Edgar Filing: Physicians Realty Trust

Document

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 March 31, 2018

☐ 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)

Commission file number: 333-205034-01 (Physicians Realty L.P.)

PHYSICIANS REALTY TRUST

PHYSICIANS REALTY L.P.

(Exact Name of Registrant as Specified in its Charter)



Maryland (Physicians Realty Trust) Delaware (Physicians Realty L.P.) (State of Organization)		46-2519850 80-0941870 (IRS Employer Identification No.)

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

(414) 367-5600

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Physicians Realty Trust Yes ý No o Physicians Realty L.P. Yes ý No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Physicians Realty Trust Yes ý No o Physicians Realty L.P. Yes ý No o

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. (Check one):


Physicians Realty Trust	Large accelerated filer ý Accelerated filer o Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company o Emerging growth company o


Physicians Realty L.P.	Large accelerated filer o Accelerated filer o Non-accelerated filer ý (Do not check if a smaller reporting company) Smaller reporting company o Emerging growth company o

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.

Physicians Realty Trust o Physicians Realty L.P. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Physicians Realty Trust Yes o No ý Physicians Realty L.P. Yes o No ý

The number of Physicians Realty Trust’s common shares outstanding as of April 30, 2018 was 182,004,287.

EXPLANATORY NOTE

This Quarterly Report on Form 10-Q combines the Quarterly Reports on Form 10-Q for the quarter ended March 31, 2018 of Physicians Realty Trust (the “Trust”), a Maryland real estate investment trust, and Physicians Realty L.P. (the “Operating Partnership”), a Delaware limited partnership. Unless otherwise indicated or unless the context requires otherwise, all references in this report to “we,” “us,” “our,” and the “Company,” refer to the Trust, together with its consolidated subsidiaries, including the Operating Partnership. References to the “Operating Partnership” mean collectively the Operating Partnership, together with its consolidated subsidiaries. In this report, all references to “common shares” refer to the common shares of the Trust and references to “our shareholders” refer to shareholders of the common shares of the Trust, the term “OP Units” refers to partnership interests of the Operating Partnership and the term “Series A Preferred Units” refers to Series A Participating Redeemable Preferred Units of the Operating Partnership.

The Trust is a self-managed real estate investment trust (“REIT”) formed primarily to acquire, selectively develop, own, and manage healthcare properties that are leased to physicians, hospitals, and healthcare delivery systems. 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 conducts substantially all of its operations through the Operating Partnership. As of March 31, 2018, the Trust held a 97.1% interest in the Operating Partnership and owns no Series A Preferred Units. Apart from this ownership interest, the Trust has no independent operations.

Noncontrolling interests in the Operating Partnership, shareholders’ equity of the Trust and partners’ capital of the Operating Partnership are the primary areas of difference between the consolidated financial statements of the Trust and those of the Operating Partnership. OP Units not owned by the Trust are accounted for as limited partners’ capital in the Operating Partnership’s consolidated financial statements and as noncontrolling interests in the Trust’s consolidated financial statements. The differences between the Trust’s shareholders’ equity and the Operating Partnership’s partners’ capital are due to the differences in the equity issued by the Trust and the Operating Partnership, respectively.

The Company believes combining the Quarterly Reports of the Trust and the Operating Partnership, including the notes to the consolidated financial statements, into this single report results in the following benefits:


•	a combined report enhances investors’ understanding of the Trust and the Operating Partnership by enabling investors to view the business as a whole in the same manner as management views and operates the business;


•	a combined report eliminates duplicative disclosure and provides a more streamlined and readable presentation, as a substantial portion of the Company’s disclosure applies to both the Trust and the Operating Partnership; and


•	a combined report creates time and cost efficiencies through the preparation of one combined report instead of two separate reports.

To help investors understand the significant differences between the Trust and the Operating Partnership, this report presents the following separate sections for each of the Trust and the Operating Partnership:


•	the consolidated financial statements in Part I, Item 1 of this report;


•	certain accompanying notes to the consolidated financial statements, including Note 3 (Acquisitions and Dispositions) and Note 14 (Earnings Per Share and Earnings Per Unit);


•	controls and procedures in Part I, Item 4 of this report; and


•	the certifications of the Chief Executive Officer and the Chief Financial Officer included as Exhibits 31 and 32 to this report.

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PHYSICIANS REALTY TRUST AND PHYSICIANS REALTY L.P.

Quarterly Report on Form 10-Q

for the Quarter Ended March 31, 2018

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		Page Number
Part I	Financial Information

Item 1	Financial Statements (Unaudited)

Financial Statements of Physicians Realty Trust
	Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017	3
	Consolidated Statements of Income for the Three Months Ended March 31, 2018 and 2017	4
	Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2018 and 2017	5
	Consolidated Statement of Equity for the Three Months Ended March 31, 2018	6
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017	7

Financial Statements of Physicians Realty L.P.
	Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017	8
	Consolidated Statements of Income for the Three Months Ended March 31, 2018 and 2017	9
	Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2018 and 2017	10
	Consolidated Statement of Changes in Capital for the Three Months Ended March 31, 2018	11
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017	12

Notes for Physicians Realty Trust and Physicians Realty L.P.
	Notes to Consolidated Financial Statements	13

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
Item 3	Quantitative and Qualitative Disclosures About Market Risk	50
Item 4	Controls and Procedures	51

Part II	Other Information

Item 1	Legal Proceedings	52
Item 1A	Risk Factors	52
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	53
Item 6	Exhibits	55

SIGNATURES		56

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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;


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


•	our failure to generate sufficient cash flows to service our outstanding indebtedness, or our ability to pay down or refinance our indebtedness;


•	fluctuations in interest rates and increased operating costs;


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


•	our ability to make distributions on our common shares;


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


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


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


•	changes in our business or strategy;


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


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


•	the degree and nature of our competition;


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


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


•	decreased rental rates or increased vacancy rates;


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


•	competition for investment opportunities;

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


•	the impact of our investments in joint ventures;


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


•	cybersecurity incidents could disrupt our business and result in the compromise of confidential information;


•	our ability to operate as a public company;


•	changes in accounting principles generally accepted in the United States (GAAP);


•	lack of or insufficient amounts of insurance;


•	other factors affecting the real estate industry generally;


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


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


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


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


•	higher market interest rates;


•	the number of our common shares available for future issuance or sale;


•	our issuance of equity securities or the perception that such issuance might occur;


•	future debt;


•	failure of securities analysts to publish research or reports about us or our industry; and


•	securities analysts’ downgrade of our common shares or the healthcare-related real estate sector.

While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, new information, data or methods, future events or other changes after the date of this report, except as required by applicable law. You should not place undue reliance on any forward-looking statements that are based on information currently available to us or the third parties making the forward-looking statements. For a further discussion of these and other factors that could impact our future results, performance or transactions, see Part II, Item 1A (Risk Factors) of this report and, Part I, Item 1A (Risk Factors) of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 (the “2017 Annual Report”).

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PART I. Financial Information

Item 1. Financial Statements

Physicians Realty Trust

Consolidated Balance Sheets

(In thousands, except share and per share data)



	March 31, 2018			December 31, 2017
	(unaudited)
ASSETS
Investment properties:
Land and improvements	$	214,476		$	217,695
Building and improvements	3,570,056			3,568,858
Tenant improvements	19,121			23,056
Acquired lease intangibles	459,836			458,713
	4,263,489			4,268,322
Accumulated depreciation	(318,393		)	(300,458		)
Net real estate property	3,945,096			3,967,864
Real estate held for sale	93,289			—
Real estate loans receivable	71,529			76,195
Investments in unconsolidated entities	1,331			1,329
Net real estate investments	4,111,245			4,045,388
Cash and cash equivalents	6,550			2,727
Tenant receivables, net	4,293			9,966
Other assets	134,919			106,302
Total assets	$	4,257,007		$	4,164,383
LIABILITIES AND EQUITY
Liabilities:
Credit facility	$	466,828		$	324,394
Notes payable	966,387			966,603
Mortgage debt	154,373			186,471
Accounts payable	2,562			11,023
Dividends and distributions payable	43,388			43,804
Accrued expenses and other liabilities	56,706			56,405
Acquired lease intangibles, net	15,767			15,702
Total liabilities	1,706,011			1,604,402

Redeemable noncontrolling interest - Series A Preferred Units (2018) and partially owned properties	23,736			12,347

Equity:
Common shares, $0.01 par value, 500,000,000 common shares authorized, 181,943,725 and 181,440,051 common shares issued and outstanding as of March 31, 2018 and December 31, 2017, respectively	1,819			1,814
Additional paid-in capital	2,778,616			2,772,823
Accumulated deficit	(345,571		)	(315,417		)
Accumulated other comprehensive income	18,250			13,952
Total shareholders’ equity	2,453,114			2,473,172
Noncontrolling interests:
Operating Partnership	73,527			73,844
Partially owned properties	619			618
Total noncontrolling interests	74,146			74,462
Total equity	2,527,260			2,547,634
Total liabilities and equity	$	4,257,007		$	4,164,383

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 March 31,
	2018			2017
Revenues:
Rental revenues	$	78,887		$	59,092
Expense recoveries	24,308			16,354
Interest income on real estate loans and other	2,028			1,220
Total revenues	105,223			76,666
Expenses:
Interest expense	16,494			9,815
General and administrative	8,459			4,736
Operating expenses	30,459			22,089
Depreciation and amortization	38,576			27,933
Acquisition expenses	—			5,405
Total expenses	93,988			69,978
Income before equity in income of unconsolidated entities and gain on sale of investment properties:	11,235			6,688
Equity in income of unconsolidated entities	28			28
Gain on sale of investment properties	69			—
Net income	11,332			6,716
Net income attributable to noncontrolling interests:
Operating Partnership	(313		)	(147		)
Partially owned properties (1)	(111		)	(167		)
Net income attributable to controlling interests	10,908			6,402
Preferred distributions	(487		)	(211		)
Net income attributable to common shareholders:	$	10,421		$	6,191
Net income per share:
Basic	$	0.06		$	0.04
Diluted	$	0.06		$	0.04
Weighted average common shares:
Basic	181,809,570			138,986,629
Diluted	187,317,243			142,605,930

Dividends and distributions declared per common share and OP Unit	$	0.230		$	0.225


(1)	An adjustment of $0.1 million was required for net income attributable to redeemable noncontrolling interests for the three months ended March 31, 2018 and March 31, 2017.

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 March 31,
	2018			2017
Net income	$	11,332		$	6,716
Other comprehensive income:
Change in fair value of interest rate swap agreements	4,298			825
Total other comprehensive income	4,298			825
Comprehensive income	15,630			7,541
Comprehensive income attributable to noncontrolling interests - Operating Partnership	(438		)	(201		)
Comprehensive income attributable to noncontrolling interests - partially owned properties	(111		)	(167		)
Comprehensive income attributable to common shareholders	$	15,081		$	7,173

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

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Physicians Realty Trust

Consolidated Statement of Equity

(In thousands) (Unaudited)



	Par Value		Additional Paid in Capital			Accumulated Deficit			Accumulated Other Comprehensive Income		Total Shareholders’ Equity			Operating Partnership Noncontrolling Interest			Partially Owned Properties Noncontrolling Interest			Total Noncontrolling Interests			Total Equity
Balance at January 1, 2018	$	1,814	$	2,772,823		$	(315,417	)	$	13,952	$	2,473,172		$	73,844		$	618		$	74,462		$	2,547,634
Net proceeds from sale of common shares	3		5,313			—			—		5,316			—			—			—			5,316
Restricted share award grants, net	2		872			59			—		933			—			—			—			933
Conversion of OP Units	—		126			—			—		126			(126		)	—			(126		)	—
Dividends/distributions declared	—		—			(41,910		)	—		(41,910		)	(1,216		)	—			(1,216		)	(43,126		)
Preferred distributions	—		—			(487		)	—		(487		)	—			—			—			(487		)
Distributions	—		—			—			—		—			—			(43		)	(43		)	(43		)
Change in market value of Redeemable Noncontrolling Interest in Operating Partnership	—		194			1,276			—		1,470			—			—			—			1,470
Change in fair value of interest rate swap agreements	—		—			—			4,298		4,298			—			—			—			4,298
Net income	—		—			10,908			—		10,908			313			44			357			11,265
Adjustment for Noncontrolling Interests ownership in Operating Partnership	—		(712		)	—			—		(712		)	712			—			712			—
Balance at March 31, 2018	$	1,819	$	2,778,616		$	(345,571	)	$	18,250	$	2,453,114		$	73,527		$	619		$	74,146		$	2,527,260

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

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Physicians Realty Trust

Consolidated Statements of Cash Flows

(In thousands) (Unaudited)



	Three Months Ended March 31,
	2018			2017
Cash Flows from Operating Activities:
Net income	$	11,332		$	6,716
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization	38,576			27,933
Amortization of deferred financing costs	618			549
Amortization of lease inducements and above/below-market lease intangibles	1,190			1,307
Straight-line rental revenue/expense	(6,450		)	(4,508		)
Amortization of discount on unsecured senior notes	142			20
Amortization of above market assumed debt	(16		)	(59		)
Gain on sale of investment properties	(69		)	—
Equity in income of unconsolidated entities	(28		)	(28		)
Distributions from unconsolidated entities	26			55
Change in fair value of derivative	2			165
Provision for bad debts	(141		)	(127		)
Non-cash share compensation	2,605			1,490
Net change in fair value of contingent consideration	—			(70		)
Change in operating assets and liabilities:
Tenant receivables	5,437			2,703
Other assets	(222		)	(287		)
Accounts payable	(8,461		)	(1,297		)
Accrued expenses and other liabilities	(3,651		)	(676		)
Net cash provided by operating activities	40,890			33,886
Cash Flows from Investing Activities:
Proceeds on sales of investment properties	2,440			—
Acquisition of investment properties, net	(84,202		)	(174,737		)
Escrowed cash - acquisition deposits / earnest deposits	(2,720		)	1,375
Capital expenditures on existing investment properties	(5,608		)	(3,434		)
Issuance of real estate loans receivable	(2,000		)	(2,279		)
Repayment of real estate loan receivable	6,717			1,507
Issuance of note receivable	(20,385		)	—
Repayment of note receivable	—			16,423
Leasing commissions	(664		)	(552		)
Lease inducements	—			(2,050		)
Net cash used in investing activities	(106,422		)	(163,747		)
Cash Flows from Financing Activities:
Net proceeds from sale of common shares	5,316			301,572
Proceeds from credit facility borrowings	166,000			128,000
Payment on credit facility borrowings	(24,000		)	(529,000		)
Proceeds from issuance of senior unsecured notes	—			396,108
Principal payments on mortgage debt	(32,157		)	(5,823		)
Debt issuance costs	(412		)	(651		)
Dividends paid - shareholders	(42,251		)	(30,945		)
Distributions to noncontrolling interest - Operating Partnership	(1,232		)	(703		)
Preferred distributions paid - OP Unit holder	(81		)	(480		)
Contributions from noncontrolling interest	—			47
Distributions to noncontrolling interest - partially owned properties	(127		)	(154		)
Payments of employee taxes for withheld stock based compensation shares	(1,701		)	(2,431		)
Purchase of Series A Preferred Units	—			(19,961		)
Purchase of OP Units	—			(3,725		)
Net cash provided by financing activities	69,355			231,854
Net increase in cash and cash equivalents	3,823			101,993
Cash and cash equivalents, beginning of period	2,727			15,491
Cash and cash equivalents, end of period	$	6,550		$	117,484
Supplemental disclosure of cash flow information - interest paid during the period	$	19,230		$	10,764
Supplemental disclosure of noncash activity - change in fair value of interest rate swap agreements	$	4,298		$	825
Supplemental disclosure of noncash activity - assumed debt	$	—		$	26,379
Supplemental disclosure of noncash activity - issuance of OP Units and Series A Preferred Units in connection with acquisitions	$	22,651		$	44,978

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

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Physicians Realty L.P.

Consolidated Balance Sheets

(In thousands, except unit and per unit data)



	March 31, 2018			December 31, 2017
	(unaudited)
ASSETS
Investment properties:
Land and improvements	$	214,476		$	217,695
Building and improvements	3,570,056			3,568,858
Tenant improvements	19,121			23,056
Acquired lease intangibles	459,836			458,713
	4,263,489			4,268,322
Accumulated depreciation	(318,393		)	(300,458		)
Net real estate property	3,945,096			3,967,864
Real estate held for sale	93,289			—
Real estate loans receivable	71,529			76,195
Investments in unconsolidated entities	1,331			1,329
Net real estate investments	4,111,245			4,045,388
Cash and cash equivalents	6,550			2,727
Tenant receivables, net	4,293			9,966
Other assets	134,919			106,302
Total assets	$	4,257,007		$	4,164,383
LIABILITIES AND CAPITAL
Liabilities:
Credit facility	$	466,828		$	324,394
Notes payable	966,387			966,603
Mortgage debt	154,373			186,471
Accounts payable	2,562			11,023
Dividends and distributions payable	43,388			43,804
Accrued expenses and other liabilities	56,706			56,405
Acquired lease intangibles, net	15,767			15,702
Total liabilities	1,706,011			1,604,402

Redeemable noncontrolling interest - Series A Preferred Units (2018) and partially owned properties	23,736			12,347

Capital:
Partners’ capital:
General partners’ capital, 181,943,725 and 181,440,051 units issued and outstanding as of March 31, 2018 and December 31, 2017, respectively	2,434,864			2,459,220
Limited partners’ capital, 5,464,217 and 5,364,632 units issued and outstanding as of March 31, 2018 and December 31, 2017, respectively	73,527			73,844
Accumulated other comprehensive income	18,250			13,952
Total partners’ capital	2,526,641			2,547,016
Noncontrolling interest - partially owned properties	619			618
Total capital	2,527,260			2,547,634
Total liabilities and capital	$	4,257,007		$	4,164,383

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

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Physicians Realty L.P.

Consolidated Statements of Income

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



	Three Months Ended March 31,
	2018			2017
Revenues:
Rental revenues	$	78,887		$	59,092
Expense recoveries	24,308			16,354
Interest income on real estate loans and other	2,028			1,220
Total revenues	105,223			76,666
Expenses:
Interest expense	16,494			9,815
General and administrative	8,459			4,736
Operating expenses	30,459			22,089
Depreciation and amortization	38,576			27,933
Acquisition expenses	—			5,405
Total expenses	93,988			69,978
Income before equity in income of unconsolidated entities and gain on sale of investment properties:	11,235			6,688
Equity in income of unconsolidated entities	28			28
Gain on sale of investment properties	69			—
Net income	11,332			6,716
Net income attributable to noncontrolling interests - partially owned properties (1)	(111		)	(167		)
Net income attributable to controlling interests	11,221			6,549
Preferred distributions	(487		)	(211		)
Net income attributable to common unitholders	$	10,734		$	6,338
Net income per common unit:
Basic	$	0.06		$	0.04
Diluted	$	0.06		$	0.04
Weighted average common units:
Basic	187,264,064			142,172,746
Diluted	187,317,243			142,605,930

Distributions declared per common unit	$	0.230		$	0.225


(1)	An adjustment of $0.1 million was required for net income attributable to redeemable noncontrolling interests for the three months ended March 31, 2018 and March 31, 2017.

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

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Physicians Realty L.P.

Consolidated Statements of Comprehensive Income

(In thousands) (Unaudited)



	Three Months Ended March 31,
	2018			2017
Net income	$	11,332		$	6,716
Other comprehensive income:
Change in fair value of interest rate swap agreements	4,298			825
Total other comprehensive income	4,298			825
Comprehensive income	15,630			7,541
Comprehensive income attributable to noncontrolling interests - partially owned properties	(111		)	(167		)
Comprehensive income attributable to common unitholders	$	15,519		$	7,374

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

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Physicians Realty L.P.

Consolidated Statement of Changes in Capital

(In thousands) (Unaudited)



	General Partner			Limited Partner			Accumulated Other Comprehensive Income		Total Partners’ Capital			Partially Owned Properties Noncontrolling Interest			Total Partners’ Capital
Balance at January 1, 2018	2,459,220			73,844			13,952		2,547,016			618			2,547,634
Net proceeds from sale of common shares	5,316			—			—		5,316			—			5,316
Restricted share award grants, net	933			—			—		933			—			933
Conversion of OP Units	126			(126		)	—		—			—			—
OP Units - distributions	(41,910		)	(1,216		)	—		(43,126		)	—			(43,126		)
Preferred distributions	(487		)	—			—		(487		)	—			(487		)
Distributions	—			—			—		—			(43		)	(43		)
Change in market value of Redeemable Limited Partners	194			—			—		194			—			194
Buyout of Noncontrolling Interest - partially owned properties	1,276			—			—		1,276			—			1,276
Change in fair value of interest rate swap agreements	—			—			4,298		4,298			—			4,298
Net income	10,908			313			—		11,221			44			11,265
Adjustments for Limited Partners ownership in Operating Partnership	(712		)	712			—		—			—			—
Balance at March 31, 2018	$	2,434,864		$	73,527		$	18,250	$	2,526,641		$	619		$	2,527,260

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

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Physicians Realty L.P.

Consolidated Statements of Cash Flows

(In thousands) (Unaudited)



	Three Months Ended March 31,
	2018			2017
Cash Flows from Operating Activities:
Net income	$	11,332		$	6,716
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization	38,576			27,933
Amortization of deferred financing costs	618			549
Amortization of lease inducements and above/below-market lease intangibles	1,190			1,307
Straight-line rental revenue/expense	(6,450		)	(4,508		)
Amortization of discount on unsecured senior notes	142			20
Amortization of above market assumed debt	(16		)	(59		)
Gain on sale of investment properties	(69		)	—
Equity in income of unconsolidated entities	(28		)	(28		)
Distributions from unconsolidated entities	26			55
Change in fair value of derivative	2			165
Provision for bad debts	(141		)	(127		)
Non-cash share compensation	2,605			1,490
Net change in fair value of contingent consideration	—			(70		)
Change in operating assets and liabilities:
Tenant receivables	5,437			2,703
Other assets	(222		)	(287		)
Accounts payable	(8,461		)	(1,297		)
Accrued expenses and other liabilities	(3,651		)	(676		)
Net cash provided by operating activities	40,890			33,886
Cash Flows from Investing Activities:
Proceeds on sales of investment properties	2,440			—
Acquisition of investment properties, net	(84,202		)	(174,737		)
Escrowed cash - acquisition deposits / earnest deposits	(2,720		)	1,375
Capital expenditures on existing investment properties	(5,608		)	(3,434		)
Issuance of real estate loans receivable	(2,000		)	(2,279		)
Repayment of real estate loan receivable	6,717			1,507
Issuance of note receivable	(20,385		)	—
Repayment of note receivable	—			16,423
Leasing commissions	(664		)	(552		)
Lease inducements	—			(2,050		)
Net cash used in investing activities	(106,422		)	(163,747		)
Cash Flows from Financing Activities:
Net proceeds from sale of common shares	5,316			301,572
Proceeds from credit facility borrowings	166,000			128,000
Payment on credit facility borrowings	(24,000		)	(529,000		)
Proceeds from issuance of senior unsecured notes	—			396,108
Principal payments on mortgage debt	(32,157		)	(5,823		)
Debt issuance costs	(412		)	(651		)
OP Unit distributions - General Partner	(42,251		)	(30,945		)
OP Unit distributions - Limited Partner	(1,232		)	(703		)
Preferred OP Units distributions - Limited Partner	(81		)	(480		)
Contributions from noncontrolling interest	—			47
Distributions to noncontrolling interest - partially owned properties	(127		)	(154		)
Payments of employee taxes for withheld stock based compensation shares	(1,701		)	(2,431		)
Purchase of Series A Preferred Units	—			(19,961		)
Purchase of Limited Partner Units	—			(3,725		)
Net cash provided by financing activities	69,355			231,854
Net increase in cash and cash equivalents	3,823			101,993
Cash and cash equivalents, beginning of period	2,727			15,491
Cash and cash equivalents, end of period	$	6,550		$	117,484
Supplemental disclosure of cash flow information - interest paid during the period	$	19,230		$	10,764
Supplemental disclosure of noncash activity - change in fair value of interest rate swap agreements	$	4,298		$	825
Supplemental disclosure of noncash activity - assumed debt	$	—		$	26,379
Supplemental disclosure of noncash activity - issuance of OP Units and Series A Preferred Units in connection with acquisitions	$	22,651		$	44,978

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

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Physicians Realty Trust and Physicians Realty L.P.

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”) was organized in the state of Maryland on April 9, 2013. As of March 31, 2018, the Trust was authorized to issue up to 500,000,000 common shares of beneficial interest, par value $0.01 per share (“common shares”). The Trust filed a Registration Statement on Form S-11 with the Securities and Exchange Commission (the “Commission”) 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 and the Operating Partnership are managed and operated as one entity. The Trust has no significant assets other than its investment in 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. Therefore, the assets and liabilities of the Trust and the Operating Partnership are the same.

ATM Program

On August 5, 2016, the Trust and the Operating Partnership entered into separate At Market Issuance Sales Agreements (the “Sales Agreements”) with each of KeyBanc Capital Markets Inc., Credit Agricole Securities (USA) Inc., JMP Securities LLC, Raymond James & Associates, Inc., and Stifel Nicolaus & Company, Incorporated (the “Agents”), pursuant to which the Trust may issue and sell, from time to time, its common shares having an aggregate offering price of up to $300.0 million, through the Agents (the “ATM Program”). In accordance with the Sales Agreements, the Trust may offer and sell its common shares through any of 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 of 1933, as amended, 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. With the Trust’s express written consent, sales may also be made in negotiated transactions or any other method permitted by law.

During the quarterly period ended March 31, 2018, the Trust sold 311,786 common shares pursuant to the ATM Program, at a weighted average price of $17.85 per share, resulting in total net proceeds of approximately $5.5 million.

As of April 30, 2018, the Trust has $168.2 million 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 March 31, 2018 and 2017 pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X. All such adjustments are of a normal recurring nature. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the audited financial statements included in the Trust’s and the Operating Partnership’s combined Annual Report on Form 10-K for the year ended December 31, 2017, filed with the Commission on March 1, 2018.

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Principles of Consolidation

GAAP requires us to identify entities for which control is achieved through means other than voting rights and to determine which business enterprise is the primary beneficiary of variable interest entities (“VIEs”). ASC 810 broadly defines a VIE as an entity in which either (i) the equity investors as a group, if any, lack the power through voting or similar rights to direct the activities of such entity that most significantly impact such entity’s economic performance or (ii) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support. We identify the primary beneficiary of a VIE as the enterprise that has both of the following characteristics: (i) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance, and (ii) the obligation to absorb losses or receive benefits of the VIE that could potentially be significant to the entity. We consolidate our investment in a VIE when we determine that we are the VIE’s primary beneficiary. We may change our original assessment of a VIE upon subsequent events such as the modification of contractual arrangements that affect the characteristics or adequacy of the entity’s equity investments at risk and the disposition of all or a portion of an interest held by the primary beneficiary. We perform this analysis on an ongoing basis.

For property holding entities not determined to be VIEs, we consolidate such entities in which the Operating Partnership owns 100% of the equity or has a controlling financial interest evidenced by ownership of a majority voting interest. All intercompany balances and transactions are eliminated in consolidation. For entities in which the Operating Partnership owns less than 100% of the equity interest, the Operating Partnership consolidates the property if it has the direct or indirect ability to control the entities’ activities based upon the terms of the respective entities’ ownership agreements. For these entities, the Operating Partnership records a noncontrolling interest representing equity held by noncontrolling interests.

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: 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.

Noncontrolling interests in the Company include OP Units held by other investors. As of March 31, 2018, the Trust held a 97.1% 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.

Holders of OP Units may not transfer their OP Units without the Trust’s prior written consent, as general partner of the Operating Partnership. Beginning on the first anniversary of the issuance of OP Units, OP Unit holders may tender their units for redemption by the Operating Partnership in exchange for cash equal to the market price of the Trust’s common shares at the time of redemption or for unregistered common shares on a one-for-one basis. Such selection to pay cash or issue common shares to satisfy an OP Unit holder’s redemption request is solely within the control of the Trust. Accordingly, the Trust presents the OP Units of the Operating Partnership held by investors other than the Trust as noncontrolling interests within equity in the consolidated balance sheets.

Partially Owned Properties: The Trust and Operating Partnership reflect noncontrolling interests in partially owned properties on the balance sheet 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.

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Redeemable Noncontrolling Interests - Series A Preferred Units and Partially Owned Properties

On February 5, 2015, the Company entered into a Second Amended and Restated Agreement of Limited Partnership (the “Partnership Agreement”) which provides for the designation and issuance of the newly designated Series A Participating Redeemable Preferred Units of the Operating Partnership (“Series A Preferred Units”). Series A Preferred Units have priority over all other partnership interests of the Operating Partnership with respect to distributions and liquidation. Holders of Series A Preferred Units are entitled to a 5% cumulative return and upon redemption, the receipt of one common share and $200. The holders of the Series A Preferred Units have agreed not to cause the Operating Partnership to redeem their Series A Preferred Units prior to one year from the issuance date. In addition, Series A Preferred Units are redeemable at the option of the holders which redemption obligation may be satisfied, at the Trust’s option, in cash or registered common shares. Instruments that require settlement in registered common shares may not be classified in permanent equity as it is not always completely within an issuer’s control to deliver registered common shares. Due to the redemption rights associated with the Series A Preferred Units, the Company classifies the Series A Preferred Units in the mezzanine section of the consolidated balance sheets.

The Series A Preferred Units were evaluated for embedded features that should be bifurcated and separately accounted for as a freestanding derivative. The Company determined that the Series A Preferred Units contained features that require bifurcation. The Company records the carrying amount of the redeemable noncontrolling interests, less the value of the embedded derivative, at the greater of the carrying value or redemption value in the consolidated balance sheets.

On January 9, 2018, the acquisition of the HealthEast Clinic & Specialty Center (“Hazelwood Medical Commons”) was partially funded with the issuance of 104,172 Series A Preferred Units with a value of $22.7 million. Due to the redemption rights associated with the Series A Preferred Units the Trust classifies the Series A Preferred Units in the mezzanine section of its consolidated balance sheet. As of March 31, 2018, the value of the embedded derivative is $3.8 million and is classified in accrued expenses and other liabilities on the consolidated balance sheet.

As of March 31, 2018, there were 104,172 Series A Preferred Units outstanding.

In connection with the acquisition of a medical office portfolio in Minnesota (the “Minnesota portfolio”), the Trust received a $5 million equity investment from a third party, effective March 1, 2015. This investment earns a 15% cumulative preferred return. At any point subsequent to the third anniversary of the investment, the holder can require the Trust to redeem the instrument at a price for which the investor will realize a 15% internal rate of return. Due to the redemption provision, which is outside of the control of the Trust, the Trust classifies the investment in the mezzanine section of its consolidated balance sheet. The Trust records the carrying amount of the redeemable noncontrolling interests at the greater of the carrying value or redemption value. As of March 1, 2018, holders redeemed a portion of their noncontrolling interest for $6.4 million.

In connection with the acquisition on December 29, 2015 of a medical office building located on the campus of the Great Falls Clinic and Hospital in Great Falls, Montana, physicians affiliated with the seller retained a noncontrolling interest which may, at the holders’ option, be redeemed at any time. Due to the redemption provision, which is outside of the control of the Trust, the Trust classifies the investment in the mezzanine section of its consolidated balance sheet. The Trust records the carrying amount of the redeemable noncontrolling interests at the greater of the carrying value or redemption value.

Dividends and Distributions

On March 23, 2018, the Trust announced that its Board of Trustees authorized and the Trust declared a cash dividend of $0.23 per common share for the quarterly period ended March 31, 2018. The distribution was paid on April 18, 2018 to common shareholders and OP Unit holders of record as of the close of business on April 3, 2018.

All distributions paid by the Operating Partnership are declared and paid at the same time as dividends are distributed by the Trust to common shareholders. It has been the Operating Partnership’s policy to declare quarterly distributions so as to allow the Trust to comply with applicable provisions of the Internal Revenue Code of 1986, as amended (the “Code”), governing REITs. The declaration and payment of quarterly distributions remains subject to the review and approval of the Trust’s Board of Trustees.