Physicians Realty Trust - Quarter Report: 2023 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2023

☐ 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		46-2519850
(State of Organization)		(IRS Employer Identification No.)

309 N. Water Street, Suite 500		53202
Milwaukee,	Wisconsin
(Address of Principal Executive Offices)		(Zip Code)

(414) 367-5600

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common stock, $0.01 par value per share

DOC

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

The number of Physicians Realty Trust’s common shares outstanding as of July 27, 2023 was 238,454,396.

PHYSICIANS REALTY TRUST

Quarterly Report on Form 10-Q

for the Quarter Ended June 30, 2023

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		Page Number
Part I	Financial Information

Item 1	Financial Statements (Unaudited)


	Consolidated Balance Sheets as of June 3 0 , 2023 and December 31, 2022	3
	Consolidated Statements of Income for the Three and Six Months Ended June 3 0 , 2023 and 2022	4
	Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 3 0 , 2023 and 2022	5
	Consolidated Statements of Equity for the Three and Six Months Ended June 3 0 , 2023 and 2022	6
	Consolidated Statements of Cash Flows for the Six Months Ended June 3 0 , 2023 and 2022	8









	Notes to Consolidated Financial Statements	9

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3	Quantitative and Qualitative Disclosures About Market Risk	37
Item 4	Controls and Procedures	38

Part II	Other Information

Item 1	Legal Proceedings	39
Item 1A	Risk Factors	39
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 5	Other Information	39
Item 6	Exhibits	41

SIGNATURES		42

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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 within the meaning of the federal securities laws. 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 “believe,” “expect,” “outlook,” “continue,” “project,” “may,” “will,” “should,” “seek,” “approximately,” “intend,” “plan,” “pro forma,” “estimate,” or “anticipate” 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, expectations, 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, including inflation and recession;

•changes in our business or strategy;

•our ability to operate as a public company;

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

•our geographic concentration in Texas may cause us to be particularly exposed to downturns in the Texas economy or other changes in Texas market conditions;

•our concentration of investment in health care properties;

•the disruption of our business and the compromise of confidential information resulting from cybersecurity attacks, breaches, and other incidents;

•any adverse effects to the business, financial position, or results of operations of CommonSpirit Health (“CommonSpirit”), or one or more of the CommonSpirit-affiliated tenants, that impact the ability of CommonSpirit-affiliated tenants to pay us rent;

•the degree and nature of our competition;

•competition for investment opportunities;

•difficulties in identifying health care properties to acquire and completing acquisitions;

•risks related to development, redevelopment, or construction projects;

•changes in health care laws or government reimbursement rates;

•decreased rental rates or increased vacancy rates;

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

•the potential impact of severe weather events and climate change;

•our failure to generate sufficient cash flows to service, pay down, or refinance our indebtedness or make distributions on our common shares;

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•fluctuations and increases in interest rates and operating costs;

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

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

•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 impact of our investments in joint ventures we have made and may make in the future;

•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;

•changes in governmental regulations or interpretations thereof, such as real estate and zoning laws and increases in real property tax rates, taxation of real estate investment trusts (“REITs”), and similar matters;

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

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

•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; and

•other factors that may materially adversely affect us, or the per share trading price of our common shares, including:

•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 health care-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, 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 I, Item 1A (Risk Factors) of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 filed with the Securities and Exchange Commission (the “Commission”) on February 24, 2023 (the “2022 Annual Report”).

As used in this report, unless the context otherwise requires, references to “we,” “us,” “our,” and the “Company” refer to Physicians Realty Trust (the “Trust”), a Maryland real estate investment trust, and Physicians Realty L.P. (the “Operating Partnership”), a Delaware limited partnership and the consolidated subsidiary of the Trust through which we conduct our business.

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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)


	June 30, 2023		December 31, 2022
	(unaudited)
ASSETS
Investment properties:
Land and improvements	$	248,123	$	241,559
Building and improvements	4,696,846		4,659,780
Construction in progress	30,899		18,497
Tenant improvements	91,649		88,640
Acquired lease intangibles	508,549		505,335
	5,576,066		5,513,811
Accumulated depreciation	(1,092,057)		(996,888)
Net real estate property	4,484,009		4,516,923

Right-of-use lease assets, net	229,110		231,225
Real estate loans receivable, net	88,969		104,973
Investments in unconsolidated entities	73,801		77,716
Net real estate investments	4,875,889		4,930,837
Cash and cash equivalents	245,660		7,730
Tenant receivables, net	8,294		11,503
Other assets	149,695		146,807
Total assets	$	5,279,538	$	5,096,877
LIABILITIES AND EQUITY
Liabilities:
Credit facility	$	392,524	$	188,328
Notes payable	1,451,162		1,465,437
Mortgage debt	163,926		164,352
Accounts payable	4,209		4,391
Dividends and distributions payable	60,404		60,148
Accrued expenses and other liabilities	93,432		87,720
Lease liabilities	104,696		105,011
Acquired lease intangibles, net	23,211		24,381
Total liabilities	2,293,564		2,099,768

Redeemable noncontrolling interests - partially owned properties	3,115		3,258

Equity:
Common shares, $0.01 par value, 500,000,000 common shares authorized, 238,451,853 and 233,292,030 common shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively	2,385		2,333
Additional paid-in capital	3,813,864		3,743,876
Accumulated deficit	(969,743)		(881,672)
Accumulated other comprehensive income	9,282		5,183
Total shareholders’ equity	2,855,788		2,869,720
Noncontrolling interests:
Operating Partnership	117,766		123,015
Partially owned properties	9,305		1,116
Total noncontrolling interests	127,071		124,131
Total equity	2,982,859		2,993,851
Total liabilities and equity	$	5,279,538	$	5,096,877

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

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Physicians Realty Trust

Consolidated Statements of Income

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Revenues:
Rental and related revenues	$	131,178	$	129,328	$	262,576	$	257,119
Interest income on real estate loans and other	3,922		2,839		6,868		5,438
Total revenues	135,100		132,167		269,444		262,557
Expenses:
Interest expense	20,634		17,234		39,787		34,057
General and administrative	10,162		10,028		21,362		20,321
Operating expenses	45,075		42,681		90,469		84,433
Depreciation and amortization	47,946		47,702		95,623		94,962

Total expenses	123,817		117,645		247,241		233,773
Income before equity in gain (loss) of unconsolidated entities and gain on sale of investment properties, net:	11,283		14,522		22,203		28,784
Equity in gain (loss) of unconsolidated entities	1,802		(224)		1,538		(390)
Gain on sale of investment properties, net	—		3,634		13		3,481
Net income	13,085		17,932		23,754		31,875
Net income attributable to noncontrolling interests:
Operating Partnership	(515)		(886)		(938)		(1,578)
Partially owned properties (1)	(26)		(155)		(70)		(314)


Net income attributable to common shareholders	$	12,544	$	16,891	$	22,746	$	29,983
Net income per share:
Basic	$	0.05	$	0.07	$	0.10	$	0.13
Diluted	$	0.05	$	0.07	$	0.10	$	0.13
Weighted average common shares:
Basic	238,399,653		225,617,275		237,944,378		225,344,756
Diluted	249,228,221		239,006,973		249,069,697		238,738,465

Dividends and distributions declared per common share	$	0.23	$	0.23	$	0.46	$	0.46

(1)Includes amounts attributable to redeemable noncontrolling interests.

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

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Physicians Realty Trust

Consolidated Statements of Comprehensive Income

(In thousands) (Unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Net income	$	13,085	$	17,932	$	23,754	$	31,875
Other comprehensive income:
Change in fair value of interest rate swap agreements, net	5,120		3,083		4,099		4,462
Total other comprehensive income	5,120		3,083		4,099		4,462
Comprehensive income	18,205		21,015		27,853		36,337
Comprehensive income attributable to noncontrolling interests - Operating Partnership	(717)		(1,040)		(1,100)		(1,801)
Comprehensive income attributable to noncontrolling interests - partially owned properties	(26)		(155)		(70)		(314)
Comprehensive income attributable to common shareholders	$	17,462	$	19,820	$	26,683	$	34,222

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

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Physicians Realty Trust

Consolidated Statements of Equity

(In thousands) (Unaudited)


	Par Value		Additional Paid in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income (Loss)		Total Shareholders’ Equity		Operating Partnership Noncontrolling Interest		Partially Owned Properties Noncontrolling Interest		Total Noncontrolling Interests		Total Equity
Balance at December 31, 2022	$	2,333	$	3,743,876	$	(881,672)	$	5,183	$	2,869,720	$	123,015	$	1,116	$	124,131	$	2,993,851

Net proceeds from sale of common shares	44		65,769		—		—		65,813		—		—		—		65,813
Restricted share award grants, net	5		(1,127)		(408)		—		(1,530)		—		—		—		(1,530)

Conversion of OP Units	2		2,417		—		—		2,419		(2,419)		—		(2,419)		—
Dividends/distributions declared	—		—		(54,912)		—		(54,912)		(2,263)		—		(2,263)		(57,175)


Contributions	—		—		—		—		—		—		7,884		7,884		7,884
Distributions	—		—		—		—		—		—		(53)		(53)		(53)




Change in fair value of interest rate swap agreements	—		—		—		(1,021)		(1,021)		—		—		—		(1,021)
Adjustment for Noncontrolling Interests ownership in Operating Partnership	—		(431)		—		—		(431)		431		—		431		—


Net income	—		—		10,202		—		10,202		423		64		487		10,689
Balance as of March 31, 2023	$	2,384	$	3,810,504	$	(926,790)	$	4,162	$	2,890,260	$	119,187	$	9,011	$	128,198	$	3,018,458

Net proceeds from sale of common shares	—		294		—		—		294		—		—		—		294
Restricted share award grants, net	1		3,459		(561)		—		2,899		—		—		—		2,899
Purchase of OP Units	—		—		—		—		—		(72)		—		(72)		(72)

Dividends/distributions declared	—		—		(54,936)		—		(54,936)		(2,257)		—		(2,257)		(57,193)


Contributions	—		—		—		—		—		—		287		287		287
Distributions	—		—		—		—		—		—		(52)		(52)		(52)




Change in fair value of interest rate swap agreements	—		—		—		5,120		5,120		—		—		—		5,120
Adjustment for Noncontrolling Interests ownership in Operating Partnership	—		(393)		—		—		(393)		393		—		393		—


Net income	—		—		12,544		—		12,544		515		59		574		13,118
Balance as of June 30, 2023	$	2,385	$	3,813,864	$	(969,743)	$	9,282	$	2,855,788	$	117,766	$	9,305	$	127,071	$	2,982,859

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

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Physicians Realty Trust

Consolidated Statements of Equity

(In thousands) (Unaudited)


	Par Value		Additional Paid in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income (Loss)		Total Shareholders’ Equity		Operating Partnership Noncontrolling Interest		Partially Owned Properties Noncontrolling Interest		Total Noncontrolling Interests		Total Equity
Balance at December 31, 2021	$	2,247	$	3,610,954	$	(776,001)	$	(892)	$	2,836,308	$	150,241	$	484	$	150,725	$	2,987,033

Net proceeds from sale of common shares	3		5,029		—		—		5,032		—		—		—		5,032
Restricted share award grants, net	3		118		(421)		—		(300)		—		—		—		(300)
Purchase of OP Units	—		—		—		—		—		(184)		—		(184)		(184)

Dividends/distributions declared	—		—		(51,879)		—		(51,879)		(2,740)		—		(2,740)		(54,619)


Contributions	—		—		—		—		—		—		569		569		569
Distributions	—		—		—		—		—		—		(55)		(55)		(55)
Change in market value of Redeemable Noncontrolling Interest in partially owned properties	—		—		717		—		717		—		—		—		717



Change in fair value of interest rate swap agreement	—		—		—		1,379		1,379		—		—		—		1,379
Adjustment for Noncontrolling Interests ownership in Operating Partnership	—		(217)		—		—		(217)		217		—		217		—


Net income	—		—		13,092		—		13,092		692		82		774		13,866
Balance as of March 31, 2022	$	2,253	$	3,615,884	$	(814,492)	$	487	$	2,804,132	$	148,226	$	1,080	$	149,306	$	2,953,438

Net proceeds from sale of common shares	9		18,475		—		—		18,484		—		—		—		18,484
Restricted share award grants, net	1		3,588		(911)		—		2,678		—		—		—		2,678


Dividends/distributions declared	—		—		(52,116)		—		(52,116)		(2,712)		—		(2,712)		(54,828)



Distributions	—		—		—		—		—		—		(61)		(61)		(61)
Change in market value of Redeemable Noncontrolling Interest in partially owned properties	—		—		527		—		527		—		—		—		527



Change in fair value of interest rate swap agreement	—		—		—		3,083		3,083		—		—		—		3,083
Adjustment for Noncontrolling Interests ownership in Operating Partnership	—		(488)		—		—		(488)		488		—		488		—


Net income	—		—		16,891		—		16,891		886		79		965		17,856
Balance as of June 30, 2022	$	2,263	$	3,637,459	$	(850,101)	$	3,570	$	2,793,191	$	146,888	$	1,098	$	147,986	$	2,941,177

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)


	Six Months Ended June 30,
	2023		2022
Cash Flows from Operating Activities:
Net income	$	23,754	$	31,875
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization	95,623		94,962
Amortization of deferred financing costs	1,265		1,158
Amortization of lease inducements and above/below-market lease intangibles	2,725		3,100
Straight-line rental revenue, net	(1,936)		(3,881)
Amortization of discount on unsecured senior notes	547		527
Amortization of above market assumed debt	—		(10)
Gain on sale of investment properties, net	(13)		(3,481)
Equity in (gain) loss of unconsolidated entities	(1,538)		390
Distributions from unconsolidated entities	3,722		3,932

Provision for bad debts	316		95
Non-cash share compensation	8,322		8,051


Change in operating assets and liabilities:
Tenant receivables	3,651		(1,672)
Other assets	3,910		3,650
Accounts payable	(182)		(1,315)
Accrued expenses and other liabilities	5,619		2,117
Net cash provided by operating activities	145,785		139,498
Cash Flows from Investing Activities:
Proceeds from sale of investment properties	2,553		7,900
Acquisition of investment properties, net	(35,112)		(27,325)
Investment in unconsolidated entities, net	(2,340)		(12,119)
Returns of investment in unconsolidated entities	3,428		—
Development of real estate	(5,296)		—
Escrowed cash - acquisition deposits/earnest deposits	—		360
Capital expenditures on investment properties	(19,458)		(21,515)
Investment in real estate loans receivable	(17,741)		(14,611)
Repayment of real estate loans receivable	27,600		22,441


Leasing commissions	(1,812)		(1,842)
Lease inducements	(400)		(500)
Net cash used in investing activities	(48,578)		(47,211)
Cash Flows from Financing Activities:
Net proceeds from sale of common shares	66,107		23,516
Proceeds from credit facility borrowings	513,000		147,000
Repayment of credit facility borrowings	(306,000)		(157,000)
Repayment of senior unsecured notes	(15,000)		—


Principal payments on mortgage debt	(502)		(838)
Debt issuance costs	(3,813)		(17)

Dividends paid - shareholders	(110,556)		(104,737)
Distributions to noncontrolling interests - Operating Partnership	(4,526)		(5,479)

Contributions from noncontrolling interest	8,171		569
Distributions to noncontrolling interests - partially owned properties	(195)		(331)
Payments of employee taxes for withheld stock-based compensation shares	(5,891)		(4,261)

Purchase of OP Units	(72)		(184)
Net cash provided by (used in) financing activities	140,723		(101,762)
Net increase (decrease) in cash and cash equivalents	237,930		(9,475)
Cash and cash equivalents, beginning of period	7,730		9,876
Cash and cash equivalents, end of period	$	245,660	$	401
Supplemental disclosure of cash flow information—interest paid during the period	$	37,957	$	32,405

Supplemental disclosure of noncash activity—change in fair value of interest rate swap agreements	$	4,099	$	4,462
Supplemental disclosure of noncash activity—conversion of loan receivable in connection to the acquisition of investment property	$	5,398	$	5,700

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

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Physicians Realty Trust

Notes to Consolidated Financial Statements

Unless otherwise indicated or unless the context requires otherwise, the use of the words “we,” “us,” “our,” and the “Company,” refer to Physicians Realty Trust, together with its consolidated subsidiaries, including Physicians Realty L.P.

Note 1. Organization and Business

Physicians Realty Trust (the “Trust” or the “Company”) was organized in the state of Maryland on April 9, 2013. As of June 30, 2023, the Trust was authorized to issue up to 500,000,000 common shares of beneficial interest, par value $0.01 per share. The Trust filed a Registration Statement on Form S-11 with the Commission with respect to a proposed underwritten initial public offering (the “IPO”) and completed the IPO of its common shares and commenced operations on July 24, 2013.

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 REIT formed primarily to acquire, selectively develop, own, and manage health care properties that are leased to physicians, hospitals, and health care delivery systems.

ATM Program

In May 2021, the Trust and the Operating Partnership entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) with KeyBanc Capital Markets Inc., Credit Agricole Securities (USA) Inc., BMO Capital Markets Corp., and Raymond James & Associates, Inc. in their capacity as agents for the Company and/or forward sellers and Stifel, Nicolaus & Company, Incorporated in its capacity as sales agent for the Company (collectively, the “Agents”) and Bank of Montreal, Credit Agricole Corporate and Investments Bank, KeyBanc Capital Markets Inc., and Raymond James & Associates, Inc. as forward purchasers for the Company (the “Forward Purchasers”), pursuant to which the Trust may issue and sell, from time to time, its common shares having an aggregate offering price of up to $500 million through the Agents (the “ATM Program”). The Sales Agreement contemplates that, in addition to the issuance and sale of the Trust’s common shares through the Agents, the Trust may also enter into one or more forward sales agreements from time to time in the future with each of the Forward Purchasers.

During the quarters ended March 31, 2023 and June 30, 2023, the Trust issued and sold common shares through the ATM Program as follows (net proceeds in thousands):


	Common shares sold	Weighted average price		Net proceeds
Quarter ended March 31, 2023	4,400,000	$	15.10	$	65,776
Quarter ended June 30, 2023	—	—		—

Year to date	4,400,000	$	15.10	$	65,776

As of June 30, 2023, the Trust has $158.6 million of common shares remaining available under the ATM Program.

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 June 30, 2023 and 2022 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 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 2022 Annual Report. The Company has consistently applied its accounting policies to all periods presented in these consolidated financial statements.

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Noncontrolling Interests

The Company presents the portion of any equity it does not own in entities that it controls (and thus consolidates) as noncontrolling interests and classifies such interests as a component of consolidated equity, separate from the Company’s total shareholders’ equity, on the consolidated balance sheets.

Operating Partnership: Noncontrolling interests in the Company include partnership interests of the Operating Partnership (“OP Units”) held by other investors. Net income or loss is allocated to noncontrolling interests (limited partners) 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.

As of June 30, 2023, the Trust held a 96.0% interest in the Operating Partnership. As the sole general partner and the majority interest holder, the Trust consolidates the financial position and results of operations of the Operating Partnership.

Partially Owned Properties: The Trust reflects noncontrolling interests in partially owned properties on the consolidated balance sheets for the portion of consolidated properties that are not wholly owned by the Company. The earnings or losses from those properties attributable to the noncontrolling interests are reflected as noncontrolling interests in partially owned properties in the consolidated statements of income.

Redeemable Noncontrolling Interests - Partially Owned Properties

In connection with the Company’s acquisitions of the outpatient medical facility, ambulatory surgery center, and hospital located on the Great Falls Hospital campus in Great Falls, Montana, physicians affiliated with the sellers retained non-controlling interests which were, at the holders’ option, able to be redeemed at any time after May 1, 2023. Due to the redemption provision, which was outside of the control of the Trust, the Trust classified the investment in the mezzanine section of its consolidated balance sheets. On July 14, 2022, the Company disposed of these three properties and removed the related redeemable noncontrolling interests from its consolidated balance sheets.

Through a consolidated joint venture with MedProperties Realty Advisors, LLC (“MedProperties”), the Company acquired Calko Medical Center in Brooklyn, New York. As part of the joint venture, MedProperties can redeem its interest, at its option, at any time after September 9, 2025. Due to the redemption provision, which is outside of the control of the Company, the Company classifies the noncontrolling interests in the mezzanine section of its consolidated balance sheets. The Company records the carrying amount of the redeemable noncontrolling interests at the greater of the carrying value or redemption value.

Dividends and Distributions

On June 16, 2023, the Trust announced that its Board of Trustees authorized, and the Trust declared, a cash dividend of $0.23 per common share for the quarter ended June 30, 2023. The dividend was paid on July 18, 2023, to common shareholders and holders of record of OP Units as of the close of business on July 5, 2023.

Tax Status of Dividends and Distributions

The Company’s distributions of current and accumulated earnings and profits for U.S. federal income tax purposes generally are taxable to shareholders as ordinary income. Distributions in excess of these earnings and profits generally are treated as a non-taxable reduction of the shareholders’ basis in the shares to the extent thereof (non-dividend distributions) and thereafter as taxable gain.

Any cash distributions received by an OP Unit holder in respect of its OP Units generally will not be taxable to such OP Unit holder for U.S. federal income tax purposes, to the extent that such distribution does not exceed the OP Unit holder’s basis in its OP Units. Any such distribution will instead reduce the OP Unit holder’s basis in its OP Units (and OP Unit holders will be subject to tax on the taxable income allocated to them by the Operating Partnership in respect of their OP Units when such income is earned by the Operating Partnership, with such income allocation increasing the OP Unit holders’ basis in their OP Units).

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The Company has elected taxable REIT subsidiary (“TRS”) status for certain of its corporate subsidiaries and, as a result, these entities will incur both federal and state income taxes on any taxable income of such entities after consideration of any net operating losses. To date, these income taxes have been de minimis.

Real Estate Loans Receivable, Net

Real estate loans receivable consists of eight mezzanine loans, five term loans, and two construction loans as of June 30, 2023. Generally, each mezzanine loan is collateralized by a pledge of the borrower’s ownership interest in the respective real estate owner, each term loan is secured by a mortgage on a related outpatient medical facility, and construction loans are secured by mortgages on the land and the improvements as constructed. The reserve for loan losses was $0.2 million as of June 30, 2023.

Rental and Related Revenues

Rental revenue is recognized on a straight-line basis over the terms of the related leases when collectability is probable. 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 $103.9 million and $101.3 million as of June 30, 2023 and December 31, 2022, respectively. If the Company determines that collectability of straight-line rents is not probable, income recognition is limited to the lesser of cash collected, or lease income reflected on a straight-line basis, plus variable rent when it becomes accruable.

In accordance with ASC 842, Leases, Topic 842, if the collectability of a lease changes after the commencement date, any difference between lease income that would have been recognized and the lease payments shall be recognized as an adjustment to lease income. Bad debt recognized as an adjustment to rental and related revenues was $0.9 million for the six months ended June 30, 2023 and $0.2 million for the six months ended June 30, 2022.

Rental revenue is adjusted by the amortization of lease inducements and above-market or below-market rents on certain leases. Lease inducements and above-market or below-market rents are amortized on a straight-line basis over the remaining lease term. Rental and related revenues also include expense recoveries, which relate to tenant reimbursement of real estate taxes, insurance, and other operating expenses that are recognized in the period the applicable expenses are incurred. The reimbursements are recorded gross, as these costs are incurred by the Company and reimbursed by the tenants. The Company has certain tenants with absolute net leases. Under these lease agreements, the tenant is responsible for operating and building expenses and the Company does not recognize expense recoveries.

Reclassifications

Certain amounts in the accompanying consolidated balance sheet for 2022 have been reclassified to conform to the 2023 consolidated financial statement presentation. The reclassifications had no impact on total assets or any balance sheet total or subtotal.

New Accounting Pronouncements

In March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-04, Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional relief to applying reference rate reform to changing reference rates, contracts, hedging relationships, and other transactions that reference the London Inter-Bank Offered Rate (“LIBOR”). The amendments in this update may be applied through December 31, 2024.

On March 31, 2023, the Operating Partnership, as borrower, and the Trust, as guarantor, executed a First Amendment to the Third Amended and Restated Credit Agreement to update the benchmark provisions to replace LIBOR with the Secured Overnight Financing Rate (“SOFR”), as the reference rate for the purpose of calculating interest under the agreement. The Company also amended its fixed interest rate swap agreement on its mortgage debt to update the reference rate from LIBOR to SOFR. As a result, the Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients maintains the presentation of derivatives consistent with past presentation. As of June 30, 2023, the Company has one mortgage contract referencing LIBOR, which transitioned to an alternative interest rate following the the discontinuation of LIBOR. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

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Note 3. Investment and Disposition Activity

During the six months ended June 30, 2023, the Company executed contractual commitments related to a $40.5 million development project, with $5.3 million spent on construction in progress thus far, completed the acquisition of two outpatient medical facilities and three medical condominium units for an investment of $35.9 million and one parcel of land adjacent to one of its outpatient medical facilities for an investment of $0.8 million, and paid $2.2 million of additional purchase consideration under four earn-out agreements. The Company also closed on a $35.8 million construction loan, funding $6.6 million to date. Additionally, the Company funded an aggregate of $11.4 million on new term loans, previously announced loan commitments, and other investments. The Company contributed $2.0 million to the joint venture with Davis Medical Investors, LLC (the “Davis Joint Venture”) to fund additional purchase consideration related to the venture’s acquisitions. Investment activity totaled approximately $64.2 million during the six months ended June 30, 2023. As part of these investments, the Company incurred approximately $1.6 million of capitalized acquisition costs.

Investment activity for the three months ended June 30, 2023, included the acquisition of two outpatient medical facilities and two medical condominium units for a purchase price of $34.6 million. Additionally, the Company funded an aggregate of $7.0 million on a new term loan, previously announced loan commitments, and other investments. The Company contributed $2.0 million to the Davis Joint Venture to fund additional purchase consideration related to the venture’s acquisitions and $1.9 million of additional purchase consideration under two earn-out agreements. Additionally, the Company funded construction in progress of $4.3 million, resulting in total investment activity of approximately $49.8 million as of June 30, 2023.

The following table summarizes the acquisition date fair values of the assets acquired and the liabilities assumed, as well as follow-on capitalized costs during the six months ended June 30, 2023, which the Company determined using Level 2 and Level 3 inputs (in thousands):


	1st Quarter		2nd Quarter		Total
Land	$	1,356	$	6,016	$	7,372
Building and improvements	1,294		28,353		29,647
In-place lease intangibles	—		3,491		3,491





Net assets acquired	$	2,650	$	37,860	$	40,510

Satisfaction of real estate loans receivable	—		(5,398)		(5,398)

Cash used in acquisition of investment property	$	2,650	$	32,462	$	35,112

Dispositions

During the six months ended June 30, 2023, the Company sold one outpatient medical facility for approximately $2.6 million, realizing an insignificant gain.

Note 4. Intangibles

The following is a summary of the carrying amount of intangible assets and liabilities as of June 30, 2023 and December 31, 2022 (in thousands):


	June 30, 2023						December 31, 2022
	Cost		Accumulated Amortization		Net		Cost		Accumulated Amortization		Net
Assets
In-place leases	$	448,797	$	(262,439)	$	186,358	$	445,583	$	(241,643)	$	203,940
Above-market leases	$	59,752	$	(32,909)	$	26,843	$	59,752	$	(30,096)	$	29,656
Liabilities
Below-market leases	$	36,409	$	(13,198)	$	23,211	$	37,002	$	(12,621)	$	24,381

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The following is a summary of acquired lease intangible amortization for the three and six months ended June 30, 2023 and 2022 (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Amortization expense related to in-place leases	$	10,461	$	11,145	$	21,073	$	22,185
Decrease in rental income related to above-market leases	1,398		1,503		2,813		3,006
Increase in rental income related to below-market leases	585		508		1,171		966

Future aggregate net amortization of acquired lease intangibles as of June 30, 2023, is as follows (in thousands):


	Net Decrease (Increase) in Revenue		Net Increase in Expenses
2023	$	1,548	$	19,812
2024	2,929		35,116
2025	2,357		29,594
2026	1,203		23,479
2027	1,036		20,557
Thereafter	(5,441)		57,800
Total	$	3,632	$	186,358

As of June 30, 2023, the weighted average remaining amortization period is 7 years for in-place and above-market lease intangible assets and 15 years for below-market lease intangibles.

Note 5. Other Assets

Other assets consisted of the following as of June 30, 2023 and December 31, 2022 (in thousands):


	June 30, 2023		December 31, 2022
Straight line rent receivable, net	$	103,866	$	101,306
Leasing commissions, net	13,882		13,231
Lease inducements, net	7,822		7,894
Prepaid expenses	7,499		11,009
Interest rate swaps	6,749		2,045
Escrows	1,499		1,565
Notes receivable, net	365		370
Other	8,013		9,387
Total	$	149,695	$	146,807

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Note 6. Debt

The following is a summary of debt as of June 30, 2023 and December 31, 2022 (in thousands):


	June 30, 2023		December 31, 2022
Fixed interest mortgage notes (1)	$	59,511	$	59,776
Variable interest mortgage notes (2)	104,916		105,153
Total mortgage debt	164,427		164,929
$1.0 billion unsecured revolving credit facility due September 2025 (3)	—		193,000
$400 million unsecured term borrowing bearing fixed interest of 4.693%, due May 2028 (4)	400,000		—
$400 million senior unsecured notes bearing fixed interest of 4.30%, due March 2027	400,000		400,000
$350 million senior unsecured notes bearing fixed interest of 3.95%, due January 2028	350,000		350,000
$500 million senior unsecured notes bearing fixed interest of 2.625%, due November 2031	500,000		500,000
$135 million senior unsecured notes bearing fixed interest of 4.43% to 4.74%, due January 2026 to 2031	135,000		150,000
$75 million senior unsecured notes bearing fixed interest of 4.09% to 4.24%, due August 2025 to 2027	75,000		75,000
Total principal	2,024,427		1,832,929
Unamortized deferred financing costs	(10,003)		(7,453)
Unamortized discounts	(6,812)		(7,359)

Total debt	$	2,007,612	$	1,818,117

(1)As of June 30, 2023, fixed interest mortgage notes bear interest from 3.25% to 4.63%, due in 2024, with a weighted average interest rate of 3.80%. As of December 31, 2022, fixed interest mortgage notes bear interest from 3.33% to 4.63%, due in 2024, with a weighted average interest rate of 3.85%. The notes are collateralized by two properties with a net book value of $91.7 million as of June 30, 2023 and two properties with a net book value of $94.9 million as of December 31, 2022. One mortgage note bears interest at LIBOR plus 1.90% and the Trust entered into a pay-fixed receive-variable interest rate swap, fixing the variable component at 1.35% as of June 30, 2023 and 1.43% as of December 31, 2022.

(2)Variable interest mortgage notes bear variable interest of SOFR plus 1.85% and LIBOR plus 2.75% for a weighted average interest rate of 6.99% and 6.20% as of June 30, 2023 and December 31, 2022, respectively. The notes are due in 2026 and 2028 and collateralized by four properties with a net book value of $287.8 million as of June 30, 2023 and $295.5 million as of December 31, 2022.

(3)The unsecured revolving credit facility bears variable interest of SOFR plus 0.95%, inclusive of a 0.10% SOFR index adjustment, as of June 30, 2023 and LIBOR plus 0.85% as of December 31, 2022.

(4)The Company’s borrowings under the term loan feature of the Credit Agreement (as defined below) bear interest at a rate equal to 1.10%, inclusive of a 0.10% SOFR index adjustment, plus Daily Simple SOFR as of June 30, 2023 based on the Company’s current credit rating. The Company entered into fixed-for-floating interest rate swaps for the full borrowing amount, fixing the SOFR component of this rate at 3.593%, and a current all-in fixed rate of 4.693%.

On September 24, 2021, the Operating Partnership, as borrower, and the Trust, as guarantor, executed a Third Amended and Restated Credit Agreement (as amended, the “Credit Agreement”) which extended the maturity date of the revolving credit facility under the Credit Agreement to September 24, 2025 and reduced the interest rate margin applicable to borrowings. The Credit Agreement included an unsecured revolving credit facility of $1.0 billion and contained a term loan feature of $250.0 million, bringing total borrowing capacity to $1.25 billion. The Credit Agreement also included a swingline loan commitment for up to 10% of the maximum principal amount and provided an accordion feature allowing the Operating Partnership to increase borrowing capacity by up to an additional $500.0 million, subject to customary terms and conditions, resulting in a maximum borrowing capacity of $1.75 billion. The revolving credit facility under the Credit Agreement also included two six-month extension options.

On March 31, 2023, the Operating Partnership, as borrower, and the Trust, as guarantor, executed a First Amendment to the Credit Agreement which expanded the accordion feature allowing the Operating Partnership to increase borrowing capacity by up to an additional $500.0 million, and replaced the LIBOR-based benchmark rates applicable to borrowings under the Credit Agreement with SOFR based benchmark rates plus a SOFR index adjustment of 0.10%.

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On May 24, 2023, the Operating Partnership, as borrower, and the Trust, as guarantor, executed a Second Amendment to the Credit Agreement, which added a new $400 million unsecured term loan with a scheduled maturity date of May 24, 2028 and expanded the accordion feature, which allows the Operating Partnership to increase borrowing capacity under the Credit Agreement by up to an additional $500 million, subject to customary terms and conditions, for a maximum aggregate principal amount of all revolving commitments and term loans under the Credit Agreement of $1.9 billion. On the same day, the Operating Partnership borrowed $400 million under the term loan feature of the Credit Agreement. Borrowings under the term loan feature of the Credit Agreement bear interest on the outstanding principal amount at a rate equal to 1.10%, inclusive of a 0.10% SOFR index adjustment, plus Daily Simple SOFR as defined in the Credit Agreement. The Company simultaneously entered into fixed-for-floating interest rate swaps for the full borrowing amount under the term loan, fixing the Daily Simple SOFR component of the borrowing rate at 3.593%, for a current all-in fixed rate of 4.693%. Both the borrowing and the fixed-for-floating interest rate swaps have a maturity date of May 24, 2028.

As of June 30, 2023, the borrower had investment grade ratings of BBB from S&P and Baa2 from Moody’s. As such, borrowings under the revolving credit facility of the Credit Agreement accrue interest on the outstanding principal at a rate of SOFR plus 0.95%, inclusive of a 0.10% SOFR index adjustment. The Credit Agreement includes a facility fee equal to 0.20% per annum, which is also determined by the borrower’s investment grade rating.

Base Rate Loans, Adjusted SOFR Loans, and Letters of Credit (each, as defined in the Credit Agreement) will be subject to interest rates, based upon the borrower’s investment grade rating as follows:


Credit Rating	Applicable Margin for Revolving Loans: SOFR Loans and Letter of Credit Fee	Applicable Margin for Revolving Loans: Base Rate Loans		Applicable Margin for Term Loans: SOFR Loans	Applicable Margin for Term Loans: Base Rate Loans
At Least A- or A3	SOFR + 0.725%	—	%	SOFR + 0.85%	—	%
At Least BBB+ or Baa1	SOFR + 0.775%	—	%	SOFR + 0.90%	—	%
At Least BBB or Baa2	SOFR + 0.85%	—	%	SOFR + 1.00%	—	%
At Least BBB- or Baa3	SOFR + 1.05%	0.05	%	SOFR + 1.25%	0.25	%
Below BBB- or Baa3	SOFR + 1.40%	0.40	%	SOFR + 1.65%	0.65	%

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, grant liens, or make distributions. The Company may, at any time, voluntarily prepay any revolving or term loan under the Credit Agreement in whole or in part without premium or penalty. As of June 30, 2023, the Company was in compliance with all financial covenants related to the Credit Agreement.

The Credit Agreement includes customary representations and warranties by the Trust and the Operating Partnership and imposes customary covenants on the Operating Partnership and the Trust. 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.

As of June 30, 2023, the Company did not have any borrowings outstanding under its $1.0 billion unsecured revolving credit facility feature of the Credit Agreement and had $400 million of borrowings outstanding under the term loan feature of the Credit Agreement.

Notes Payable

As of June 30, 2023, the Company had $1.5 billion aggregate principal amount of senior notes issued and outstanding by the Operating Partnership, comprised of $25.0 million maturing in 2025, $70.0 million maturing in 2026, $425.0 million maturing in 2027, $395.0 million maturing in 2028, and $545.0 million maturing in 2031.

Certain properties are encumbered by mortgage loans that contains financial covenants. As of June 30, 2023, the Trust was in compliance with all mortgage debt financial covenants.

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Scheduled principal payments due on consolidated debt as of June 30, 2023 are as follows (in thousands):


2023	$	505
2024	59,719
2025	25,476
2026	170,476
2027	425,476
Thereafter	1,342,775
Total Payments	$	2,024,427

As of June 30, 2023, the Company had total consolidated indebtedness of approximately $2.0 billion. The weighted average interest rate on consolidated indebtedness was 4.04% (based on the 30-day LIBOR rate of 5.18% and a SOFR rate of 5.09% as of June 30, 2023).

For the three months ended June 30, 2023 and 2022, the Company incurred interest expense on its debt, exclusive of deferred financing cost amortization, of $19.9 million and $16.7 million, respectively. For the six month periods ending June 30, 2023 and 2022, the Company incurred interest expense on its debt, exclusive of deferred financing cost amortization, of $38.5 million and $32.9 million, respectively.

Note 7. Derivatives

In the normal course of business, a variety of financial instruments are used to manage or hedge interest rate risk. The Company has implemented ASC 815, Derivatives and Hedging (“ASC 815”), which establishes accounting and reporting standards requiring that all derivatives, including certain derivative instruments embedded in other contracts, be recorded as either an asset or a liability measured at their fair value unless they qualify for a normal purchase or normal sales exception.

When specific hedge accounting criteria are not met, ASC 815 requires that changes in a derivative’s fair value be recognized currently in earnings. Changes in the fair market values of the Company’s derivative instruments are recorded in the consolidated statements of income if such derivatives do not qualify for, or the Company does not elect to apply for, hedge accounting. As a result of the Company’s adoption of ASU 2017-12 as of January 1, 2019, the entire change in the fair value of its derivatives designated and qualified as cash flow hedges are recorded in accumulated other comprehensive income on the consolidated balance sheets and are subsequently reclassified into earnings in the period in which the hedged forecasted transaction affects earnings.

To manage interest rate risk for certain of its variable-rate debt, the Company uses interest rate swaps as part of its risk management strategy. These derivatives are designed to mitigate the risk of future interest rate increases by providing a fixed interest rate for a limited, pre-determined period of time. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. As of June 30, 2023, the Company had four outstanding interest rate swaps designated as cash flow hedges of interest rate risk. See Note 2 (Summary of Significant Accounting Policies) of the 2022 Annual Report for a further discussion of our derivatives. In addition, the Company recognizes its share of other comprehensive income related to derivative instruments held by unconsolidated entities.

The following table presents the fair value of the Company’s derivative financial instruments, as well as their classification on the Company’s Consolidated Balance Sheets as of June 30, 2023 (in thousands):


Derivatives Designed as Hedging Instruments	Maturity Date	Number of Instruments	Total Notional Amount		Interest Rate		Balance Sheet Location	Fair Value
Interest rate swap	5/24/2028	3	$	400,000	3.59	%	Other Assets	$	4,922
Interest rate swap	10/31/2024	1	36,050		1.90	%	Other Assets	1,827
Total		4	$	436,050				$	6,749

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Note 8. Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities consisted of the following as of June 30, 2023 and December 31, 2022 (in thousands):


	June 30, 2023		December 31, 2022
Prepaid rent	$	25,113	$	21,062
Real estate taxes payable	22,102		23,303
Accrued interest	18,684		18,196
Accrued expenses	7,226		7,920
Security deposits	4,539		4,338
Accrued incentive compensation	3,422		2,700
Tenant improvement allowances	1,853		1,831



Other	10,493		8,370
Total	$	93,432	$	87,720

Note 9. Stock-based Compensation

The Company 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. Any common shares issued pursuant to the Company's incentive equity compensation and employee stock purchase plans will result in the Operating Partnership issuing OP Units to the Trust on a one-for-one basis, with the Operating Partnership receiving the net cash proceeds of such issuances.

Certain of the Company’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 Company’s determination of the amount of stock compensation expense requires judgment in estimating the probability of achievement of these performance targets. Subsequent changes in actual experience are monitored and estimates are updated as information is available.

In connection with the IPO, the Trust adopted the Physicians Realty Trust 2013 Equity Incentive Plan, which made shares available for awards for participants (the “2013 Plan”). At the Company’s Annual Meeting of Shareholders held on May 3, 2023, shareholders approved the Amended and Restated Physicians Realty Trust 2013 Equity Incentive Plan (the “Amended and Restated 2013 Plan”). The Amended and Restated 2013 Plan increased the number of common shares authorized for issuance to a total of 11,000,000. The Amended and Restated 2013 Plan also extended the term of the plan from 2029 to 2033, among other changes.

Restricted Common Shares

Restricted common shares granted under the 2013 Plan are eligible for dividends as well as the right to vote. In the six months ended June 30, 2023, the Trust granted a total of 342,939 restricted common shares with a total value of $5.0 million to its officers and certain of its employees, which have a vesting period of one to three years. In January 2023, under the 2013 Plan, the Company granted restricted common shares to certain of its officers under a salary deferral program, part of which vests after one year, with the remainder vesting after two years.

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A summary of the status of the Trust’s non-vested restricted common shares as of June 30, 2023 and changes during the six month period then ended follow:


	Common Shares	Weighted Average Grant Date Fair Value
Non-vested at December 31, 2022	272,898	$	16.69
Granted	342,939	14.57
Vested	(239,602)	16.54
Forfeited	(364)	17.45
Non-vested at June 30, 2023	375,871	$	14.84

For all service awards, the Company records compensation expense for the entire award on a straight-line basis over the requisite service period. For the three months ended June 30, 2023 and 2022, the Company recognized non-cash share compensation of $1.2 million and $1.0 million, respectively. For the six month periods ending June 30, 2023 and 2022, the Company recognized non-cash share compensation of $2.3 million and $1.9 million, respectively. Unrecognized compensation expense on June 30, 2023 was $4.1 million.

Restricted Share Units

In January 2023, under the 2013 Plan, the Company granted 11,274 restricted share units to certain of its trustees in lieu of all or a portion of such trustee’s 2023 cash retainer. These units are subject to certain timing conditions and a one-year service period. Each restricted share unit contains one dividend equivalent. Each 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. With respect to the performance and timing conditions of the January 2023 grants, the grant date fair value of $14.47 per unit was based on the share price at the date of grant.

In March 2023, under the 2013 Plan, the Company granted restricted share units at a target level of 355,388 to its officers and certain of its employees and 62,586 to its trustees. Units granted to officers and certain employees under the Company’s 2013 Plan are subject to certain performance and market conditions and a three-year service period. Units granted to trustees are subject to certain timing conditions and a two-year service period for full vesting. Each restricted share unit contains one dividend equivalent. Each 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.

Approximately 30% of the restricted share units issued to officers and certain employees under the Company’s 2013 Plan in 2023 vest based on a certain market condition. The awards containing the market condition were valued with the assistance of independent valuation specialists. The Company utilized a Monte Carlo simulation to calculate the weighted average grant date fair value of $18.71 per unit for the March 2023 grant using the following assumptions:


Volatility	23.4		%
Dividend assumption	reinvested
Expected term in years	2.83 years
Risk-free rate	4.70		%
Share price (per share)	$	14.70

The remaining 70% of the restricted share units issued to officers and certain employees under the Company’s 2013 Plan, and 100% of other restricted share units issued to trustees vest based upon certain performance or timing conditions. With respect to the performance and timing conditions of the March 2023 grants, the grant date fair value of $14.70 per unit was based on the share price at the date of grant. The combined weighted average grant date fair value of the March 2023 restricted share units issued to officers and certain employees was $15.90 per unit.

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The following is a summary of the activity in the Trust’s restricted share units during the six months ended June 30, 2023:


	Executive Awards				Trustee Awards
	Restricted Share Units		Weighted Average Grant Date Fair Value		Restricted Share Units	Weighted Average Grant Date Fair Value
Non-vested at December 31, 2022	1,046,940		$	21.41	77,992	$	16.60
Granted	355,388		15.90		73,860	14.66
Vested	(223,579)	(1)	24.36		(49,890)	16.74

Non-vested at June 30, 2023	1,178,749		$	19.19	101,962	$	15.13

(1)Restricted units vested by Company executives in 2023 resulted in the issuance of 652,851 common shares, less 290,380 common shares withheld to cover minimum withholding tax obligations.

For the three months ended June 30, 2023 and 2022, the Company recognized non-cash share compensation of $2.4 million and $2.8 million, respectively. For the six month periods ending June 30, 2023 and 2022, the Company recognized non-cash share compensation of $5.9 million and $6.1 million, respectively. Unrecognized compensation expense on June 30, 2023 was $14.1 million.

Note 10. 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 Company 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. As part of the Company’s acquisition process, Level 3 inputs are used to measure the fair value of the assets acquired and liabilities assumed.

The Company’s derivative instruments as of June 30, 2023 consist of four interest rate swaps, as detailed in the Derivative Instruments section of Note 7 (Derivatives) of this report and Note 2 (Summary of Significant Accounting Policies) of Part II, Item 8 (Financial Statements and Supplementary Data) of our 2022 Annual Report.

The interest rate swaps are not traded on an exchange. The Company’s derivative assets and liabilities are recorded at fair value based on a variety of observable inputs including contractual terms, interest rate curves, yield curves, measure of volatility, and correlations of such inputs. The Company measures its derivatives at fair value on a recurring basis. The fair values are based on Level 2 inputs described above. The Company considers its own credit risk, as well as the credit risk of its counterparties, when evaluating the fair value of its derivatives.

The Company 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 June 30, 2023.

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.

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The following table presents the fair value of the Company’s financial instruments (in thousands):


	June 30, 2023				December 31, 2022
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Assets:
Real estate loans receivable, net	$	88,970	$	87,036	$	104,973	$	102,162
Notes receivable, net	$	365	$	365	$	370	$	370
Derivative assets	$	6,749	$	6,749	$	2,045	$	2,045
Liabilities:
Credit facility	$	(400,000)	$	(400,000)	$	(193,000)	$	(193,000)
Notes payable	$	(1,460,000)	$	(1,284,250)	$	(1,475,000)	$	(1,302,767)
Mortgage debt	$	(164,427)	$	(162,649)	$	(164,929)	$	(163,129)

Note 11. Tenant Operating Leases

The Company is a lessor of outpatient medical facilities and other health care facilities. Leases have expirations from 2023 through 2042. As of June 30, 2023, the future minimum rental payments on non-cancelable leases, exclusive of expense recoveries and minimum rental payments for assets classified as held for sale, if applicable, were as follows (in thousands):


2023	$	185,592
2024	358,748
2025	340,921
2026	289,769
2027	232,726
Thereafter	802,665
Total	$	2,210,421

For the three months ended June 30, 2023 and 2022, the Company recognized $131.2 million and $129.3 million, respectively, of rental and other lease-related income related to our operating leases, of which $37.6 million and $35.8 million, respectively, were variable lease payments. For the six month periods ending June 30, 2023 and 2022, the Company recognized $262.6 million and $257.1 million, respectively, of rental and other leased-related income with respect to our operating leases, of which $75.4 million and $71.0 million, respectively, were variable lease payments.

Note 12. Rent Expense

The Company leases the rights to parking structures at two of its properties, the air that one property occupies, and the land upon which 97 of its properties are located from third party landowners pursuant to separate leases. In addition, the Company has nine corporate leases, primarily for office space.

The Company’s leases include both fixed and variable rental payments and may also include escalation clauses and renewal options. These leases have terms of up to 92 years remaining, excluding extension options, with a weighted average remaining term of 43 years.

At the inception of a new lease, the Company establishes an operating or finance lease asset and operating or finance lease liability calculated as the present value of future minimum lease payments. As the Company’s leases do not provide an implicit rate, the Company calculates a discount rate that approximates its incremental borrowing rate available at lease commencement in order to determine the present value of future minimum lease payments. The approximated weighted average discount rate was 4.4% as of June 30, 2023. There are no operating or finance leases that have not yet commenced that would have a significant impact on the Company’s consolidated balance sheets.

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As of June 30, 2023, the future minimum lease obligations under non-cancelable parking, air, ground, and corporate leases were as follows (in thousands):


2023	$	2,216
2024	4,819
2025	4,798
2026	4,787
2027	4,789
Thereafter	239,130
Total undiscounted lease payments	$	260,539
Less: Interest	(155,843)
Present value of lease liabilities	$	104,696

Lease costs consisted of the following for the six months ended June 30, 2023 (in thousands):



Fixed lease cost	$	1,649
Variable lease cost	672
Total lease cost	$	2,321

Note 13. Credit Concentration

The Company uses annualized base rent (“ABR”) as its credit concentration metric. ABR is calculated by multiplying contractual base rent for the month ended June 30, 2023 by 12, excluding the impact of concessions and straight-line rent. The following table summarizes certain information about the Company’s top five tenant credit concentrations as of June 30, 2023 (in thousands):


Tenant	Total ABR		Percent of ABR
CommonSpirit - CHI - Nebraska	$	18,615	5.1	%
Northside Hospital	16,409		4.5	%
UofL Health - Louisville, Inc.	14,637		4.0	%
HonorHealth	11,310		3.1	%
US Oncology	11,024		3.0	%
Remaining portfolio	294,395		80.3	%
Total	$	366,390	100.0	%

ABR collected from the Company’s top five tenant relationships comprises 19.7% of its total ABR as of June 30, 2023. Total ABR from CommonSpirit-affiliated tenants totals 14.9%, including the affiliate disclosed above.

The following table summarizes certain information about the Company’s top five geographic concentrations as of June 30, 2023:


State	Total ABR		Percent of ABR
Texas	$	49,041	13.4	%
Georgia	26,949		7.4	%
Florida	25,667		7.0	%
Indiana	23,729		6.5	%
Arizona	21,668		5.9	%
Other	219,336		59.8	%
Total	$	366,390	100.0	%

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Note 14. 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 June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Numerator for earnings per share - basic:
Net income	$	13,085	$	17,932	$	23,754	$	31,875
Net income attributable to noncontrolling interests:
Operating Partnership	(515)		(886)		(938)		(1,578)
Partially owned properties	(26)		(155)		(70)		(314)

Numerator for earnings per share - basic	$	12,544	$	16,891	$	22,746	$	29,983
Numerator for earnings per share - diluted:
Numerator for earnings per share - basic	$	12,544	$	16,891	$	22,746	$	29,983
Noncontrolling interest - Operating Partnership income	515		886		938		1,578
Numerator for earnings per share - diluted	$	13,059	$	17,777	$	23,684	$	31,561
Denominator for earnings per share - basic and diluted:
Weighted average number of shares outstanding - basic	238,399,653		225,617,275		237,944,378		225,344,756
Effect of dilutive securities:
Noncontrolling interest - Operating Partnership units	9,838,203		11,914,523		9,840,200		11,913,318
Restricted common shares	49,891		52,843		112,101		102,651
Restricted share units	940,474		1,422,332		1,173,018		1,377,740
Denominator for earnings per share - diluted:	249,228,221		239,006,973		249,069,697		238,738,465
Earnings per share - basic	$	0.05	$	0.07	$	0.10	$	0.13
Earnings per share - diluted	$	0.05	$	0.07	$	0.10	$	0.13

Note 15. Subsequent Events

On July 20, 2023, the Company closed on the acquisition of an outpatient medical facility in Palos Heights, Illinois for approximately $2.6 million.

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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 1 (Business) and Part I, Item 1A (Risk Factors) of our 2022 Annual Report.

Second Quarter Highlights:

•Reported second quarter 2023 total revenue of $135.1 million, an increase of 2.2% over the prior year period.

•Reported net income of $13.1 million for the second quarter ended June 30, 2023, a decrease of 27.0% over the prior year period, and second quarter net income per share of $0.05 on a fully diluted basis.

•Generated second quarter Normalized Funds From Operations (“Normalized FFO”) of $0.25 per share on a fully diluted basis.

•Completed $49.8 million in investments, including the funding of previous loan commitments.

•Second quarter Outpatient Medical Same-Store Cash Net Operating Income growth was 0.8% year-over-year.

•Declared a quarterly dividend of $0.23 per share and OP Unit for the second quarter 2023, paid on July 18, 2023.

•Closed on a $400.0 million five-year term loan that, with the effect of related swaps, bears interest at an all-in fixed rate of 4.693%.

Overview

We are a self-managed health care real estate company organized in April 2013 to acquire, selectively develop, own, and manage health care properties that are leased to physicians, hospitals, and health care delivery systems. We invest in real estate that is integral to providing high quality health care services. Our properties are typically located on a campus with a hospital or other health care facilities or strategically affiliated with a hospital or other health care facilities. We believe the impact of government programs and continuing trends in the health care industry create attractive opportunities for us to invest in health care related real estate. In particular, we believe the demand for health care will continue to increase as a result of the aging population as older persons generally utilize health care services at a rate well in excess of younger people. Our management team has significant public health care REIT experience and has long-established relationships with physicians, hospitals, and health care delivery system decision makers that we believe will provide quality investment and growth opportunities. Our principal investments include outpatient medical facilities, outpatient treatment facilities, as well as other real estate integral to health care providers. In recent years, we have seen increased competition for health care properties, and we expect this trend to continue. We seek to generate attractive risk-adjusted returns for our shareholders through a combination of stable and increasing dividends and potential long-term appreciation in the value of our properties and our common shares.

We grew our portfolio of gross real estate investments from approximately $124 million at the time of our IPO in July 2013 to approximately $5.8 billion as of June 30, 2023. As of June 30, 2023, our consolidated portfolio consisted of 277 health care properties located in 32 states with approximately 15,625,828 net leasable square feet, which were approximately 95% leased with a weighted average remaining lease term of approximately 5.4 years. As of June 30, 2023, approximately 91% of the net leasable square footage of our portfolio was either on the campus of a hospital or strategically affiliated with a health system.

We receive a cash rental stream from the health care providers under our leases. Approximately 93% of the annualized base rent payments from our properties as of June 30, 2023 were from absolute net and triple net leases, pursuant to which the tenants are responsible for operating expenses subject to specific lease terms 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 6% of the ABR payments from our properties as of June 30, 2023 were from modified gross 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 4.0%, with an annual weighted average rent escalator of approximately 2.4%. However, certain of the Company’s leases contain annual rent escalators indexed to changes in the Consumer Price Index (“CPI”), often with a floor or ceiling. As of June 30, 2023, approximately 5.7% of the

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Company’s annual rent escalators had CPI provisions. Our operating results depend significantly upon the ability of our tenants to make required rental payments. We believe that our portfolio of outpatient medical facilities and other health care 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 June 30, 2023, leases representing approximately 2.3%, 5.7%, and 7.2% of leased square feet will expire in 2023, 2024, and 2025, respectively.

We intend to grow our portfolio of high-quality outpatient medical facilities leased to physicians, hospitals, health care delivery systems, and other health care providers primarily through acquisitions of existing health care facilities that provide stable revenue growth and predictable long-term cash flows. We may also selectively finance the development of new health care facilities through joint venture or fee arrangements with health care real estate developers or health system development professionals. Generally, we expect to make investments in new development properties when approximately 80% or more of the development property has been pre-leased before construction commences. We seek to invest in properties where we can develop strategic alliances with financially sound health care providers and health care delivery systems that offer need-based health care services in sustainable health care markets. We focus our investment activity on outpatient medical facilities and ambulatory surgery centers.

We believe that trends such as shifting consumer preferences, limited space in hospitals, the desire of patients and health care providers to limit non-essential services provided in a hospital setting, and cost considerations, continue to drive the industry towards performing more procedures in outpatient facilities versus the hospital setting. As these trends continue, we believe that demand for outpatient medical facilities and similar health care properties away from hospital settings and in convenient locations to patients will continue to rise. We intend to exploit this trend and seek outpatient properties consistent with our investment philosophy and strategies.

While not our focus, we may choose to invest opportunistically in life science facilities, senior housing properties, skilled nursing facilities, specialty hospitals, behavioral health facilities, and treatment centers. Consistent with our qualification as a REIT, we may also opportunistically invest in companies that provide health care services, and in joint venture entities with operating partners, structured to comply with the REIT Investment Diversification Act of 2007.

The Trust is a Maryland real estate investment trust and elected to be taxed as a REIT for U.S. federal income tax purposes. 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. The Trust is the sole general partner of our Operating Partnership and, as of June 30, 2023, owned approximately 96.0% of the OP Units. As of July 27, 2023, there were 238,454,396 common shares outstanding.

Key Transactions in Second Quarter 2023

Investment Activity

During the second quarter ended June 30, 2023, the Company completed the acquisition of two outpatient medical facilities and two medical condominium units for a purchase price of $34.6 million. Additionally, the Company funded an aggregated of $7.0 million on a new term loan, previously announced loan commitments, and other investments. The Company contributed $2.0 million to the Davis Joint Venture to fund additional purchase consideration related to the venture’s acquisitions, $1.9 million of additional purchase consideration under two earn-out agreements. Additionally, the Company funded construction in progress of $4.3 million, resulting in total investment activity of approximately $49.8 million as of June 30, 2023.

El Paso Seller Financing Loan Update

On June 30, 2023, the Company received payment in full for a term loan related to the Foundation El Paso Surgical Hospital, which the Company previously owned. The $27.6 million loan originated in conjunction with the Company’s sale of the facility in October 2019 and yielded interest at a rate of 14.0% per year at the time of payoff.

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Capital Activity

At the Company’s Annual Meeting held on May 3, 2023, shareholders approved the Amended and Restated 2013 Plan. The Amended and Restated 2013 Plan increased the number of common shares authorized for issuance to a total of 11,000,000 and extended the term of the plan from 2029 to 2033, among other changes.

On May 24, 2023, the Operating Partnership borrowed $400 million under the term loan feature of the Credit Agreement. Borrowings under the term loan feature of the Credit Agreement bear interest on the outstanding principal amount at a rate currently equal to 1.10%, inclusive of a 0.10% SOFR index adjustment, plus Daily Simple SOFR as defined in the Credit Agreement. The Company simultaneously entered into fixed-for-floating interest rate swaps for the full borrowing amount under the term loan, fixing the Daily Simple SOFR component of the borrowing rate at 3.593%, for an all-in fixed rate of 4.693%. Both the borrowing and the fixed-for-floating rate swaps have a maturity date of May 24, 2028. A portion of the proceeds from the term loan were used to repay all amounts outstanding on the unsecured revolving credit facility.

Recent Developments

Quarterly Distribution

On June 16, 2023, we announced that our Board of Trustees authorized and declared a cash distribution of $0.23 per common share for the quarterly period ended June 30, 2023. The dividend was paid on July 18, 2023, to common shareholders and OP Unit holders of record as of the close of business on July 5, 2023.

Recent Events

On July 20, 2023, the Company closed on the acquisition of an outpatient medical facility in Palos Heights, Illinois for approximately $2.6 million.

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Results of Operations

Three months ended June 30, 2023 compared to the three months ended June 30, 2022.

The following table summarizes our results of operations for the three months ended June 30, 2023 and 2022 (in thousands):


	2023		2022		Change		%
Revenues:
Rental and related revenues	$	131,178	$	129,328	$	1,850	1.4	%
Interest income on real estate loans and other	3,922		2,839		1,083		38.1	%
Total revenues	135,100		132,167		2,933		2.2	%
Expenses:
Interest expense	20,634		17,234		3,400		19.7	%
General and administrative	10,162		10,028		134		1.3	%
Operating expenses	45,075		42,681		2,394		5.6	%
Depreciation and amortization	47,946		47,702		244		0.5	%

Total expenses	123,817		117,645		6,172		5.2	%
Income before equity in gain (loss) of unconsolidated entities and gain on sale of investment properties, net:	11,283		14,522		(3,239)		(22.3)	%
Equity in gain (loss) of unconsolidated entities	1,802		(224)		2,026		NM
Gain on sale of investment properties, net	—		3,634		(3,634)		NM
Net income	$	13,085	$	17,932	$	(4,847)	(27.0)	%

NM = Not Meaningful

Revenues

Total revenues increased $2.9 million, or 2.2%, for the three months ended June 30, 2023 as compared to the three months ended June 30, 2022. An analysis of selected revenues follows.

Rental and related revenues. Rental and related revenues increased $1.9 million, or 1.4%, for the three months ended June 30, 2023 compared to the three months ended June 30, 2022. Rental and related revenues were comprised of the following based upon contractual billing terms (in thousands):


	2023		2022		Change		%
Rental revenues	$	93,615	$	93,492	$	123	0.1	%
Expense recoveries	37,563		35,836		1,727		4.8	%
Rental and related revenues	$	131,178	$	129,328	$	1,850	1.4	%

Rental revenues increased $0.1 million, or 0.1%, for the three months ended June 30, 2023 compared to the three months ended June 30, 2022. Rental revenues increased $1.7 million from properties acquired in 2023 and 2022. This increase was partially offset by a decrease of $1.6 million related to properties sold in 2023 and 2022.

Expense recoveries increased $1.7 million, or 4.8%, for the three months ended June 30, 2023 compared to the three months ended June 30, 2022. Expense recoveries increased $1.0 million due to higher reimbursable operating expenses on our existing portfolio and $0.7 million from properties acquired in 2023 and 2022.

Interest income on real estate loans and other. Interest income on real estate loans and other increased $1.1 million, or 38.1%, for the three months ended June 30, 2023 as compared to the three months ended June 30, 2022. Interest income on real estate loans and other increased by $1.0 million due to interest earned on the remaining proceeds of $214.0 million from our new $400.0 million term loan.

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Expenses

Total expenses increased $6.2 million, or 5.2%, for the three months ended June 30, 2023 as compared to the three months ended June 30, 2022. An analysis of selected expenses follows.

Interest expense. Interest expense increased $3.4 million, or 19.7%, for the three months ended June 30, 2023 compared to the three months ended June 30, 2022. Interest expense increased $2.6 million due to the new $400 million term loan executed on May 24, 2023. Interest expense also increased $2.2 million due to higher weighted average effective interest rates on our variable debt. These increases were partially offset by an increase of $1.0 million of proceeds from the Company’s outstanding interest rate swaps and $0.4 million due to lower debt balances on our credit facility.

General and administrative. General and administrative expenses increased $0.1 million, or 1.3%, for the three months ended June 30, 2023 compared to the three months ended June 30, 2022. The increase was primarily due to higher travel costs of $0.1 million.

Operating expenses. Operating expenses increased $2.4 million, or 5.6%, for the three months ended June 30, 2023 compared to the three months ended June 30, 2022. Operating expenses on the existing portfolio increased by $1.6 million, or 3.8% quarter over quarter, mainly due to higher maintenance costs of $1.3 million and property management costs of $0.3 million. Operating expenses from properties acquired in 2023 and 2022 increased by $0.8 million.

Depreciation and amortization. Depreciation and amortization increased $0.2 million, or 0.5%, for the three months ended June 30, 2023 compared to the three months ended June 30, 2022. Depreciation and amortization increased $1.1 million for properties purchased in 2023 and 2022. These increases were partially offset by $0.5 million related to properties sold during 2023 and 2022, and $0.4 million related to our existing portfolio primarily due to fully amortized lease intangibles.

Equity in gain (loss) of unconsolidated entities. Equity in gain (loss) of unconsolidated entities increased $2.0 million, for the three months ended June 30, 2023 compared to the three months ended June 30, 2022. This increase was due to a $1.8 million gain on our share of the sale of two assets held within our unconsolidated joint venture portfolio.

Gain on sale of investment properties, net. During the three months ended June 30, 2022, we sold one property containing 17,213 net leasable square feet located in Ohio for approximately $6.4 million, realizing a net gain of approximately $3.7 million.

Six months ended June 30, 2023 compared to the six months ended June 30, 2022.

The following table summarizes our results of operations for the six months ended June 30, 2023 and 2022 (in thousands):


	2023		2022		Change		%
Revenues:
Rental and related revenues	$	262,576	$	257,119	$	5,457	2.1	%
Interest income on real estate loans and other	6,868		5,438		1,430		26.3	%
Total revenues	269,444		262,557		6,887		2.6	%
Expenses:
Interest expense	39,787		34,057		5,730		16.8	%
General and administrative	21,362		20,321		1,041		5.1	%
Operating expenses	90,469		84,433		6,036		7.1	%
Depreciation and amortization	95,623		94,962		661		0.7	%


Total expenses	247,241		233,773		13,468		5.8	%
Income before equity in gain (loss) of unconsolidated entities and gain on sale of investment properties, net:	22,203		28,784		(6,581)		(22.9)	%
Equity in gain (loss) of unconsolidated entities	1,538		(390)		1,928		NM
Gain on sale of investment properties, net	13		3,481		(3,468)		NM
Net income	$	23,754	$	31,875	$	(8,121)	(25.5)	%

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Revenues

Total revenues increased $6.9 million, or 2.6%, for the six months ended June 30, 2023 as compared to the six months ended June 30, 2022. An analysis of selected revenues follows.

Rental and related revenues. Rental and related revenues increased $5.5 million, or 2.1%, for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. Rental and related revenues were comprised of the following based on contractual billing terms (in thousands):


	2023		2022		Change		%
Rental revenues	$	187,158	$	186,157	$	1,001	0.5	%
Expense recoveries	75,418		70,962		4,456		6.3	%
Rental and related revenues	$	262,576	$	257,119	$	5,457	2.1	%

Rental revenues increased $1.0 million, or 0.5%, for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. Rental revenues increased $3.4 million from properties acquired in 2023 and 2022, and $0.8 million from our existing portfolio. This increase was partially offset by a decrease of $3.0 million related to properties sold in 2023 and 2022.

Expense recoveries increased $4.5 million, or 6.3%, for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. Expense recoveries increased $3.0 million due to an increase in reimbursable operating expenses from our existing portfolio, and $1.6 million from properties acquired in 2023 and 2022. These increases were partially offset by $0.1 million related to properties sold in 2023 and 2022.

Interest income on real estate loans and other. Interest income on real estate loans and other increased $1.4 million, or 26.3%, for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. Interest income on real estate loans and other increased by $1.0 million due to interest earned on the remaining proceeds of $214.0 million from our new $400.0 million term loan, and $0.3 million due to higher average real estate loan balances in 2023 compared to 2022.

Expenses

Total expenses increased by $13.5 million, or 5.8%, for the six months ended June 30, 2023 as compared to the six months ended June 30, 2022. An analysis of selected expenses follows.

Interest expense. Interest expense increased $5.7 million, or 16.8%, for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. Interest expense increased $5.5 million due to higher weighted average effective interest rates on our variable debt. Interest expense also increased $2.6 million due to the new $400 million term loan executed on May 24, 2023. These increases were partially offset by an increase of $1.4 million of proceeds from the Company’s outstanding interest rate swaps, $0.7 million due to lower debt balances on our credit facility, and $0.3 million less interest expense from the repayment of our $15.0 million senior unsecured notes in 2023.

General and administrative. General and administrative expenses increased $1.0 million, or 5.1%, for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. The increase was primarily attributable to increased payroll and benefits of $0.5 million, inclusive of non-cash compensation of $0.3 million, and higher professional fees and marketing costs of $0.4 million.

Operating expenses. Operating expenses increased $6.0 million, or 7.1%, for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. Operating expenses on the existing portfolio increased by $4.4 million, or 5.3% year over year, mainly due to additional building maintenance costs of $2.7 million, utility charges of $1.0 million, property administration costs of $0.5 million, and insurance expense of $0.1 million. Net operating expenses from properties acquired in 2023 and 2022 also increased by $1.6 million.

Depreciation and amortization. Depreciation and amortization increased $0.7 million, or 0.7%, for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. Depreciation and amortization increased $2.3 million for properties purchased in 2023 and 2022. These increases were partially offset by $1.0 million from properties sold during 2023 and 2022, and $0.6 million from our existing portfolio primarily due to fully amortized lease intangibles.

Equity in gain (loss) of unconsolidated entities. The $1.9 million change in equity in loss of unconsolidated entities for the six months ended June 30, 2023 compared to the six months ended June 30, 2022 is primarily due to a $1.8 million gain on

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our share of the sale of two assets held within our unconsolidated joint venture portfolio.

Gain on sale of investment properties, net. During the six months ended June 30, 2023, we sold one property in Pennsylvania containing 30,000 square feet for approximately $2.6 million, realizing an insignificant gain. During the six months ended June 30, 2022, we sold two properties with 27,210 net leasable square feet in two states for approximately $8.4 million, recognizing a net gain of $3.5 million.

Cash Flows

Six months ended June 30, 2023 compared to the six months ended June 30, 2022 (in thousands).


	2023		2022
Cash provided by operating activities	$	145,785	$	139,498
Cash used in investing activities	(48,578)		(47,211)
Cash provided by (used in) financing activities	140,723		(101,762)
Increase (decrease) in cash and cash equivalents	$	237,930	$	(9,475)

Cash flows from operating activities. Cash flows provided by operating activities were $145.8 million during the six months ended June 30, 2023 compared to $139.5 million during the six months ended June 30, 2022, representing an increase of $6.3 million. The increase in cash provided by operating activities is primarily due to the timing of payment on our tenant receivables and accrued expenses and other liabilities.

Cash flows from investing activities. Cash flows used in investing activities was $48.6 million during the six months ended June 30, 2023 compared to cash flows provided by investing activities of $47.2 million during the six months ended June 30, 2022, representing a change of $1.4 million. The change in cash used in investing activities was primarily due to net cash spent on the development of real estate and capital expenditures, which increased by $3.2 million, and the net cash spent on acquisitions and sales of investment property, totaling $0.3 million. This was partially offset by net real estate loan payoffs which provided an increase in cash of $2.0 million.

Cash flows from financing activities. Cash flows provided by financing activities was $140.7 million during the six months ended June 30, 2023 compared to cash flows used by financing activities of $101.8 million during the six months ended June 30, 2022, representing a change of $242.5 million. The change in cash provided by financing activities was primarily due to an increase in proceeds from credit facility borrowings of $366.0 million, an increase in the sale of common shares pursuant to the ATM Program of $42.6 million, an increase in contributions from noncontrolling interests of $7.6 million, and a decrease of distributions to noncontrolling interests of $1.0 million. These sources of cash were partially offset by an increase in paydowns under the credit facility of $149.0 million, the repayment of senior unsecured notes of $15.0 million, an increase of dividends paid to shareholders of $5.8 million, an increase in debt issuance costs of $3.8 million, and an increase of $1.6 million for payments of employee taxes withheld for stock-based compensation.

Non-GAAP Financial Measures

This report includes Funds From Operations (“FFO”), Normalized FFO, Normalized Funds Available For Distribution (“FAD”), Net Operating Income (“NOI”), Cash NOI, Outpatient Medical Same-Store Cash NOI, Earnings Before Interest, Taxes, Depreciation and Amortization for Real Estate (“EBITDAre”) and Adjusted EBITDAre, which are non-GAAP financial measures. For purposes of Item 10(e) of Regulation S-K promulgated under the Securities Act, a non-GAAP financial measure is a numerical measure of a company’s historical or future financial performance, financial position or cash flows that excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the most directly comparable financial measure calculated and presented in accordance with GAAP in the statement of operations, balance sheet or statement of cash flows (or equivalent statements) of the company, or includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable financial measure so calculated and presented. As used in this report, GAAP refers to generally accepted accounting principles in the United States of America. Pursuant to the requirements of Item 10(e) of Regulation S-K promulgated under the Securities Act of 1933, as amended (the Securities Act”), we have provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures.

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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. 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 includes our share of required adjustments from our unconsolidated joint ventures and may not be comparable to FFO reported by other REITs that do not compute FFO in accordance with the 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, 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, acceleration of deferred financing costs, net change in fair value of contingent consideration, and other normalizing items. Our Normalized FFO computation includes our share of required adjustments from our unconsolidated joint ventures and 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 of cash flow from operating activities (computed in accordance with GAAP), or as an indicator of our liquidity, nor is it indicative of funds available to fund our cash needs, including our 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, 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 June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Net income	$	13,085	$	17,932	$	23,754	$	31,875
Earnings per share - diluted	$	0.05	$	0.07	$	0.10	$	0.13

Net income	$	13,085	$	17,932	$	23,754	$	31,875
Net income attributable to noncontrolling interests - partially owned properties	(26)		(155)		(70)		(314)

Depreciation and amortization expense	47,834		47,589		95,394		94,738
Depreciation and amortization expense - partially owned properties	(140)		(70)		(278)		(140)
Gain on sale of investment properties, net	—		(3,634)		(13)		(3,481)

Proportionate share of unconsolidated joint venture adjustments	422		2,350		2,728		4,733
FFO applicable to common shares	$	61,175	$	64,012	$	121,515	$	127,411



Proportionate share of unconsolidated joint venture adjustments	—		(270)		—		(278)
Normalized FFO applicable to common shares	$	61,175	$	63,742	$	121,515	$	127,133

FFO per common share - diluted	$	0.25	$	0.27	$	0.49	$	0.53
Normalized FFO per common share - diluted	$	0.25	$	0.27	$	0.49	$	0.53

Weighted average common shares outstanding - diluted	249,228,221		239,006,973		249,069,697		238,738,465

Normalized FAD

We define Normalized FAD, a non-GAAP measure, which excludes from Normalized FFO non-cash share compensation expense, straight-line rent adjustments, amortization of acquired above-market or below-market leases and assumed debt, amortization of lease inducements, amortization of deferred financing costs, and loan reserve adjustments, including our share of all required adjustments from unconsolidated joint ventures. We also adjust for recurring capital expenditures related to building, site, and tenant improvements, leasing commissions, cash payments from seller master leases, and rent abatement payments, including our share of all required adjustments for unconsolidated joint ventures. Other REITs or real estate companies may use different methodologies for calculating Normalized FAD, and accordingly, our computation may not be comparable to those reported by other REITs. Although our computation of Normalized FAD may not be comparable to that of other REITs, we believe Normalized FAD provides a meaningful supplemental measure of our performance due to its frequency of use by analysts, investors, and other interested parties in the evaluation of our performance as a REIT. Normalized FAD should not be considered as an alternative to net income or loss attributable to controlling interest (computed in accordance with GAAP) or as an indicator of our financial performance. Normalized FAD should be reviewed in connection with other GAAP measurements.

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The following is a reconciliation from net income, the most direct financial measure calculated and presented in accordance with GAAP, to Normalized FAD (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Net income	$	13,085	$	17,932	$	23,754	$	31,875
Normalized FFO applicable to common shares	$	61,175	$	63,742	$	121,515	$	127,133

Normalized FFO applicable to common shares	$	61,175	$	63,742	$	121,515	$	127,133
Non-cash share compensation expense	3,655		3,798		8,322		8,051
Straight-line rent adjustments	(701)		(1,727)		(1,936)		(3,881)
Amortization of acquired above/below-market leases/assumed debt	1,119		1,301		2,254		2,640
Amortization of lease inducements	242		225		471		450
Amortization of deferred financing costs	696		579		1,265		1,158
Recurring capital expenditures and lease commissions	(5,790)		(6,868)		(11,576)		(12,531)
Loan reserve adjustments	7		4		10		7

Proportionate share of unconsolidated joint venture adjustments	(226)		(66)		(445)		(497)
Normalized FAD applicable to common shares	$	60,177	$	60,988	$	119,880	$	122,530

NOI, Cash NOI, and Outpatient Medical Same-Store 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 and other investments before general and administrative 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, including our share of all required adjustments from our unconsolidated joint ventures. 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, including our share of all required adjustments from unconsolidated joint ventures. Other non-cash and normalizing items include items such as the amortization of lease inducements, loan reserve adjustments, payments received from seller master leases and rent abatements, and changes in fair value of contingent consideration. 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.

Outpatient Medical Same-Store Cash NOI is a non-GAAP financial measure which excludes from Cash NOI assets not held for the entire preceding five quarters, non-outpatient medical facility assets, and other normalizing items not specifically related to the same-store property portfolio. Management considers Outpatient Medical Same-Store Cash NOI a supplemental measure because it allows investors, analysts, and Company management to measure unlevered property-level operating results. Our use of the term Outpatient Medical Same-Store 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.

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The following is a reconciliation from the Trust’s net income, the most direct financial measure calculated and presented in accordance with GAAP, to NOI, Cash NOI, and Outpatient Medical Same-Store Cash NOI (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Net income	$	13,085	$	17,932	$	23,754	$	31,875
General and administrative	10,162		10,028		21,362		20,321

Depreciation and amortization expense	47,946		47,702		95,623		94,962
Interest expense	20,634		17,234		39,787		34,057

Gain on sale of investment properties, net	—		(3,634)		(13)		(3,481)

Proportionate share of unconsolidated joint venture adjustments	1,758		3,404		5,402		6,826
NOI	$	93,585	$	92,666	$	185,915	$	184,560

NOI	$	93,585	$	92,666	$	185,915	$	184,560
Straight-line rent adjustments	(701)		(1,727)		(1,936)		(3,881)
Amortization of acquired above/below-market leases	1,119		1,301		2,254		2,650
Amortization of lease inducements	242		225		471		450
Loan reserve adjustments	7		4		10		7


Proportionate share of unconsolidated joint venture adjustments	(84)		(99)		(192)		(170)
Cash NOI	$	94,168	$	92,370	$	186,522	$	183,616

Cash NOI	$	94,168	$	92,370
Assets not held for all periods	(1,569)		(1,770)
Non-outpatient medical facilities	(2,804)		(2,850)
Lease termination fees	(16)		(182)
Interest income on real estate loans	(2,512)		(2,248)
Joint venture and other income	(4,915)		(3,634)
Outpatient Medical Same-Store Cash NOI	$	82,352	$	81,686

EBITDAre and Adjusted EBITDAre

We calculate EBITDAre in accordance with standards established by Nareit and define EBITDAre as net income or loss computed in accordance with GAAP plus depreciation and amortization, interest expense, gain or loss on the sale of investment properties, and impairment loss, including our share of all required adjustments from unconsolidated joint ventures. We define Adjusted EBITDAre, which excludes from EBITDAre non-cash share compensation expense, non-cash changes in fair value, pursuit costs, non-cash intangible amortization, corporate high yield interest income, the pro forma impact of investment activity, and other normalizing items. We consider EBITDAre and Adjusted EBITDAre 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.

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The following is a reconciliation from the Trust’s net income, the most direct financial measure calculated and presented in accordance with GAAP, to EBITDAre and Adjusted EBITDAre (in thousands):


	Three Months Ended June 30,
	2023		2022
Net income	$	13,085	$	17,932
Depreciation and amortization expense	47,946		47,702
Interest expense	20,634		17,234
Gain on sale of investment properties, net	—		(3,634)

Proportionate share of unconsolidated joint venture adjustments	1,738		3,674
EBITDAre	$	83,403	$	82,908

Non-cash share compensation expense	3,655		3,798

Pursuit costs	195		93
Non-cash intangible amortization	1,361		1,525
Corporate high yield interest income	(977)		—
Proportionate share of unconsolidated joint venture adjustments	—		(270)
Pro forma adjustments for investment activity	(593)		280
Adjusted EBITDAre	$	87,044	$	88,334

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 June 30, 2023, we had a total of $245.7 million of cash and cash equivalents and $1.0 billion of near-term availability on our unsecured revolving credit facility. Our primary sources of cash include rent we collect from our tenants, borrowings under our unsecured credit facility, and financing of debt and equity securities. 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 year. However, because of the 90% distribution requirement under the REIT tax rules under the Internal Revenue 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 and debt securities, proceeds from select property dispositions and joint venture transactions, and, in connection with acquisitions of additional properties, the issuance of OP Units of our Operating Partnership.

Our ability to access capital in a timely and cost-effective manner is essential to the success of our business strategy as it affects our ability to satisfy existing obligations, including repayment of maturing indebtedness, and to make future investments and acquisitions. Factors such as general market conditions, interest rates, credit ratings on our debt and equity

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securities, expectations of our potential future earnings and cash distributions, and the market price of our common shares, each of which are beyond our control and vary or fluctuate over time, all impact our access to and cost of capital. In particular, to the extent interest rates continue to rise, we may continue to experience a decline in the trading price of our common shares, which may impact our decision to conduct equity offerings for capital raising purposes. We have experienced and will likely continue to experience higher borrowing costs as interest rates rise, which may also impact our decisions to incur additional indebtedness, or to engage in transactions that we may need to fund through borrowing. We expect to continue to utilize equity and debt financing to support our future growth and investment activity.

We also continuously evaluate opportunities to finance future investments. New investments are generally funded from temporary borrowings under our primary unsecured credit facility and the proceeds from financing transactions such as those discussed above. Our investments generate cash from net operating income and principal payments on loans receivable. Permanent financing for future investments, which generally replaces funds drawn under our primary unsecured credit facility, has historically been provided through a combination of the issuance of debt and equity securities and the incurrence or assumption of secured debt.

We intend to invest in additional properties as suitable opportunities arise and adequate sources of financing are available. We are currently 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’s 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 equity or debt securities.

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 currently are in compliance with all debt covenants on our outstanding indebtedness.

Credit Facility

On September 24, 2021, the Operating Partnership, as borrower, and the Trust, as guarantor, executed the Credit Agreement which extended the maturity date of the revolving credit facility under the Credit Agreement to September 24, 2025 and reduced the interest rate margin applicable to borrowings. The Credit Agreement includes an unsecured revolving credit facility of $1.0 billion and contains a term loan feature of $250 million, which the Company borrowed on, bringing total borrowing capacity to $1.25 billion. The Credit Agreement also 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 $500 million, subject to customary terms and conditions, resulting in a maximum borrowing capacity of $1.75 billion. On October 13, 2021, the Company paid off the $250.0 million term loan feature of the Credit Agreement and the term loan feature is no longer available to the Company. The revolving credit facility under the Credit Agreement also includes two six-month extension options.

On March 31, 2023, the Operating Partnership, as borrower, and the Trust, as guarantor, executed a First Amendment to the Credit Agreement which expanded the accordion feature allowing the Operating Partnership to increase borrowing capacity by up to an additional $500.0 million, resulting in a maximum borrowing capacity of $2.25 billion, and replaced the LIBOR-based benchmark rates applicable to borrowings under the Amended Credit Agreement with SOFR based benchmark rates.

On May 24, 2023, the Operating Partnership, as borrower, and the Trust, as guarantor, executed a Second Amendment to the Credit Agreement, which added a new $400 million unsecured term loan with a scheduled maturity date of May 24, 2028, expanded the accordion feature, and allows the Operating Partnership to increase borrowing capacity under the Credit Agreement by up to an additional $500 million, subject to customary terms and conditions, for a maximum aggregate principal amount of all revolving commitments and term loans under the Credit Agreement of $1.9 billion. On the same day, the Operating Partnership borrowed $400 million under the 5-year term loan feature of the Credit Agreement. Borrowings under the term loan feature of 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 1.10%, inclusive of a 0.10% SOFR index adjustment, plus Daily Simple SOFR. The Company simultaneously entered into fixed-for-floating interest rate swaps for the full borrowing amount under the term loan, fixing the Daily Simple SOFR (as defined in the Credit Agreement) component of the borrowing rate to 3.593%, for a all-in

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fixed rate of 4.693%. Both the borrowing and the fixed-for-floating rate swaps have a maturity date of May 24, 2028. A portion of the proceeds from the term loan were used to repay all amounts outstanding on the unsecured revolving credit facility.

As of June 30, 2023, the Company did not have any borrowings outstanding under its $1.0 billion unsecured revolving credit facility, as defined by the Credit Agreement. The credit facility contains a term loan feature that allows the Company to borrow in a single drawing up to $400 million and provides an accordion feature that allows the Company to increase borrowing capacity by up to an additional $500 million, subject to customary terms and conditions for a maximum aggregate principal amount of all revolving commitments and term loans under the Credit Agreement of $1.9 billion. As of June 30, 2023 the Company had $400 million of borrowings outstanding under the term loan feature of the Credit Agreement. See Note 6 (Debt) to our accompanying consolidated financial statements for a further discussion of our credit facility.

Senior Notes

As of June 30, 2023, we had $1.5 billion aggregate principal amount of senior notes issued and outstanding by the Operating Partnership, comprised of $25.0 million maturing in 2025, $70.0 million maturing in 2026, $425.0 million maturing in 2027, $395.0 million maturing in 2028, and $545.0 million maturing in 2031. See Note 6 (Debt) to our accompanying consolidated financial statements for a further discussion of our senior notes.

ATM Program

In May 2021, the Company entered into the Sales Agreement, pursuant to which the Trust may issue and sell, from time to time, its common shares having an aggregate offering price of up to $500 million. In accordance with the Sales Agreement, the Trust may offer and sell its common shares through the Agents, from time to time, by any method deemed to be an “at the market offering” as defined in Rule 415 under the Securities Act, which includes sales made directly on the New York Stock Exchange or other existing trading market, or sales made to or through a market maker. As of June 30, 2023, the Trust has $158.6 million remaining available under the ATM Program.

Dividend Reinvestment and Share Purchase Plan

In December 2014, the Company adopted a Dividend Reinvestment and Share Purchase Plan (“DRIP”). Under the DRIP:

•existing shareholders may purchase additional common shares by reinvesting all or a portion of the dividends paid on their common shares and by making optional cash payments of not less than $50 and up to a maximum of $10,000 per month;

•new investors may join the DRIP by making an initial investment of not less than $1,000 and up to a maximum of $10,000; and

•once enrolled in the DRIP, participants may authorize electronic deductions from their bank account for optional cash payments to purchase additional shares.

The DRIP is administered by our transfer agent, Computershare Trust Company, N.A. Our common shares sold under the DRIP are newly issued or purchased in the open market, as further described in the DRIP. As of June 30, 2023, the Company had issued 224,152 common shares under the DRIP since its inception.

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 ASC, as published by the 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 2022 Annual Report 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.

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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 we could incur substantial tax liabilities which could have an adverse impact upon our results of operations, liquidity, and distributions to our shareholders.

Off-Balance Sheet Arrangements

As of June 30, 2023, we have investments in two unconsolidated joint ventures with ownership interests of 46.5% and 12.3%, respectively. The aggregate carrying amount of debt, including both our and our partners’ share, incurred by these ventures was approximately $764.2 million (of which our proportionate share is approximately $139.1 million). See Note 2 (Summary of Significant Accounting Policies) of Part II, Item 8 (Financial Statements and Supplementary Data) of our 2022 Annual Report for the fiscal year ended December 31, 2022 for additional information. We have no other off-balance sheet arrangements that we expect would materially affect our liquidity and capital resources.

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 four interest rate swaps. See Note 7 (Derivatives) in Part I, Item I of this report and Note 2 (Summary of Significant Accounting Policies) of Part II, Item 8 (Financial Statements and Supplementary Data) of our 2022 Annual Report for further detail on our interest rate swap.

Interest rate 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.

Fixed Interest Rate Debt

As of June 30, 2023, our consolidated fixed interest rate debt totaled $1.5 billion, which represented 73.3% of our total consolidated debt, excluding the impact of the interest rate swap. We entered into fixed-for-floating interest rate swaps for the full borrowing amount of our $400.0 million term loan, fixing the Daily Simple SOFR (as defined in the Credit Agreement) component of the borrowing rate to 3.593%, for an all-in fixed rate as of June 30, 2023 of 4.693%. Both the borrowing and the fixed-for-floating rate swaps have a maturity date of May 24, 2028. The Company also holds a pay-fixed receive-variable rate swap for $36.1 million of our mortgage debt, fixing the variable component of the borrowing rate to 1.35%, for an all-in fixed rate as of June 30, 2023 of 3.25%. Both the borrowing and pay-fixed receive-variable swap have a maturity date of October 31, 2024.

Assuming the effects of our interest rate swap agreements, our fixed interest rate debt would represent 94.8% of our total consolidated debt. Interest rate fluctuations on our fixed interest rate debt will generally not affect our future earnings or cash flows unless such instruments mature or are otherwise terminated. However, interest rate changes could affect the fair value of our fixed interest rate debt.

As of June 30, 2023, the fair value and the carrying value of our consolidated fixed interest rate debt were approximately $1.3 billion and $1.5 billion, respectively. The fair value estimate of our fixed interest rate debt was estimated using a discounted cash flow analysis utilizing rates we would expect to pay for debt of a similar type and remaining maturity if the loans were originated on June 30, 2023. As we expect to hold our fixed interest rate debt instruments to maturity, based on the underlying structure of the debt instrument, and the amounts due under such instruments are limited to the outstanding principal balance and any accrued and unpaid interest, we do not expect that market fluctuations in interest rates, and the resulting change in fair value of our fixed interest rate debt instruments, would have a significant impact on our operating cash flows.

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Variable Interest Rate Debt

As of June 30, 2023, our consolidated variable interest rate debt totaled $541.0 million, which represented 26.7% of our total consolidated debt. Assuming the effects of our interest rate swap agreements, our variable interest rate debt would represent 5.2% of our total consolidated debt. Interest rate changes on our variable rate debt could impact our future earnings and cash flows but would not significantly affect the fair value of such debt. As of June 30, 2023, we were exposed to market risks related to fluctuations in interest rates on $104.9 million of consolidated borrowings. Assuming no increase in the amount of our variable rate debt, if LIBOR and SOFR were to change by 100 basis points, interest expense on our variable rate debt as of June 30, 2023 would change by approximately $0.1 million and $1.0 million annually, respectively.

Derivative Instruments

As of June 30, 2023, we had four outstanding interest rate swaps that were designated as cash flow hedges of interest rate risk, with a total notional amount of $436.1 million. See Note 7 (Derivatives) within our consolidated financial statements for further detail on our interest rate swap. We are exposed to credit risk of the counterparty to our interest rate swap agreements in the event of non-performance under the terms of the agreements. If we were not able to replace the swaps in the event of non-performance by the counterparty, we would be subject to variability of the interest rate on the amount outstanding under our debt that is fixed through the use of the swap.

Indebtedness

As of June 30, 2023, we had total consolidated indebtedness of approximately $2.0 billion. The weighted average interest rate on our consolidated indebtedness was 4.04% (based on the 30-day LIBOR rate of 5.18% and a SOFR rate of 5.09% as of June 30, 2023). As of June 30, 2023, we had approximately $104.9 million, or approximately 5.2%, of our outstanding long-term debt exposed to fluctuations in short-term interest rates. See Note 6 (Debt) to our consolidated financial statements included in Part I, Item 1 to this report for a summary of our indebtedness as of June 30, 2023.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Trust’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Trust’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this report. Based on such evaluation, the Trust’s Chief Executive Officer and Chief Financial Officer concluded that as of June 30, 2023, the Trust’s disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information it is required to disclose in reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to the Trust’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There have been no changes in the Trust’s system of internal control over financial reporting during the quarter ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, the Trust’s internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating the disclosure controls and procedures and the Trust’s internal control over financial reporting, 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. In addition, the design of disclosure controls and procedures and the Trust’s internal control over financial reporting must reflect the fact that there are resource constraints, and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

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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

Information on risk factors can be found in Part I, Item 1A (Risk Factors) of our 2022 Annual Report. There have been no material changes from the risk factors previously disclosed in our 2022 Annual Report.

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

Recent Sales of Unregistered Securities

From time to time the Operating Partnership issues OP Units to the Trust, as required by the Second Amended and Restated Agreement of Limited Partnership, to reflect additional issuances of common shares by the Trust and to preserve equitable ownership ratios.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

The following table sets forth information relating to repurchases of our common shares of beneficial interest and OP Units during the three months ended June 30, 2023:

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
April 1, 2023 - April 30, 2023	5,000	(1)	$	14.45	N/A	N/A
May 1, 2023 - May 31, 2023	—		—		N/A	N/A
June 1, 2023 - June 30, 2023	10,683	(2)	13.99		N/A	N/A
Total	15,683		$	14.14	—	—

(1)Represents OP Units redeemed by holders in exchange for cash.

(2)Represents repurchased common shares to satisfy employee withholding tax obligations related to stock-based compensation.

Item 5. Other Information

On August 1, 2023, the Trust’s Board of Trustees approved amendments to the Trust’s bylaws (as so amended and restated, the “Bylaws”), effective as of such date, to implement proxy access and to add or revise various provisions related to shareholder nominations of trustees, among other changes.

Article II, Section 12 has been added to the Bylaws to permit a nominating shareholder, or a group of up to 20 shareholders, owning at least 3% of the Trust’s common shares of beneficial interest, $0.01 par value per share, for at least three continuous years, to nominate and include in the Trust’s proxy materials up to the greater of two individuals or 20% of the Board of Trustees as trustee nominees, provided that the nominating shareholder(s) and the trustee nominee(s) satisfy the procedural, eligibility and disclosure requirements specified in the Bylaws. The procedural and eligibility requirements set forth in Article II, Section 12 of the Bylaws include a requirement that, subject to certain exceptions, a notice of proxy access nomination must be received by the Secretary of the Trust at the principal executive office of the Trust no earlier than the 150th day and no later than the 120th day prior to the first anniversary of the date of the Trust’s proxy statement for the previous year’s annual meeting of shareholders. Article 11, Section 12 of the Bylaws also includes requirements that the nominating

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shareholder(s) and the trustee nominee(s) provide certain information, representations and agreements to the Trust in order to be eligible for proxy access.

The Bylaws were also amended to reflect certain procedural requirements for shareholder nominations of trustees, including with respect to Rule 14a-19 under the Exchange Act. In particular, the advance notice provisions of the Bylaws were amended to, among other things, (i) require a shareholder and proposed trustee nominee(s) to comply with Rule 14a-19 under the Exchange Act, including that any such shareholder solicit holders of at least 67% of shares entitled to vote on the election of trustees, (ii) require a shareholder to provide additional information regarding the shareholder and trustee nominee(s), and make certain representations and undertakings, (iii) prohibit a shareholder from nominating more trustee nominees than the number of trustees to be elected at the annual meeting of shareholders or substituting or replacing a nominee (unless the substitute or replacement fulfills the obligations set forth in the Bylaws, including compliance with any applicable deadlines) and (iv) require a shareholder to appear in person or by proxy at a meeting of shareholders to present the trustee nominee(s) and to use a proxy card color other than white.

The foregoing summary of the amendments to the Bylaws is qualified in its entirety by reference to the copy of the Bylaws filed herewith as Exhibit 3.1.

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Item 6. Exhibits


Exhibit No.		Description
3.1	(1)	Amended and Restated Bylaws, as amended through August 1, 2023.
10.1	(2)	Physicians Realty Trust Amended and Restated 2013 Equity Incentive Plan, eﬀective May 3, 2023.
10.2	(3)	Second Amendment to Third Amended and Restated Credit Agreement, dated May 24, 2023, among Physicians Realty L.P., as Borrower, Physicians Realty Trust, as Guarantor, KeyBank National Association, as Administrative Agent, and the Lenders party thereto.
22.1		List of Subsidiary Issuers and Guaranteed Securities**
31.1		Certification of John T. Thomas, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Physicians Realty Trust**
31.2		Certification of Jeffrey N. Theiler, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Physicians Realty Trust**
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) for Physicians Realty Trust**

101.INS		This instance document does not appear in the interactive data file because of XBRL tags are embedded within the inline XBRL document.
101.SCH		Inline XBRL Extension Schema Document (+)
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document (+)
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document (+)
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document (+)
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document (+)
104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

** Filed herewith

(+) 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.

(1) Incorporated by reference to the Registrant’s Current Report on Form 8-K filed with the SEC on August 3, 2023 (File No. 001-36007).

(2) Incorporated by reference to the Registrant’s Current Report on Form 8-K ﬁled with the SEC on May 4, 2023 (File No. 001-36007).

(3) Incorporated by reference to the Registrant’s Current Report on Form 8-K ﬁled with the SEC on May 25, 2023 (File No. 001-36007).

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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: August 4, 2023			/s/ John T. Thomas
			John T. Thomas
			President and Chief Executive Officer
			(Principal Executive Officer)


Date: August 4, 2023			/s/ Jeffrey N. Theiler
			Jeffrey N. Theiler
			Executive Vice President and Chief Financial Officer
			(Principal Financial Officer)