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Physicians Realty Trust - Quarter Report: 2016 March (Form 10-Q)

Table of Contents

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 March 31, 2016
 
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)
 
 

Maryland
(State of Organization)
 
46-2519850
(IRS Employer Identification No.)
 
 
 
309 N. Water Street,
Suite 500
Milwaukee, Wisconsin
(Address of Principal Executive Offices)
 
53202
(Zip Code)
 
(414) 367-5600
(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):
 
Large Accelerated Filer x
Accelerated Filer o
 
 
Non-Accelerated Filer o
(Do not check if a smaller reporting company)
Smaller reporting company o
 
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 as of April 29, 2016 was 134,323,712.
 


Table of Contents

PHYSICIANS REALTY TRUST
 
Quarterly Report on Form 10-Q
for the Quarter Ended March 31, 2016
 
Table of Contents
 
 

 
 
 
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Table of Contents

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
 
This Quarterly Report on Form 10-Q contains forward-looking statements made pursuant to safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts may be forward-looking statements. In particular, statements pertaining to our capital resources, property performance and results of operations contain forward-looking statements. Likewise, all of our statements regarding anticipated growth in our funds from operations and anticipated market conditions, demographics and results of operations are forward-looking statements. You can identify forward-looking statements by the use of forward-looking terminology such as “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.
 
These forward-looking statements reflect the views of our management regarding current expectations and projections about future events and are based on currently available information. These forward-looking statements are not guarantees of future performance and involve numerous risks and uncertainties and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise and we may not be able to realize them. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:
 
•
general economic conditions;

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

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

•
fluctuations in interest rates and increased operating costs;

•
the availability, terms and deployment of debt and equity capital, including our unsecured revolving credit facility;

•
our ability to make distributions on our common shares;

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

•
our increased vulnerability economically due to the concentration of our investments in healthcare properties;

•
our geographic concentrations in Texas, Georgia, and Arizona cause us to be particularly exposed to downturns in these local economies or other changes in local real estate market conditions;

•
changes in our business or strategy;

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

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

•
the degree and nature of our competition;

•
changes in governmental regulations, 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, including our ability to consummate the CHI Acquisition (as defined herein);

•
competition for investment opportunities;


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•
our failure to successfully develop, integrate and operate acquired properties and operations, including our ability to integrate the properties to be acquired upon closing of the CHI Acquisition (as defined herein);

•
the impact of our investment in joint ventures;

•
the financial condition and liquidity of, or disputes with, any joint venture and development partners with whom we may make co-investments in the future;

•
cybersecurity incidents could disrupt our business and result in the compromise of confidential information;
 
•
our ability to operate as a public company;

•
changes in accounting principles generally accepted in the United States (GAAP);
 
•
lack of or insufficient amounts of insurance;
 
•
other factors affecting the real estate industry generally;
 
•
our failure to maintain our qualification as a real estate investment trust (or 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;
 
•
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; and
 
•
factors that may materially adversely affect us, or the per share trading price of our common shares, including:
 
•
higher market interest rates;
•
the number of our common shares available for future issuance or sale;
•
our issuance of equity securities or the perception that such issuance might occur;
•
future debt;
•
failure of securities analysts to publish research or reports about us or our industry; and
•
securities analysts’ downgrade of our common shares or the healthcare-related real estate sector.
 
While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events or other changes after the date of this report, except as required by applicable law. You should not place undue reliance on any forward-looking statements that are based on information currently available to us or the third parties making the forward-looking statements. For a further discussion of these and other factors that could impact our future results, performance or transactions, see Part II, Item 1A. (Risk Factors) of this report and Part I, Item 1A. (Risk Factors) of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 (the “Annual Report”).
 
In this report, the terms “we,” “us,” “our,” “our company,” the “Trust,” the “Company,” 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, which we refer to in this report as our “Operating Partnership,” and the historical business and operations of four healthcare real estate funds that we have classified for accounting purposes as our “Predecessor” and which we sometimes refer to as the “Ziegler Funds.” In this report, the term “OP Units” refers to partnership interests in the Operating Partnership and the term “Series A Preferred Units” refers to Series A Participating Redeemable Preferred Units of the Operating Partnership, which have priority over the OP Units with respect to distributions and liquidation.


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PART I.                          Financial Information
Item 1.                                 Financial Statements
Physicians Realty Trust
Consolidated Balance Sheets
(In thousands, except share and per share data)
 
March 31,
2016
 
December 31,
2015
 
(unaudited)
 
 
ASSETS
 

 
 

Investment properties:
 

 
 

Land and improvements
$
141,152

 
$
130,788

Building and improvements
1,452,885

 
1,284,863

Tenant improvements
10,455

 
9,243

Acquired lease intangibles
228,788

 
205,168

 
1,833,280


1,630,062

Accumulated depreciation
(108,239
)
 
(91,250
)
Net real estate property
1,725,041


1,538,812

Real estate loans receivable
35,937

 
39,349

Investment in unconsolidated entity
1,327

 
1,322

Net real estate investments
1,762,305


1,579,483

Cash and cash equivalents
22,906

 
3,143

Tenant receivables, net
6,024

 
2,977

Other assets
59,657

 
53,283

Total assets
$
1,850,892


$
1,638,886

LIABILITIES AND EQUITY
 

 
 

Liabilities:
 

 
 

Credit facility
$
115,789

 
$
389,375

Notes payable
149,551

 
—

Mortgage debt
114,816

 
94,240

Accounts payable
1,659

 
644

Dividends payable
25,701

 
20,783

Accrued expenses and other liabilities
28,948

 
24,473

Acquired lease intangibles, net
6,407

 
5,950

Total liabilities
442,871


535,465

 
 
 
 
Redeemable noncontrolling interest - Operating Partnership and partially owned properties
27,065

 
26,960

 
 
 
 
Equity:
 

 
 

Common shares, $0.01 par value, 500,000,000 common shares authorized, 108,379,324 and 86,864,063 common shares issued and outstanding as of March 31, 2016 and December 31, 2015, respectively.
1,087

 
872

Additional paid-in capital
1,451,347

 
1,129,284

Accumulated deficit
(129,183
)
 
(109,024
)
Total shareholders’ equity
1,323,251


1,021,132

Noncontrolling interests:
 

 
 

Operating Partnership
47,567

 
45,451

Partially owned properties
10,138

 
9,878

Total noncontrolling interests
57,705


55,329

Total equity
1,380,956


1,076,461

Total liabilities and equity
$
1,850,892


$
1,638,886


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

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Physicians Realty Trust
Consolidated Statements of Operations
(In thousands, except share and per share data) (Unaudited)
 
 
Three Months Ended
March 31,
 
 
2016
 
2015
Revenues:
 
 

 
 

Rental revenues
 
$
34,855

 
$
20,341

Expense recoveries
 
7,903

 
3,536

Interest income on real estate loans and other
 
1,376

 
607

Total revenues

44,134


24,484

Expenses:
 
 

 
 

Interest expense
 
4,197

 
1,710

General and administrative
 
4,121

 
3,352

Operating expenses
 
11,037

 
5,709

Depreciation and amortization
 
16,010

 
8,240

Acquisition expenses
 
3,377

 
5,932

Total expenses

38,742


24,943

Income (loss) before equity in income of unconsolidated entity and loss on sale of investment property:
 
5,392

 
(459
)
Equity in income of unconsolidated entity
 
32

 
26

Loss on sale of investment property
 
—

 
(15
)
Net income (loss)

5,424


(448
)
Net (income) loss attributable to noncontrolling interests:
 
 

 
 

Operating Partnership
 
(173
)
 
24

Partially owned properties
 
(317
)
 
(32
)
Net income (loss) attributable to controlling interest

4,934


(456
)
Preferred distributions
 
(548
)
 
(66
)
Net income (loss) attributable to common shareholders

$
4,386


$
(522
)
Net income (loss) per share:
 
 

 
 

Basic
 
$
0.04

 
$
(0.01
)
Diluted
 
$
0.04

 
$
(0.01
)
Weighted average common shares:
 
 

 
 

Basic
 
102,704,008

 
65,649,478

Diluted
 
107,148,380

 
65,649,478

 
 
 
 
 
Dividends and distributions declared per common share and OP Unit
 
$
0.225

 
$
0.225

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


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Physicians Realty Trust
Consolidated Statement of Equity
(In thousands) (Unaudited)
 
Par
Value
 
Additional
Paid in
Capital
 
Accumulated
Deficit
 
Total
Shareholders’ 
Equity
 
Operating
Partnership
Noncontrolling
Interest
 
Partially
Owned
Properties 
Noncontrolling
Interest
 
Total Non-
Controlling
Interests
 
Total
Equity
Balance at January 1, 2016
$
872

 
$
1,129,284

 
$
(109,024
)
 
$
1,021,132

 
$
45,451

 
$
9,878

 
$
55,329

 
$
1,076,461

Net proceeds from sale of common shares
213

 
321,025

 
—

 
321,238

 
—

 
—

 
—

 
321,238

Restricted share award grants, net
1

 
1,184

 
(76
)
 
1,109

 
—

 
—

 
—

 
1,109

Conversion of OP Units
1

 
1,860

 
—

 
1,861

 
(1,861
)
 
—

 
(1,861
)
 
—

Dividends/distributions declared
—

 
—

 
(24,469
)
 
(24,469
)
 
(848
)
 
—

 
(848
)
 
(25,317
)
Preferred distribution
—

 
—

 
(548
)
 
(548
)
 
—

 
—

 
—

 
(548
)
Issuance of OP Units in connection with acquisition
—

 
—

 
—

 
—

 
2,869

 
—

 
2,869

 
2,869

Distributions
—

 
—

 
—

 
—

 
—

 
(57
)
 
(57
)
 
(57
)
Change in market value of Redeemable Noncontrolling Interests in Operating Partnership
—

 
(223
)
 
—

 
(223
)
 
—

 
—

 
—

 
(223
)
Net income
—

 
—

 
4,934

 
4,934

 
173

 
317

 
490

 
5,424

Adjustment for Noncontrolling Interests ownership in Operating Partnership
—

 
(1,783
)
 
—

 
(1,783
)
 
1,783

 
—

 
1,783

 
—

Balance at March 31, 2016
$
1,087


$
1,451,347


$
(129,183
)

$
1,323,251


$
47,567


$
10,138


$
57,705


$
1,380,956

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


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Physicians Realty Trust
Consolidated Statements of Cash Flows
(In thousands) (Unaudited)
 
Three Months Ended
March 31,
 
2016
 
2015
Cash Flows from Operating Activities:
 

 
 

Net income (loss)
$
5,424

 
$
(448
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
 
 
 

Depreciation and amortization
16,010

 
8,240

Amortization of deferred financing costs
448

 
293

Amortization of lease inducements and above/below market lease intangibles
962

 
302

Straight-line rental revenue/expense
(3,185
)
 
(2,012
)
Amortization of above market assumed debt
(59
)
 
(10
)
Loss on sale of investment property
—

 
15

Equity in income of unconsolidated entity
(32
)
 
(26
)
Distribution from unconsolidated entity
27

 
26

Change in fair value of derivative
(40
)
 
(13
)
Provision for bad debts
30

 
—

Non-cash share compensation
1,185

 
867

Change in operating assets and liabilities:
 

 
 

Tenant receivables
(3,665
)
 
(1,022
)
Other assets
(1,995
)
 
(580
)
Accounts payable
1,015

 
(252
)
Accrued expenses and other liabilities
4,023

 
4,345

Net cash provided by operating activities
20,148


9,725

Cash Flows from Investing Activities:
 

 
 

Proceeds on sales of investment properties
—

 
1,550

Acquisition of investment properties, net
(197,876
)
 
(205,278
)
Capital expenditures on existing investment properties
(1,820
)
 
(1,028
)
Real estate loans receivable
(500
)
 
(4,123
)
Repayment of real estate loan receivable
4,500

 
—

Leasing commissions
(58
)
 
(35
)
Lease inducements
(1,284
)
 
(462
)
Net cash used in investing activities
(197,038
)

(209,376
)
Cash Flows from Financing Activities:
 

 
 

Net proceeds from sale of common shares
321,238

 
301,772

Proceeds from credit facility borrowings
150,000

 
73,000

Payment on credit facility borrowings
(424,000
)
 
(138,000
)
Proceeds from issuance of mortgage debt
21,500

 
—

Proceeds from issuance of senior unsecured notes
150,000

 
—

Principal payments on mortgage debt
(541
)
 
(466
)
Debt issuance costs
(808
)
 
(24
)
Dividends paid - shareholders
(19,666
)
 
(15,792
)
Distributions to noncontrolling interest - Operating Partnership
(809
)
 
(714
)
Preferred distributions paid - OP Unit holder
(204
)
 
—

Distributions to noncontrolling interest - partially owned properties
(57
)
 
(69
)
Purchase of OP Units
—

 
(205
)
Net cash provided by financing activities
196,653


219,502

Net increase in cash and cash equivalents
19,763

 
19,851

Cash and cash equivalents, beginning of period
3,143

 
15,923

Cash and cash equivalents, end of period
$
22,906


$
35,774

Supplemental disclosure of cash flow information - interest paid during the period
$
2,181

 
$
1,402

Supplemental disclosure of noncash activity - assumed debt
$
—

 
$
6,323

Supplemental disclosure of noncash activity - issuance of OP Units and Series A Preferred Units in connection with acquisitions
$
2,869

 
$
17,017

Supplemental disclosure of noncash activity - contingent consideration
$
—

 
$
1,482


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

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Physicians Realty Trust
Notes to Consolidated 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 March 31, 2016, the Trust was authorized to issue up to 500,000,000 common shares of beneficial interest, par value $0.01 per share (“common shares”). The Trust filed a Registration Statement on Form S-11 with the Securities and Exchange Commission (the “Commission” or the “SEC”) with respect to a proposed underwritten initial public offering (the “IPO”) and completed the IPO of its common shares and commenced operations on July 24, 2013.
 
The Trust contributed the net proceeds from the IPO to Physicians Realty L.P., a Delaware limited partnership (the “Operating Partnership”), and is the sole general partner of the Operating Partnership. The Trust’s operations are conducted through the Operating Partnership and wholly-owned and majority-owned subsidiaries of the Operating Partnership. The Trust, as the general partner of the Operating Partnership, controls the Operating Partnership and consolidates the assets, liabilities and results of operations of the Operating Partnership.
 
The Trust is a self-managed real estate investment trust (“REIT”) formed primarily to acquire, selectively develop, own and manage healthcare properties that are leased to physicians, hospitals and healthcare delivery systems.
 
Follow-On Public Offering

On January 25, 2016, the Trust completed a follow-on public offering of 21,275,000 common shares of beneficial interest, including 2,775,000 common shares issued upon exercise of the underwriters’ overallotment option, resulting in net proceeds to it of approximately $321.1 million. The Trust contributed the net proceeds of this offering to its Operating Partnership in exchange for 21,275,000 OP Units, and its Operating Partnership used the net proceeds of the public offering to repay borrowings under its unsecured revolving credit facility and for general corporate and working capital purposes and funding acquisitions.
 
Note 2. Summary of Significant Accounting Policies
 
The accompanying unaudited consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the periods ended March 31, 2016 and 2015 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 Annual Report on Form 10-K for the year ended December 31, 2015, filed with the SEC on February 29, 2016.
 
Principles of Consolidation
 
GAAP requires the Trust to identify entities for which control is achieved through means other than voting rights and to determine which business enterprise is the primary beneficiary of variable interest entities (“VIEs”). ASC 810 broadly defines a VIE as an entity in which either (i) the equity investors as a group, if any, lack the power through voting or similar rights to direct the activities of such entity that most significantly impact such entity’s economic performance or (ii) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support. The Company identifies the primary beneficiary of a VIE as the enterprise that has both of the following characteristics: (i) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance; and (ii) the obligation to absorb losses or receive benefits of the VIE that could potentially be significant to the entity. The Trust consolidates its investment in a VIE when it determines that it is its primary beneficiary. The Trust may change its original assessment of a VIE upon subsequent events such as the modification of contractual arrangements that affect the characteristics or adequacy of the entity’s equity investments at risk and the disposition of all or a portion of an interest held by the primary beneficiary. The Trust performs this analysis on an ongoing basis.
 
For property holding entities not determined to be VIEs, the Trust consolidates such entities in which the Trust or the Operating Partnership owns 100% of the equity or has a controlling financial interest evidenced by ownership of a majority voting interest. All intercompany balances and transactions are eliminated in consolidation. For entities in which the Trust owns less than 100% of the equity interest, the Trust consolidates the property if it has the direct or indirect ability to control the

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entities’ activities based upon the terms of the respective entities’ ownership agreements. For these entities, the Trust records a noncontrolling interest representing equity held by noncontrolling interests.
 
Noncontrolling Interests
 
The Trust presents the portion of any equity it does not own in entities that it controls (and thus consolidates) as noncontrolling interests and classified such interests as a component of consolidated equity, separate from the Trust’s total shareholders’ equity, on the consolidated balance sheets.
 
Operating Partnership: Net income or loss is allocated to noncontrolling interests based on their respective ownership percentage of the Operating Partnership. The ownership percentage is calculated by dividing the number of OP Units held by the noncontrolling interests by the total OP Units held by the noncontrolling interests and the Trust. Issuance of additional Common Shares and OP Units changes the ownership interests of both the noncontrolling interests and the Trust. Such transactions and the related proceeds are treated as capital transactions.
 
During the three months ended March 31, 2016, the Operating Partnership partially funded a property acquisition by issuing an aggregate of 174,085 OP Units valued at approximately $2.9 million. The acquisition had a total purchase price of approximately $8.5 million.
 
Noncontrolling interests in the Trust represent OP Units held by the Predecessor’s prior investors and other investors. As of March 31, 2016, the Trust held a 96.5% 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 OP 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 OP 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 unregistered common shares on a one-for-one basis. Such selection to pay cash or issue common shares to satisfy an OP Unit holder’s redemption request is solely within the control of the Trust. 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.
 
Partially Owned Properties: The Trust reflects noncontrolling interests in partially owned properties on the balance sheet for the portion of properties consolidated by the Trust that are not wholly owned by the Trust. The earnings or losses from those properties attributable to the noncontrolling interests are reflected as “net income or loss attributable to noncontrolling interests - partially owned properties” in the consolidated statement of operations.
 
Redeemable Noncontrolling Interests - Operating Partnership and Partially Owned Properties
 
On February 5, 2015, the Trust entered into a Second Amended and Restated Agreement of Limited Partnership (the “Partnership Agreement”) which provides for the designation and issuance of the newly designated Series A Participating Redeemable Preferred Units of the Operating Partnership (“Series A Preferred Units”). Series A Preferred Units have priority over all other partnership interests of the Operating Partnership with respect to distributions and liquidation. Holders of Series A Preferred Units are entitled to a 5% cumulative return and upon redemption, the receipt of one common share and $200. The holders of the Series A Preferred Units have agreed not to cause the Operating Partnership to redeem their Series A Preferred Units prior to one year from the issuance date. In addition, Series A Preferred Units are redeemable at the option of the holders which redemption obligation may be satisfied, at the Trust’s option, in cash or registered common shares. Instruments that require settlement in registered common shares may not be classified in permanent equity as it is not always completely within an issuer’s control to deliver registered common shares. Due to the redemption provision, which is outside of the control of the Trust, the Trust classifies the investment in the mezzanine section of its consolidated balance sheet. The Trust records the carrying amount of the redeemable noncontrolling interests at the greater of the carrying value or redemption value. The fair value of the embedded derivative is $8.6 million and is included on the Trust’s consolidated balance sheets in accrued expenses and other liabilities.

Effective March 1, 2015, the Trust received a $5 million equity investment from a third party. This investment earns a 15% cumulative preferred return. At any point subsequent to the third anniversary of the investment, the holder can require the Trust to redeem the instrument at a price for which the investor will realize a 15% internal rate of return. Due to the redemption provision, which is outside of the control of the Trust, the Trust classifies the investment in the mezzanine section of its consolidated balance sheet. The Trust records the carrying amount of the redeemable noncontrolling interests at the greater of the carrying value or redemption value.

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Dividends and Distributions
 
On March 18, 2016, the Trust announced that its Board of Trustees authorized and the Trust declared a cash dividend of $0.225 per common share for the quarterly period ended March 31, 2016. The distribution was paid on April 18, 2016 to common shareholders and OP Unit holders of record as of the close of business on April 1, 2016.
 
Purchase of Investment Properties
 
A property acquired not subject to an existing lease is treated as an asset acquisition and recorded at its purchase price, inclusive of acquisition costs, allocated between the acquired tangible assets and assumed liabilities based upon their relative fair values at the date of acquisition. A property acquired with an existing lease is accounted for as a business combination pursuant to the acquisition method in accordance with ASC Topic 805, Business Combinations (“ASC 805”), and assets acquired and liabilities assumed, including identified intangible assets and liabilities, are recorded at fair value.
 
The determination of fair value involves the use of significant judgment and estimation. The Trust makes estimates of the fair value of the tangible and intangible acquired assets and assumed liabilities using information obtained from multiple sources as a result of pre-acquisition due diligence and may include the assistance of a third party appraiser. The Trust estimates the fair value of buildings acquired on an “as-if-vacant” basis and depreciates the building value over the estimated remaining life of the building. The Trust determines the allocated value of other fixed assets, such as site improvements, based upon the replacement cost and depreciates such value over the assets’ estimated remaining useful lives as determined at the applicable acquisition date. The fair value of land is determined either by considering the sales prices of similar properties in recent transactions or based on internal analyses of recently acquired and existing comparable properties within the Trust’s portfolio.
 
In recognizing identified intangible assets and liabilities in connection with a business combination, the value of above-or-below market leases is estimated based on the present value (using an interest rate which reflected the risks associated with the leases acquired) of the difference between contractual amounts to be received pursuant to the leases and management’s estimate of market lease rates measured over a period equal to the estimated remaining term of the lease. The capitalized above-market or below-market lease intangibles are amortized as a reduction or addition to rental income over the estimated remaining term of the respective leases.
 
In determining the value of in-place leases, management considers current market conditions and costs to execute similar leases in arriving at an estimate of the carrying costs during the expected lease-up period from vacant to existing occupancy. In estimating carrying costs, management includes real estate taxes, insurance, other operating expenses, estimates of lost rental revenue during the expected lease-up periods, and costs to execute similar leases, including leasing commissions, tenant improvements, legal, and other related costs based on current market demand. The values assigned to in-place leases are amortized to amortization expense over the estimated remaining term of the lease.
 
The values assigned to all lease intangible assets and liabilities are amortized to amortization expense over the estimated remaining term of the lease. If a lease terminates prior to its scheduled expiration, all unamortized costs related to that lease are written off, net of any required lease termination payments.
 
The Trust calculates the fair value of any long-term debt assumed by discounting the remaining contractual cash flows on each instrument at the current market rate for those borrowings, which the Trust approximates based on the rate at which it would expect to incur on a replacement instrument on the date of acquisition, and recognize any fair value adjustments related to long-term debt as effective yield adjustments over the remaining term of the instrument.
 
Based on these estimates, the Trust recognizes the acquired assets and assumed liabilities at their estimated fair values, which are generally determined using Level 3 inputs, such as market rental rates, capitalization rates, discount rates, or other available market data. Initial valuations are subject to change until the information is finalized, no later than 12 months from the acquisition date. The Trust expenses transaction costs associated with acquisitions accounted for as business combinations in the period incurred.

Impairment of Intangible and Long-Lived Assets
 
The Trust periodically evaluates its long-lived assets, primarily consisting of investments in real estate, for impairment indicators or whenever events or changes in circumstances indicate that the recorded amount of an asset may not be fully recoverable. If indicators of impairment are present, the Trust evaluates the carrying value of the related real estate properties in relation to the undiscounted expected future cash flows of the underlying operations. In performing this evaluation, management considers market conditions and current intentions with respect to holding or disposing of the real estate property.

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The Trust adjusts the net book value of real estate properties to fair value if the sum of the expected future undiscounted cash flows, including sales proceeds, is less than book value. The Trust recognizes an impairment loss at the time it makes any such determination. If the Trust determines 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. Fair value is typically determined using a discounted future cash flow analysis or other acceptable valuation techniques, which are based, in turn, upon Level 3 inputs, such as revenue and expense growth rates, capitalization rates, discount rates or other available market data.
 
The Trust did not record impairment charges in the three month periods ended March 31, 2016 and 2015.
 
Investments in Unconsolidated Entities
 
The Trust reports investments in unconsolidated entities over whose operating and financial policies it has the ability to exercise significant influence under the equity method of accounting. Under this method of accounting, the Trust’s share of the investee’s earnings or losses is included in its consolidated statements of operations. The initial carrying value of investments in unconsolidated entities is based on the amount paid to purchase the equity interest.
 
Real Estate Loans Receivable
 
Real estate loans receivable consists of seven mezzanine loans and a term loan. Each mezzanine loan is collateralized by an ownership interest in the respective borrower, while the term loan is secured by an equity interest in one medical office building development. Interest income on the loans are recognized as earned based on the terms of the loans subject to evaluation of collectability risks and are included in the Trust’s consolidated statement of operations.
 
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 approximately $18.8 million and $15.6 million as of March 31, 2016 and December 31, 2015, 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 adjusted by amortization of lease inducements and above or below market rents on certain leases. Lease inducements and above or below market rents are amortized over the remaining life of the lease.
 
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 responsible for operating and building expenses. For absolute net leases, the Trust does not recognize expense recoveries.

Income Taxes
 
The Trust elected to be taxed as a REIT for federal tax purposes commencing with the filing of its tax return for the short taxable year ending 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 GAAP). 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 continue to operate in such a manner as to continue qualifying for treatment as a REIT. Although the Trust

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continues to qualify 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.
 
Management Estimates
 
The preparation of consolidated financial statements in conformity with GAAP 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 consolidated financial statements and the amounts of revenue and expenses reported in the period. Significant estimates are made for the fair value assessments with respect to purchase price allocations, impairment assessments, stock-based compensation, and the valuation of financial instruments. Actual results could differ from these estimates.
 
Contingent Liabilities
 
The Trust records a liability for contingent consideration (included in accrued expenses and other liabilities on its consolidated balance sheets) at fair value as of the acquisition date and reassesses the fair value at the end of each reporting period, with any changes being recognized in earnings. Increases or decreases in the fair value of contingent consideration can result from changes in discount periods, discount rates and probabilities that contingencies will be met.
 
Reclassifications
 
Certain prior period amounts have been reclassified to conform to the current financial statement presentation, with no effect on the previously reported consolidated financial position or consolidated results of operations.
 
New Accounting Pronouncements
 
In May 2014, the FASB issued ASU 2014-9, Revenue from Contracts with Customers, which creates a new Topic, Accounting Standards Codification Topic 606. The standard is principle-based and provides a five-step model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This standard is effective for interim or annual periods beginning after December 15, 2017 and allows for either full retrospective or modified retrospective adoption. Early adoption of this standard is permitted for reporting periods beginning after December 15, 2016. The Trust is currently evaluating the impact the adoption of Topic 606 will have on its consolidated financial statements.

In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis. ASU 2015-02 requires entities to evaluate whether they should consolidate certain legal entities. Principally, the new consolidation standard modified the evaluation of whether limited partnerships and similar legal entities are variable interest entities ("VIE") or voting interest entities. The Company adopted ASU 2015-02 on January 1, 2016. Based on the Trust’s review and subsequent analysis of the structure of the Company’s legal entities, the Trust has concluded that the Operating Partnership is a VIE because the limited partners of the Operating Partnership do not have substantive kick-out or participating rights. The Trust is the general partner and controlling owner of approximately 96.5% of the Operating Partnership and will continue to consolidate the Operating Partnership under this new guidance. With respect to the Trust’s investment in unconsolidated joint ventures, the new consolidation standard did not have an impact on previous consolidation conclusions.
 
In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which changes the presentation of debt issuance costs in financial statements. ASU 2015-03 requires an entity to present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs will continue to be reported as interest expense. ASU 2015-03 is effective for annual reporting periods beginning after December 15, 2016. Early adoption is permitted. The new guidance has been applied retrospectively to each prior period presented. The Company adopted ASU 2015-03 on January 1, 2016. As a result of the adoption of ASU 2015-03, the Company reclassified $6.0 million from net deferred costs to the related liabilities within the December 31, 2015 Consolidated Balance Sheet.
 
In February 2016, the FASB issued ASU 2016-02, Leases. The update amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. The standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. ASU 2016-02 will be effective for annual reporting periods beginning after December 15, 2018. Early adoption is permitted. The Trust is currently evaluating the impact of adopting the new leases standard on its consolidated financial statements.

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Note 3. Acquisitions and Dispositions
 
During the three months ended March 31, 2016, the Trust completed acquisitions of 16 operating healthcare properties and 2 condominium units located in 13 states for an aggregate purchase price of approximately $201.8 million. In addition, the Trust completed a $0.5 million mezzanine loan transaction, resulting in total investment activity of $202.3 million.

Investment activity for the three months ended March 31, 2016 is summarized below:
Property (1)
 
 
Location
 
Acquisition
Date
 
Purchase
Price
(in thousands)
Randall Road MOB - Suite 380
(3)
 
Elgin, IL
 
January 14, 2016
 
$
704

Great Falls Hospital
(2)
 
Great Falls, MT
 
January 25, 2016
 
29,043

Monterey Medical Center ASC
(2)
 
Stuart, FL
 
February 1, 2016
 
6,900

Physicians Medical Plaza MOB
(2)(4)
 
Indianapolis, IN
 
February 1, 2016
 
8,500

Mezzanine Loan - Davis
(2)
 
Minnetonka, MN
 
February 4, 2016
 
500

Park Nicollet Clinic
(2)
 
Chanhassen, MN
 
February 8, 2016
 
18,600

HEB Cancer Center
(2)
 
Bedford, TX
 
February 12, 2016
 
13,980

Riverview Medical Center
(2)
 
Lancaster, OH
 
February 26, 2016
 
12,800

St. Luke's Cornwall MOB
(2)
 
Cornwall, NY
 
February 26, 2016
 
14,550

HonorHealth Glendale
(3)
 
Glendale, AZ
 
March 15, 2016
 
9,820

Columbia MOB
(2)
 
Hudson, NY
 
March 21, 2016
 
18,450

St Vincent POB 1
(2)
 
Birmingham, AL
 
March 23, 2016
 
10,951

St Vincent POB 2
(2)
 
Birmingham, AL
 
March 23, 2016
 
7,945

St Vincent POB 3
(2)
 
Birmingham, AL
 
March 23, 2016
 
10,455

Emerson Medical Building
(2)
 
Creve Coeur, MO
 
March 24, 2016
 
14,250

Randall Road MOB - Suite 160
(3)
 
Elgin, IL
 
March 24, 2016
 
865

Patient Partners Surgery Center
(2)
 
Gallatin, TN
 
March 30, 2016
 
4,750

Eye Associates of NM - Santa Fe
(3)
 
Santa Fe, NM
 
March 31, 2016
 
8,739

Eye Associates of NM - Albuquerque
(3)
 
Albuquerque, NM
 
March 31, 2016
 
10,536

 
 
 
 
 
 
 
$
202,338

(1)
“MOB” means medical office building. “ASC” means ambulatory surgery center. “POB” means professional office building.
(2)
The Trust accounted for these acquisitions as business combinations pursuant to the acquisition method and expensed total acquisition costs of $3.4 million.
(3)
The Trust accounted for these acquisitions as asset acquisitions and capitalized total acquisition costs of $0.2 million.
(4)
The Operating Partnership partially funded the purchase price of this acquisition by issuing a total of 174,085 OP Units valued at approximately $2.9 million in the aggregate on the date of issuance.

 For the three months ended March 31, 2016, the Trust recorded revenues and net income from its 2016 acquisitions of $1.8 million and $0.6 million, respectively.
 

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The following table summarizes the acquisition date fair values of the assets acquired and the liabilities assumed, which the Trust determined using Level 2 and Level 3 inputs (in thousands):
Land
$
9,240

Building and improvements
168,570

In-place lease intangible
19,158

Above market in-place lease intangible
2,407

Below market in-place lease intangible
(469
)
Above market in-place ground lease
(218
)
Below market in-place ground lease
2,057

Lease inducement
1,284

Issuance of OP Units
(2,869
)
Net assets acquired
$
199,160


 These preliminary allocations are subject to revision within the measurement period, not to exceed one year from the date of the acquisitions.

Unaudited Pro Forma Financial Information
 
The following table illustrates the effect on net income and earnings per share - basic and diluted as if the Trust had acquired the above acquisitions as of January 1, 2015 (in thousands, except per share amounts):
 
 
Three Months Ended
March 31,
 
 
2016
 
2015
Revenue
 
$
48,264

 
$
30,464

Net income
 
6,554

 
1,326

Net income available to common shareholders
 
5,477

 
1,166

Earnings per share - basic
 
$
0.05

 
$
0.01

Earnings per share - diluted
 
$
0.05

 
$
0.01

Weighted average number of shares outstanding - basic
 
102,704,008

 
102,704,008

Weighted average number of shares outstanding - diluted
 
107,148,380

 
107,148,380


Note 4. Intangibles
 
The following is a summary of the carrying amount of intangible assets and liabilities as of March 31, 2016 and December 31, 2015 (in thousands):
 
March 31, 2016
 
December 31, 2015
 
Cost
 
Accumulated
Amortization
 
Net
 
Cost
 
Accumulated
Amortization
 
Net
Assets
 

 
 

 
 

 
 

 
 

 
 

In-place leases
$
182,885

 
$
(32,391
)
 
$
150,494

 
$
163,728

 
$
(26,702
)
 
$
137,026

Above market leases
29,194

 
(4,161
)
 
25,033

 
26,787

 
(3,174
)
 
23,613

Leasehold interest
712

 
(79
)
 
633

 
712

 
(64
)
 
648

Below market ground lease
15,997

 
(115
)
 
15,882

 
13,941

 
(68
)
 
13,873

Total
$
228,788


$
(36,746
)

$
192,042


$
205,168


$
(30,008
)

$
175,160

Liabilities
 

 
 

 
 

 
 

 
 

 
 

Below market lease
$
6,537

 
$
(1,025
)
 
$
5,512

 
$
6,068

 
$
(799
)
 
$
5,269

Above market ground lease
919

 
(24
)
 
895

 
701

 
(20
)
 
681

Total
$
7,456


$
(1,049
)

$
6,407


$
6,769


$
(819
)

$
5,950

 

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The following is a summary of the acquired lease intangible amortization for the three month periods ended March 31, 2016 and 2015, respectively (in thousands):
 
 
Three Months Ended
March 31,
 
 
2016
 
2015
Amortization expense related to in-place leases
 
$
5,689

 
$
2,474

Decrease of rental income related to above-market leases
 
987

 
352

Decrease of rental income related to leasehold interest
 
15

 
15

Increase of rental income related to below-market leases
 
226

 
126

Decrease of operating expense related to above market ground leases
 
4

 
4

Increase in operating expense related to below market ground lease
 
47

 
1


Future aggregate net amortization of the acquired lease intangibles as of March 31, 2016, is as follows (in thousands):
 
Net Decrease in 
Revenue
 
Net Increase in 
Expenses
2016
$
(2,935
)
 
$
18,218

2017
(2,522
)
 
22,288

2018
(2,234
)
 
20,481

2019
(2,126
)
 
16,603

2020
(2,047
)
 
14,441

Thereafter
(8,290
)
 
73,450

Total
$
(20,154
)

$
165,481

 
As of March 31, 2016, the weighted average amortization period for asset lease intangibles and liability lease intangible is 16 and 12 years, respectively.
 
Note 5. Other Assets
 
Other assets consisted of the following as of March 31, 2016 and December 31, 2015 (in thousands):
 
 
March 31,
2016
 
December 31,
2015
Straight line rent receivable
$
18,803

 
$
15,584

Lease inducements, net
6,151

 
4,970

Escrows
4,688

 
4,788

Earnest deposits
143

 
343

Note receivable
20,815

 
20,620

Leasing commissions, net
1,061

 
1,052

Prepaid expenses and other
7,996

 
5,926

Total
$
59,657


$
53,283

 

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Note 6. Debt
 
The following is a summary of debt as of March 31, 2016 and December 31, 2015 (in thousands):
 
March 31,
2016
 
December 31,
2015
 
Fixed interest mortgage notes
$
89,157

(1)
$
89,664

(2)
Variable interest mortgage note
25,729

(3)
4,262

(4)
Total mortgage debt
114,886


93,926

 
$750 million unsecured revolving credit facility bearing variable interest of LIBOR plus 1.20%, due September 2019.
121,000

 
395,000

 
$150 million senior unsecured notes bearing fixed interest of 4.03% to 4.74%, due January 2023 to 2031.
150,000

 
—

 
Total principal
385,886


488,926

 
Unamortized deferred financing cost
(6,345
)
 
(5,985
)
 
Unamortized fair value adjustment
615

 
674

 
Total debt
$
380,156


$
483,615

 
(1)
Fixed interest mortgage notes, bearing interest from 4.71% to 6.58%, with a weighted average interest rate of 5.40%, and due in 2016, 2017, 2019, 2020, 2021 and 2022 collateralized by 11 properties with a net book value of $143,725.
(2)
Fixed interest mortgage notes, bearing interest from 4.71% to 6.58%, with a weighted average interest rate of 5.40%, and due in 2016, 2017, 2019, 2020, 2021 and 2022 collateralized by 11 properties with a net book value of $145,038.
(3)
Variable interest mortgage notes, bearing variable interest of LIBOR plus 2.75% to 3.25%, with a weighted average interest rate of 3.6% and due in 2017 and 2018, collateralized by three properties with a net book value of $38,766.
(4)
Variable interest mortgage note bearing variable interest of LIBOR plus 2.75% and due in 2017, collateralized by one property with a net book value of $5,994.

The unsecured revolving credit facility (“Credit Agreement”) has a maturity date of September 18, 2019 and includes a one year extension option. Borrowings under the Credit Agreement bear interest on the outstanding principal amount at a rate which is determined by the Trust’s credit rating, currently equal to LIBOR plus 1.20%. In addition, the Credit Agreement includes a facility fee equal to 0.25% per annum, which is determined by the Trust’s investment grade rating under the Credit Agreement.

The Credit Agreement includes a swingline loan commitment for up to 10% of the maximum principal amount and provides an accordion feature allowing the Trust to increase borrowing capacity by up to an additional $350 million, subject to customary terms and conditions, resulting in a maximum borrowing capacity of $1.1 billion. 

The Credit Agreement contains financial covenants that, among other things, require compliance with leverage and coverage ratios and maintenance of minimum tangible net worth, as well as covenants that may limit the Trust’s and the Operating Partnership’s ability to incur additional debt or make distributions. The Trust may, at any time, voluntarily prepay any loan under the Credit Agreement in whole or in part without premium or penalty. As of March 31, 2016, the Trust was in compliance with all financial covenants.
 
The Credit Agreement includes customary representations and warranties by the Operating Partnership, the Trust, and each other guarantor and imposes customary covenants on the Operating Partnership, the Trust, and each other guarantor. The Credit Agreement also contains customary events of default, and if an event of default occurs and continues, the Operating Partnership is subject to certain actions by the administrative agent, including without limitation, the acceleration of repayment of all amounts outstanding under the Credit Agreement.
 
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 investment grade rating of the Trust, the Operating Partnership, and its subsidiaries as follows:

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Credit Rating
 
Adjusted LIBOR Rate Loans
and Letter of Credit Fee
 
Base Rate Loans
At Least A- or A3
 
LIBOR + 0.85%
 
—
%
At Least BBB+ or BAA1
 
LIBOR + 0.90%
 
—
%
At Least BBB or BAA2
 
LIBOR + 1.00%
 
0.10
%
At Least BBB- or BAA3
 
LIBOR + 1.20%
 
0.20
%
Below BBB- or BAA3
 
LIBOR + 1.55%
 
0.60
%
 
As of March 31, 2016, there were $121.0 million of borrowings outstanding under the unsecured revolving credit facility and $294.6 million available for the Trust to borrow without adding additional properties to the unencumbered borrowing base of assets, as defined by the Credit Agreement. Also, the Trust had an additional $334.4 million of availability under its unsecured revolving credit facility as of March 31, 2016 which is subject to customary property underwriting standards.

On January 7, 2016, the Operating Partnership issued and sold $150.0 million aggregate principal amount of senior notes, comprised of (i) $15.0 million aggregate principal amount of 4.03% Senior Notes, Series A, due January 7, 2023 (the “Series A Notes”), (ii) $45.0 million aggregate principal amount of 4.43% Senior Notes, Series B, due January 7, 2026 (the “Series B Notes”), (iii) $45.0 million aggregate principal amount of 4.57% Senior Notes, Series C, due January 7, 2028 (the “Series C Notes”) and (iv) $45.0 million aggregate principal amount of 4.74% Senior Notes, Series D, due January 7, 2031 (the “Series D Notes,” and together with the Series A Notes, the Series B Notes, and the Series C Notes, the “Notes”).
 
Certain properties have mortgage debt that contains financial covenants. As of March 31, 2016, the Trust was in compliance with all mortgage debt financial covenants.

Scheduled principal payments due on debt as of March 31, 2016, are as follows (in thousands):
2016
$
9,178

2017
40,688

2018
22,765

2019
141,081

2020
5,521

Thereafter
166,653

Total Payments
$
385,886

 
As of March 31, 2016, the Trust had total consolidated indebtedness of approximately $385.9 million. The weighted average interest rate on consolidated indebtedness was 3.76% (based on the 30-day LIBOR rate as of March 31, 2016, of 0.44%).

For the three month periods ended March 31, 2016 and 2015, the Trust incurred interest expense on its debt of $3.8 million and $1.4 million, respectively.
 
Note 7. Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities consisted of the following as of March 31, 2016 and December 31, 2015 (in thousands):
 
March 31,
2016
 
December 31,
2015
 Embedded derivatives
$
8,610

 
$
8,149

 Security deposits
4,043

 
4,038

 Prepaid rent
4,117

 
2,778

 Contingent consideration
2,075

 
2,559

 Accrued interest
1,589

 
22

 Accrued expenses and other
8,514

 
6,927

Total
$
28,948

 
$
24,473


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Note 8. Stock-based Compensation
 
The Trust follows ASC 718, Compensation - Stock Compensation (“ASC 718”), in accounting for its share-based payments. This guidance requires measurement of the cost of employee services received in exchange for stock compensation based on the grant-date fair value of the employee stock awards. This cost is recognized as compensation expense ratably over the employee’s requisite service period. Incremental compensation costs arising from subsequent modifications of awards after the grant date must be recognized when incurred. Share-based payments classified as liability awards are marked to fair value at each reporting period.
 
Certain of the Trust’s employee stock awards vest only upon the achievement of performance targets. ASC 718 requires recognition of compensation cost only when achievement of performance conditions is considered probable. Consequently, the Trust’s determination of the amount of stock compensation expense requires a significant level of judgment in estimating the probability of achievement of these performance targets. Additionally, the Trust must make estimates regarding employee forfeitures in determining compensation expense. Subsequent changes in actual experience are monitored and estimates are updated as information is available.
 
In connection with the IPO, the Trust adopted the 2013 Equity Incentive Plan (“2013 Plan”), which made available 600,000 common shares to be administered by the compensation and nominating governance committee of the Board of Trustees (the “Committee”). On August 7, 2014, at the Annual Meeting of Shareholders of Physicians Realty Trust, the Trust’s shareholders approved an amendment to the 2013 Plan to increase the number of common shares authorized for issuance under the 2013 Plan by 1,850,000 common shares, for a total of 2,450,000 common shares.
 
The Committee has broad discretion in administering the terms of the 2013 Plan. Restricted common shares granted under the 2013 Plan are eligible for dividends as well as the right to vote. In the three month period ended March 31, 2016, the Trust granted a total of 141,381 restricted common shares with a total value of $2.5 million to its officers and certain of its employees, which have a one-year vesting period for officer award-recipients and a three-year vesting period for employee award-recipients.

A summary of the status of the Trust’s non-vested restricted common shares as of March 31, 2016 and changes during the three month period then ended follow:
 
Common Shares
 
Weighted
Average Grant
Date Fair Value
Non-vested at December 31, 2015
311,839

 
$
14.17

Granted
141,381

 
17.66

Vested
(81,535
)
 
15.98

Forfeited
(326
)
 
15.36

Non-vested at March 31, 2016
371,359

 
$
15.10

 
For all service awards, the Trust records compensation expense for the entire award on a straight-line basis (or, if applicable, on the accelerated method) over the requisite service period. For the three month periods ended March 31, 2016 and 2015, the Trust recognized non-cash share compensation of $0.9 million and $0.7 million, respectively. Unrecognized compensation expense at March 31, 2016 was $3.7 million. The Trust’s compensation expense recorded in connection with grants of restricted common shares reflects an initial estimated cumulative forfeiture rate of 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.
 
Restricted Share Units:
 
In March 2016, under the 2013 Plan, the Trust granted restricted share units at a target level of 141,337 to its officers and trustees, which are subject to certain performance, timing, and market conditions and a three-year and two-year service period for officers and trustees, respectively. In addition, each restricted share unit contains one dividend equivalent. The recipient will accrue dividend equivalents on awarded share units equal to the cash dividend that would have been paid on the awarded share unit had the awarded share unit been an issued and outstanding common share on the record date for the dividend.
 

17
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Approximately 80% of the restricted share units issued to officers vest based on certain market conditions. The market conditions were valued with the assistance of independent valuation specialists. The Trust utilized a Monte Carlo simulation to calculate the weighted average grant date fair value of $28.50 per unit for the March 2016 grant using the following assumptions:
 
Volatility
20.3
%
Dividend assumption
reinvested

Expected term in years
2.8

Risk-free rate
1.07
%
Share price (per share)
$
17.67

 
The remaining 20% of the restricted share units issued to officers, and 100% of restricted share units issued to trustees, vest based upon certain performance or timing conditions. With respect to the performance conditions of the March 2016 grant, the grant date fair value of $17.67 per unit was based on the share price at the date of grant. The combined weighted average grant date fair value of the March 2016 restricted share units issued to officers is $26.33 per unit.
 
The following is a summary of the activity in the Trust’s restricted share units during the three months ended March 31, 2016: 
 
Restricted 
Share Units
 
Weighted
Average Grant
Date Fair Value
Non-vested at December 31, 2015
171,886

 
$
18.48

Granted
141,337

 
24.08

Vested
(20,481
)
 
15.87

Non-vested at March 31, 2016
292,742

 
$
21.37


For the three month periods ended March 31, 2016 and 2015, the Trust recognized non-cash share unit compensation expense of $0.4 million and $0.1 million, respectively. Unrecognized compensation expense at March 31, 2016 was $4.7 million.
 
Note 9. Fair Value Measurements
 
ASC Topic 820, Fair Value Measurement (“ASC 820”), requires certain assets and liabilities be reported and/or disclosed 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.
 
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 or liability. 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.
 
The Trust has three derivative instruments at March 31, 2016 consisting of (1) the two embedded derivatives detailed in the Redeemable Noncontrolling Interests - Operating Partnership and Partially Owned Properties section of Note 2 (Summary of Significant Accounting Policies) and (2) one interest rate swap.
 
Neither the embedded derivatives nor the interest rate swap are traded on an exchange.  The Trust’s derivative liabilities are recorded at fair value based on a variety of observable inputs including contractual terms, interest rate curves,

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yield curves, measure of volatility, and correlations of such inputs. The Trust measures its derivatives at fair value on a recurring basis. The fair values are based on Level 2 inputs described above.
 
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 March 31, 2016.
 
The carrying amounts of cash and cash equivalents, tenant receivables, payables, and accrued interest are reasonable estimates of fair value because of the short term maturities of these instruments. Fair values for real estate loans receivable and mortgage debt are estimated based on rates currently prevailing for similar instruments of similar maturities and are based primarily on Level 2 inputs.
 
The following table presents the fair value of the Trust’s financial instruments (in thousands): 
 
March 31,
2016
 
December 31,
2015
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Real estate loans receivable
$
35,937

 
$
35,937

 
$
39,349

 
$
39,349

Credit facility
$
(121,000
)
 
$
(121,000
)
 
$
(395,000
)
 
$
(395,000
)
Notes payable
$
(150,000
)
 
$
(150,000
)
 
$
—

 
$
—

Mortgage debt
$
(115,501
)
 
$
(116,060
)
 
$
(94,600
)
 
$
(95,275
)
Derivative liabilities
$
(8,638
)
 
$
(8,638
)
 
$
(8,216
)
 
$
(8,216
)

Note 10. Tenant Operating Leases
 
The Trust is lessor of medical office buildings and other healthcare facilities. Leases have expirations from 2016 through 2045. As of March 31, 2016, the future minimum rental payments on non-cancelable leases, exclusive of expense recoveries, were as follows (in thousands):
2016
$
104,216

2017
136,608

2018
131,416

2019
126,264

2020
121,738

Thereafter
881,573

Total
$
1,501,815

 
Note 11. Rent Expense
 
The Trust leases the rights to parking structures at three of its properties, the air space above one property, and the land upon which nineteen of its properties are located from third party land owners pursuant to separate leases. The leases require fixed rental payments and may also include escalation clauses and renewal options. These leases have terms up to 90 years remaining, excluding extension options. As of March 31, 2016, the future minimum lease obligations under non-cancelable parking, air, and ground leases were as follows (in thousands):
2016
$
1,183

2017
1,610

2018
1,660

2019
1,704

2020
1,751

Thereafter
27,087

Total
$
34,995

 

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Rent expense for the parking, air, and ground leases of $0.4 million and $0.4 million for the three month periods ended March 31, 2016 and 2015, respectively, are reported in operating expenses in the consolidated statements of operations.

Note 12. Earnings Per Share
 
The following table shows the amounts used in computing the Trust’s basic and diluted earnings per share (in thousands, except share and per share data):
 
 
Three Months Ended
March 31,
 
 
2016
 
2015
Numerator for earnings per share - basic:
 
 

 
 

Net income (loss)
 
$
5,424

 
$
(448
)
Net (income) loss attributable to noncontrolling interests:
 
 
 
 
Operating Partnership
 
(173
)
 
24

Partially owned properties
 
(317
)
 
(32
)
Preferred distributions
 
(548
)
 
(66
)
Numerator for earnings per share - basic

$
4,386

 
$
(522
)
Numerator for earnings per share - diluted:
 
 
 
 
Numerator for earnings per share - basic
 
$
4,386

 
$
(522
)
Operating Partnership net income
 
173

 
—

Numerator for earnings per share - diluted

$
4,559

 
$
(522
)
Denominator for earnings per share - basic and diluted:
 
 
 
 
Weighted average number of shares outstanding - basic
 
102,704,008

 
65,649,478

Effect of dilutive securities:
 
 
 
 

Noncontrolling interest - Operating Partnership units
 
3,846,459

 
—

Restricted common shares
 
162,314

 
—

Restricted share units
 
435,599

 
—

Denominator for earnings per share - diluted common shares:
 
107,148,380

 
65,649,478

Earnings per share - basic
 
$
0.04

 
$
(0.01
)
Earnings per share - diluted
 
$
0.04

 
$
(0.01
)
 
Note 13. Subsequent Events
 
On April 1, 2016, 44,685 Series A Preferred Units issued in conjunction with the Minnetonka MOB acquisition were redeemed for a total value of $9.8 million.

On April 5, 2016, the Trust announced the execution of a series of purchase and sale agreements and a letter of intent (and negotiations to purchase with respect to two medical office facilities) with regional health systems controlled by Catholic Health Initiatives (“CHI”) to acquire 52 medical office facilities (the “CHI Portfolio”) from CHI containing 3,159,495 rentable square feet located in 10 states (the “CHI Acquisition”). The purchase price for these facilities is approximately $724.9 million, which includes an obligation to fund $32.9 million of future capital improvements. The Trust expects to use proceeds from its unsecured line of credit and the proceeds from its follow-on offering of common shares of the Company completed on April 11, 2016 to fund the purchase.

The CHI Acquisition is expected to close in two or more tranches of assets during the second quarter of 2016. The first tranche is expected to close in mid May, for a total purchase price of approximately $335 million. The closing of the CHI Acquisition is subject to customary conditions to closing and, in addition, the second tranche closing is subject to certain third party approvals.

On April 11, 2016, the Trust completed a follow-on public offering of 25,875,000 common shares of beneficial interest, including 3,375,000 common shares issued upon exercise of the underwriters’ overallotment option, resulting in net proceeds to the Company of approximately $442.7 million. The Trust contributed the net proceeds of this offering to the Operating Partnership in exchange for 25,875,000 OP Units, and the Operating Partnership used the net proceeds of the public

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offering to repay borrowings under its unsecured revolving credit facility, for general corporate and working capital purposes, funding acquisitions, and expects to use the net proceeds to fund a portion of the purchase price for the CHI Acquisition.

The Trust, through subsidiaries of its Operating Partnership, closed on the below acquisitions:
Property
 
Location
 
Acquisition
Date
 
Purchase
Price
(in thousands)
Gardendale Surgery Center
 
Gardendale, AL
 
April 11, 2016
 
$
7,450

Health East Facilities
 
Minneapolis-St.Paul, MN
 
April 14, 2016
 
10,169

 
 
 
 
 
 
$
17,619



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Item 2.                                 Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion should be read in conjunction with our unaudited consolidated financial statements, including the notes to those statements, included in Part I, Item 1 of this report, and the Section entitled “Cautionary Statement Regarding Forward-Looking Statements” in this report. As discussed in more detail in the Section entitled “Cautionary Statement Regarding Forward-Looking Statements,” this discussion contains forward-looking statements, which involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause those differences include those discussed in Part I, Item 1A (Risk Factors) of this report and Part I, Item 1A (Risk Factors) of our Annual Report on Form 10-K for the Year Ended December 31, 2015.
 
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 invest in stabilized medical facility assets with initial cash yields of 6% to 9%. 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. 

As of March 31, 2016, our portfolio consisted of 167 properties located in 27 states with approximately 6,551,298 net leasable square feet, which were approximately 95.9% leased with a weighted average remaining lease term of approximately 8.8 years. As of March 31, 2016, approximately 73.8% of the net leasable square footage of our portfolio was affiliated with a healthcare delivery system or located within approximately 1/4 mile of a hospital campus. We expect to acquire between $1.0 billion to $1.25 billion of real estate during 2016, including the 2016 acquisitions described in this report.

We receive a cash rental stream from these healthcare providers under our leases. Approximately 86.2% of the annualized base rent payments from our properties as of March 31, 2016 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. Approximately 10.9% of the annualized base rent payments from our properties as of March 31, 2016 are from modified gross base stop leases which allow us to pass through certain increases in future operating expenses (e.g., property tax and insurance) to tenants for reimbursement, thus protecting us from increases in such operating expenses. 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 1.5% to 3.0%. 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 March 31, 2016, leases representing 3.0%, 5.1%, and 5.5% of leasable square feet in our portfolio will expire in 2016, 2017, and 2018, respectively.

We have entered into an unsecured credit facility in the maximum principal amount of $750 million and intend to use borrowings under the facility to finance future acquisitions and developments, fund tenant improvements, leasing commissions to third parties, capital expenditures, provide for working capital and for other general corporate purposes. The unsecured credit facility includes a swingline loan commitment for up to 10% of the maximum principal amount and provides an accordion feature allowing us to increase borrowing capacity by up to an additional $350 million, subject to customary terms and conditions, resulting in a maximum borrowing capacity of $1.1 billion. As of March 31, 2016, we had approximately $114.9 million of mortgage indebtedness outstanding secured by first mortgages on certain of our properties, $121.0 million of outstanding borrowings under our unsecured credit facility, and $150.0 million of outstanding notes payable.
 
During the quarterly period ended March 31, 2016, we completed acquisitions of 16 operating healthcare properties and 2 condominium units located in 13 states with approximately 751,961 net leasable square feet for an aggregate purchase price of approximately $201.8 million. In addition, we funded a single mezzanine loan investment totaling $0.5 million. Acquisitions are detailed in Note 3 to our consolidated financial statements included in Item 1 of this report.

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Table of Contents

We have grown our portfolio of gross real estate investments from approximately $124 million at the time of our IPO in July 2013 to approximately $1.9 billion as of March 31, 2016. As of April 29, 2016, we have 134,323,712 common shares outstanding.

On January 7, 2016, our Operating Partnership issued and sold $150 million aggregate principal amount of senior notes, comprised of (i) $15,000,000 aggregate principal amount of 4.03% Senior Notes, Series A, due January 7, 2023 (the “Series A Notes”), (ii) $45,000,000 aggregate principal amount of 4.43% Senior Notes, Series B, due January 7, 2026 (the “Series B Notes”), (iii) $45,000,000 aggregate principal amount of 4.57% Senior Notes, Series C, due January 7, 2028 (the “Series C Notes”) and (iv) $45,000,000 aggregate principal amount of 4.74% Senior Notes, Series D, due January 7, 2031 (the “Series D Notes,” and together with the Series A Notes, the Series B Notes, and the Series C Notes, the “Notes”). The proceeds of the Notes were used to repay borrowings under our unsecured revolving credit facility, for general corporate and working capital purposes, and for funding acquisitions.

On January 25, 2016, we completed a follow-on public offering of 21,275,000 common shares of beneficial interest, including 2,775,000 common shares issued upon exercise of the underwriters’ overallotment option, resulting in net proceeds to us of approximately $321.1 million. We contributed the net proceeds of this offering to our Operating Partnership in exchange for 21,275,000 OP Units, and our Operating Partnership used the net proceeds of the public offering to repay borrowings under our unsecured revolving credit facility, for general corporate and working capital purposes, and for funding acquisitions.

On March 18, 2016, we announced that our Board of Trustees authorized and we declared a cash distribution of $0.225 per common share for the quarterly period ended March 31, 2016. The distribution was paid on April 18, 2016 to common shareholders and OP Unit holders of record as of the close of business on April 1, 2016.

We are a Maryland real estate investment trust and elected to be taxed as a REIT for U.S. federal income tax purposes beginning with our short taxable year ended December 31, 2013. We conduct our business through an UPREIT structure in which our properties are owned by our Operating Partnership directly or through limited partnerships, limited liability companies or other subsidiaries. We are the sole general partner of our Operating Partnership and, as of March 31, 2016, own approximately 96.5% of the OP Units.
 
Recent Developments
 
Preferred OPU Redemption

On April 1, 2016, 44,685 Series A Preferred Units issued in conjunction with the Minnetonka MOB acquisition were redeemed for a total value of $9.8 million.

CHI Medical Office Facility Portfolio Acquisition

On April 5, 2016, we announced the execution of a series of purchase and sale agreements and a letter of intent (and negotiations to purchase with respect to two medical office facilities) with regional health systems controlled by Catholic Health Initiatives (“CHI”) to acquire 52 medical office facilities (the “CHI Portfolio”) from CHI containing 3,159,495 rentable square feet located in 10 states (the “CHI Acquisition”). The purchase price for these facilities is approximately $724.9 million, which includes $32.9 million of future capital improvements. We expect to use proceeds from our unsecured line of credit and the proceeds from our follow-on offering of common shares of the Company completed on April 11, 2016 to fund the purchase.

The CHI Acquisition is expected to close in two or more tranches of assets during the second quarter of 2016. The first tranche is expected to close in mid May, for a total purchase price of approximately $335 million. The closing of the CHI Acquisition is subject to customary conditions to closing and, in addition, the second tranche closing is subject to certain third party approvals.

April 2016 Follow-on Public Offering

On April 11, 2016, we completed a follow-on public offering of 25,875,000 common shares of beneficial interest, including 3,375,000 common shares issued upon exercise of the underwriters’ overallotment option, resulting in net proceeds to us of approximately $442.7 million. We contributed the net proceeds of this offering to our Operating Partnership in exchange for 25,875,000 OP Units, and our Operating Partnership used the net proceeds of the public offering to repay borrowings under our unsecured revolving credit facility, for general corporate and working capital purposes, and for funding acquisitions, and expects to use the net proceeds to fund a portion of the purchase price for the CHI Acquisition.


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Table of Contents

Investment Activity
 
Since March 31, 2016, we completed acquisitions of 3 operating healthcare properties located in 2 states with approximately 51,629 net leasable square feet for an aggregate purchase price of approximately $17.6 million. Investment activity since March 31, 2016 is summarized below:
Property
 
Location
 
Acquisition
Date
 
Purchase
Price
(in thousands)
Gardendale Surgery Center
 
Gardendale, AL
 
April 11, 2016
 
$
7,450

Health East Facilities
 
Minneapolis-St.Paul, MN
 
April 14, 2016
 
10,169

 
 
 
 
 
 
$
17,619


Revenues
 
Revenues consist primarily of the rental revenues and property operating expense recoveries we collect from tenants pursuant to our leases. Additionally, we recognize certain cash and non-cash revenues. These cash and non-cash revenues are highlighted below.
 
Rental revenues. Rental revenues represent rent under existing leases that is paid by our tenants, straight-lining of contractual rents and below-market lease amortization reduced by lease inducements and above-market lease amortization.
 
Expense recoveries. Certain of our leases require our tenants to make estimated payments to us to cover their proportional share of operating expenses, including but not limited to real estate taxes, property insurance, routine maintenance and repairs, utilities, and property management expenses. We collect these estimated expenses and are reimbursed by our tenants for any actual expenses in excess of our estimates or reimburse tenants if our collected estimates exceed our actual operating expenses. The net reimbursed operating expenses are included in revenues as expense recoveries.
 
We have certain tenants with absolute net leases. Under these lease agreements, the tenant is responsible for operating and building expenses. For absolute net leases, we do not recognize operating expense or expense recoveries.
 
Interest income on real estate loans and other. Represents interest income on mezzanine loans, term loans, notes receivable, income generated on tenant improvements, changes in the fair value of derivative liabilities, and other. Interest income on the loans are recognized as earned based on the terms of the loans subject to evaluation of collectability risks.
 
Expenses
 
Expenses consist primarily of interest expense, general and administrative costs associated with operating our properties, operating expenses of our properties, depreciation and amortization, and costs we incur to acquire properties.
 
Interest expense. We recognize the interest expense we incur on our borrowings as interest expense. Additionally, we incur amortization expense for charges such as legal fees, commitment fees and arrangement fees that reflect costs incurred with arranging certain debt financings. We generally recognize these costs over the term of the respective debt instrument for which the costs were incurred as a component of interest expense.
 
General and administrative. General and administrative expenses include certain expenses such as compensation, accounting, legal and other professional fees as well as certain other administrative and travel costs, and expenses related to bank charges, franchise taxes, corporate filing fees, exchange listing fees, officer and trustee insurance costs and other costs associated with being a public company.
 
Operating Expenses. Operating expenses include property operating expenses such as real estate taxes, property insurance, routine maintenance and repairs, utilities and third party property management expenses, some of which are reimbursed to us by tenants under the terms of triple net leases.
 
Depreciation and amortization. We incur depreciation and amortization expense on all of our long-lived assets. This non-cash expense is designed under generally accepted accounting principles, or GAAP, to reflect the economic useful lives of our assets.


24
Table of Contents

Acquisition expenses. Acquisition costs are costs we incur in pursuing and closing property acquisitions accounted for as business combinations. These costs include legal, accounting, valuation, other professional or consulting fees and the compensation of certain employees who dedicate substantially all of their time to acquisition related job functions. We account for acquisition-related costs as expenses in the period in which the costs are incurred and the services are received.
 
Equity in income of unconsolidated entity. We recognize our 40% share of earnings and losses from the entity that owns the land under Crescent City Surgical Centre.
 
Cash Flow
 
Cash flows from operating activities. Cash flows from operating activities are derived largely from net income by adjusting our revenues for those amounts not collected in cash during the period in which the revenue is recognized and for cash collected that was billed in prior periods or will be billed in future periods. Net income is further adjusted by adding back expenses charged in the period that is not paid for in cash during the same period. We expect to make our distributions based largely from cash provided by operations.
 
Cash flows from investing activities. Cash flows from investing activities consist of cash that is used during a period for making new investments and capital expenditures, offset by cash provided from sales of real estate investments.
 
Cash flows from financing activities. Cash flows from financing activities consist of cash we receive from debt and equity financings. This cash provides the primary basis for investments in new properties and capital expenditures. While we may invest a portion of our cash from operations into new investments, as a result of the distribution requirements to maintain our REIT status, it is likely that additional debt or equity financings will finance the majority of our investment activity. Cash used in financing activities consists of repayment of debt and distributions paid to shareholders and OP Unit holders.

Three months ended March 31, 2016 compared to the three months ended March 31, 2015.
 
The following table summarizes our results of operations for the three months ended March 31, 2016 and the three months ended March 31, 2015 (in thousands):
 
2016
 
2015
 
Change
 
%
Revenues:
 

 
 

 
 

 
 

Rental revenues
$
34,855

 
$
20,341

 
$
14,514

 
71.4
 %
Expense recoveries
7,903

 
3,536

 
4,367

 
123.5
 %
Interest income on real estate loans and other
1,376

 
607

 
769

 
126.7
 %
Total revenues
44,134

 
24,484

 
19,650

 
80.3
 %
Expenses:
 

 
 

 
 

 
 

Interest expense
4,197

 
1,710

 
2,487

 
145.4
 %
General and administrative
4,121

 
3,352

 
769

 
22.9
 %
Operating expenses
11,037

 
5,709

 
5,328

 
93.3
 %
Depreciation and amortization
16,010

 
8,240

 
7,770

 
94.3
 %
Acquisition expenses
3,377

 
5,932

 
(2,555
)
 
(43.1
)%
Total expenses
38,742

 
24,943

 
13,799

 
55.3
 %
Income (loss) before equity in income of unconsolidated entity and loss on sale of investment property:
5,392

 
(459
)
 
5,851

 
NM

Equity in income of unconsolidated entity
32

 
26

 
6

 
23.1
 %
Loss on sale of property
—

 
(15
)
 
$
15

 
(100.0
)%
Net income (loss)
$
5,424

 
$
(448
)
 
$
5,872

 
NM

 NM = Not Meaningful
 
Revenues
 
Total revenues increased $19.7 million, or 80.3%, for the three months ended March 31, 2016 as compared to the three months ended March 31, 2015. An analysis of selected revenues follows.

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Table of Contents

 
Rental revenues. Rental revenues increased $14.5 million, or 71.4%, from $20.3 million for the three months ended March 31, 2015 to $34.9 million for the three months ended March 31, 2016. The increase in rental revenues primarily resulted from our 2016 and 2015 acquisitions which resulted in additional rental revenue of $1.5 million and $13.0 million, respectively.
 
Expense recoveries. Expense recoveries increased $4.4 million, or 123.5%, for the three months ended March 31, 2016 as compared to the three months ended March 31, 2015. The increase in expense recoveries primarily resulted from our 2016 and 2015 acquisitions which resulted in additional expense recoveries of $0.3 million and $3.9 million, respectively.
 
Interest income on real estate loans and other. Interest income on real estate loans and other increased $0.8 million for the three months ended March 31, 2016 as compared to the three months ended March 31, 2015. A $0.4 million increase is due to interest on mezzanine loan transactions completed during the prior twelve months, a $0.2 million increase is due to interest income on Preferred OP Unit (“POPU”) loans, and an increase of $0.2 million is due to other items.
 
Expenses
 
Total expenses increased by $13.8 million, or 55.3%, for the three months ended March 31, 2016 as compared to the three months ended March 31, 2015. An analysis of selected expenses follows.
 
Interest expense. Interest expense for the three months ended March 31, 2016 was $4.2 million compared to $1.7 million for the three months ended March 31, 2015, representing an increase of $2.5 million, or 145.4%. An increase of $1.6 million resulted from the issuance of our Senior Notes, an increase of $0.2 million was the result of an increase in interest on new mortgage debt, and an increase of $0.3 million resulted from outstanding balances, non-use fees, and facility fees on our revolving line of credit. The remaining $0.4 million of increased interest expense was due to the amortization of deferred financing costs.

General and administrative. General and administrative expenses increased $0.8 million or 22.9%, from $3.4 million during the three months ended March 31, 2015 to $4.1 million during the three months ended March 31, 2016. The increase included salaries and benefits of $0.3 million (including non-cash share compensation of $0.1 million) and increased professional fees of $0.3 million.
 
Operating expenses. Operating expenses increased $5.3 million or 93.3%, from $5.7 million during the three months ended March 31, 2015 to $11.0 million during the three months ended March 31, 2016. The increase is primarily due to our 2016 and 2015 property acquisitions which resulted in additional operating expenses of $0.4 million and $4.8 million, respectively.
 
Depreciation and amortization. Depreciation and amortization increased $7.8 million, or 94.3%, from $8.2 million during the three months ended March 31, 2015 to $16.0 million during the three months ended March 31, 2016. The increase is primarily due to our 2016 and 2015 property acquisitions which resulted in additional depreciation and amortization of $0.7 million and $7.1 million, respectively.
 
Acquisition expenses. Acquisition expenses decreased $2.6 million, or 43.1%, from $5.9 million during the three months ended March 31, 2015 to $3.4 million during the three months ended March 31, 2016. During the three month periods ending March 31, 2016 and 2015, we acquired $171.2 million and $224.1 million, respectively, of real estate that were considered business combinations and as such, the related acquisition costs were expensed.

Equity in income of unconsolidated entity. The change in equity income from unconsolidated entity for the three months ended March 31, 2016 compared to the three months ended March 31, 2015 is not significant.
 
Loss on sale of property. On March 26, 2015, the Trust sold a 20,329 square foot medical office building located in Ohio for approximately $1.6 million, resulting in an insignificant loss. We have not disposed of any properties during the three months ended March 31, 2016.
 
Cash Flows
 
Three months ended March 31, 2016 compared to the three months ended March 31, 2015.

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2016
 
2015
Cash provided by operating activities
20,148


9,725

Cash used in investing activities
(197,038
)

(209,376
)
Cash provided by financing activities
196,653


219,502

Increase in cash and cash equivalents
$
19,763


$
19,851

 
Cash flows from operating activities. Cash flows provided by operating activities was $20.1 million during the three months ended March 31, 2016 compared to $9.7 million during the three months ended March 31, 2015, representing an increase of $10.4 million. This change is attributable to the increased operating cash flows resulting from our 2016 and 2015 acquisitions.
 
Cash flows from investing activities. Cash flows used in investing activities was $197.0 million during the three months ended March 31, 2016 compared to cash flows used in investing activities of $209.4 million during the three months ended March 31, 2015, representing a change of $12.3 million. The decrease in cash flows used in investing activities was primarily attributable to our $7.4 million decrease in acquisition activity over the prior year.
 
Cash flows from financing activities. Cash flows provided by financing activities was $196.7 million during the three months ended March 31, 2016 compared to cash flows provided by financing activities of $219.5 million during the three months ended March 31, 2015, representing an decrease of $22.8 million. The 2016 activity was primarily attributable to sales of our common shares, resulting in net proceeds of $321.2 million, $150.0 million of proceeds from the credit facility, and $150.0 million from our issuance of senior notes. These were partially offset by the $424.0 million payoff of our revolving credit facility and $19.7 million of dividends paid.
 
Non-GAAP Financial Measures
 
Funds From Operations (FFO) and Normalized FFO
 
We believe that information regarding FFO is helpful to shareholders and potential investors because it facilitates an understanding of the operating performance of our properties without giving effect to real estate depreciation and amortization, which assumes that the value of real estate assets diminishes ratably over time. Because real estate values have historically increased or decreased with market conditions, we believe that FFO provides a more meaningful and accurate indication of our performance. We calculate FFO in accordance with standards established by the National Association of Real Estate Investment Trusts, (“NAREIT”). NAREIT defines FFO as net income or loss (computed in accordance with GAAP) before noncontrolling interests of holders of OP units, excluding preferred distributions, gains (or losses) on sales of depreciable operating property, impairment write-downs on depreciable assets, plus real estate related depreciation and amortization (excluding amortization of deferred financing costs). Our FFO computation may not be comparable to FFO reported by other REITs that do not compute FFO in accordance with NAREIT definition or that interpret the NAREIT definition differently than we do. The GAAP measure that we believe to be most directly comparable to FFO, net income (loss), includes depreciation and amortization expenses, gains or losses on property sales, impairments and noncontrolling interests. In computing FFO, we eliminate these items because, in our view, they are not indicative of the results from the operations of our properties. To facilitate a clear understanding of our historical operating results, FFO should be examined in conjunction with net income (determined in accordance with GAAP) as presented in our financial statements. FFO does not represent cash generated from operating activities in accordance with GAAP, should not be considered to be an alternative to net income or loss (determined in accordance with GAAP) as a measure of our liquidity and is not indicative of funds available for our cash needs, including our ability to make cash distributions to shareholders.
 
We use Normalized FFO, which excludes from FFO net change in fair value of derivative financial instruments, acquisition-related expenses, acceleration of deferred financing costs, and other normalizing items. However, our use of the term Normalized FFO may not be comparable to that of other real estate companies as they may have different methodologies for computing this amount. Normalized FFO should not be considered as an alternative to net income or loss (computed in accordance with GAAP) as an indicator of our financial performance or to cash flow from operating activities (computed in accordance with GAAP) as an indicator of our liquidity, nor its indicative of funds available to fund our cash needs, including its ability to make distributions. Normalized FFO should be reviewed in connection with other GAAP measurements.
 

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The following is a reconciliation from net income (loss), the most direct financial measure calculated and presented in accordance with GAAP, to FFO and Normalized FFO (in thousands, except per share data):
 
Three Months Ended
March 31,
 
2016
 
2015
Net income (loss)
$
5,424

 
$
(448
)
Net income attributable to noncontrolling interests - partially owned properties
(317
)
 
(32
)
Preferred distributions
(548
)
 
(66
)
Depreciation and amortization expense
15,989

 
8,240

Depreciation and amortization expense - partially owned properties
(195
)
 
(100
)
Loss on the sale of investment property
—

 
15

FFO applicable to common shares and OP Units
$
20,353

 
$
7,609

FFO per common share and OP Unit
$
0.19

 
$
0.11

Net change in fair value of derivative
(40
)
 
(13
)
Acquisition related expenses
3,377

 
5,932

Normalized FFO applicable to common shares and OP Units
$
23,690

 
$
13,528

Normalized FFO per common share and OP Unit
$
0.22

 
$
0.19

 
 
 
 
Weighted average number of common shares and OP Units outstanding
107,148,380

 
69,490,587


Normalized Funds Available for Distribution (FAD)

The Company defines Normalized FAD, a non-GAAP measure, which excludes from Normalized FFO, non-cash compensation expense, straight-line rent adjustments, amortization of acquired above or below market leases and assumed debt, amortization of deferred financing costs, amortization of lease inducements, recurring capital expenditures related to tenant improvements and leasing commissions, and includes cash payments from seller master leases and rent abatement payments. The Company believes Normalized FAD provides a meaningful supplemental measure of its ability to fund its ongoing distributions. Normalized FAD should not be considered as an alternative to net income or loss attributable to controlling interest (computed in accordance with GAAP) as an indicator of the Company’s financial performance or to cash flow from operating activities (computed in accordance with GAAP) as an indicator of the Company’s liquidity. Normalized FAD should be reviewed in connection with other GAAP measurements.

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The following is a reconciliation from Normalized FFO to Normalized FAD (in thousands, except per share data):
 
Three Months Ended
March 31,
 
2016
 
2015
Normalized FFO applicable to common shares and OP Units
$
23,690

 
$
13,528

Non-cash share compensation expense
815

 
703

Straight-line rent adjustments
(3,185
)
 
(2,012
)
Amortization of acquired above/below market leases/assumed debt
745

 
222

Amortization of lease inducements
158

 
119

Amortization of deferred financing costs
448

 
293

TI/LC and recurring capital expenditures
(1,878
)
 
(1,028
)
Seller master lease and rent abatement payments
270

 
511

Normalized FAD applicable to common shares and OP Units
$
21,063

 
$
12,336

Normalized FAD per common share and OP Unit
$
0.20

 
$
0.18

 
 
 
 
Weighted average number of common shares and OP Units outstanding
107,148,380

 
69,490,587


Net Operating Income (NOI), Cash NOI, and Same-Property Cash NOI
 
NOI is a non-GAAP financial measure that is defined as net income or loss, computed in accordance with GAAP, generated from our total portfolio of properties before general and administrative expenses, acquisition-related expenses, depreciation and amortization expense, interest expense, net change in the fair value of derivative financial instruments, gain or loss on the sale of investment properties, and impairment losses. We believe that NOI provides an accurate measure of operating performance of our operating assets because NOI excludes certain items that are not associated with management of the properties. Our use of the term NOI may not be comparable to that of other real estate companies as they may have different methodologies for computing this amount.
 
Cash NOI is a non-GAAP financial measure which excludes from NOI straight-line rent adjustments, amortization of acquired above and below market leases, and other non-cash and normalizing items. Other non-cash and normalizing items include items such as the amortization of lease inducements and payments received from seller master leases and rent abatements. We believe that Cash NOI provides an accurate measure of the operating performance of our operating assets because it excludes certain items that are not associated with management of the properties. Additionally, we believe that Cash NOI is a widely accepted measure of comparative operating performance in the real estate community. Our use of the term Cash NOI may not be comparable to that of other real estate companies as such other companies may have different methodologies for computing this amount.
 
Same-Property Cash NOI is Cash NOI for the same-store portfolio which consists of properties held for the entire preceding year and not currently slated for disposition.  We do not measure Same-Property Cash NOI on a year-to-date basis.  In a year-to-date period the same-store portfolio would be different than the same-store portfolio used in any individual quarter resulting in Same-Property Cash NOI information that is not indicative of the Same-Property Cash NOI from the current same-store portfolio.
 

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The following is a reconciliation from net income (loss), the most direct financial measure calculated and presented in accordance with GAAP, to NOI, Cash NOI and Same-Property Cash NOI (in thousands):
 
 
Three Months Ended
March 31,
 
 
2016
 
2015
Net income (loss)
 
$
5,424

 
$
(448
)
General and administrative
 
4,121

 
3,352

Acquisition-related expenses
 
3,377

 
5,932

Depreciation and amortization
 
16,010

 
8,240

Interest expense
 
4,197

 
1,710

Net change in the fair value of derivative
 
(40
)
 
(13
)
Loss on the sale of investment properties
 
—

 
15

NOI
 
$
33,089

 
$
18,788

 
 
 
 
 
NOI
 
$
33,089

 
$
18,788

Straight-line rent adjustments
 
(3,185
)
 
(2,012
)
Amortization of acquired above/below market leases
 
745

 
222

Amortization of lease inducements
 
158

 
119

Seller master lease and rent abatement payments
 
270

 
511

Cash NOI
 
$
31,077

 
$
17,628

 
 
 
 
 
Cash NOI
 
$
31,077

 
$
17,628

Non-same-property cash NOI
 
15,627

 
2,500

Same-Property Cash NOI
 
$
15,450

 
$
15,128

 
Same-Property Cash NOI increased $0.3 million to $15.5 million for the three months ended March 31, 2016, as compared to the three months ended March 31, 2015.  The increase was primarily the result of a $0.5 million increase in rental revenue from rent escalations which was partially offset by a $0.2 million increase in operating expenses.

Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) and Adjusted EBITDA
 
We define EBITDA as net income or loss computed in accordance with GAAP plus depreciation and amortization, interest expense and net change in the fair value of derivative financial instruments. We define Adjusted EBITDA as net income or loss computed in accordance with GAAP plus depreciation and amortization, interest expense, net change in the fair value of derivative financial instruments, acquisition-related expenses and non-cash share compensation. We consider EBITDA and Adjusted EBITDA important measures because they provide additional information to allow management, investors, and our current and potential creditors to evaluate and compare our core operating results and our ability to service debt.

The following is a reconciliation from net income (loss), the most direct financial measure calculated and presented in accordance with GAAP, to EBITDA and Adjusted EBITDA (in thousands):
 
 
Three Months Ended
March 31,
 
 
2016
 
2015
Net income (loss)
 
$
5,424

 
$
(448
)
Depreciation and amortization
 
16,010

 
8,240

Interest expense
 
4,197

 
1,710

Net change in fair value of derivative
 
(40
)
 
(13
)
EBITDA
 
$
25,591

 
$
9,489

Acquisition-related expenses
 
3,377

 
5,932

Non-cash share compensation
 
815

 
703

Adjusted EBITDA
 
$
29,783

 
$
16,124

 

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Liquidity and Capital Resources
 
Our short-term liquidity requirements consist primarily of operating and interest expenses and other expenditures directly associated with our properties, including:
 
•
property expenses;
 
•
interest expense and scheduled principal payments on outstanding indebtedness;
 
•
general and administrative expenses; and
 
•
capital expenditures for tenant improvements and leasing commissions.
 
In addition, we will require funds for future distributions expected to be paid to our common shareholders and OP Unit holders in our Operating Partnership.
 
As of March 31, 2016, we had a total of $22.9 million of cash and cash equivalents and $294.6 million of near-term availability on our unsecured revolving credit facility. Also, we had an additional $334.4 million of availability under our unsecured revolving credit facility as of March 31, 2016 which is subject to customary property underwriting standards. We believe that our existing cash and cash equivalents, cash flow from operating activities and borrowings available under our unsecured revolving credit facility will be adequate to fund any existing contractual obligations to purchase properties and other obligations through the next twelve months. However, because of the 90% distribution requirement under the REIT tax rules under the Code, we may not be able to fund all of our future capital needs from cash retained from operations, including capital needed to make investments and to satisfy or refinance maturing obligations. As a result, we expect to rely upon external sources of capital, including debt and equity financing, to fund future capital needs. If we are unable to obtain needed capital on satisfactory terms or at all, we may not be able to make the investments needed to expand our business or to meet our obligations and commitments as they mature. We will rely upon external sources of capital to fund future capital needs, and, if we encounter difficulty in obtaining such capital, we may not be able to make future acquisitions necessary to grow our business or meet maturing obligations.

Our long-term liquidity needs consist primarily of funds necessary to pay for acquisitions, recurring and non-recurring capital expenditures and scheduled debt maturities. We expect to satisfy our long-term liquidity needs through cash flow from operations, unsecured borrowings, issuances of equity securities, and, in connection with acquisitions of additional properties, the issuance of OP Units of our Operating Partnership, and proceeds from select property dispositions and joint venture transactions.
 
We intend to invest in additional properties as suitable opportunities arise and adequate sources of financing are available. We currently are evaluating additional potential investments consistent with the normal course of our business. There can be no assurance as to whether or when any portion of these investments will be completed. Our ability to complete investments is subject to a number of risks and variables, including our ability to negotiate mutually agreeable terms with sellers and our ability to finance the investment. We may not be successful in identifying and consummating suitable acquisitions or investment opportunities, which may impede our growth and negatively affect our results of operations and may result in the use of a significant amount of management resources. We expect that future investments in properties will depend on and will be financed by, in whole or in part, our existing cash, borrowings, including under our unsecured revolving credit facility or the proceeds from additional issuances of common or preferred shares, issuances of OP Units or other securities.

On July 22, 2015, the Operating Partnership, as borrower, and we and certain subsidiaries and other affiliates of our company, as guarantors, entered into an amendment to the existing credit agreement with KeyBank National Association as administrative agent, KeyBanc Capital Markets Inc., Regions Capital Markets and BMO Capital Markets, as joint lead arrangers and joint bookrunners, Regions Capital Markets and BMO Capital Markets, as co-syndication agents, and the lenders party thereto (as amended, the “Credit Agreement”) which increased the maximum principal amount available under an unsecured revolving credit facility from $400 million to $750 million. The Credit Agreement includes a swingline loan commitment for up to 10% of the maximum principal amount and provides an accordion feature allowing us to increase borrowing capacity by up to an additional $350 million, subject to customary terms and conditions, resulting in a maximum borrowing capacity of $1.1 billion.

The Credit Agreement has a maturity date of September 18, 2019 and includes a one year extension option. Borrowings under the Credit Agreement bear interest on the outstanding principal amount at an adjusted LIBOR rate, which is based on the Trust’s investment grade rating under the Credit Agreement. As of March 31, 2016, the Trust had an investment

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grade rating from Moody’s of Baa3 and as such, borrowings under the Credit Agreement accrued interest on the outstanding principal at a rate of LIBOR plus 1.20%. The Credit Agreement includes a facility fee equal to 0.25% per annum, which is also determined by the Trust’s investment grade rating.
 
The Credit Agreement contains financial covenants that, among other things, require compliance with leverage and coverage ratios and maintenance of minimum tangible net worth, as well as covenants that may limit our and the Operating Partnership’s ability to incur additional debt or make distributions. We may, at any time, voluntarily prepay any loan under the Credit Agreement in whole or in part without premium or penalty. As of March 31, 2016, we were in compliance with all financial covenants.
 
The Credit Agreement includes customary representations and warranties by the Operating Partnership, us and each other guarantor and imposes customary covenants on the Operating Partnership, us and each other guarantor. The Credit Agreement also contains customary events of default, and if an event of default occurs and continues, the Operating Partnership is subject to certain actions by the administrative agent, including without limitation, the acceleration of repayment of all amounts outstanding under the Credit Agreement.
 
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 our investment grade rating as follows:
Investment Grade Rating
 
Adjusted LIBOR Rate Loans
and Letter of Credit Fee
 
Base Rate Loans
At Least A- or A3
 
LIBOR + 0.85%
 
—
%
At Least BBB+ or BAA1
 
LIBOR + 0.90%
 
—
%
At Least BBB or BAA2
 
LIBOR + 1.00%
 
0.10
%
At Least BBB- or BAA3
 
LIBOR + 1.20%
 
0.20
%
Below BBB- or BAA3
 
LIBOR + 1.55%
 
0.60
%
  
As of March 31, 2016, there were $121.0 million of borrowings outstanding under our unsecured revolving credit facility and $294.6 million available for us to borrow without adding additional properties to the unencumbered borrowing base of assets, as defined by the Credit Agreement.

On January 7, 2016, our Operating Partnership issued and sold $150 million aggregate principal amount of senior notes, comprised of (i) $15,000,000 aggregate principal amount of 4.03% Senior Notes, Series A, due January 7, 2023 (the “Series A Notes”), (ii) $45,000,000 aggregate principal amount of 4.43% Senior Notes, Series B, due January 7, 2026 (the “Series B Notes”), (iii) $45,000,000 aggregate principal amount of 4.57% Senior Notes, Series C, due January 7, 2028 (the “Series C Notes”) and (iv) $45,000,000 aggregate principal amount of 4.74% Senior Notes, Series D, due January 7, 2031 (the “Series D Notes,” and together with the Series A Notes, the Series B Notes, and the Series C Notes, the “Notes”). The proceeds of the Notes were used to repay borrowings under our unsecured revolving credit facility, and for general corporate and working capital purposes, and for funding acquisitions.

The note agreement covering the Notes contains covenants that are substantially similar to those contained in the Credit Agreement, including financial covenants that require compliance with leverage and coverage ratios and maintenance of minimum tangible net worth, as well as other affirmative and negative covenants that may limit, among other things, our ability to incur additional debt, make distributions or investments, incur liens and sell, transfer or dispose of assets. The note agreement also includes customary representations and warranties and customary events of default substantially similar to those contained in the Credit Agreement.

On January 25, 2016, we completed a follow-on public offering of 21,275,000 common shares of beneficial interest, including 2,775,000 common shares issued upon exercise of the underwriters’ overallotment option, resulting in net proceeds to us of approximately $321.1 million. We contributed the net proceeds of this offering to our Operating Partnership in exchange for 21,275,000 OP Units, and our Operating Partnership used the net proceeds of the public offering to repay borrowings under our unsecured revolving credit facility, for general corporate and working capital purposes, and for funding acquisitions.

On April 11, 2016, we completed a follow-on public offering of 25,875,000 common shares of beneficial interest, including 3,375,000 common shares issued upon exercise of the underwriters’ overallotment option, resulting in net proceeds to us of approximately $442.7 million. We contributed the net proceeds of this offering to our Operating Partnership in exchange for 25,875,000 OP Units, and our Operating Partnership used the net proceeds of the public offering to repay borrowings under

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our unsecured revolving credit facility, for general corporate and working capital purposes, and for funding acquisitions, and expects to use the net proceeds to fund a portion of the purchase price for the CHI Acquisition.
 
We currently do not expect to sell any of our properties to meet our liquidity needs, although we may do so in the future.
 
We intend to refinance at maturity the mortgage notes payable that have balloon payments at maturity.
 
We currently are in compliance with all debt covenants in our outstanding indebtedness.

Off-Balance Sheet Arrangements
 
As of March 31, 2016, we have no off-balance sheet debt.
 
Seasonality
 
Our business has not been and we do not expect it to become subject to material seasonal fluctuations.
 
Critical Accounting Policies
 
Our consolidated financial statements included in Part I, Item 1 of this report are prepared in conformity with GAAP for interim financial information set forth in the Accounting Standards Codification (“ASC”), as published by the Financial Accounting Standards Board (“FASB”), which require us to make estimates and assumptions regarding future events that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. We base these estimates on our experience and assumptions we believe to be reasonable under the circumstances. However, if our judgment or interpretation of the facts and circumstances relating to various transactions or other matters had been different, we may have applied a different accounting treatment, resulting in a different presentation of our financial statements. We periodically reevaluate our estimates and assumptions, and in the event they prove to be different from actual results, we make adjustments in subsequent periods to reflect more current estimates and assumptions about matters that are inherently uncertain. Please refer to our Annual Report on Form 10-K for the year ended December 31, 2015, filed with the SEC on February 29, 2016, for further information regarding the critical accounting policies that affect our more significant estimates and judgments used in the preparation of our consolidated financial statements included in Part I, Item 1 of this report.
 
REIT Qualification Requirements
 
We are subject to a number of operational and organizational requirements necessary to qualify and maintain our qualification as a REIT. If we fail to qualify as a REIT or fail to remain qualified as a REIT in any taxable year, our income would be subject to federal income tax at regular corporate rates and potentially increased state and local taxes and could incur substantial tax liabilities which could have an adverse impact upon our results of operations, liquidity and distributions to our shareholders.
 
Item 3.                                 Quantitative and Qualitative Disclosures about Market Risk
 
Our future income, cash flows and fair values relevant to financial instruments are dependent upon prevailing market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. We use certain derivative financial instruments to manage, or hedge, interest rate risks related to our borrowings. We do not use derivatives for trading or speculative purposes and only enter into contracts with major financial institutions based upon their credit rating and other factors. Our derivative instruments consist of two embedded derivatives and an interest rate swap and are recognized as liabilities on the consolidated balance sheets in accrued expenses and other liabilities and are measured at fair value. See Note 9 to our consolidated financial statements included in Item 1 to this report.
 
An interest rate swap is a contractual agreement entered into by two counterparties under which each agrees to make periodic payments to the other for an agreed period of time based on a notional amount of principal. Under the most common form of interest rate swap, known from our perspective as a floating-to-fixed interest rate swap, a series of floating, or variable, rate payments on a notional amount of principal is exchanged for a series of fixed interest rate payments on such notional amount.
 

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No assurance can be given that any future hedging activities by us will have the desired beneficial effect on our results of operations or financial condition.
 
The variable rate component of our consolidated indebtedness at March 31, 2016 is LIBOR based. Assuming no increase in the amount of our variable rate debt, if LIBOR were to increase by 100 basis points, interest expense on our variable rate debt at March 31, 2016, would increase by approximately $1.5 million annually, and if LIBOR were to decrease by 100 basis points, interest expense on our variable rate debt at March 31, 2016, would decrease by approximately $1.5 million annually.
 
Interest risk amounts are our management’s estimates and were determined by considering the effect of hypothetical interest rates on our consolidated financial instruments. These analyses do not consider the effect of any change in overall economic activity that could occur in that environment. Further, in the event of a change of that magnitude, we may take actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, these analyses assume no changes in our financial structure.
 
Indebtedness
 
As of March 31, 2016, we had total consolidated indebtedness of approximately $385.9 million. The weighted average interest rate on our consolidated indebtedness was 3.76% (based on the 30-day LIBOR rate as of March 31, 2016, of 0.44%). As of March 31, 2016, we had approximately $146.7 million, or approximately 38%, of our outstanding long-term debt exposed to fluctuations in short-term interest rates.
 
The following table sets forth certain information with respect to our consolidated indebtedness outstanding as of March 31, 2016:
(in thousands)
 
Principal
 
Fixed/Floating
Rate
 
Rate
 
 
Maturity
Senior Unsecured Revolving Credit Facility
 
$
121,000

 
Floating
 
LIBOR + 1.2%

 
 
9/18/2019
Senior Unsecured Notes
 
 
 
 
 
 
 
 
 
Series A
 
15,000

 
Fixed
 
4.03
%
 
 
1/7/2023
Series B
 
45,000

 
Fixed
 
4.43
%
 
 
1/7/2026
Series C
 
45,000

 
Fixed
 
4.57
%
 
 
1/7/2028
Series D
 
45,000

 
Fixed
 
4.74
%
 
 
1/7/2031
Canton Medical Office Building(1)
 
6,072

 
Fixed
 
5.94
%
 
 
6/6/2017
Firehouse Square
 
2,681

 
Fixed
 
6.58
%
 
 
9/6/2017
Hackley Medical Center
 
5,253

 
Fixed
 
5.93
%
 
 
1/6/2017
MeadowView Professional Center
 
10,176

 
Fixed
 
5.81
%
 
 
6/6/2017
Mid Coast Hospital Medical Office Building(2)
 
7,601

 
Fixed
 
4.90
%
(3)
 
5/16/2016
Remington Medical Commons
 
4,229

 
Floating
 
LIBOR + 2.75%

 
 
9/28/2017
Valley West Hospital Medical Office Building
 
4,739

 
Fixed
 
4.83
%
 
 
12/1/2020
Oklahoma City, OK Medical Office Building
 
7,429

 
Fixed
 
4.71
%
 
 
1/10/2021
Crescent City Surgical Center
 
18,750

 
Fixed
 
5.00
%
 
 
1/23/2019
San Antonio, TX Hospital
 
8,949

 
Fixed
 
5.00
%
 
 
6/26/2022
Savage Medical Office Building
 
5,717

 
Fixed
 
5.50
%
 
 
2/1/2022
Plaza HCA MOB
 
11,790

 
Fixed
 
6.13
%
 
 
8/1/2017
St. Luke's Cornwall MOB
 
9,500

 
Floating
 
LIBOR + 3.25%

 
 
3/21/2018
Columbia MOB
 
12,000

 
Floating
 
LIBOR + 3.25%

 
 
3/21/2018
Total principal
 
385,886

 
 
 
 

 
 
 
Unamortized deferred financing cost
 
(6,345
)
 
 
 
 
 
 
 
Unamortized fair value adjustment
 
615

 
 
 
 

 
 
 
Total
 
$
380,156

 
 
 
 

 
 
 
(1)
We own a 51.0% interest in the joint venture that owns this property. Debt shown in this schedule is the full amount of the mortgage indebtedness on this property.

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(2)
We own a 66.3% interest in the joint venture that owns this property. Debt shown in this schedule is the full amount of the mortgage indebtedness on this property.
(3)
This loan bears interest at a rate of LIBOR + 2.75%. We have entered into an interest rate swap to effectively fix the rate on this loan at 4.90% through the date of maturity.

Item 4.                                 Controls and Procedures
 
We have carried out an evaluation, under the supervision and with the participation of management, including our principal executive officer and principal financial officer, regarding the effectiveness of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of March 31, 2016, the end of the period covered by this report. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our principal executive officer and principal financial officer have concluded, as of March 31, 2016, that our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in reports filed or submitted under the Exchange Act (i) is processed, recorded, summarized and reported within the time periods specified in the Commission’s rules and forms and (ii) is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate to allow for timely decisions regarding required disclosure.
 
No changes to our internal control over financial reporting were identified in connection with the evaluation referenced above that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
PART II.        Other Information
 
Item 1.                                 Legal Proceedings
 
From time to time, we are party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of our business. We are not currently a party, as plaintiff or defendant, to any legal proceedings which, individually or in the aggregate, would be expected to have a material effect on our business, financial condition or results of operations if determined adversely to us.
 
Item 1A.                        Risk Factors
 
The following risk factors and other information included in this report should be carefully considered. The risks and uncertainties described below are not the only ones we face. You should also carefully consider the risk factors described in Part I, Item 1A (Risk Factors) of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, filed with the Commission on February 29, 2016 (the “Annual Report”). Our business, financial condition and operating results can be materially adversely affected by a number of factors, whether currently known or unknown, including, but not limited to, those described below, any one or more of which could, directly or indirectly, cause our actual results of operations and financial condition to vary materially from past, or from anticipated future, results of operations and financial condition. Any of these factors, in whole or in part, could materially and adversely affect our business, financial condition, results of operations and common stock price. In such case, the market value of our securities could be detrimentally affected, and investors may lose part or all of the value of their investment.

The following discussion of risk factors contains forward-looking statements. These risk factors and the risk factors described in Part I, Item 1A (Risk Factors) of the Annual Report may be important to understanding any statement in this report or elsewhere. The following information should be read in conjunction with our consolidated and combined financial statements included and related notes in Part I, Item 1, “Financial Statements” and Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this report.

Because of the following factors, as well as other factors affecting our financial condition and operating results, past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods. You should carefully consider the risks and uncertainties described below as well as the risk factors described in Part I, Item 1A (Risk Factors) of the Annual Report.
    

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Risks Related to the CHI Acquisition

Failure to complete the CHI Acquisition could negatively impact our business, prospects, financial condition and results of operations.

The CHI Acquisition is subject to the satisfaction of certain conditions to closing, including receipt of certain third party approvals with respect to the sale of 22 of the 51 properties included in the CHI Portfolio, and other customary conditions to closing. Assuming the satisfaction or waiver of all other outstanding conditions, the acquisitions are anticipated to occur in a series of two or more closings, with the first closing of some or all of the 29 properties that do not require third party approvals anticipated to occur in the second quarter of 2016 and the second closing to occur promptly following the date on which certain third party approvals are obtained, or at such other times as the parties may agree. Five properties in the CHI Portfolio are currently only subject to a non-binding LOI and no definitive agreements regarding the acquisition of such properties has been executed.
    
There can be no assurance that any or all of the conditions to closing, including obtaining third party approvals, will be satisfied or, if satisfied, that we will complete the acquisition of one or more of the properties comprising the CHI Portfolio, or the timing of any such closings. Moreover, the non-binding LOI described above remain subject to negotiation and execution of definitive agreements and customary closing conditions and there can be no assurance the Company will complete any of these transactions or acquire any of these properties.

In addition, we intend to use all or a significant portion of the net proceeds of the April 2016 follow-on public offering of our common shares (the “April 2016 Offering”) to fund a portion of the aggregate purchase price of the CHI Acquisition. However, we will be required to fund the remaining aggregate purchase price through borrowings under our unsecured revolving credit facility, additional issuances of senior indebtedness and/or cash available on hand. We have also obtained a fully committed $400.0 million one-year senior unsecured bridge loan from KeyBank N.A. to be drawn upon in the event that we are unable to otherwise fund the aggregate purchase price of the CHI Acquisition. The bridge loan is subject to a LIBOR rate or a Base rate plus applicable margin based on our credit rating, with variable increases based upon the length of time that the debt remains outstanding. The bridge loan is also subject to negotiation and execution of definitive loan documentation and draws on the bridge loan are subject to customary conditions to funding.

If the CHI Acquisition is not completed, in whole or in part, for any reason, we may be subject to several risks, including, but not limited to, the following:

•
the requirement that, under certain circumstances, we may be required to forfeit an initial deposit of $6.0 million;

•
the incurrence of substantial legal, accounting, financial advisory and costs relating to the transaction that are payable whether or not the transaction is completed;

•
we will have issued a significant number of additional common shares in the April 2016 Offering without realizing a corresponding increase in earnings and cash flow from acquiring the CHI properties;

•
the focus of our management being directed toward the transaction and integration planning instead of on our core business and other opportunities; and

•
we will have broad authority to use the net proceeds of the April 2016 Offering for other general corporate purposes, including funding acquisitions and other investments and the repayment of debt that may not be accretive to our results of operations.

If the transaction is not completed, these risks may materially adversely affect our business, financial condition, operating results and cash flows, including our ability to service debt and to make distributions to our shareholders.

The intended benefits of the CHI Acquisition may not be realized, and if we are unable to successfully integrate the operations of the acquired properties, our business, prospects, financial condition and results of operations may be negatively affected.

We may not be able to achieve the anticipated benefits of the CHI Acquisition, even if the transaction is consummated. The CHI Acquisition poses risks associated with acquisition activities. Such risks include, without limitation, the following:


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•
the inability to successfully integrate the operations, maintain consistent standards, controls, policies and procedures, or realize the anticipated benefits of the CHI Acquisition within the anticipated timeframe, or at all;

•
certain properties in the CHI Portfolio are located in new markets where we face risks associated with a limited number of established business relationships in the area;

•
the inability to effectively monitor and manage our expanded business;

•
diversion of our management’s attention away from managing our business and other properties or seeking out other investment opportunities; and

•
the properties in the CHI Portfolio may subject us to liabilities and without any recourse, or with only limited recourse, with respect to unknown liabilities.
 
We cannot assure our shareholders that we will be able to complete the integration of the CHI Portfolio into our existing operations without encountering difficulties or that any such difficulties will not have a material adverse effect on us. Failure to realize the intended benefits of the CHI Acquisition could have a material adverse effect on our business, financial condition, operating results and cash flows, including our ability to service debt and to make distributions to our shareholders.

If we are unable to complete the CHI Acquisition, we will have no designated use for a substantial portion of the net proceeds from the April 2016 Offering, which could result in significant dilution to our shareholders and delays securing attractive alternative investments and may cause our future operating results to fall short of expectations.

We intend to use all or a significant portion of the net proceeds of the April 2016 Offering to fund a portion of the aggregate purchase price of the CHI Acquisition. If we are unable to complete the CHI Acquisition, we will have no designated use for the net proceeds from the April 2016 Offering, which could result in significant dilution to our shareholders. There can be no assurances that we will secure attractive alternative investments, which may cause our future operating results to fall short of expectations. Any delays in securing attractive alternative investments could also affect our ability to make distributions to our shareholders. In addition, our shareholders will be unable to evaluate in advance the manner in which we invest the net proceeds or the economic merits of the properties we may ultimately acquire with the net proceeds.

If we do not complete the CHI Acquisition, we will have incurred substantial expenses without our shareholders realizing the expected benefits.

If we are unable to complete the CHI Acquisition, we will have incurred significant due diligence, legal, accounting and other transaction costs in connection with the CHI Acquisition without our shareholders realizing the anticipated benefits. We cannot assure our shareholders that we will acquire the CHI Portfolio because the proposed CHI Acquisition is subject to a variety of factors, including the consent of certain third parties with respect to the sale of 22 of the 51 properties included in the CHI Portfolio, and the satisfaction of other customary closing conditions. Five properties in the CHI Portfolio are currently only subject to a non-binding LOI and no definitive agreements regarding the acquisition of such properties has been executed.

If we are unable to complete the CHI Acquisition, we may lose a $6.0 million initial deposit we made upon execution of the Purchase Agreements.

We made a $6.0 million initial deposit upon execution of the purchase agreements governing the CHI Acquisition that is non-refundable except in the case of a material default by the sellers or the sellers’ failure to satisfy a closing condition. If we are unable to complete the CHI Acquisition, we may lose the initial deposit without our shareholders realizing the expected benefits.

We intend to incur additional indebtedness to complete the CHI Acquisition, which may have a material adverse effect on our financial condition, results of operations and our ability to make distributions to our shareholders.

We intend to use all or a significant portion of the net proceeds of the April 2016 Offering to fund a portion of the aggregate purchase price of the CHI Acquisition. We expect to fund the remaining aggregate purchase price through borrowings under our unsecured revolving credit facility, additional issuances of senior indebtedness and/or cash available on hand. We have also obtained a fully committed $400.0 million one-year senior unsecured bridge loan from KeyBank N.A. to be drawn upon in the event that we are unable to otherwise fund the aggregate purchase price of the CHI Acquisition. The incurrence of additional indebtedness to fund the purchase price for the CHI Acquisition may have a material adverse effect on our financial condition, results of operations and our ability to make distributions to our shareholders.

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Some of the properties in the CHI Portfolio will be subject to ground leases or other restrictions on the use of the space that could adversely affect our ability to procure new tenants, in which case our business and results of operations may suffer.

Thirty-four of the properties in the CHI Portfolio will be subject to long-term ground leases that contain certain restrictions. These restrictions include limits on our ability to re-let our initial properties to tenants not affiliated with CHI or its affiliates who own the underlying ground lessor interests, rights of first offer and refusal with respect to sales of the property, and limits on the types of medical procedures that may be performed. In addition, lower than expected rental rates upon re-letting could impede our growth. We may not be able to re-let space on terms that are favorable to us or at all. If we are unable to promptly re-let our properties, or if the rates upon such re-letting are significantly lower than expected, our business, financial condition and results of operations, our ability to make distributions to our shareholders and the trading price of our common shares may be adversely affected.

The market price of our common shares and our earnings per share may decline as a result of the CHI Acquisition.

The market price of our common shares may decline as a result of the CHI Acquisition if we do not achieve the perceived benefits of the transaction as rapidly, or to the extent anticipated, by financial or industry analysts, if at all, or if the effect of the transaction on our financial results is not consistent with the expectations of financial or industry analysts or our own financial projections. In addition, the failure to achieve expected benefits and unanticipated costs relating to the transaction could reduce our future financial performance.

Item 2.                        Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth information relating to repurchases of our common shares of beneficial interest and OP Units during the three months ended March 31, 2016.

ISSUER PURCHASES OF EQUITY SECURITIES
Period
 
(a) Total Number of Shares (or Units) Purchased
 
(b) Average Price Paid per Share (or Unit)
 
(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs
 
(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
January 1, 2016 - January 31, 2016
 
147,437

(1)
13.94

 
N/A

 
N/A

February 1, 2016 - February 29, 2016
 
2,761

(2)
17.20

 
N/A

 
N/A

March 1, 2016 - March 31, 2016
 
8,936

(2)
17.83

 
N/A

 
N/A

Total
 
159,134

 
14.22

 
—

 
—

(1)
Represents OP Units redeemed by holders in exchange for common shares of the Company.
(2)
Pursuant to a general authorization, not publicly announced, whereby the Company is authorized to repurchase common shares of the Company to satisfy employee withholding tax obligations related to stock-based compensation.


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Item 6.                                 Exhibits
 
Exhibit No.
 
Description
10.1
 
Purchase and Sale Agreement (Building Sale / Ground Lease Form), dated as of April 5, 2016, by and between the Seller Entities identified on Exhibit A thereto and Physicians Realty L.P.*
10.2
 
Purchase and Sale Agreement (Fee Simple Form), dated as of April 5, 2016, by and between the Seller Entities identified on Exhibit A thereto and Physicians Realty L.P.*
10.3
(1)
Note Purchase and Guarantee Agreement, dated as of January 7, 2016, among the Operating Partnership,the Company and each of the Purchasers
10.4
(1)
Form of 4.03% Senior Notes, Series A, due January 7, 2023 (included in Exhibit 10.3)
10.5
(1)
Form of 4.43% Senior Notes, Series B, due January 7, 2026 (included in Exhibit 10.3)
10.6
(1)
Form of 4.57% Senior Notes, Series C, due January 7, 2028 (included in Exhibit 10.3)
10.7
(1)
Form of 4.74% Senior Notes, Series D, due January 7, 2031 (included in Exhibit 10.3)
10.8
(2)
Employment Agreement dated February 26, 2016, between Physicians Realty Trust and John T. Thomas**
31.1
 
Certification of John T. Thomas, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
 
Certification of Jeffrey N. Theiler, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
 
Certification of John T. Thomas and Jeffrey N. Theiler, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)
 
 
 
101.INS
 
XBRL Instance Document (+)
101.SCH
 
XBRL Extension Schema Document (+)
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document(+)
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document(+)
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document(+)
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document(+)
*
Filed herewith
**
Indicates a management contract or compensatory plan or arrangement.

(1)
Incorporated by reference to the Registrant’s Current Report on Form 8-K filed with the SEC on January 12, 2016 (File No. 001-36007)
(2)
Incorporated by reference to the Registrant’s Current Report on Form 8-K filed with the SEC on March 1, 2016 (File No. 001-36007).

(+) Users of this data are advised pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a registration statement for purposes of Section 11 or 12 of the Securities Act, is deemed not filed for purposes of Section 18 of the Exchange Act, and otherwise is not subject to liability under these sections.
 
 



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SIGNATURES
 
Pursuant to the requirements 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.
 
 
 
PHYSICIANS REALTY TRUST
 
 
 
 
Date: May 6, 2016
/s/ John T. Thomas
 
John T. Thomas
 
Chief Executive Officer and President
 
(Principal Executive Officer)
 
 
 
 
Date: May 6, 2016
/s/ Jeffrey N. Theiler
 
Jeffrey N. Theiler
 
Executive Vice President and Chief Financial Officer
 
(Principal Financial Officer)


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