport, TN
Pittsburgh, PA 6
Dallas, TX 5
TYPE 1
MOB
MOB
MOB
IRF
MOB
SNF
IRF
MOB
DATE
DISPOSED
SALES
PRICE
CLOSING
ADJUSTMENTS
NET
PROCEEDS
NET REAL
ESTATE
INVESTMENT
OTHER
including
receivables 2
GAIN/
(IMPAIRMENT)
SQUARE
FOOTAGE
unaudited
4/9/19 $ 13.0 $
(0.9) $
12.1 $
6.9 $
0.4 $
8/1/19
8/28/19
1.3
0.9
10/25/19
14.0
11/25/19
11/27/19
12/18/19
12/30/19
3.7
9.5
3.8
8.7
(0.1)
(0.1)
—
(0.2)
(0.3)
(0.3)
(0.6)
1.2
0.8
14.0
3.5
9.2
3.5
8.1
1.2
0.6
1.3
1.2
5.0
3.5
6.1
$ 54.9 $
(2.5) $
52.4 $
25.8 $
—
—
—
0.2
1.3
—
(0.4)
1.5 $
4.8
—
0.2
12.7
2.1
2.9
—
2.4
67,345
10,000
10,138
90,123
136,155
75,000
78,731
69,558
25.1
537,050
1
2
3
4
5
6
MOB = medical office building; IRF = inpatient rehabilitation facility; SNF = skilled nursing facility
Includes straight-line rent receivables, leasing commissions and lease inducements.
Includes four properties sold to a single purchaser.
The Company reclassified this property to held for sale during the second quarter of 2019 and recorded an impairment charge of $0.4 million based on
the sales price less estimated costs to sell.
Includes two properties.
The Company reclassified this property to held for sale during the first quarter of 2017 and subsequently in the second quarter of 2019, the Company
accepted an offer to purchase and recorded an impairment charge of $5.2 million.
2018 Real Estate Asset Dispositions
The following table details the Company's dispositions for the year ended December 31, 2018:
Dollars in millions
Roanoke, VA 2, 4
Michigan 5
St. Louis, MO
Denver, CO
Cleveland, TN
Tucson, AZ
TYPE 1
DATE
DISPOSED
SALES
PRICE
CLOSING
ADJUSTMENTS
NET
PROCEEDS
NET REAL
ESTATE
INVESTMENT
OTHER
including
receivables 3
GAIN/
(IMPAIRMENT)
SQUARE
FOOTAGE
unaudited
MOB, OFC
4/26/18 $ 46.2 $
— $
46.2 $
23.9 $
— $
22.3
460,881
SNF
MOB
IRF
MOB
MOB
6/27/18
8/30/18
12/20/18
12/21/18
12/27/18
9.5
9.8
16.9
13.3
3.0
(0.7)
(0.5)
(0.3)
(0.2)
(0.2)
8.8
9.3
16.6
13.1
2.8
3.4
7.5
9.2
8.6
1.9
—
0.5
1.4
0.4
0.2
5.4
1.3
6.0
4.1
0.7
121,672
70,893
34,068
81,382
37,310
$ 98.7 $
(1.9) $
96.8 $
54.5 $
2.5 $
39.8
806,206
1
2
3
4
MOB = medical office building; IRF = inpatient rehabilitation facility; OFC = office; SNF = skilled nursing facility
Previously classified as held for sale.
Includes straight-line rent receivables, leasing commissions and lease inducements.
Includes seven properties and comprised of five single-tenant net lease buildings and two multi-tenant buildings. These buildings were sold pursuant to
the exercise of a fixed-price purchase option.
5
Includes five skilled nursing facilities. Sales price includes $0.5 million of forfeited earnest money from a prior terminated transaction.
5. Held for Sale
Assets and liabilities of properties sold or classified as held for sale are separately identified on the Company’s
Consolidated Balance Sheets. As of December 31, 2019 the Company had no properties classified as held for sale, and
as of December 31, 2018, the Company had one property classified as held for sale.
68 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
The table below reflects the assets and liabilities of the properties classified as held for sale as of December 31, 2019
and 2018.
Dollars in thousands
Balance Sheet data
Land
Buildings, improvements and lease intangibles
Accumulated depreciation
Real estate assets held for sale, net
Other assets, net
Assets held for sale, net
Accounts payable and accrued liabilities
Other liabilities
Liabilities of properties held for sale
DECEMBER 31,
2019
2018
$
— $
1,125
—
—
—
—
37
37 $
37 $
108
145 $
18,231
19,356
(10,657)
8,699
573
9,272
450
137
587
$
$
$
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 for the years ended
December 31, 2019 and 2017 totaling $5.6 million and $5.4 million, respectively. The Company did not record any
impairment charges in 2018. 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, additional long-lived assets, prepaids, intangible
assets, debt issuance costs and accounts receivable. Items included in "Other assets, net" on the Company’s
Consolidated Balance Sheets as of December 31, 2019 and 2018 are detailed in the table below:
Dollars in millions
DECEMBER 31,
2019
Straight-line rent receivables
$
70.5 $
Prepaid assets
Additional long-lived assets, net
Accounts receivable, net
Ground lease modification, net
Equity investments in joint ventures
Debt issuance costs, net 1
Project costs
Goodwill
Customer relationship intangible assets, net
Above-market intangible assets, net 2
Interest rate swap assets
Other
44.3
22.7
13.0
9.4
8.1
5.0
4.6
3.5
2.5
1.2
—
0.6
2018
69.5
66.2
23.5
9.7
9.9
8.5
2.2
2.2
3.5
1.7
16.8
0.2
0.8
1
2
Includes debt issuance costs related to the Company's Unsecured Credit Facility and Unsecured Term Loan due 2026.
Includes below-market ground lease intangibles as of December 31, 2018. These intangibles were reclassified to Operating right-of-use assets on the
Company's Consolidated Balance Sheets as of December 31, 2019.
$
185.4 $
214.7
69 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
Unconsolidated Joint Ventures
The Company owns a non-managing membership interest in two limited liability companies, or LLCs, that own two
parking garages in Atlanta, Georgia which is included in the equity investments in the 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 years ended December 31,
2019 and 2018 related to its LLCs accounted for under the equity method are shown in the table below:
Dollars in millions
Net LLC investments, beginning of period
Equity income (loss) recognized during the period
Owner distributions
Net LLC investments, end of period
DECEMBER 31,
2019
8.5 $
—
(0.4)
8.1 $
2018
8.7
—
(0.2)
8.5
$
$
8. Intangible Assets and Liabilities
The Company has several types of intangible assets and liabilities included in its Consolidated Balance Sheets,
including goodwill, debt issuance costs, above-, below-, and at-market lease intangibles, and customer relationship
intangibles. The Company’s intangible assets and liabilities as of December 31, 2019 and 2018 consisted of the
following:
GROSS BALANCE
at December 31,
ACCUMULATED
AMORTIZATION
at December 31,
2019
2018
2019
2018
WEIGHTED AVG.
REMAINING LIFE
in years
$
3.5 $
3.5 $
— $
Dollars in millions
Goodwill
Credit facility debt issuance costs
Above-market lease intangibles (lessor)
Customer relationship intangibles (lessor)
Below-market lease intangibles
Debt issuance costs 1
At-market lease intangibles
Above-market lease intangibles (lessee)
Below-market lease intangibles (lessee)
5.8
4.0
4.1
(7.3)
9.2
5.4
4.5
2.7
(7.3)
9.3
147.9
114.4
(7.2)
18.8
(2.0)
17.8
0.8
2.8
1.6
(4.0)
3.5
59.8
(0.2)
2.5
—
3.2
3.3
1.0
(4.0)
2.8
52.0
(0.1)
2.2
$ 178.8 $ 148.3 $
66.8 $
60.4
BALANCE SHEET
CLASSIFICATION
Other assets, net
Other assets, net
Other assets, net
Other assets, net
Other liabilities
Notes and bonds payable
Real estate properties
Right-of-use asset
Right-of-use asset
N/A
3.8
3.9
43.1
6.7
5.8
5.4
75.5
63.0
16.6
1
Includes debt issuance costs related to the Company's Unsecured Senior Notes payable, Unsecured Term Loan due 2024, and mortgage notes payable.
For the years ended December 31, 2019 and 2018, the Company recognized approximately $28.0 million and $23.2
million of intangible amortization expense, respectively.
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, 2019:
Dollars in millions
FUTURE AMORTIZATION
OF INTANGIBLES, NET
$
2019
2020
2021
2022
2023
24.1
19.1
16.0
11.2
7.0
70
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
9. Notes and Bonds Payable
Dollars in thousands
Unsecured Credit Facility
Unsecured Term Loan due 2024 1
Unsecured Term Loan due 2026 2
Senior Notes due 2023 1
Senior Notes due 2025 1
Senior Notes due 2028 1
Mortgage notes payable 3
DECEMBER 31,
2019
2018
$
293,000 $
262,000
199,013
149,183
—
248,540
248,522
295,651
129,343
—
248,117
248,278
295,198
MATURITY
DATES
CONTRACTUAL
INTEREST RATES
PRINCIPAL
PAYMENTS
INTEREST
PAYMENTS
5/23
5/24
6/26
4/23
5/25
1/28
LIBOR + .90%
At maturity Monthly
LIBOR + 1.00%
At maturity Monthly
LIBOR + 1.60%
At maturity Monthly
3.75%
3.88%
3.63%
At maturity
Semi-Annual
At maturity
Semi-Annual
At maturity
Semi-Annual
143,208
7/20-5/40
3.31%-6.88%
Monthly
Monthly
Balances are shown net of discounts and unamortized issuance costs.
$ 1,414,069 $ 1,345,984
As of December 31, 2019, there are no outstanding loans under the Unsecured Term Loan 2026. This term loan has a delayed draw feature that allows
the Company up to February 2020 to draw against the $150 million commitments.
1
2
3
Balances are shown net of discounts and unamortized issuance costs and include 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, 2019, the Company was in compliance with its financial covenant
provisions under its various debt instruments.
Unsecured Credit Facility
On October 14, 2011, the Company entered into a $700.0 million unsecured credit facility with a syndicate of lenders.
On May 31, 2019, the Company entered into an amended and restated Unsecured Credit Facility to extend the
maturity date to May 2023. The credit facility agreement provides the Company with two six-month extension
options that could extend the maturity date to May 2024. Each option is subject to an extension fee of 0.0625% 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 0.775% to
1.45% (0.90% as of December 31, 2019). In addition, the Company pays a facility fee per annum on the aggregate
amount of commitments ranging from 0.125% to 0.30% (0.20% as of December 31, 2019). In connection with the
amendment, the Company paid up-front fees to the lenders of approximately $3.5 million, which will be amortized
over the term of the facility. As of December 31, 2019, the Company had $293.0 million outstanding under the
Unsecured Credit Facility with an effective interest rate of approximately 2.66% and had a remaining borrowing
capacity of approximately $407.0 million.
Unsecured Term Loan due 2024
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 May 31, 2019, the Company
entered into an amendment to the unsecured term loan due 2022 with a syndicate of nine lenders to extend the
maturity date to May 2024 and to increase the loan amount from $150.0 million to $200 million. The Unsecured Term
Loan due 2024 bears interest at a rate equal to (x) LIBOR plus (y) a margin ranging from 0.85% to 1.65% (1.00% as of
December 31, 2019) based upon the Company's unsecured debt ratings. Payments under the Unsecured Term Loan
due 2024 are interest only, with the full amount of the principal due at maturity. The Unsecured Term Loan due 2024
may be prepaid at any time, without penalty. The Unsecured Term Loan due 2024 has various financial covenant
provisions that are required to be met on a quarterly and annual basis that are equivalent to those of the Unsecured
Credit Facility. As of December 31, 2019, the Company had interest rate swaps totaling $175.0 million to hedge the 1-
month LIBOR portion of the cost of borrowing under the Unsecured Term Loan due 2024 at a weighted average rate
of 2.29%. The outstanding balance on the Unsecured Term Loan due 2024 was $200.0 million as of December 31, 2019
with an effective interest rate of approximately 3.27% including the impact of the interest rate swaps. In connection
with the amendment, the Company paid up-front fees to the lenders of approximately $0.7 million, of which $0.4
71 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
million was capitalized and will be amortized over the term of the loan, and $0.3 million was expensed during the
second quarter of 2019. For each of the years ended December 31, 2019, 2018, and 2017 the Company amortized
approximately $0.2 million of the debt issuance costs which is included in interest expense on the Company's
Consolidated Statements of Income. The following table reconciles the balance of the Unsecured Term Loan due 2024
on the Company’s Consolidated Balance Sheets as of December 31, 2019 and 2018:
Dollars in thousands
Unsecured Term Loan due 2024 principal balance
Debt issuance costs
Unsecured Term Loan due 2024 carrying amount
DECEMBER 31,
2019
2018
200,000 $
150,000
(987)
199,013 $
(817)
149,183
$
$
Unsecured Term Loan due 2026
On May 31, 2019, the Company amended and restated its term loan agreement with a syndicate of lenders. The
Unsecured Term Loan due 2026 has a delayed draw feature that allows the Company up to nine months to draw
against the $150.0 million commitments. Loans outstanding under the Unsecured Term Loan due 2026 will bear
interest at a rate equal to LIBOR plus a margin ranging from 1.45% to 2.40% (1.60% at December 31, 2019). As of
December 31, 2019, no loans were outstanding under the Unsecured Term Loan due 2026. Committed amounts that
remain undrawn are subject to a ticking fee ranging from 0.125% to 0.30% per annum (0.20% at December 31, 2019).
In connection with the amendment, the Company paid up-front fees to the lenders of approximately $1.1 million, of
which $0.7 million was capitalized and will be amortized over the term of the loan, and $0.4 million was expensed
during the second quarter of 2019.
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, 2019, 2018 and 2017, 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, 2019 and 2018:
Dollars in thousands
DECEMBER 31,
2019
2018
Senior Notes due 2023 face value
$
250,000 $
250,000
Unaccreted discount
Debt issuance costs
(761)
(699)
(974)
(909)
Senior Notes due 2023 carrying amount
$
248,540 $
248,117
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
each of the years ended December 31, 2019 , 2018, and 2017 the Company amortized approximately $0.2 million 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.
72 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
The following table reconciles the balance of the Senior Notes due 2025 on the Company’s Consolidated Balance
Sheets as of December 31, 2019 and 2018:
Dollars in thousands
DECEMBER 31,
2019
2018
Senior Notes due 2025 face value
$
250,000 $
250,000
Unaccreted discount
Debt issuance costs
(121)
(1,357)
(141)
(1,581)
Senior Notes due 2028 carrying amount
$
248,522 $
248,278
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. For
the year ended December 31, 2019, the Company amortized approximately $0.2 million of the discount and $0.2
million of the debt issuance costs which are included in interest expense on the Company's Consolidated Statements
of Income. 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, 2019:
Dollars in thousands
DECEMBER 31,
2019
2018
Senior Notes due 2028 face value
$
300,000 $
300,000
Unaccreted discount
Debt issuance costs
(2,100)
(2,249)
(2,319)
(2,483)
Senior Notes due 2028 carrying amount
$
295,651 $
295,198
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, 2019 and 2018. For the years ended December 31, 2019, 2018 and
2017, the Company amortized approximately $0.6 million, $0.4 million and $0.3 million of the discount and $0.4
million, $0.8 million, and $0.7 million of the premium. For the years ended December 31, 2019, 2018 and 2017, the
Company also amortized approximately $0.2 million, $0.1 million, and $0.1 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
DECEMBER 31,
2019
2018
Mortgage notes payable principal balance
$
129,258 $
143,115
Unamortized premium
Unaccreted discount
Debt issuance costs
1,162
(528)
(549)
1,805
(968)
(744)
Mortgage notes payable carrying amount
$
129,343 $
143,208
73 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
The following table details the Company’s mortgage notes payable, with related collateral.
Dollars in millions
Commercial Bank 1
Commercial Bank 2
Life Insurance Co. 3
Life Insurance Co. 4
Life Insurance Co. 5
Commercial Bank 6
Life Insurance Co. 7
Life Insurance Co. 8
Financial Services 9
Life Insurance Co. 10
Life Insurance Co. 11
Life Insurance Co. 12
Financial Services 13
Commercial Bank
Commercial Bank 14
Municipal Government 15, 16
ORIGINAL
BALANCE
EFFECTIVE
INTEREST
RATE 20
MATURITY
DATE
COLLATERAL 21
PRINCIPAL AND
INTEREST PAYMENTS 19
$
9.4
15.2
7.9
7.3
5.6
12.9
11.0
12.3
12.4
9.0
13.3
6.8
9.7
11.5
15.0
11.0
4.55%
7.65%
4.00%
5.25%
4.30%
6.43%
3.87%
3.86%
4.27%
4.84%
4.13%
3.96%
4.32%
3.71%
5.25%
4.79%
7/19 MOB
7/20 MOB
8/20 MOB
8/20 MOB
1/21 MOB
2/21 MOB
11/22 MOB
8/23 MOB
10/23 MOB
Monthly/8-yr amort
18
$
Monthly/15-yr amort.
Monthly/27-yr amort.
Monthly/10-yr amort.
Monthly/12-yr amort.
Monthly/7-yr amort.
Monthly/7-yr amort.
Monthly/10-yr amort.
12/23 MOB,OFC
Monthly/10-yr amort.
1/24 MOB
2/24 MOB
9/24 MOB
1/26 MOB
4/27 MOB
17
MOB
Monthly/10-yr amort.
Monthly/7-yr amort.
Monthly/10-yr amort.
Monthly/10-yr amort.
Monthly/20-yr amort.
Semi-Annual 17
INVESTMENT IN
COLLATERAL
at December 31,
BALANCE
at December 31,
2019
2019
2018
— $ — $
9.0
18.6
20.7
18.1
15.8
55.2
22.0
25.4
22.6
25.7
20.8
14.6
17.0
38.6
33.5
21.0
12.5
12.5
0.5
6.0
4.5
10.1
10.0
10.9
11.7
7.6
12.7
6.4
8.3
9.6
7.9
10.6
1.3
6.2
4.6
10.3
10.2
11.2
12.0
7.8
13.0
6.6
8.6
10.1
8.8
11.0
$
369.6 $ 129.3 $ 143.2
1
2
3
4
5
6
7
8
9
The Company repaid this mortgage note in April 2019. The Company's unencumbered gross investment was $27.8 million at December 31, 2019.
The unaccreted portion of the $2.4 million discount recorded on this note upon acquisition is included in the balance above.
The unamortized portion of the $0.3 million premium recorded on this note upon acquisition is included in the balance above.
The unamortized portion of the $0.4 million premium recorded on this note upon acquisition is included in the balance above. This mortgage note
payable was repaid in full on February 3, 2020.
The unamortized portion of the $0.2 million premium recorded on this note upon acquisition is included in the balance above.
The unaccreted portion of the $1.0 million discount recorded on this note upon acquisition is included in the balance above.
The unaccreted portion of the $0.1 million discount recorded on this note upon acquisition is included in the balance above.
The unaccreted portion of the $0.2 million discount recorded on this note upon acquisition is included in the balance above.
The unamortized portion of the $0.4 million premium recorded on this note upon acquisition is included in the balance above.
10
The unamortized portion of the $0.1 million premium recorded on this note upon acquisition is included in the balance above.
11
12
13
14
15
16
17
18
The unamortized portion of the $0.8 million premium recorded on this note upon acquisition is included in the balance above.
The unamortized portion of the $0.2 million premium recorded on this note upon acquisition is included in the balance above.
The unamortized portion of the $0.1 million premium recorded on this note upon acquisition is included in the balance above.
The unamortized portion of the $0.7 million premium recorded on this note upon acquisition is included in the balance above.
Balance consists of three notes secured by the same building.
The unamortized portion of the $1.0 million premium recorded on the three notes upon acquisition is included in the balance above.
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.
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.
19
Payable in monthly installments of principal and interest with the final payment due at maturity (unless otherwise noted).
20 The contractual interest rates for the 17 outstanding mortgage notes ranged from 3.3% to 6.9% as of December 31, 2019.
21 MOB-Medical office building. OFC-Office
74
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
Other Long-Term Debt Information
Future maturities of the Company’s notes and bonds payable as of December 31, 2019 were as follows:
Dollars in thousands
PRINCIPAL
MATURITIES
NET ACCRETION/
AMORTIZATION 1
DEBT
ISSUANCE COSTS 2
NOTES AND
BONDS PAYABLE
2020
2021
2022
2023
2024
2025 and thereafter
$
23,064 $
(392) $
(1,081) $
17,594
12,977
573,230
225,966
569,427
(326)
(336)
(183)
(262)
(849)
(1,065)
(1,077)
(921)
(667)
(1,030)
21,591
16,203
11,564
572,126
225,037
567,548
%
1.5%
1.1%
0.8%
40.5%
15.9%
40.2%
$ 1,422,258 $
(2,348) $
(5,841) $
1,414,069
100.0%
1
2
Includes discount accretion and premium amortization related to the Company’s Senior Notes due 2023, Senior Notes due 2025, Senior Notes due 2028
and 16 mortgage notes payable.
Excludes approximately $5.0 million in debt issuance costs related to the Company's Unsecured Credit Facility and Unsecured Term Loan due 2026
included in other assets, net.
10. Derivative Financial Instruments
Risk Management Objective of Using Derivatives
The Company is exposed to certain risks 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 2019, 2018 and 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 (loss) related to derivatives will be reclassified to interest expense as interest payments are
made on the Company’s variable-rate debt.
The Company had eight outstanding interest rate derivatives that were designated as cash flow hedges of interest
rate risk:
INTEREST RATE DERIVATIVE
Interest rate swaps - 2017
Interest rate swaps - 2018
Interest rate swaps - 2019
Total interest rate swaps
NUMBER OF
INSTRUMENTS
NOTIONAL
in millions
2 $
2
4
8 $
25.0
50.0
100.0
175.0
75 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
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, 2019 and 2018.
Dollars in thousands
Derivatives designated as hedging instruments
Interest rate swaps 2017
Interest rate swaps 2018
Interest rate swaps 2019
AS OF DECEMBER 31, 2019
AS OF DECEMBER 31, 2018
BALANCE SHEET
LOCATION
FAIR
VALUE
BALANCE SHEET
LOCATION
FAIR
VALUE
Other liabilities
$
(467)
Other assets, net
$
229
Other liabilities
Other liabilities
(1,335)
(3,478)
Other liabilities
Other liabilities
(68)
—
$
161
Total derivatives designated as hedging instruments
$ (5,280)
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, 2019 related to the Company's outstanding interest rate swaps.
AMOUNT OF (LOSS)
RECOGNIZED IN OCI
on derivatives
AMOUNT OF (GAIN)/LOSS RECLASSIFIED
FROM OCI INTO INCOME
for the twelve months ended December 31,
Dollars in thousands
Interest rate swaps 2017
Interest rate swaps 2018
Interest rate swaps 2019
Settled interest rate swaps
$
$
2019
(674)
(1,366)
(3,552)
Interest expense
Interest expense
Interest expense
—
Interest expense
$
2019
(22) $
99
74
168
(5,592)
Total interest expense
$
319 $
2018
51
204
—
169
424
The Company estimates that an additional $1.4 million will be reclassified from accumulated other comprehensive
loss as an increase to interest expense over the next 12 months.
Tabular Disclosure Offsetting Derivatives
The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company's
derivatives as of December 31, 2019. The net amounts of derivative liabilities can be reconciled to the tabular
disclosure of fair value. The tabular disclosure of fair value provides the location that derivative liabilities are
presented on the Company's Consolidated Balance Sheets.
Offsetting of Derivative Liabilities
GROSS AMOUNTS
of recognized
liabilities
GROSS AMOUNTS OFFSET
in the Consolidated
Balance Sheets
NET AMOUNTS OF LIABILITIES
presented in the Consolidated
Balance Sheets
GROSS AMOUNTS NOT OFFSET
in the Consolidated Balance Sheets
FINANCIAL
INSTRUMENTS
CASH
COLLATERAL
NET
AMOUNT
Derivatives
$
(5,280) $
— $
(5,280)
$
5,280 $
— $
—
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. The Company has agreements with each of its
derivative counterparties that contain a provision where if the Company either defaults or is capable of being
declared in default on any of its indebtedness, then the Company could also be declared in default on its derivative
obligations.
As of December 31, 2019, the fair value of derivatives in a net liability position including accrued interest but
excluding any adjustment for nonperformance risk related to these agreements was $5.5 million. As of December 31,
2019, the Company has not posted any collateral related to these agreements and was not in breach of any agreement
76 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
provisions. If the Company had breached any of these provisions, it could have been required to settle its obligations
under the agreements at their aggregate termination value of $5.5 million.
11. Stockholders’ Equity
Common Stock
The Company had no preferred shares outstanding and had common shares outstanding for the three years ended
December 31, 2019 as follows:
Balance, beginning of year
Issuance of common stock
Non-vested share-based awards, net of withheld shares and forfeitures
YEAR ENDED DECEMBER 31,
2019
2018
2017
$
125,279,455 $
125,131,593 $
116,416,900
9,251,440
175,259
26,203
121,659
8,395,607
319,086
Balance, end of year
$
134,706,154 $
125,279,455 $
125,131,593
Equity Offering
On March 19, 2019, the Company issued 3,737,500 shares of common stock, par value $0.01 per share, at $31.40 per
share in an underwritten public offering pursuant to the Company's existing effective registration statement. The net
proceeds of the offering, after underwriting discounts and offering expenses, were approximately $115.8 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.
SHARES
SOLD
SALE PRICE
per share
NET PROCEEDS
in millions
5,470,673
$32.01 - $33.77 $
179.1
—
—
NA $
NA $
—
—
2019
2018
2017
The Company had 398,024 authorized shares remaining available to be sold under the current sales agreements as of
January 31, 2020 and no shares were sold related to this program during 2017 or 2018.
Dividends Declared
During 2019, the Company declared and paid common stock dividends aggregating $1.20 per share ($0.30 per share
per quarter).
On February 11, 2020, the Company declared a quarterly common stock dividend in the amount of $0.30 per share
payable on March 9, 2020 to stockholders of record on February 24, 2020.
Authorization to Repurchase Common Stock
On April 30, 2019, the Company’s Board of Directors authorized the repurchase of up to $50 million of outstanding
shares of the Company’s common stock either in the open market or through privately negotiated transactions,
subject to market conditions, regulatory constraints, and other customary conditions. The Company is not obligated
under this authorization to repurchase any specific number of shares. This authorization supersedes all previous
stock repurchase authorizations. As of the date of these Consolidated Financial Statements, the Company has not
repurchased any shares of its common stock under this authorization.
77 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
Accumulated Other Comprehensive Loss
During each of the two years ended December 31, 2019 and 2018, the Company entered into interest rate swaps to
hedge the variable cash flows associated with existing variable-rate debt. 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 years ended
December 31, 2019 and 2018:
Dollars in thousands
Beginning balance
Other comprehensive loss before reclassifications
Amounts reclassified from accumulated other comprehensive income (loss)
Net current-period other comprehensive (loss) income
Ending balance
INTEREST RATE SWAPS
as of December 31,
2019
2018
$
(902) $
(1,299)
319
(5,592)
(5,273)
424
(27)
397
$
(6,175) $
(902)
The following table represents the details regarding the reclassifications from Accumulated other comprehensive
income (loss) during the year ended December 31, 2019 (dollars in thousands):
DETAILS ABOUT ACCUMULATED OTHER COMPREHENSIVE
INCOME (LOSS) COMPONENTS
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
$
$
168
Interest Expense
Interest Expense
151
319
12. Stock and Other Incentive Plans
Stock Incentive Plan
In May 2015, the Company's stockholders approved the 2015 Stock 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, 2019 and 2018, the Company had issued a total of 1,988,079 and 1,711,240
restricted shares, respectively, under the 2015 Incentive Plan for compensation-related awards to employees and
directors, with a total of 1,511,921 and 1,788,760, respectively, remaining unissued under the plan. 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, included in general and
administrative expense, recognized during the years ended December 31, 2019, 2018 and 2017 from the amortization
of the value of shares over the vesting period issued to employees and directors was $12.0 million, $10.4 million and
$9.8 million, respectively. The Company's former Executive Chairman, David R. Emery, died on September 30, 2019
resulting in $2.9 million of expenses associated with the acceleration of his outstanding nonvested share-based
awards. This charge is included in the 2019 compensation expense. In connection with the vesting, 80,490 shares
78 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
were withheld to pay employee federal income taxes. The following table represents expected amortization of the
Company's non-vested shares issued:
Dollars in millions
FUTURE AMORTIZATION
of non-vested shares
2020
2021
2022
2023
2024
2025 and thereafter
Total
$
$
8.7
7.3
5.9
3.8
2.5
1.9
30.1
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 2019, 2018 and 2017, compensation expense, included in general and
administrative expense, resulting from the amortization of non-vested share grants to officers was approximately
$5.7 million, $5.7 million, and $5.0 million, respectively. Details of the awards that have been earned from this plan
are as follows:
• On December 12, 2019, the Company granted non-vested stock awards for TSR performance to its four named
executive officers, five senior vice presidents, and five first vice presidents with a grant date fair value totaling
$6.1 million, which were granted in the form of 187,072 non-vested shares, with a five-year vesting period, which
will result in annual compensation expense of $1.2 million for the each of 2020, 2021, 2022, and 2023, and $1.1
million for 2024, respectively.
• On December 12, 2018, the Company granted non-vested stock awards for TSR performance to its four named
executive officers and five senior vice presidents with a grant date fair value totaling $5.0 million, which were
granted in the form of 165,261 non-vested shares, with a five-year vesting period, which will result in annual
compensation expense of $1.0 million for the each of 2019, 2020, 2021, and 2022, and $0.9 million for 2023,
respectively.
• 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 2019, 2020, and 2021, and $1.9 million for 2022, respectively.
Long-Term Incentive Program
In the first quarter of 2019 and 2018, the Company granted a performance-based award to officers, excluding the four
named executive officers and five senior vice presidents, under the Long-term Incentive Program adopted under the
2015 Incentive Plan (the "LTIP") totaling approximately $1.0 million and $1.2 million, which was granted in the form
of 31,262 non-vested shares and 43,414 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.
79 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
For 2019, 2018 and 2017, compensation expense resulting from the amortization of non-vested share grants to
officers was approximately $1.1 million, $1.2 million, and $1.1 million, respectively.
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 2019, 2018 and 2017, the Company issued 33,509 shares, 33,348 shares and 39,016 shares,
respectively, to its officers through the salary deferral plan. For 2019, 2018 and 2017, compensation expense resulting
from the amortization of non-vested share grants to officers was approximately $0.9 million, $1.0 million, and $1.2
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 2019, 2018 and 2017, the Company issued 24,996 shares, 30,989 shares, and 23,231 shares,
respectively, to its non-employee directors through the 2015 Incentive Plan. For each of the years 2019, 2018 and
2017, compensation expense resulting from the amortization of non-vested share grants to directors was
approximately $0.8 million, respectively.
Other Grants
The Company issued three one-time non-vested share grants related to executive management transition in 2016.
For 2019, 2018 and 2017 compensation expense resulting from the amortization of these non-vested share grants to
officers was approximately $3.5 million, $1.7 million, and $1.7 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. The Company's former Executive Chairman,
David R. Emery, died on September 30, 2019 resulting in the acceleration of this outstanding grant totaling $2.0
million.
80 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
A summary of the activity under the 2015 Incentive Plan and related information for the three years in the period
ended December 31, 2019 follows:
Dollars in thousands, except per share data
YEAR ENDED DECEMBER 31,
2019
2018
2017
Share-based awards, beginning of year
1,769,863
1,907,645
1,786,497
Granted
Vested
276,839
273,012
413,489
(292,636)
(410,794)
(292,341)
Share-based awards, end of year
1,754,066
1,769,863
1,907,645
Weighted-average grant date fair value of
Share-based awards, beginning of year
Share-based awards granted during the year
Share-based awards vested during the year
Share-based awards, end of year
Grant date fair value of shares granted during the year
$
$
$
$
$
29.36 $
31.75 $
28.84 $
29.82 $
28.44 $
29.72 $
25.32 $
29.36 $
27.18
32.05
25.88
28.44
8,791 $
8,114 $
13,254
The vesting periods for the non-vested shares granted during 2019 ranged from one to eight years with a weighted-
average amortization period remaining as of December 31, 2019 of approximately 5 years.
During 2019, 2018 and 2017, the Company withheld 101,580 shares, 151,353 shares and 94,403 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 $0.5
million for the year ended December 31, 2019 and $0.4 million for each year during 2018 and 2017.
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, 2019, the Company had issued 599,104 shares under the plan of which 7,990
shares were issued in 2019, 9,487 shares were issued in 2018 and 26,031 shares were issued in 2017.
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. 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. The Company accounts for these awards based on fair value, using the Black-
Scholes model, and generally recognizes expense over the award’s vesting period, net of 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.
During the years ended December 31, 2019, 2018 and 2017, the Company recognized in general and administrative
expenses approximately $0.2 million, $0.3 million, and $0.2 million, respectively, of compensation expense related to
the annual grant of options to its employees to purchase shares under the Employee Stock Purchase Plan.
81 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
Cash received from employees upon exercising options under the Employee Stock Purchase Plan was approximately
$1.0 million for the year ended December 31, 2019, $0.4 million for the year ended December 31, 2018, and $0.8
million for the year ended December 31, 2017.
A summary of the Employee Stock Purchase Plan activity and related information for the three years in the period
ended December 31, 2019 is as follows:
Dollars in thousands, except per share data
YEAR ENDED DECEMBER 31,
2019
2018
2017
Options outstanding, beginning of year
328,533
318,100
316,321
Granted
Exercised
Forfeited
Expired
235,572
203,836
206,824
(35,277)
(54,095)
(16,716)
(40,897)
(32,076)
(40,659)
(142,074)
(135,790)
(132,310)
Options outstanding and exercisable, end of year
332,659
328,533
318,100
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)
$
$
$
$
$
$
$
$
$
$
24.17 $
24.17 $
25.01 $
25.26 $
25.77 $
25.59 $
25.00 $
27.30 $
24.01 $
24.06 $
23.55 $
24.17 $
7.02 $
7.81 $
269 $
71 $
23.69
25.77
24.31
25.01
23.22
25.00
6.31
271
2,589 $
1,402 $
2,683
25.59 $
24.17 $
25.00
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)
2019
2018
2017
2.48%
4.19%
1.45
1.89%
3.66%
1.45
1.20%
3.70%
1.45
Expected volatility
29.8%
28.4%
20.4%
Expected forfeiture rates
85%
85%
85%
82 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
13. Earnings Per Share
The Company uses the two-class method of computing net earnings per common share. 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, 2019.
Dollars in thousands, except per share data
Weighted average common shares
YEAR ENDED DECEMBER 31,
2019
2018
2017
Weighted average common shares outstanding
129,735,723
125,219,773
119,739,216
Non-vested shares
(1,736,022)
(1,927,648)
(1,813,058)
Weighted average common shares - basic
127,999,701
123,292,125
117,926,158
Weighted average common shares - basic
127,999,701
123,292,125
117,926,158
Dilutive effect of employee stock purchase plan
84,283
58,808
91,007
Weighted average common shares - diluted
128,083,984
123,350,933
118,017,165
Net income
Dividends paid on nonvested share-based awards
Net income applicable to common stockholders
Basic earnings per common share
Diluted earnings per common share
14. Commitments and Contingencies
$
$
$
$
39,185 $
69,771 $
(2,075)
(2,320)
23,092
(2,149)
37,110 $
67,451 $
20,943
0.29 $
0.29 $
0.55 $
0.55 $
0.18
0.18
Redevelopment Activity
The Company completed the redevelopment of a medical office building in Charlotte, North Carolina, which includes
a 40,278 square foot vertical expansion and funded approximately $1.5 million during the year ended December 31,
2019. The first tenant took occupancy in the second quarter of 2019.
The Company initiated the redevelopment of a 110,883 square foot medical office building in Memphis, Tennessee in
December 2019. The Company funded approximately $0.3 million, excluding the purchase price of $8.7 million for the
land and building. The building will continue to operate with in-place leases during construction. The Memphis
Redevelopment is expected to be completed in the first quarter of 2021.
The Company also funded approximately $1.0 million of primarily tenant improvements in connection with its
previously completed redevelopment of a medical office building in Nashville, Tennessee.
Development Activity
The Company continued the development of a 151,000 square foot medical office building in Seattle, Washington. The
Company spent approximately $25.2 million on the development during the year ended December 31, 2019. The
Company expects initial occupancy to occur in the first quarter of 2020.
The Company also funded approximately $0.6 million of primarily tenant improvements as the Company continues to
lease up its previously completed development of a medical office building in Denver, Colorado.
83 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
The table below details the Company’s construction activity as of December 31, 2019. The information included in the
table below represents management’s estimates and expectations at December 31, 2019, 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
INITIAL
OCCUPANCY
DECEMBER 31, 2019
CONSTRUCTION
IN PROGRESS
BALANCE
TOTAL FUNDED
during the year
TOTAL
AMOUNT
FUNDED
ESTIMATED
REMAINING
FUNDINGS
unaudited
ESTIMATED
TOTAL
INVESTMENT
unaudited
APPROXIMATE
SQUARE FEET
unaudited
Construction Activity
Seattle, WA
Redevelopment Activity
Memphis, TN 1
Total
1
1
Q1 2020
Q1 2021
$
$
48,731 $
25,211 $ 49,033 $
15,087 $
64,120
151,000
—
9,032
9,032
18,768
27,800
48,731 $
34,243 $ 58,065 $
33,855 $
91,920
110,883
261,883
1
Initial occupancy represents the quarter in which the redevelopment is expected to be completed. The building will continue to operate with in-place
leases during construction.
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, 2019, the Company had commitments of approximately $46.6 million
that are 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 seven parcels of land held for
development located adjacent to certain of the Company's existing medical office buildings in Texas, Iowa, Tennessee
and Colorado totaled approximately $24.6 million as of December 31, 2019 and December 31, 2018.
15. 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 $4.4 billion, $4.0 billion, and $4.0 billion
as of December 31, 2019, 2018 and 2017, respectively.
84 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
The following table reconciles the Company’s consolidated net income attributable to common stockholders to taxable
income for the three years ended December 31, 2019:
Dollars in thousands
Net income
Reconciling items to taxable income
Depreciation and amortization
Gain or loss on disposition of depreciable assets
Straight-line rent
Receivable allowances
Share-based compensation
Other
Taxable income 1
Dividends paid
1
Before REIT dividend paid deduction.
YEAR ENDED DECEMBER 31,
2019
2018
2017
$
39,185 $
69,771 $
23,092
67,953
(15,689)
(11,535)
1,942
2,628
12,631
57,930
64,775
(27,581)
(3,049)
2,470
(1,699)
842
46,426
1,570
(4,551)
1,680
1,855
6,552
35,758
53,532
$
$
97,115 $
105,529 $
76,624
155,358 $
150,266 $
142,327
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, 2019.
For the three years ended December 31, 2019, there were no preferred shares outstanding. As such, no dividends
were distributed related to preferred shares for those periods.
2019
2018
2017
PER SHARE
%
PER SHARE
%
PER SHARE
%
Common stock
Ordinary income 1
Return of capital
Unrecaptured section 1250 gain
Common stock distributions
$
$
0.79
0.40
0.01
65.7% $
33.9%
0.4%
0.75
0.33
0.12
62.2% $
27.8%
10.0%
0.42
0.50
0.28
34.5%
42.0%
23.5%
1.20
100.0% $
1.20
100.0% $
1.20
100.0%
1
For the 2018 reporting year all ordinary income is also Code Section 199A eligible per the The Tax Cut and Jobs Act of 2017.
State Income Taxes
The Company must pay certain state income taxes, which are typically 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, 2019 are detailed in
the table below:
Dollars in thousands
State income tax expense
Texas gross margins tax
Total state income tax expense
State income tax payments, net of refunds and collections
YEAR ENDED DECEMBER 31,
2019
2018
2017
$
$
$
550 $
550 $
543 $
586 $
586 $
637 $
608
608
555
85
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
16. 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.
• Borrowings under the Unsecured Credit Facility, Unsecured Term Loan due 2024 and Unsecured Term Loan due 2026 - 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, 2019 and
2018.
Dollars in millions
Notes and bonds payable 1
CARRYING VALUE
FAIR VALUE
CARRYING VALUE
FAIR VALUE
$
1,414.1 $
1,425.8 $
1,346.0 $
1,326.5
DECEMBER 31, 2019
DECEMBER 31, 2018
1
Level 2 – model-derived valuations in which significant inputs and significant value drivers are observable in active markets.
17. Selected Quarterly Financial Data (unaudited)
Quarterly financial information for the year ended December 31, 2019 is summarized below.
Dollars in thousands, except per share data
MARCH 31
JUNE 30
SEPTEMBER 30
DECEMBER 31 1
QUARTER ENDED
2019
Revenues
Net income attributable to common stockholders
Net income attributable to common stockholders per share
Basic earnings per common share
Diluted earnings per common share
$
$
$
$
112,657 $
116,317 $
119,799 $
121,524
4,891 $
4,484 $
2,601 $
27,210
0.04 $
0.04 $
0.03 $
0.03 $
0.02 $
0.02 $
0.20
0.20
1
The increases in net income and amounts per share for the fourth quarter of 2019 are primarily attributable to gains of $20.0 million on the sale of six
properties.
Quarterly financial information for the year ended December 31, 2018 is summarized below.
Dollars in thousands, except per share data
MARCH 31
JUNE 30 1
SEPTEMBER 30
DECEMBER 31 2
QUARTER ENDED
2018
Revenues
Net income attributable to common stockholders
Net income attributable to common stockholders per share
Basic earnings per common share
Diluted earnings per common share
$
$
$
$
112,124 $
111,634 $
113,462 $
113,168
9,180 $
37,729 $
6,548 $
16,314
0.07 $
0.07 $
0.30 $
0.30 $
0.05 $
0.05 $
0.13
0.13
1
2
The increases in net income and amounts per share for the second quarter of 2018 are primarily attributable to gains of $27.7 million on the sale of
twelve properties.
The increases in net income and amounts per share for the fourth quarter of 2018 are primarily attributable to gains of $10.8 million on the sale of three
properties.
86 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 SEC’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 Company's management 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,
2019 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, 2019. 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.
87 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Report of
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, 2019, 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, 2019, 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 as of December 31, 2019 and 2018, the related consolidated
statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended
December 31, 2019, and the related notes and financial statement schedules and our report dated February 12, 2020 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 12, 2020
88 PART III
Item 10. Directors, Executive Officers and Corporate Governance
Directors
Information with respect to the Company’s directors, set forth in the Company’s Proxy Statement relating to the
Annual Meeting of Stockholders to be held on May 12, 2020 under the caption “Election of Directors,” is incorporated
herein by reference.
Executive Officers
The executive officers of the Company are:
NAME
AGE
POSITION
Todd J. Meredith
J. Christopher Douglas
John M. Bryant, Jr.
Robert E. Hull
45
44
53
47
President & Chief Executive Officer
Executive Vice President & Chief Financial Officer
Executive Vice President & General Counsel
Executive Vice President - Investments
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 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. 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.
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.
89 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 12, 2020 under the caption
“Security Ownership of Certain Beneficial Owners and Management – Delinquent Section 16(a) Reports,” is
incorporated herein by reference.
Stockholder Recommendation of Director Candidates
There have been no material changes with respect to the Company’s policy relating to stockholder recommendations
of director candidates. Such information is set forth in the Company’s Proxy Statement relating to the Annual
Meeting of Stockholders to be held on May 12, 2020 under the caption “Shareholder Recommendation or Nomination
of Director Candidates,” and is incorporated herein by reference.
Audit Committee
Information relating to the Company’s Audit Committee, its members and the Audit Committee’s financial experts,
set forth in the Company’s Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 12,
2020 under the caption “Committee Membership,” is incorporated herein by reference.
Item 11. Executive Compensation
Information relating to executive compensation, set forth in the Company’s Proxy Statement relating to the Annual
Meeting of Stockholders to be held on May 12, 2020 under the captions “Compensation Discussion and Analysis,”
“Executive Compensation,” “Compensation Committee Interlocks and Insider Participation,” “Compensation
Committee Report” and “Director Compensation,” is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
Information relating to the security ownership of management and certain beneficial owners, set forth in the
Company’s Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 12, 2020 under the
caption “Security Ownership of Certain Beneficial Owners and Management,” is incorporated herein by reference.
Information relating to securities authorized for issuance under the Company’s equity compensation plans, set forth
in Item 5 of this report under the caption “Equity Compensation Plan Information,” is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions, and Director
Independence
Information relating to certain relationships and related transactions, and director independence, set forth in the
Company’s Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 12, 2020 under the
captions “Certain Relationships and Related Transactions” and “Corporate Governance – Independence of Directors,”
is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
Information relating to the fees paid to the Company’s accountants, set forth in the Company’s Proxy Statement
relating to the Annual Meeting of Stockholders to be held on May 12, 2020 under the caption “Ratification of
Appointment of Independent Registered Public Accounting Firm,” is incorporated herein by reference.
90 Item 15. Exhibits and Financial Statement Schedules
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, 2019 and December 31, 2018.
• Consolidated Statements of Income for the years ended December 31, 2019, December 31, 2018 and
December 31, 2017.
• Consolidated Statements of Comprehensive Income for the years ended December 31, 2019, December 31, 2018
and December 31, 2017.
• Consolidated Statements of Equity for the years ended December 31, 2019, December 31, 2018 and December 31,
2017.
• Consolidated Statements of Cash Flows for the years ended December 31, 2019, December 31, 2018 and
December 31, 2017.
• Notes to Consolidated Financial Statements.
2. Financial Statement Schedules
Schedule II — Valuation and Qualifying Accounts for the years ended December 31, 2019, 2018, and 2017
Schedule III — Real Estate and Accumulated Depreciation as of December 31, 2019
95
96
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
DESCRIPTION OF EXHIBITS
3.1 — Second Articles of Amendment and Restatement of the Company, as amended.1
3.2 — Amended and Restated Bylaws of the Company, as amended.1
4.1 — Specimen stock certificate. 2
4.2 — 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). 3
4.3 — 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). 4
4.4 — Form of 3.75% Senior Note due 2023 (set forth in Exhibit B to the Fifth Supplemental Indenture filed as Exhibit (4.8)
hereto). 4
4.5 — 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). 5
4.6 — Form of 3.875% Senior Notes due 2025 (set forth in Exhibit B to the Sixth Supplemental Indenture filed as Exhibit 4.9
hereto). 5
4.7 — Seventh Supplemental Indenture, dated December 11, 2017, by and between the Company and Branch Banking and
Trust Company, as Trustee. 6
4.8 — Form of 3.625% Senior Note due 2028 (set forth in Exhibit B to the Seventh Supplemental Indenture filed as Exhibit
4.11 hereto). 6
4.9 — Description of Registrant's securities registered pursuant to Section 12 of the Securities Exchange Act of 1934 (filed
herewith).
10.1 — 2000 Employee Stock Purchase Plan. 7
10.2 — Amendment No. 1 to 2000 Employee Stock Purchase Plan, dated February 13, 2018. 8
10.3 — Dividend Reinvestment Plan, as Amended. 9
10.4 — Third Amended and Restated Employment Agreement, dated February 16, 2016, between Todd J. Meredith and the
Company. 10
10.5 — Amendment No. 1 to Third Amended and Restated Employment Agreement, dated February 12, 2020, between Todd
J. Meredith and the Company. (filed herewith)
91 10.6 — Third Amended and Restated Employment Agreement, dated February 15, 2017, between John M. Bryant, Jr. and the
Company. 11
Amendment No. 1 to Third Amended and Restated Employment Agreement, dated February 12, 2020, between John
M. Bryant, Jr. and the Company. (filed herewith)
10.7 —
10.8 — Amended and Restated Employment Agreement, dated January 1, 2017, between Robert E. Hull and the Company. 11
Amendment No. 1 to Amended and Restated Employment Agreement, dated February 12, 2020, between Robert E.
Hull and the Company. (filed herewith)
10.9 —
10.10 — Amended and Restated Employment Agreement, dated February 2, 2016, between J. Christopher Douglas and the
Company. 12
Amendment No. 1 to Amended and Restated Employment Agreement, dated February 12, 2020, between J.
Christopher Douglas and the Company. (filed herewith)
10.11 —
10.12 — Healthcare Realty Trust Incorporated Amended and Restated Executive Incentive Plan. 10
10.13 — 2010 Restricted Stock Implementation for Non-Employee Directors, dated May 4, 2010. 13
10.14 — Amendment No. 1 to 2010 Restricted Stock Implementation for Non-Employee Directors, dated December 11, 2013. 14
10.15 — Amendment No. 2 to 2010 Restricted Stock Implementation for Non-Employee Directors, dated August 4, 2015. 15
10.16 — Healthcare Realty Trust Incorporated Form of Restricted Stock Agreement for Non-Employee Directors. 16
10.17 — Healthcare Realty Trust Incorporated Form of Restricted Stock Agreement for Officers. 16
10.18 — Healthcare Realty Trust Incorporated 2015 Stock Incentive Plan. 17
10.19 — Amendment No. 1 to Healthcare Realty Trust Incorporated 2015 Stock Incentive Plan. 15
10.20 — Amended and Restated Credit Agreement, dated as of May 31, 2019, among the Company, Wells Fargo Bank, National
Association, as Administrative Agent, and the other lenders that are party thereto. 18
10.21 — Amended and Restated Term Loan, dated as of May 31, 2019, among the Company, Wells Fargo Bank, National
Association, as Administrative Agent, and the other lenders that are party thereto. 18
21 — Subsidiaries of the Registrant. (filed herewith)
23 — Consent of BDO USA, LLP, independent registered public accounting firm. (filed herewith)
31.1 — 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)
31.2 — 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)
32 — 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 — This instance document does not appear in the interactive data file because its XBRL tags are embedded within the
inline XBRL document.
101.SCH — XBRL Taxonomy Extension Schema Document. (filed herewith)
101.CAL — XBRL Taxonomy Extension Calculation Linkbase Document. (filed herewith)
101.LAB — XBRL Taxonomy Extension Labels Linkbase Document. (filed herewith)
101.DEF — XBRL Taxonomy Extension Definition Linkbase Document. (filed herewith)
101.PRE — XBRL Taxonomy Extension Presentation Linkbase Document. (filed herewith)
1
2
3
4
5
6
7
8
9
Filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 filed on February 13, 2019 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 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.
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 Form 10-Q for the quarter ended March 31, 2018 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.
10
Filed as an exhibit to the Company's Form 10-K for the year ended December 31, 2015 and hereby incorporated by reference.
11
12
13
14
15
16
17
18
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 May 31, 2019 and hereby incorporated by reference.
92 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. Amendment No. 1 to 2000 Employee Stock Purchase Plan (filed as Exhibit 10.2)
3. Third Amended and Restated Employment Agreement, dated February 16, 2016, between Todd J. Meredith and
the Company (filed as Exhibit 10.4)
4. Amendment No. 1 to Third Amended and Restated Employment Agreement, dated February 12, 2020, between
Todd J. Meredith and the Company (filed as Exhibit 10.5)
5. Third Amended and Restated Employment Agreement, dated February 15, 2017, between John M. Bryant, Jr.
and the Company (filed as Exhibit 10.6)
6. Amendment No. 1 to Third Amended and Restated Employment Agreement, dated February 12, 2020, between
John M. Bryant, Jr. and the Company (filed as Exhibit 10.7)
7. Amended and Restated Employment Agreement, dated January 1, 2017, between Robert E. Hull and the
Company (filed as Exhibit 10.8)
8. Amendment No. 1 to Amended and Restated Employment Agreement, dated February 12, 2020, between Robert
E. Hull and the Company (filed as Exhibit 10.9)
9. Amended and Restated Employment Agreement, dated February 2, 2016, between J. Christopher Douglas and
the Company (filed as Exhibit 10.10)
10. Amendment No. 1 to Amended and Restated Employment Agreement, dated February 12, 2020, between J.
Christopher Douglas and the Company (filed as Exhibit 10.11)
11. Healthcare Realty Trust Incorporated Amended and Restated Executive Incentive Plan (filed as Exhibit 10.12)
12. 2010 Restricted Stock Implementation for Non-Employee Directors, dated May 4, 2010 (filed as Exhibit 10.13)
13. Amendment No. 1 to Restricted Stock Implementation for Non-Employee Directors (filed as Exhibit 10.14)
14. Amendment No. 2 to Restricted Stock Implementation for Non-Employee Directors (filed as Exhibit 10.15)
15. Healthcare Realty Trust Incorporated Form of Restricted Stock Agreement for Non-Employee Directors (filed as
Exhibit 10.16)
16. Healthcare Realty Trust Incorporated Form of Restricted Stock Agreement for Officers (filed as Exhibit 10.17)
17. Healthcare Realty Trust Incorporated 2015 Stock Incentive Plan (filed as Exhibit 10.18)
18. Amendment No. 1 to Healthcare Realty Trust Incorporated 2015 Stock Incentive Plan (filed as Exhibit 10.19)
Item 16. Form 10-K Summary
None.
93 SIGNATURES AND SCHEDULES
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
HEALTHCARE REALTY TRUST INCORPORATED
By:
/s/ TODD J. MEREDITH
Todd J. Meredith
President and Chief Executive Officer
February 12, 2020
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE
TITLE
DATE
/s/ Todd J. Meredith
Todd J. Meredith
/s/ J. Christopher Douglas
J. Christopher Douglas
/s/ Amanda L. Callaway
Amanda L. Callaway
/s/ John V. Abbott
John V. Abbott
/s/ Nancy H. Agee
Nancy H. Agee
/s/ Edward H. Braman
Edward H. Braman
/s/ Peter F. Lyle
Peter F. Lyle
/s/ John Knox Singleton
John Knox Singleton
/s/ Bruce D. Sullivan
Bruce D. Sullivan
/s/ Christann M. Vasquez
Christann M. Vasquez
President and Chief Executive Officer
February 12, 2020
(Principal Executive Officer)
Executive Vice President and Chief Financial
February 12, 2020
Officer (Principal Financial Officer)
Senior Vice President and Chief Accounting
February 12, 2020
Officer (Principal Accounting Officer)
Director
February 12, 2020
Director
February 12, 2020
Director
February 12, 2020
Director
February 12, 2020
Director
February 12, 2020
Director
February 12, 2020
Director
February 12, 2020
94 Schedule II – Valuation and Qualifying Accounts for the years ended
December 31, 2019, 2018 and 2017
Dollars in thousands
DESCRIPTION
ADDITIONS AND DEDUCTIONS
BALANCE
AT BEGINNING
OF PERIOD
CHARGED/
(CREDITED) TO COSTS
AND EXPENSES
CHARGED
TO OTHER
ACCOUNTS
UNCOLLECTIBLE
ACCOUNTS
WRITTEN-OFF
BALANCE
AT END OF
PERIOD
2019 Accounts receivable allowance
2018 Accounts receivable allowance
2017 Accounts receivable allowance
$
$
$
251
256
148
$
$
$
167 $
60 $
159 $
— $
— $
— $
— $
65 $
51 $
418
251
256
95 Schedule III – Real Estate and Accumulated Depreciation as of
December 31, 2019
Dollars in thousands
MARKET
Seattle, WA
Dallas, TX
Los Angeles, CA
Atlanta, GA
Nashville, TN
Charlotte, NC
Denver, CO
Washington, DC
Richmond, VA
Houston, TX
Honolulu, HI
Des Moines, IA
Oklahoma, City, OK
Indianapolis, IN
San Francisco, CA
Springfield, MO
Austin, TX
Memphis, TN
San Antonio, TX
Chicago, IL
Minneapolis, MN
Other (16 markets)
Total real estate
Construction in progress
Land held for develop.
Memphis redevelopment
Corporate property
LAND 1
COST
CAPITALIZED
subsequent to
acquisition
BUILDINGS, IMPROVEMENTS,
LEASE INTANGIBLES AND CIP 1
TOTAL
INITIAL
INVESTMENT
COST
CAPITALIZED
subsequent to
acquisition
NUMBER
OF PROP.
INITIAL
INVESTMENT
TOTAL
PERSONAL
PROPERTY
2, 3, 5
TOTAL
PROPERTY
1, 3
ACCUMULATED
DEPRECIATION
4
ENCUMBRANCES
DATE
ACQUIRED
DATE
CONST.
25 $
54,446 $
4,119 $ 58,565 $
490,461 $
42,306 $
532,767 $
421 $
591,753 $
88,890 $
22,666 2008-2019
1957-2010
25
14
9
6
16
9
6
7
9
3
7
4
4
3
1
5
7
6
3
4
31
204
—
—
—
—
18,785
43,719
3,251
20,004
4,163
13,887
—
—
15,475
8,314
12,584
9,838
3,299
14,054
1,989
14,233
5,241
6,456
5,859
2,090
16,434
274,121
—
24,647
5,222
—
409
667
428
49
37
19,194
44,386
3,679
20,053
4,200
2,627
16,514
—
—
—
—
736
16,211
13
81
8,327
12,665
563
10,401
—
—
—
3
—
31
—
—
3,299
14,054
1,989
14,236
5,241
6,487
5,859
2,090
372,644
161,322
209,400
115,061
159,340
106,183
141,467
139,636
107,902
93,839
114,527
114,212
112,718
93,852
109,304
70,976
66,868
62,161
69,993
61,078
124,039
496,683
44,507
205,829
3,109
212,509
65,402
16,921
27,821
8,837
9,496
24,111
41,802
11,874
1,494
6,129
180,463
176,261
134,004
150,304
149,132
132,013
135,641
126,401
115,706
118,847
13,544
107,396
—
109,304
21,833
25,640
26,422
17,595
1,281
92,809
92,508
88,583
87,588
62,359
645
17,079
388,102
87,307
475,409
442
347
84
516,319
250,562
216,272
1,109
201,625
180,566
150,789
150,325
149,238
148,302
144,127
139,165
126,122
122,146
121,493
111,293
107,168
97,943
95,474
93,658
64,449
105
271
21
106
78
159
99
15
—
43
—
123
194
404
211
—
806
181,556
— 2003-2019
1974-2018
95,979
20,040
64,038
67,040
25,265
25,097
44,204
44,229
39,165
34,725
19,351
26,082
20,906
17,740
24,048
37,582
40,573
23,540
10,486
22,340 1993-2019
1973-1998
31,715 2017-2019
1999-2014
— 2004-2018
1960-2015
— 2008-2013
1961-2008
7,565 2010-2018
1977-2015
11,707 2004-2019
1967-2005
—
2011
1992-2005
— 1993-2019
1984-2012
— 2003-2004
1975-2010
515 2008-2014
2002-2009
5,985 2010-2019
1970-2014
— 2008-2019
1992-2008
— 2015-2017
1975-2014
—
2013
2013
— 2007-2015
1972-2015
— 1999-2013
1993-2007
— 1996-2010
1978-2011
— 2004-2018
1993-2009
18,907 2014-2017
1974-2010
10,408
284,529
3,361,046
621,470
3,982,516
5,038
4,272,083
1,115,695
129,343
—
—
—
—
—
24,647
5,222
—
—
—
3,810
—
—
—
—
—
48,731
—
3,810
—
—
—
—
5,500
48,731
24,647
9,032
5,500
671
50
4,686
—
—
—
—
493,294
165,159
7,943 1993-2019
1906-2009
Total properties
204 $
303,990 $
10,408 $314,398 $ 3,364,856 $
621,470 $ 4,035,057 $
10,538 $ 4,359,993 $
1,121,102 $
129,343
1
2
3
4
5
The Company had no assets held for sale as of December 31, 2019.
Total properties as of December 31, 2019 have an estimated aggregate total cost of $4.4 billion for federal income tax purposes.
Depreciation is provided for on a straight-line basis on buildings and improvements over 3.3 to 39.0 years, lease intangibles over 2.1 to 99.0 years, personal property
over 2.8 to 20.0 years, and land improvements over 3.0 to 39.0 years.
Includes unamortized premium of $1.2 million and unaccreted discount of $0.5 million and issuance costs of $0.5 million as of December 31, 2019.
Rollforward of Total Property and Accumulated Depreciation, including assets held for sale, for the year ended December 31, 2019, 2018 and 2017 follows:
YEAR ENDED DEC. 31, 2019
YEAR ENDED DEC. 31, 2018
YEAR ENDED DEC. 31, 2017
Dollars in thousands
TOTAL
PROPERTY
ACCUMULATED
DEPRECIATION
TOTAL
PROPERTY
ACCUMULATED
DEPRECIATION
TOTAL
PROPERTY
ACCUMULATED
DEPRECIATION
Beginning Balance
$ 3,993,427 $
1,025,831 $ 3,907,010 $
933,220 $ 3,633,993 $
843,816
Additions during the period
Real Estate acquired
Other improvements
Land held for development
Construction in Progress
Retirement/dispositions
384,762
71,666
—
15,625
9,285
112,591
4,175
322,616
165,367
278
—
74,317
4,525
27,649
157,385
59,442
153
—
—
14,598
4,206
135,807
74
—
Real Estate
(105,487)
(79,659)
(132,665)
(69,102)
(123,639)
(50,683)
Land held for development
—
—
—
—
—
Ending Balance
$ 4,359,993 $
1,121,102 $ 3,993,427 $
1,025,831 $ 3,907,010 $
933,220
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange
Commission are omitted because they are not required under the related instructions or are not applicable, or because the
required information is shown in the consolidated financial statements or notes thereto.
96