Physicians Realty Trust - Quarter Report: 2013 September (Form 10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2013

 

or

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to          

 

Commission file number: 001-36007

 

 

PHYSICIANS REALTY TRUST

(Exact Name of Registrant as Specified in its Charter)

 

 

 

(414) 978-6494

(Registrant’s Telephone Number, Including Area Code)

 

 

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.     x  Yes    o  No

 

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    x  Yes    o  No

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    o  Yes    x  No

 

The number of the Registrant’s common shares outstanding on November 8, 2013 was 12,003,597.

 

 

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PHYSICIANS REALTY TRUST

 

Quarterly Report on Form 10-Q
for the Quarter Ended September 30, 2013

 

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		Page
		Number
Part I	Financial Information
Item 1	Financial Statements
	Condensed Consolidated and Combined Balance Sheets - as of September 30, 2013  (unaudited) and December 31, 2012	2
	Condensed Consolidated and Combined Statements of Operations — for the Three and Nine Months Ended September 30, 2013 and 2012 (unaudited)	3
	Condensed Consolidated and Combined Statements of Owner Equity — as of September 30, 2013 (unaudited)	4
	Condensed Consolidated and Combined Statements of Cash Flow — for the Nine Months  Ended September 30, 2013 and 2012 (unaudited)	5
	Notes to Unaudited Condensed Consolidated and Combined Financial Statements	6
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operation	16
Item 3	Quantitative and Qualitative Disclosures About Market Risk	30
Item 4	Controls and Procedures	30
Part II	Other Information
Item 1	Legal Proceedings	31
Item 1A	Risk Factors	31
Item 2	Unregistered Sales of Equity Securities	31
Item 3	Defaults Upon Senior Securities	32
Item 4	Mine Safety Disclosures	32
Item 5	Other Information	32
Item 6	Exhibits	33
Part III	Signatures	35

 

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PART I.                          Financial Information

 

Item 1.                                 Financial Statements

 

Physicians Realty Trust and Predecessor

Condensed Consolidated and Combined Balance Sheets

(In thousands, except share and per share data)

 

					Predecessor
		September 30,			December 31,
		2013			2012
		(unaudited)
ASSETS
Investment properties:
Income producing real estate		$	176,883		$	89,878
Tenant improvements		5,193			5,132
Property under development		225			675
Land		23,914			15,464
		206,215			111,149
Accumulated depreciation		(18,903		)	(16,495		)
Total investment properties, net		187,312			94,654
Cash and cash equivalents		4,233			2,614
Tenant receivables, net		710			682
Deferred costs, net		2,012			1,107
Lease intangibles, net		20,716			5,243
Other assets		5,652			3,292
Total assets		$	220,635		$	107,592
LIABILITIES AND EQUITY
Liabilities:
Accounts payable to related parties		$	—		$	1,530
Accounts payable		485			802
Dividends payable		2,655			—
Accrued expenses and other liabilities		2,329			1,031
Derivative liabilities		437			643
Debt		66,525			84,489
Total liabilities		72,431			88,495
Equity:
Common shares, $0.01 par value, 500,000,000 shares authorized, 12,003,597 shares issued and outstanding as of September 30, 2013		120			—
Additional paid-in capital		122,980			—
Accumulated deficit		(3,321		)	—
Predecessor equity		—			19,068
Total shareholders’ and Predecessor equity		119,779			19,068
Noncontrolling interests		28,425			29
Total equity		148,204			19,097
Total liabilities and equity		$	220,635		$	107,592

 

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

 

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Physicians Realty Trust and Predecessor

Condensed Consolidated and Combined Statements of Operations

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

 

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2013			Predecessor 2012			2013			Predecessor 2012
Revenues:
Rental revenues		$	2,920		$	2,359		$	7,952		$	7,396
Expense recoveries		798			750			2,399			2,151
Other revenues		(5		)	2			—			7
Total revenues		3,713			3,111			10,351			9,554
Expenses:
Management fees		—			238			475			713
General and administrative		1,285			104			1,507			292
Operating expenses		1,130			1,110			3,578			3,460
Depreciation and amortization		1,146			973			3,123			2,901
Loss on sale of property under development		2			161			2			228
Acquisition expenses		756			—			756			—
Total expenses		4,319			2,586			9,441			7,594
Operating (loss)/income		(606		)	525			910			1,960
Other expense/(income)
Interest expense		826			1,203			3,114			3,667
Change in fair value of derivatives, net		(16		)	—			(206		)	(58		)
Net loss from continuing operations		(1,416		)	(678)			(1,998		)	(1,649		)
Discontinued Operations:
Loss from operations on discontinued investment properties		—			(262		)	—			(199		)
Gain on sale of investment properties		—			1,179			—			1,519
Income from discontinued operations		—			917			—			1,320
Net (loss)/income		(1,416		)	$	239		(1,998		)	$	(329	)
Less: Net (income)/ loss attributable to Predecessor		(6		)				576
Less: Net loss attributable to noncontrolling interests		262						262
Net loss attributable to common shareholders		$	(1,160	)				$	(1,160	)
Net loss per share:
Basic and diluted		$	(0.10	)				$	(0.10	)
Weighted average common shares:
Basic and diluted		11,486,011						11,486,011
Dividends/distributions declared per common share and unit		$	0.18					$	0.18

 

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

 

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Physicians Realty Trust and Predecessor

Condensed Consolidated and Combined Statement of Equity

(In thousands, except shares) (Unaudited)

 

		Number of Common Shares		Par Value			Additional Paid in Capital			Accumulated Deficit			Predecessor Equity			Total Shareholders’ and Predecessor Equity			Non- controlling Interests			Total Equity
Predecessor Balance
January 1, 2013		—		$	—		$	—		$	—		$	19,068		$	19,068		$	29		$	19,097
Net (loss)/income		—		—			—			—			(712		)	(712		)	136			(576		)
Transfer		—		—			—			—			36			36			(36		)	—
Distributions		—		—			—			—			(211		)	(211		)	(209		)	(420		)
Balance July 24, 2013		—		—			—			—			18,181			18,181			(80		)	18,101
Physicians Realty Trust
Net proceeds from sale of common shares		11,753,597		118			122,755			—			—			122,873			—			122,873
Formation Transactions		—		—			36			—			(18,181		)	(18,145		)	17,791			(354		)
Restricted share award grants		250,000		2			189			—			—			191			—			191
Dividends declared		—		—			—			(2,161		)	—			(2,161		)	(494		)	(2,655		)
Contributions		—		—			—			—			—			—			11,535			11,535
Distributions		—		—			—			—			—			—			(65		)	(65		)
Net loss		—		—			—			(1,160		)	—			(1,160		)	(262		)	(1,422		)
Balance September 30, 2013		12,003,597		$	120		$	122,980		$	(3,321	)	$	—		$	119,779		$	28,425		$	148,204

 

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

 

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Physicians Realty Trust and Predecessor

Condensed Consolidated and Combined Statements of Cash Flows

(In thousands) (Unaudited)

 

		Nine Months Ended
		September 30,
		2013			Predecessor 2012
Cash Flows from Operating Activities:
Net loss		$	(1,998	)	$	(329	)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation and amortization		3,262			3,420
Gain on sale of investment properties		—			(1,519		)
Loss on sale of property under development		2			228
Amortization of lease inducement and above market leases		70			53
Change in fair value of derivatives, net		(206		)	(58		)
Provision for bad debts		36			123
Non-cash compensation		191			—
Accelerated amortization of deferred financing costs		94			—
(Increase) decrease in
Tenant receivables		(64		)	330
Deferred costs		(163		)	(99		)
Other assets		(873		)	(380		)
Increase (decrease) in
Accounts payable to related parties		(1,530		)	153
Accounts payable		(316		)	18
Accrued expenses and other liabilities		1,298			484
Total Adjustments		1,801			2,753
Net cash (used by)/provided by operating activities		(197		)	2,424
Cash Flows from Investing Activities:
Proceeds from sale of investment properties		448			14,525
Capital expenditures for acquisition of investment properties		(100,084		)	(30		)
Lease inducement		(1,543		)	(618		)
Net cash (used in)/provided by investing activities		(101,179		)	13,877
Cash Flows from Financing Activities:
Proceeds from sale of common shares		135,166			—
Offering costs		(12,293		)	—
Formation transactions		(354		)	—
Proceeds from credit facility borrowings		19,850			—
Proceeds from issuance of debt		163			—
Debt issuance costs		(1,074		)	(36		)
Payments on notes payable		(37,978		)	(12,717		)
Distributions to members and partners		(211		)	(708		)
Contributions to noncontrolling interest		—			309
Distributions to noncontrolling interest		(274		)	(478		)
Net cash provided by/(used in) financing activities		102,995			(13,630		)
Net increase in cash and cash equivalents		1,619			2,671
Cash and cash equivalents, beginning of year		2,614			1,932
Cash and cash equivalents, end of period		$	4,233		$	4,603
Supplemental disclosure of cash flow information interest paid during the year		$	2,967		$	3,495
Supplemental disclosure of noncash activity-accrued dividends payable		$	2,655		$	—
Supplemental disclosure of noncash activity-contributions to noncontrolling interest		$	11,535		$	—

 

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

 

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Physicians Realty Trust and Predecessor

Notes to Condensed Consolidated and Combined Financial Statements

 

Note 1—Organization and Business

 

Physicians Realty Trust (the “Trust”) was organized in the state of Maryland on April 9, 2013. As of September 30, 2013, the Trust was authorized to issue up to 500,000,000 common shares of beneficial interest, par value $0.01 per share. The Trust filed a Registration Statement on Form S-11 with the Securities and Exchange Commission with respect to a proposed underwritten initial public offering (the “IPO”) and completed the IPO of its common shares and commenced operations on July 24, 2013.

 

Prior to completion of the IPO, the Trust elected to be taxed as a pass-through entity under subchapter S of the Internal Revenue Code of 1986.  Effective upon completion of the IPO, the Trust revoked the subchapter S election. The Trust intends to elect to be taxed as a real estate investment trust (“REIT”) for federal income tax purposes commencing with a short taxable year beginning on the date of the revocation of the subchapter S election and ending on December 31, 2013. The Trust had no taxable income prior to electing REIT status. To qualify as a REIT, the Trust must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of its annual REIT taxable income to its shareholders (which is computed without regard to the dividends paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with generally accepted accounting principles).

 

The Trust contributed the net proceeds from the IPO to Physicians Realty L.P. (the “Operating Partnership”), a Delaware limited partnership, and is the sole general partner of the Operating Partnership.  The Trust’s operations are conducted through the Operating Partnership and wholly-owned and majority-owned subsidiaries of the Operating Partnership. The Trust, as the general partner of the Operating Partnership, controls the Operating Partnership and consolidates the assets, liabilities and results of operations of the Operating Partnership.

 

As a REIT, the Trust generally will not be subject to federal income tax to the extent it distributes qualifying dividends to its shareholders. If the Trust fails to qualify as a REIT in any taxable year, it will be subject to federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate income tax rates and generally will not be permitted to qualify for treatment as a REIT for federal income tax purposes for the four taxable years following the year during which qualification is lost unless the Internal Revenue Service grants the Trust relief under certain statutory provisions. Such an event could materially adversely affect the Trust’s net income and net cash available for distribution to shareholders. However, the Trust intends to organize and operate in such a manner as to qualify for treatment as a REIT. Even if the Trust qualifies for taxation as a REIT, the Trust may be subject to state and local taxes on its income and property and federal income and excise taxes on its undistributed income.

 

The Trust is a self-managed REIT formed primarily to acquire, selectively develop, own and manage healthcare properties that are leased to physicians, hospitals and healthcare delivery systems.

 

Initial Public Offering and Formation Transactions

 

Concurrently with the completion of the IPO, the Trust acquired, through a series of contribution transactions, the entities that own the 19 properties that comprised the Trust’s initial properties from four healthcare real estate funds (the “Ziegler Funds”), as well as certain operating assets and liabilities. We determined that the Zeigler Funds constitute our accounting predecessor (the “Predecessor”). The Predecessor, which is not a legal entity, is comprised of the four Zeigler Funds that owned directly or indirectly interest in entities that owned the initial 19 properties in the Trust’s portfolio. The combined historical data for the predecessor is not necessarily indicative of the Trust’s future financial position or results of operations. In addition, at the completion of the IPO, the Trust entered into a shared services agreement with B.C. Ziegler & Company (“Ziegler”) pursuant to which Ziegler provides office space, IT support, accounting support and other services to the Trust in exchange for an annual fee.

 

To acquire the ownership interests in the entities that own the 19 properties included in the Trust’s initial properties, and certain other operating assets and liabilities, from the Ziegler Funds, the Operating Partnership issued to the Ziegler Funds an aggregate of 2,744,000 common units of partnership interest (“OP Units”), having an aggregate value of approximately $31.6 million based on the price to the public per share in the IPO and paid approximately $36.9 million of outstanding indebtedness related to our initial properties. These formation transactions were effected concurrently with the completion of the IPO.

 

The net proceeds from the IPO, inclusive of shares issued pursuant to the exercise of the underwriters’ overallotment option, were approximately $123.8 million (after deducting the underwriting discount and expenses of the IPO and the formation transactions

 

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payable by the Trust). The Trust contributed the net proceeds of the IPO to the Operating Partnership in exchange for 11,753,597 OP Units and at September 30, 2013 owned a 76.4% interest in the Operating Partnership. The Operating Partnership used a portion of the IPO proceeds received from the Trust to repay approximately $36.9 million of outstanding indebtedness and to purchase the 50% interest in the Arrowhead Commons property not owned by the Ziegler Funds for approximately $850,000, after which the Operating Partnership became the 100% owner of the property, and to pay certain expenses related to debt transfers and our senior secured revolving credit facility. The balance of the net proceeds was invested in investment properties.

 

The Trust is a self-managed REIT and conducts its operations through the Operating Partnership and principally through wholly-owned and majority-owned subsidiaries of the Operating Partnership.

 

Because the IPO and the formation transactions were completed on July 24, 2013, and prior to completion of the IPO we had no operations, the Trust’s balance sheet as of December 31, 2012 reflects the financial condition of the Predecessor, while the balance sheet as of September 30, 2013 reflects  the financial condition of the Trust.  The results of operation for the three and nine months ended September 30, 2013 reflect the results of operations of the Predecessor (through July 23, 2013) and of the Trust from July 24, 2013 through September 30, 2013.  References in these notes to the condensed consolidated and combined financial statements to Physicians Realty Trust signify the Trust for the period from July 24, 2013, the date of completion of the IPO and the Formation Transaction, and of the Predecessor for all prior periods.  The following is a summary of the Predecessor Statement of Operations for the period from July 1, 2013 through July 23, 2013, and for the period from January1, 2013 through July 23, 2013 (in thousands).  These amounts are included in the condensed consolidated and combined statement of operations herein for the three and nine months ended September 30, 2013.

 

		July 1, 2013 through July 23, 2013			January 1, 2013 through July 23, 2013
Revenues:
Rental revenues		$	476		$	5,508
Expense recoveries		168			1,769
Other revenues		1			6
Total revenues		645			7,283
Expenses:
Management fees		—			475
General and administrative		27			249
Operating expenses		225			2,673
Depreciation and amortization		196			2,173
Total expenses		448			5,570
Operating income		197			1,713
Interest expense		191			2,479
Change in fair value of derivatives, net		—			(190		)
Net income/(loss)		$	6		$	(576	)

 

Note 2—Summary of Significant Accounting Policies

 

The accompanying unaudited condensed consolidated and combined financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the periods ended September 30, 2013 and 2012 pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X. All such adjustments are of a normal recurring nature. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the audited financial statements included in the Trust’s final prospectus dated July 18, 2013 filed with the Securities and Exchange Commission on July 19, 2013. Operating results for interim periods are not necessarily indicative of results that may be expected for the entire year ending December 31, 2013.

 

Classification of Assets and Liabilities

 

The financial affairs of the Trust generally do not involve a business cycle since the realization of assets and the liquidation of liabilities are usually dependent on the Trust’s circumstances. Accordingly, the classification of current assets and current liabilities is not considered appropriate and has been omitted from the condensed consolidated and combined statements of assets and liabilities.

 

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Noncontrolling Interests

 

In connection with the closing of the IPO, the Trust and the Operating Partnership completed related formation transactions pursuant to which the Operating Partnership acquired from the Ziegler Funds,  the Ziegler Funds’ ownership interests in 19 medical office buildings located in ten states in exchange for an aggregate of 2,744,000 OP Units and the payment of approximately $36.9 million of debt related to such properties.

 

In connection with the acquisition of a surgical center hospital in the New Orleans, Louisiana metropolitan area for approximately $37.5 million, on September 30, 2013, the Trust partially funded the purchase price by issuing 954,877 OP Units valued at approximately $11.5 million on the date of issuance.

 

Noncontrolling interests in the Trust represent OP Units held by the Predecessor’s prior investors and other investors.  As of September 30, 2013, the Trust held a 76.4% interest in the Operating Partnership.  As the sole general partner and the majority interest holder, the Trust consolidates the financial position and results of operation of the Operating Partnership.

 

Holders of OP Units may not transfer their units without the Trust’s prior written consent, as general partner of the Operating Partnership.  Beginning on the first anniversary of the issuance of OP Units, OP Unit holders may tender their units for redemption by the Operating Partnership in exchange for cash equal to the market price of the Trust’s common shares at the time of redemption or, for common shares on a one-for-one basis.  Accordingly, the Trust presents the OP Units of the Operating Partnership held by the Predecessor’s prior investors and other investors as noncontrolling interests within equity in the consolidated balance sheet.

 

Dividends and Distributions

 

On September 30, 2013, the Trust’s Board of Trustees declared an initial, prorated cash dividend of $0.18 per share for the quarterly period from July 19, 2013 (the date of the IPO) through September 30, 2013, which is equivalent to a full quarterly dividend of $0.225 per share.  The dividend was paid on November 1, 2013 to common shareholders and common OP unit holders of record on October 18, 2013.

 

Impairment of Intangible and Long-Lived Assets

 

The Trust evaluates the recoverability of the recorded amount of intangible and long-lived assets whenever events or changes in circumstances indicate that the recorded amount of an asset may not be fully recoverable. Impairment is assessed when the undiscounted expected future cash flows derived from an asset are less than its carrying amount. If we determine that an asset is impaired, the impairment to be recognized is measured as the amount by which the recorded amount of the asset exceeds its fair value. Assets to be disposed of are reported at the lower of the recorded amount or fair value less cost to sell. Fair value is determined using a discounted future cash flow analysis.

 

The Trust did not recognize any impairment for the three months ended September 30, 2013, nor did the Predecessor in the comparative period presented.

 

Rental Revenue

 

Rental revenue is recognized on a straight-line basis over the terms of the related leases when collectability is reasonably assured. Recognizing rental revenue on a straight-line basis for leases may result in recognizing revenue for amounts more or less than amounts currently due from tenants. Amounts recognized in excess of amounts currently due from tenants are included in other assets and were $1.4 million and $1.3 million as of September 30, 2013 and December 31, 2012, respectively. If the Trust determines that collectability of straight-line rents is not reasonably assured, the Trust limits future recognition to amounts contractually owed and, where appropriate, establishes an allowance for estimated losses. Rental revenue is reduced by amortization of lease inducements and above market rents on certain leases. Lease inducements and above market rents are amortized over the average remaining life of the lease.

 

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Expense Recoveries

 

Expense recoveries relate to tenant reimbursement of real estate taxes, insurance and other operating expenses that are recognized as expense recovery revenue in the period the applicable expenses are incurred. The reimbursements are recorded at gross, as the Trust is generally the primary obligor with respect to real estate taxes and purchasing goods and services from third-party suppliers and has discretion in selecting the supplier and bears the credit risk of tenant reimbursement.

 

The Trust has certain tenants with absolute net leases. Under these lease agreements, the tenant is the responsible for operating and building expenses. For absolute net leases, the Trust does not recognize expense recoveries

 

Earnings Per Share

 

The Trust calculates earnings per share based upon the weighted average shares outstanding during the period beginning July 24, 2013.  Diluted net income per share is calculated after giving effect to all potential diluted shares outstanding during the period.  There were 3,698,877 potentially dilutive shares outstanding related to the issuance of OP Units held by noncontrolling interests during the three and nine month periods ended September 30, 2013. However, the shares were excluded from the computation of diluted shares as their impact would have been anti-dilutive.  As a result, the number of diluted outstanding shares was treated equal to the number of outstanding shares.

 

Management Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the combined financial statements and the amounts of revenue and expenses reported in the period. Significant estimates are made for the valuation of real estate and intangibles, valuation of financial instruments, impairment assessments and fair value assessments with respect to purchase price allocations. Actual results could differ from these estimates.

 

Reclassifications

 

Certain prior period amounts have been reclassified to conform to the current financial statement presentation, with no effect on the consolidated financial position or results of operations.

 

Note 3—Acquisitions and Dispositions

 

On July 24, 2013, in connection with the completion of the IPO and formation transactions, Physicians Realty L.P. purchased the 50% joint venture equity interest in Arizona 23 (Arrowhead Commons) not already owned by the Ziegler Funds for approximately $850,000, resulting in 100% ownership of this property by the Operating Partnership.

 

On August 30, 2013, we completed the acquisition of a 40,000 square foot medical office building and a 77,000 square foot, 40-bed acute care surgical hospital located in El Paso, Texas for approximately $40 million. The Trust also purchased a right of first refusal to finance development on land adjacent to the hospital.  The surgical hospital portion of the facility is 100% leased to one tenant until 2028, with annual rent escalations of 3%. The medical office building portion of the facility is 100% leased to one tenant until 2018, with annual rent escalations of 3%. The purchase price of this medical office building and hospital was allocated to the assets and liabilities acquired consisting of tangible property and identifiable intangible assets based on the respective fair values at acquisition, as determined by an independent appraisal.  Intangible assets include the value of in-place lease at the time of the acquisition and will be amortized over the remaining lease term of approximately 12 years.  The initial acquisition accounting was as follows (in thousands):

 

Land		$	3,800
Building and improvements		28,100
Intangibles		8,100
Total		$	40,000

 

On September 18, 2013, the Trust completed the acquisition of a 66-bed post-acute care specialty hospital located in Plano, Texas for approximately $18.2 million. The hospital is 100% leased to a single tenant. The term of the lease expires December 31, 2027, and the

 

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tenant has one five year extension option. The tenant’s obligations under the lease are guaranteed by its parent, which operates 26 hospitals in nine states. The purchase price was allocated to the assets and liabilities acquired consisting of tangible property and identifiable intangible assets based on the respective fair values at acquisition, as determined by an independent appraisal.  Intangible assets include the value of an in-place lease and an above-market lease at the time of the acquisition and will be amortized over the remaining lease term of approximately 9 years.  The initial acquisition accounting was as follows (in thousands):

 

Land		$	3,400
Building and improvements		11,700
In-place leases		3,100
Total		$	18,200

 

On September 30, 2013, we completed the acquisition of a hospital in the New Orleans, Louisiana metropolitan area for approximately $37.5 million. We funded the purchase price with borrowings under the senior secured revolving credit facility, proceeds of the IPO and the issuance of 954,877 OP Units to the seller valued at approximately $11.5 million on the date of issuance (based on the average three day closing price of our common shares prior to the close).  The hospital is leased until 2028 with initial rent equal to $3.0 million per year, with annual rent escalations of 3%.  The purchase price of this hospital was allocated to the assets and liabilities acquired consisting of tangible property and identifiable intangible assets based on the respective fair values at acquisition, as determined by an independent appraisal.  Intangible assets include the value of in-place lease at the time of the acquisition and will be amortized over the remaining lease term of approximately 15 years.  The initial acquisition accounting was as follows (in thousands):

 

Building and improvements		$	34,200
In-place leases		3,300
Total		$	37,500

 

On September 30, 2013, we completed the acquisition of an approximately 52,000 square foot outpatient care building located in Oklahoma City, Oklahoma for approximately $15.6 million. The property is leased until 2023 with annual rent escalations of 2%. The purchase price was allocated to the assets and liabilities acquired consisting of tangible property and identifiable intangible assets based on the respective fair values at acquisition, as determined by an independent appraisal.  Intangible assets include the value of in-place lease at the time of the acquisition and will be amortized over the average remaining lease term of approximately 10 years.  The initial acquisition accounting was as follows (in thousands):

 

Land		$	1,300
Building and improvements		12,700
In-place leases		1,600
Total		$	15,600

 

On September 30, 2013, the Trust sold a 4,000 square foot medical office building condominium unit located in Florida for approximately $0.5 million. There is one remaining condominium unit or 2,000 square feet at this location.

 

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Note 4—Intangibles

 

The following is a summary of the carrying amount of intangible assets as of September 30, 2013 and December 31, 2012 (in thousands):

 

		September 30, 2013									December 31, 2012
		Cost			Accumulated Amortization			Net			Cost			Accumulated Amortization			Net
In-place leases		$	26,073		$	(7,525	)	$	18,548		$	12,150		$	(6,907	)	$	5,243
Above market leases		2,180			(12		)	2,168			—			—			—
Total		$	28,253		$	(7,537	)	$	20,716		$	12,150		$	(6,907	)	$	5,243

 

Amortization expense related to intangibles was $0.6 million for each of the nine month periods ended September 30, 2013 and 2012. Amortization expense related to intangibles was $0.2 million for each of the three months ended September, 30, 2013 and 2012.  Future amortization of the intangible assets as of September 30, 2013, is as follows (in thousands):

 

Year Ending December 31:
2013		$	567
2014		2,217
2015		2,185
2016		2,172
2017		1,996
Thereafter		11,579
Total		$	20,716

 

Note 5—Debt

 

The following is a summary of debt as of September 30, 2013 and December 31, 2012 (in thousands):

 

		September 30,			December 31,
		2013			2012
$75 million senior secured revolving credit facility bearing interest at floating rates, due August 2016		$	19,850		$	—
Mortgage notes, bearing fixed interest from 5.35% to 6.58% and due in 2017 with a balloon payment of $23,748, and 2018 with a balloon payment of $6,169		32,125			34,457
Mortgage notes, bearing variable interest from 2.44% to 2.94% and due in 2016 with a balloon payment of $7,683 and in 2017 with a balloon payment of $5,680.		14,550			45,536
Mezzanine debt bearing interest at 12.0 % and due 2013		—			4,400
Line of credit bearing variable interest at 4.25% and due in 2012		—			96
Total debt		$	66,525		$	84,489

 

On August 29, 2013, the Trust and the Operating Partnership entered into a Credit Agreement with Regions Bank, as Administrative Agent, Regions Capital Markets, as Sole Lead Arranger and Sole Book Runner, and various other lenders in connection with a $75 million senior secured revolving credit facility (the “Credit Agreement”). Subject to satisfaction of certain conditions, including additional lender commitments, we have the option to increase the borrowing capacity under the revolving credit facility to up to $250

 

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million. The amount available to us under the Credit Agreement is subject to certain limitations including, but not limited to, the appraised value of the pledged properties that comprise the borrowing base of the credit facility.

 

The Credit Agreement has a three-year term with an initial maturity date of August 29, 2016. Subject to the terms of the Credit Agreement, the Operating Partnership has the option to extend the term of the Credit Agreement to August 29, 2017.

 

The obligations of the Operating Partnership under the Credit Agreement are guaranteed by us and certain of our subsidiaries. In addition, the Credit Agreement provides for security in the form of, among other things, mortgage liens on certain properties owned by the Operating Partnership that comprise the borrowing base. As of September 30, 2013, seven properties were included in the borrowing base with a net book value of $69.4 million

 

The Credit Agreement provides for revolving credit loans to the Operating Partnership.  Base Rate Loans, Adjusted LIBOR Rate Loans and Letters of Credit (each, as defined in the Credit Agreement) will be subject to interest rates, based upon the consolidated leverage ratio of the Trust, the Operating Partnership and its subsidiaries as follows:

 

Consolidated Leverage Ratio		Adjusted LIBOR Rate Loans and Letter of Credit Fee		Base Rate Loans
<35%		LIBOR + 2.65%		Base Rate + 1.65%
>35% and <45%		LIBOR + 2.85%		Base Rate + 1.85%
>45% and <50%		LIBOR + 2.95%		Base Rate + 1.95%
>50%		LIBOR + 3.40%		Base Rate + 2.40%

 

The Operating Partnership may, at any time, voluntarily prepay any loan under the Credit Agreement in whole or in part without premium or penalty.

 

The Credit Agreement contains financial covenants that, among other things, require compliance with loan-to-value, leverage and coverage ratios and maintenance of minimum tangible net worth, as well as covenants that may limit the Trust’s and the Operating Partnership’s ability to incur additional debt or make distributions. The Credit Agreement also contains customary events of default. Any event of default, if not cured or waived, could result in the acceleration of any outstanding indebtedness under the Credit Agreement.

 

Scheduled principal payments due on debt as of September 30, 2013, are as follows (in thousands):

 

Year Ending December 31:
2013		$	249
2014		1,022
2015		1,063
2016		28,435
2017		29,586
Thereafter		6,170
Total Payments		$	66,525

 

Note 6—Stock-based Compensation

 

We follow ASC 718 in accounting for our share-based payments. This guidance requires measurement of the cost of employee services received in exchange for stock compensation based on the grant-date fair value of the employee stock awards. This cost is

 

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recognized as compensation expense ratably over the employee’s requisite service period. Incremental compensation costs arising from subsequent modifications of awards after the grant date must be recognized when incurred.

 

For all service awards, we record compensation expense for the entire award on a straight-line basis (or, if applicable, on the accelerated method) over the requisite service period.

 

In connection with the IPO, we adopted the 2013 Equity Incentive Plan which made available 600,000 restricted shares to be administered by the Compensation, Nomination and Governance Committee of the Board of Trustees. The committee will have broad discretion in administering the terms of the plan. Restricted shares are eligible for dividends as well as the right to vote. We granted 250,000 restricted common shares upon completion of the IPO under our 2013 Equity Incentive Plan at a value per share of $11.50 and total value of $2.9 million with a vesting period of three years. For the three and nine months ended September 30, 2013, we recognized non-cash share compensation of $0.2 million. Unrecognized compensation expense at September 30, 2013 was $2.7 million. Our compensation expense recorded in connection with grants of restricted stock reflects as initial estimated cumulative forfeiture rate 0% over the requisite service period of the awards. That estimate will be revised if subsequent information indicates that the actual number of awards expected to vest is likely to differ from previous estimates.

 

Note 7—Fair Value Measurements

 

Accounting standards require certain assets and liabilities be reported at fair value in the financial statements and provides a framework for establishing that fair value. The framework for determining fair value is based on a hierarchy that prioritizes the valuation techniques and inputs used to measure fair value.

 

In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that the Trust has the ability to access. Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals. Significant Level 2 inputs include interest rate swaps.

 

Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset. These level 3 fair value measurements are based primarily on management’s own estimates using pricing models, discounted cash flow methodologies, or similar techniques taking into account the characteristics of the asset. In instances where inputs used to measure fair value fall into different levels of the fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The \ assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability.

 

We measure our interest rate swaps at fair value on a recurring basis. The fair value of ($0.4) million and $(0.6) million as of September 30, 2013 and December 31, 2012, respectively, is based on primarily level 2 inputs described above.

 

Our derivative instruments (Note 8) are not traded on an exchange. We obtained an estimate of fair value of the swaps from the counterparties. The trust then tested the fair value against a fair value determined by a methodology that included using the income approach to value the derivatives, using observable Level 2 market expectations at the measurement date and standard valuation techniques to convert future amounts to a single present amount (discounted) assuming that participants are motivated, but not compelled to transact. Level 2 inputs for the swap valuations were limited to quoted prices for similar assets or liabilities in active markets (specifically future contracts) and inputs other than quoted prices that were observable for the asset or liability (specifically LIBOR cash and swap rates, implied volatility for options, caps and floors, basis swap adjustments and credit risk at commonly quoted intervals). Mid-market pricing was used as a practical expedient for fair value measurements. Key inputs, including the cash rates for very short-term, futures rates and swap rates beyond the derivative maturities were bootstrapped to provide spot rates at resets specified by the swaps (reset rates were then further adjusted by the basis swaps, if necessary). Inputs were collected from Bloomberg as the last price on the last market day of the period. The same rates used to bootstrap the yield curves were used to discount the future cash flows prior to the credit risk effect for both the Trust and the credit risk of its counterparty when determining the fair value of derivatives under generally accepted accounting principles. The fair values resulting from the separate calculations were not significantly different.

 

Both direct and indirect observable inputs may be used to determine the fair value of the positions classified as Level 2 assets and liabilities. As a result, the unrealized gains and losses for these asset and liabilities presented above may include changes in fair value that were attributable to both direct and indirect observable inputs. Changes in fair value of the interest rate swaps totaled $(0.02) million and $(0.2)  million and $(0.2) million and $(0.1) million for the three and nine months ended September 30, 2013 and 2012, respectively, and are included in the condensed consolidated and combined statement of operations.

 

 

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The Trust also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. This generally includes assets subject to impairment. There were no such assets measured at fair value as of September 30, 2013.

 

The following table sets forth by level within the fair value hierarchy of our assets and liabilities that were accounted for on a nonrecurring basis as of December 31, 2012 (in thousands).

 

		Nonrecurring Fair Value Measurements At Report Date using:
		Fair Value as of December 31, 2012			Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total Gains (Losses) for the Year Ended December 31, 2012
Medical office buildings		$	3,589		$	—		$	—		$	3,589		$	(615	)
Land		1,210			—			—			1,210			(232		)
Property under development		675			—			—			675			(90		)
		$	5,474		$	—		$	—		$	5,474		$	(937	)

 

The impairment of the medical office buildings referenced above primarily resulted from declines in current and projected operating results and cash flows of the properties.

 

The following table summarizes the quantitative inputs and assumptions used for items categorized in Level 3 for the fair value hierarchy as of December 31, 2012. There were no changes in the quantitative inputs and assumptions used for items categorized in Level 3 for the fair hierarchy as of September 30, 2013. The disclosure below excludes information on unobservable inputs that are non-quantitative such as unadjusted prices from recent transactions or third party valuations.

 

Asset Category		Fair value at December 31, 2012			Valuation Techniques		Unobservable Inputs		Ranges
Investment in real estate properties		$	4,799		Discounted cash flow		Discount rate Capitalization rate Vacancy rate		10.7-13.5% 7.7-10.5% 9.41-17.8%
Property under development		$	675		Market comparable/ Discounted cash flow		Capitalization rate		9-10%

 

The carrying amounts of cash and cash equivalents, tenant receivables, payables, and accrued interest are reasonable estimates of fair value because of the short maturities of these instruments. Fair values for notes payable are estimates based on rates currently prevailing for similar instruments of similar maturities.

 

The following table presents the fair value of other financial instruments (in thousands). The swaps are measured at fair value on a recurring basis.

 

		September 30,						December 31,
		2013						2012
		(unaudited)
		Carrying Amount			Fair Value			Carrying Amount			Fair Value
Cash		$	4,233		$	4,233		$	2,614		$	2,614
Debt		$	46,675		$	47,192		$	84,489		$	86,982
Interest rate swaps—Liabilities		$	437		$	437		$	643		$	643

 

Note 8—Derivative Financial Instruments

 

We are exposed to certain risks in the normal course of our business operations. One risk relating to the variability of interest on variable rate debt is managed through the use of derivatives. All derivative financial instruments are reported in the balance sheet at fair value.

 

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Generally, we enter into swap relationships such that changes in the fair value or cash flows of items and transactions being hedged are expected to be offset by corresponding changes in the values of the derivatives.

 

The Trust and the Predecessor held swaps to pay fixed/receive variable interest rates swaps with a total notional amount of $8.0 million and $25.6 million as of September 30, 2013 and December 31, 2012, respectively.  Gains recognized on the interest rate swaps of $0.02 million were included in change in fair value of derivatives, net in the condensed consolidated and combined statements of operations for the three month periods ended September 30, 2013, no gain was recognized for the three months ended September 30, 2012 and a gain of $0.2 million and $0.06 million were recognized for the nine month periods ended September 30, 2013 and 2012, respectively.

 

Note 9—Operating Leases

 

The Trust is lessor of medical office buildings and other healthcare facilities. Leases have expirations from 2013 through 2028. As of September 30, 2013, the future minimum rental payments on noncancelable leases were as follows (in thousands):

 

Year Ending December 31:
2013		$	4,864
2014		19,349
2015		19,633
2016		19,555
2017		18,614
Thereafter		141,456
Total Payments		$	223,471

 

Note 10—Earnings Per Share

 

The following table shows the amounts used in computing our basic and diluted earnings per share. As the three and nine months ended September 30, 2013 resulted in a net loss, there is no dilution to earnings per share (in thousands, except share and per share data):

 

		Three Months Ended September 30,			Nine Months Ended September 30,
		2013			2013
Numerator for earnings per share — basic and diluted:
Net loss		$	(1,416	)	$	(1,998	)
Less: (Income)/loss allocable to noncontrolling interests - Predecessor		(6		)	576
Less: Loss allocable to noncontrolling interests		262			262
Numerator for earnings per share — basic and diluted		$	(1,160	)	$	(1,160	)
Denominator for earnings per share - basic and diluted shares:		11,486,011			11,486,011
Basic and diluted earnings per share		$	(0.10	)	$	(0.10	)

 

Note 11 — Subsequent Events

 

On October 4, 2013, the Trust completed the acquisition of a 20,319 square foot medical office building and ambulatory surgery center located in Pensacola, Florida for approximately $6.9 million. The purchase price was funded with borrowings on our senior secured revolving credit facility.

 

On November 6, 2013, the Trust entered into an agreement to acquire a 40.42% joint venture equity interest in the Valley West medical office building not owned by the Trust for approximately $3.0 million, resulting in our 100.0% ownership of this property.

 

On November 6, 2013, the Trust entered into an agreement to acquire a 35% joint venture equity interest in the Remington Medical Commons property not owned by us for approximately $1.1 million, resulting in our 100.0% ownership of this property.

 

On November 7, 2013, the Trust entered into an agreement to acquire four medical office buildings located in Atlanta, GA, from an unrelated seller for approximately $20.8 million.

 

On November 8, 2013, the Trust and the lenders agreed to increase the maximum borrowing capacity under the senior secured revolving credit facility to $90 million from $75 million.

 

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Item 2.                                 Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

References to “we,” “us,” “our,” “our company,” “the Trust”, and “Physicians Realty” refer to Physicians Realty Trust, a Maryland real estate investment trust, together with its consolidated subsidiaries, including Physicians Realty L.P., a Delaware limited partnership, of which Physicians Realty Trust is the sole general partner and which we refer to in this Quarterly Report on Form 10-Q as our Operating Partnership.

 

Forward-Looking Statements

 

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this report. We make statements in this report that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). In particular, statements pertaining to our capital resources, portfolio performance and results of operations contain forward-looking statements.  Likewise, our pro forma financial statements and our statements regarding anticipated market conditions are forward-looking statements. You can identify forward-looking statements by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “pro forma,” “estimates” or “anticipates” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans or intentions.

 

Forward-looking statements involve numerous risks and uncertainties and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise and we may not be able to realize them. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:

 

·                  general economic conditions;

 

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

 

·                  our failure to generate sufficient cash flows to service our outstanding indebtedness;

 

·                  fluctuations in interest rates and increased operating costs;

 

·                  the availability, terms and deployment of debt and equity capital, including our senior secured revolving credit facility;

 

·                  our ability to make distributions on our shares of beneficial interest;

 

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

 

·                  our limited operating history;

 

·                  changes in our business or strategy;

 

·                  our dependence upon key personnel whose continued service is not guaranteed;

 

·                  our ability to identify, hire and retain highly qualified personnel in the future;

 

·                  the degree and nature of our competition;

 

·                  changes in governmental regulations, tax rates and similar matters;

 

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

 

·                  decreased rental rates or increased vacancy rates;

 

·                  difficulties in identifying healthcare properties to acquire and completing acquisitions;

 

·                  competition for investment opportunities;

 

·                  our failure to successfully develop, integrate and operate acquired properties and operations;

 

·                  the impact of our investment in joint ventures;

 

·                  the financial condition and liquidity of, or disputes with, joint venture and development partners;

 

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·                  changes in GAAP;

 

·                  lack of or insufficient amounts of insurance;

 

·                  other factors affecting the real estate industry generally;

 

·                  our failure to qualify and maintain our qualification as a REIT for U.S. federal income tax purposes;

 

·                  limitations imposed on our business and our ability to satisfy complex rules in order for us to qualify as a REIT for U.S. federal income tax purposes; and

 

·                  changes in governmental regulations or interpretations thereof, such as real estate and zoning laws and increases in real property tax rates and taxation of REITs.

 

Overview

 

We are a self-managed healthcare real estate company organized in April 2013 to acquire, selectively develop, own and manage healthcare properties that are leased to physicians, hospitals and healthcare delivery systems. We invest in real estate that is integral to providing high quality healthcare services. Our properties are typically located on a campus with a hospital or other healthcare facilities or strategically located and affiliated with a hospital or other healthcare facilities. We believe the impact of government programs and continuing trends in the healthcare industry create attractive opportunities for us to invest in healthcare related real estate. Our management team has significant public healthcare REIT experience and has long established relationships with physicians, hospitals and healthcare delivery system decision makers that we believe will provide quality investment and growth opportunities. Our principal investments include medical office buildings, outpatient treatment facilities, acute and post-acute care hospitals, as well as other real estate integral to health care providers. We seek to generate attractive risk-adjusted returns for our shareholders through a combination of stable and increasing dividends and potential long-term appreciation in the value of our properties and our common shares.  We intend to elect and qualify to be taxed as a REIT for federal income tax purposes commencing with our short taxable year ending December 31, 2013.

 

We completed our underwritten initial public offering (“IPO”) and related formation transactions on July 24, 2013, issuing 11,753,597 common shares, including shares issued upon exercise of the underwriters’ over-allotment option, and received net proceeds of approximately $123.8 million, after deducting the underwriting discounts and expenses of the IPO payable by us.  We contributed the net proceeds of the IPO to our Operating Partnership in exchange for 11,753,597 common units of partnership interest in our Operating Partnership (“OP Units”) and at September 30, 2013, we owned a 76.4% interest in our Operating Partnership.  Our Operating Partnership used the net proceeds of the IPO to repay approximately $36.9 million of outstanding indebtedness related to properties in our initial portfolio and to purchase the 50% interest in the Arrowhead Common property not owned by the Ziegler Funds for approximately $850,000, after which we became the 100% owner of that property, and to pay certain expenses related to debt and transfer and our senior secured revolving credit facility.

 

Prior to completion of our IPO on July 24, 2013, we had no operations or assets, other than $1,000 of cash from our initial capitalization.  We acquired 19 properties upon the completion of our IPO and related formation transactions on July 24, 2013.  Since the completion of our IPO, we have acquired 5 additional properties containing an aggregate of 305,449 square feet.  At September 30, 2013, our portfolio consisted of 24 properties located in 12 states with approximately 829,497 net leasable square feet, which were approximately 90.3% leased with a weighted average remaining lease term of approximately 8.6 years. We receive a cash rental stream from these healthcare providers under our leases. Approximately 98% of the annualized base rent payments from our properties as of September 30, 2013 are from triple net leases, pursuant to which the tenants are responsible for all operating expenses relating to the property, including but not limited to real estate taxes, utilities, property insurance, routine maintenance and repairs, and property management. This structure helps insulate us from increases in certain operating expenses and provides more predictable cash flow. We seek to structure our triple-net leases to generate attractive returns on a long-term basis. Our leases typically have initial terms of 5 to 15 years and include annual rent escalators of approximately 2%. Our operating results depend significantly upon the ability of our tenants to make required rental payments. We believe that our portfolio of medical office buildings and other healthcare facilities will enable us to generate stable cash flows over time because of the diversity of our tenants, staggered lease expiration schedule, long-term leases, and low historical occurrence of tenants defaulting under their leases. As of September 30, 2013, leases representing 1.2%, 2.5% and 1.3% of leasable square feet in our portfolio will expire in 2013, 2014 and 2015, respectively.

 

We did not conduct business operations prior to completion of our IPO on July 24, 2013, therefore, the financial information herein for periods prior to July 24, 2013 reflects the operations of the four healthcare real estate funds managed by B.C. Ziegler & Company, which we refer to as the Ziegler Funds, from whom we acquired the equity interests in the 19 properties that constituted our initial properties upon completion of our IPO and formation transactions.  We determined the Ziegler Funds to be our accounting

 

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predecessor (the “Predecessor”).  The financial information herein since July 24, 2013 reflect our operations since completion of the IPO and formation transactions and include the results of operations of the five acquisition properties described above from the date of our acquisition.

 

We have entered into a $75 million senior secured revolving credit facility and intend to use borrowings under the facility to finance future acquisitions and developments, fund tenant improvements, leasing commissions to third parties, and capital expenditures, provide for working capital and for other general corporate purposes. At September 30, 2013, we had approximately $46.7 million of mortgage indebtedness outstanding secured by first mortgages on certain of our properties and approximately $19.9 million of outstanding borrowings under our senior secured revolving credit facility.

 

Concurrently with the completion of the IPO, we entered into a series of contribution transaction where we acquired the entities that own 19 properties that comprised our initial portfolio from the Ziegler Funds, as well as certain operating assets and liabilities, and issued to the Ziegler Funds an aggregate of 2,744,000 OP Units having an aggregate value of approximately $31.6 million based on the price to the public per share in the IPO and the payment of approximately $36.9 million of debt related to such properties. In addition, at the completion of the IPO, we entered into a shared services agreement with B.C. Ziegler & Company (“Ziegler”) pursuant to which Ziegler provides office space, IT support, accounting support and other services to us in exchange for an annual fee.

 

Following completion of our IPO and related formation transactions through September 30, 2013, we completed the acquisition of five healthcare properties as summarized below using proceeds from the IPO, borrowings under our senior secured revolving credit facility and issuance of OP Units.

 

Property		Location		Acquisition Date		Square Footage		Purchase Price
Hospital		El Paso, TX		August 30, 2013		77,000		$	32,823,775
Medical Office Building		El Paso, TX		August 30, 2013		40,000		$	7,176,225
Long Term Acute Care Specialty Hospital		Plano, TX		September 18, 2013		75,442		$	18,200,000
Surgical Center Hospital		New Orleans, LA		September 30, 2013		60,000		$	37,500,000
Outpatient Care Building		Oklahoma City, OK		September 30, 2013		52,000		$	15,600,000

 

As partial payment of the purchase price for the hospital in New Orleans, Louisiana, described above, on September 30, 2013, we issued an aggregate of 954,877 OP Units to the sellers of that property valued at approximately $11.5 million (based on the average three-day closing price of our common shares prior to closing).

 

We are a self-managed REIT and conduct our operations through our Operating Partnership and wholly-owned subsidiaries of our Operating Partnership.

 

Components of Our Revenues, Expenses and Cash Flow

 

The financial information of our Predecessor, the Ziegler Funds, prior to completion of the IPO, reflects a different structure, principally relating to expenses, than our operations following the inception of operations upon completion of our IPO and as a result, the results of operations of the Predecessor and our results since our inception of operations may not be comparable.  While the financial presentation of revenues pursuant to the leases at the properties in our initial portfolio and certain expenses, such as depreciation and amortization, are substantially consistent for the Predecessor and for us, the expense structure of our company since completion of the IPO and the formation transactions differs from the historical expense structure of the Predecessor.  During the periods of financial information for the Predecessor, the Ziegler Funds had no direct employees and paid a fixed annual management fee to B.C. Ziegler & Company (“Ziegler”), which managed the operations of the Ziegler Funds.  By contrast, as a self-managed REIT, we do not pay management fees to third parties (other than to third party property management companies with respect to certain of our properties) but rather we pay cash and other forms of compensation to our officers and employees.  Also, effective upon completion of the formation transactions, we entered into a Shared Services Agreement with Ziegler pursuant to which we pay Ziegler a fixed annual fee for office space, IT support, accounting support and similar services.  In addition, as a public reporting company,

 

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