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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
 
FORM 10-Q
 
 

x     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2016
 
or
 
o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from             to
 
Commission file number: 001-36007
 
 
 
PHYSICIANS REALTY TRUST
(Exact Name of Registrant as Specified in its Charter)
 
 

Maryland
(State of Organization)
 
46-2519850
(IRS Employer Identification No.)
 
 
 
309 N. Water Street,
Suite 500
Milwaukee, Wisconsin
(Address of Principal Executive Offices)
 
53202
(Zip Code)
 
(414) 367-5600
(Registrant’s Telephone Number, Including Area Code)
 
 

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

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    x  Yes  o  No
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large Accelerated Filer x
Accelerated Filer o
 
 
Non-Accelerated Filer o
(Do not check if a smaller reporting company)
Smaller reporting company o
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    o  Yes  x  No
 
The number of the Registrant’s common shares outstanding as of August 1, 2016 was 134,576,075.
 


Table of Contents

PHYSICIANS REALTY TRUST
 
Quarterly Report on Form 10-Q
for the Quarter Ended June 30, 2016
 
Table of Contents
 
 

 
 
 
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Table of Contents

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
 
This Quarterly Report on Form 10-Q contains forward-looking statements made pursuant to safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts may be forward-looking statements. In particular, statements pertaining to our capital resources, property performance and results of operations contain forward-looking statements. Likewise, all of our statements regarding anticipated growth in our funds from operations and anticipated market conditions, demographics and results of operations are forward-looking statements. You can identify forward-looking statements by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “pro forma,” “estimates” or “anticipates” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans, 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;

•
fluctuations in interest rates and increased operating costs;

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

•
our ability to make distributions on our common shares;

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

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

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

•
changes in our business or strategy;

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

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

•
the degree and nature of our competition;

•
changes in governmental regulations, tax rates and similar matters;
 
•
defaults on or non-renewal of leases by tenants;

•
decreased rental rates or increased vacancy rates;
 
•
difficulties in identifying healthcare properties to acquire and completing acquisitions;

•
competition for investment opportunities;


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•
our failure to successfully develop, integrate, and operate acquired properties and operations, including our ability to integrate the properties in the CHI Portfolio (as defined herein);

•
the impact of our investment in joint ventures;

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

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

•
changes in accounting principles generally accepted in the United States (GAAP);
 
•
lack of or insufficient amounts of insurance;
 
•
other factors affecting the real estate industry generally;
 
•
our failure to maintain our qualification as a real estate investment trust (or REIT) for U.S. federal income tax purposes;
 
•
limitations imposed on our business and our ability to satisfy complex rules in order for us to qualify as a REIT for U.S. federal income tax purposes;
 
•
changes in governmental regulations or interpretations thereof, such as real estate and zoning laws and increases in real property tax rates and taxation of REITs; and
 
•
factors that may materially adversely affect us, or the per share trading price of our common shares, including:
 
•
higher market interest rates;
•
the number of our common shares available for future issuance or sale;
•
our issuance of equity securities or the perception that such issuance might occur;
•
future debt;
•
failure of securities analysts to publish research or reports about us or our industry; and
•
securities analysts’ downgrade of our common shares or the healthcare-related real estate sector.
 
While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events or other changes after the date of this report, except as required by applicable law. You should not place undue reliance on any forward-looking statements that are based on information currently available to us or the third parties making the forward-looking statements. For a further discussion of these and other factors that could impact our future results, performance or transactions, see Part II, Item 1A (Risk Factors) of this report, Part I, Item 1A (Risk Factors) of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 (the “Annual Report”), and Part II, Item 1A (Risk Factors) of our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2016 (the “First Quarterly Report”).
 
In this report, the terms “we,” “us,” “our,” “our company,” the “Trust,” the “Company,” and “Physicians Realty” refer to Physicians Realty Trust, a Maryland real estate investment trust, together with its consolidated subsidiaries, including Physicians Realty L.P., a Delaware limited partnership, which we refer to in this report as our “Operating Partnership”. In this report, the term “OP Units” refers to partnership interests in the Operating Partnership and the term “Series A Preferred Units” refers to Series A Participating Redeemable Preferred Units of the Operating Partnership, which have priority over the OP Units with respect to distributions and liquidation.


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PART I.                         Financial Information
Item 1.                                 Financial Statements
Physicians Realty Trust
Consolidated Balance Sheets
(In thousands, except share and per share data)
 
June 30,
2016
 
December 31,
2015
 
(unaudited)
 
 
ASSETS
 

 
 

Investment properties:
 

 
 

Land and improvements
$
160,718

 
$
130,788

Building and improvements
2,080,192

 
1,284,863

Tenant improvements
11,519

 
9,243

Acquired lease intangibles
263,919

 
205,168

 
2,516,348


1,630,062

Accumulated depreciation
(129,136
)
 
(91,250
)
Net real estate property
2,387,212


1,538,812

Real estate loans receivable
38,774

 
39,349

Investment in unconsolidated entity
1,354

 
1,322

Net real estate investments
2,427,340


1,579,483

Cash and cash equivalents
37,945

 
3,143

Tenant receivables, net
3,427

 
2,977

Other assets
64,200

 
53,283

Total assets
$
2,532,912


$
1,638,886

LIABILITIES AND EQUITY
 

 
 

Liabilities:
 

 
 

Credit facility
$
369,685

 
$
389,375

Notes payable
149,561

 
—

Mortgage debt
114,296

 
94,240

Accounts payable
1,723

 
644

Dividends payable
31,771

 
20,783

Accrued expenses and other liabilities
38,593

 
24,473

Acquired lease intangibles, net
9,348

 
5,950

Total liabilities
714,977


535,465

 
 
 
 
Redeemable noncontrolling interest - Operating Partnership and partially owned properties
19,867

 
26,960

 
 
 
 
Equity:
 

 
 

Common shares, $0.01 par value, 500,000,000 common shares authorized, 134,337,589 and 86,864,063 common shares issued and outstanding as of June 30, 2016 and December 31, 2015, respectively.
1,348

 
872

Additional paid-in capital
1,890,016

 
1,129,284

Accumulated deficit
(153,243
)
 
(109,024
)
Total shareholders’ equity
1,738,121


1,021,132

Noncontrolling interests:
 

 
 

Operating Partnership
50,155

 
45,451

Partially owned properties
9,792

 
9,878

Total noncontrolling interests
59,947


55,329

Total equity
1,798,068


1,076,461

Total liabilities and equity
$
2,532,912


$
1,638,886


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

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Physicians Realty Trust
Consolidated Statements of Income
(In thousands, except share and per share data) (Unaudited)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2016
 
2015
 
2016
 
2015
Revenues:
 

 
 

 
 

 
 

Rental revenues
$
42,196

 
$
23,625

 
$
77,051

 
$
43,966

Expense recoveries
9,552

 
4,908

 
17,455

 
8,444

Interest income on real estate loans and other
1,468

 
1,150

 
2,844

 
1,757

Total revenues
53,216


29,683


97,350


54,167

Expenses:
 

 
 

 
 

 
 

Interest expense
4,279

 
2,193

 
8,476

 
3,903

General and administrative
4,926

 
3,989

 
9,047

 
7,341

Operating expenses
13,798

 
7,304

 
24,835

 
13,013

Depreciation and amortization
19,799

 
10,351

 
35,809

 
18,591

Acquisition expenses
3,256

 
2,575

 
6,633

 
8,507

Total expenses
46,058


26,412


84,800


51,355

Income before equity in income of unconsolidated entity and loss on sale of investment property:
7,158

 
3,271

 
12,550

 
2,812

Equity in income of unconsolidated entity
26

 
26

 
58

 
52

Loss on sale of investment property
—

 
—

 
—

 
(15
)
Net income
7,184


3,297


12,608


2,849

Net income attributable to noncontrolling interests:
 

 
 

 
 

 
 

Operating Partnership
(201
)
 
(157
)
 
(374
)
 
(133
)
Partially owned properties
(60
)
 
(144
)
 
(377
)
 
(176
)
Net income attributable to controlling interest
6,923


2,996


11,857


2,540

Preferred distributions
(437
)
 
(425
)
 
(985
)
 
(491
)
Net income attributable to common shareholders
$
6,486


$
2,571


$
10,872


$
2,049

Net income per share:
 

 
 

 
 

 
 

Basic
$
0.05

 
$
0.04

 
$
0.09

 
$
0.03

Diluted
$
0.05

 
$
0.04

 
$
0.09

 
$
0.03

Weighted average common shares:
 

 
 

 
 

 
 

Basic
131,481,329

 
70,376,959

 
117,092,668

 
68,026,278

Diluted
135,944,722

 
74,267,283

 
121,575,247

 
71,862,249

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

 
$
0.225

 
$
0.45

 
$
0.45

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


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

 
$
1,129,284

 
$
(109,024
)
 
$
1,021,132

 
$
45,451

 
$
9,878

 
$
55,329

 
$
1,076,461

Net proceeds from sale of common shares
472

 
763,733

 
—

 
764,205

 
—

 
—

 
—

 
764,205

Restricted share award grants, net
2

 
2,597

 
(270
)
 
2,329

 
—

 
—

 
—

 
2,329

Purchase of OP Units
—

 
—

 
—

 
—

 
(2,129
)
 
—

 
(2,129
)
 
(2,129
)
Conversion of OP Units
2

 
3,291

 
—

 
3,293

 
(3,293
)
 
—

 
(3,293
)
 
—

Dividends/distributions declared
—

 
—

 
(54,821
)
 
(54,821
)
 
(1,662
)
 
—

 
(1,662
)
 
(56,483
)
Preferred distributions
—

 
—

 
(985
)
 
(985
)
 
—

 
—

 
—

 
(985
)
Issuance of OP Units in connection with acquisition
—

 
(3,900
)
 
—

 
(3,900
)
 
6,869

 
(100
)
 
6,769

 
2,869

Distributions
—

 
—

 
—

 
—

 
—

 
(363
)
 
(363
)
 
(363
)
Change in market value of Redeemable Noncontrolling Interests in Operating Partnership
—

 
(444
)
 
—

 
(444
)
 
—

 
—

 
—

 
(444
)
Net income
—

 
—

 
11,857

 
11,857

 
374

 
377

 
751

 
12,608

Adjustment for Noncontrolling Interests ownership in Operating Partnership
—

 
(4,545
)
 
—

 
(4,545
)
 
4,545

 
—

 
4,545

 
—

Balance at June 30, 2016
$
1,348


$
1,890,016


$
(153,243
)

$
1,738,121


$
50,155


$
9,792


$
59,947


$
1,798,068

 
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,
 
2016
 
2015
Cash Flows from Operating Activities:
 

 
 

Net income
$
12,608

 
$
2,849

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 

Depreciation and amortization
35,809

 
18,591

Amortization of deferred financing costs
947

 
594

Amortization of lease inducements and above/below market lease intangibles
1,989

 
838

Straight-line rental revenue/expense
(7,204
)
 
(3,889
)
Amortization of above market assumed debt
(118
)
 
(55
)
Loss on sale of investment property
—

 
15

Equity in income of unconsolidated entity
(58
)
 
(52
)
Distribution from unconsolidated entity
27

 
53

Change in fair value of derivative
(67
)
 
(154
)
Provision for bad debts
104

 
—

Non-cash share compensation
2,599

 
1,944

Change in operating assets and liabilities:
 

 
 

Tenant receivables
(1,001
)
 
(1,453
)
Other assets
(3,081
)
 
(1,231
)
Accounts payable
1,079

 
397

Accrued expenses and other liabilities
15,908

 
4,013

Net cash provided by operating activities
59,541


22,460

Cash Flows from Investing Activities:
 

 
 

Proceeds on sales of investment property
—

 
1,550

Acquisition of investment properties, net
(872,497
)
 
(336,128
)
Capital expenditures on existing investment properties
(6,980
)
 
(1,815
)
Real estate loans receivable
(3,478
)
 
(9,000
)
Repayment of note receivable
4,118

 
—

Note receivable
—

 
(4,123
)
Repayment of real estate loan receivable
4,500

 
—

Leasing commissions
(116
)
 
(63
)
Lease inducements
(4,870
)
 
(2,445
)
Net cash used in investing activities
(879,323
)

(352,024
)
Cash Flows from Financing Activities:
 

 
 

Net proceeds from sale of common shares
764,205

 
318,041

Proceeds from credit facility borrowings
528,000

 
191,000

Payment on credit facility borrowings
(545,000
)
 
(138,000
)
Proceeds from issuance of mortgage debt
21,500

 
—

Proceeds from issuance of senior unsecured notes
150,000

 
—

Principal payments on mortgage debt
(1,089
)
 
(966
)
Debt issuance costs
(4,313
)
 
(144
)
Dividends paid - shareholders
(44,151
)
 
(31,613
)
Distributions to noncontrolling interest - Operating Partnership
(1,616
)
 
(1,523
)
Preferred distributions paid - OP Unit holder
(704
)
 
(238
)
Distributions to noncontrolling interest - partially owned properties
(363
)
 
(114
)
Purchase of Series A Preferred Units
(9,756
)
 
—

Purchase of OP Units
(2,129
)
 
(253
)
Net cash provided by financing activities
854,584


336,190

Net increase in cash and cash equivalents
34,802

 
6,626

Cash and cash equivalents, beginning of period
3,143

 
15,923

Cash and cash equivalents, end of period
$
37,945


$
22,549

Supplemental disclosure of cash flow information - interest paid during the period
$
4,300

 
$
3,332

Supplemental disclosure of noncash activity - assumed debt
$
—

 
$
18,690

Supplemental disclosure of noncash activity - issuance of OP Units and Series A Preferred Units in connection with acquisitions
$
6,869

 
$
20,438

Supplemental disclosure of noncash activity - contingent consideration
$
156

 
$
1,482


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

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Physicians Realty Trust
Notes to Consolidated Financial Statements
 
Note 1. Organization and Business
 
Physicians Realty Trust (the “Trust”) was organized in the state of Maryland on April 9, 2013. As of June 30, 2016, the Trust was authorized to issue up to 500,000,000 common shares of beneficial interest, par value $0.01 per share (“common shares”). The Trust filed a Registration Statement on Form S-11 with the Securities and Exchange Commission (the “Commission” or the “SEC”) with respect to a proposed underwritten initial public offering (the “IPO”) and completed the IPO of its common shares and commenced operations on July 24, 2013.
 
The Trust contributed the net proceeds from the IPO to Physicians Realty L.P., a Delaware limited partnership (the “Operating Partnership”), and is the sole general partner of the Operating Partnership. The Trust’s operations are conducted through the Operating Partnership and wholly-owned and majority-owned subsidiaries of the Operating Partnership. The Trust, as the general partner of the Operating Partnership, controls the Operating Partnership and consolidates the assets, liabilities, and results of operations of the Operating Partnership.
 
The Trust is a self-managed real estate investment trust (“REIT”) formed primarily to acquire, selectively develop, own, and manage healthcare properties that are leased to physicians, hospitals, and healthcare delivery systems.
 
2016 Follow-On Public Offerings

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

On April 11, 2016, the Trust completed a follow-on public offering of 25,875,000 common shares of beneficial interest, including 3,375,000 common shares issued upon exercise of the underwriters’ overallotment option, resulting in net proceeds to it of approximately $442.8 million. The Trust contributed the net proceeds of this offering to the Operating Partnership in exchange for 25,875,000 OP Units, and the Operating Partnership used the net proceeds of the public offering to repay borrowings under its unsecured revolving credit facility, for general corporate and working capital purposes, for funding acquisitions, and to fund a portion of the purchase price for the acquisition of medical office facilities (the “CHI Portfolio”) from certain subsidiaries and affiliates of Catholic Health Initiatives (the “CHI Acquisition”).
 
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, 2016 and 2015 pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X. All such adjustments are of a normal recurring nature. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the audited financial statements included in the Trust’s Annual Report on Form 10-K for the year ended December 31, 2015, filed with the SEC on February 29, 2016.
 
Principles of Consolidation
 
GAAP requires the Trust to identify entities for which control is achieved through means other than voting rights and to determine which business enterprise is the primary beneficiary of variable interest entities (“VIEs”). ASC 810 broadly defines a VIE as an entity in which either (i) the equity investors as a group, if any, lack the power through voting or similar rights to direct the activities of such entity that most significantly impact such entity’s economic performance or (ii) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support. The Trust identifies the primary beneficiary of a VIE as the enterprise that has both of the following characteristics: (i) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance; and (ii) the obligation to absorb losses or receive benefits of the VIE that could potentially be significant to the entity. The Trust consolidates its investment in a VIE when it determines that the Trust is the VIE’s primary beneficiary. The Trust may change its original assessment of a VIE upon subsequent events such as the modification of contractual arrangements that affect the characteristics or adequacy of the

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entity’s equity investments at risk and the disposition of all or a portion of an interest held by the primary beneficiary. The Trust performs this analysis on an ongoing basis.
 
For property holding entities not determined to be VIEs, the Trust consolidates such entities in which the Trust or the Operating Partnership owns 100% of the equity or has a controlling financial interest evidenced by ownership of a majority voting interest. All intercompany balances and transactions are eliminated in consolidation. For entities in which the Trust owns less than 100% of the equity interest, the Trust consolidates the property if it has the direct or indirect ability to control the entities’ activities based upon the terms of the respective entities’ ownership agreements. For these entities, the Trust records a noncontrolling interest representing equity held by noncontrolling interests.
 
Noncontrolling Interests
 
The Trust presents the portion of any equity it does not own in entities that it controls (and thus consolidates) as noncontrolling interests and classifies such interests as a component of consolidated equity, separate from the Trust’s total shareholders’ equity, on the consolidated balance sheets.
 
Operating Partnership: Net income or loss is allocated to noncontrolling interests based on their respective ownership percentage of the Operating Partnership. The ownership percentage is calculated by dividing the number of OP Units held by the noncontrolling interests by the total OP Units held by the noncontrolling interests and the Trust. Issuance of additional Common Shares and OP Units changes the ownership interests of both the noncontrolling interests and the Trust. Such transactions and the related proceeds are treated as capital transactions.
 
During the three months ended March 31, 2016, the Operating Partnership partially funded a property acquisition by issuing an aggregate of 174,085 OP Units valued at approximately $2.9 million. The acquisition had a total purchase price of approximately $8.5 million.

During the three months ended June 30, 2016, the Operating Partnership funded the acquisition of the remaining non-controlling interest on a property by issuing an aggregate of 217,549 OP Units valued at approximately $4.0 million.
 
Noncontrolling interests in the Trust represent OP Units held by the Predecessor’s prior investors and other investors. As of June 30, 2016, the Trust held a 97.2% interest in the Operating Partnership. As the sole general partner and the majority interest holder, the Trust consolidates the financial position and results of operation of the Operating Partnership.
 
Holders of OP Units may not transfer their OP Units without the Trust’s prior written consent, as general partner of the Operating Partnership. Beginning on the first anniversary of the issuance of OP Units, OP Unit holders may tender their OP Units for redemption by the Operating Partnership in exchange for cash equal to the market price of the Trust’s common shares at the time of redemption or for unregistered common shares on a one-for-one basis. Such selection to pay cash or issue common shares to satisfy an OP Unit holder’s redemption request is solely within the control of the Trust. Accordingly, the Trust presents the OP Units of the Operating Partnership held by the Predecessor’s prior investors and other investors as noncontrolling interests within equity in the consolidated balance sheet.
 
Partially Owned Properties: The Trust reflects noncontrolling interests in partially owned properties on the balance sheet for the portion of properties consolidated by the Trust that are not wholly owned by the Trust. The earnings or losses from those properties attributable to the noncontrolling interests are reflected as “net income or loss attributable to noncontrolling interests - partially owned properties” in the consolidated statements of income.
 
Redeemable Noncontrolling Interests - Operating Partnership and Partially Owned Properties
 
On February 5, 2015, the Trust entered into a Second Amended and Restated Agreement of Limited Partnership (the “Partnership Agreement”) which provides for the designation and issuance of the newly designated Series A Participating Redeemable Preferred Units of the Operating Partnership (“Series A Preferred Units”). Series A Preferred Units have priority over all other partnership interests of the Operating Partnership with respect to distributions and liquidation. Holders of Series A Preferred Units are entitled to a 5% cumulative return and upon redemption, the receipt of one common share and $200. The holders of the Series A Preferred Units have agreed not to cause the Operating Partnership to redeem their Series A Preferred Units prior to one year from the issuance date. In addition, Series A Preferred Units are redeemable at the option of the holder, and redemption obligations may be satisfied, at the Trust’s option, in cash or registered common shares. Instruments that require settlement in registered common shares may not be classified in permanent equity as it is not always completely within an issuer’s control to deliver registered common shares. Due to the redemption provision, which is outside of the control of the Trust, the Trust classifies the investment in the mezzanine section of its consolidated balance sheet. The Trust records the

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carrying amount of the redeemable noncontrolling interests at the greater of the carrying value or redemption value. The fair value of the embedded derivative is $6.2 million and is included on the Trust’s consolidated balance sheets in accrued expenses and other liabilities.

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

On April 1, 2016, 44,685 Series A Preferred Units issued in conjunction with the Minnetonka MOB acquisition were redeemed for a total value of $9.8 million. The fair value of the embedded derivative associated with the previously outstanding Series A Preferred Units was $2.7 million.

Dividends and Distributions
 
On June 23, 2016, the Trust announced that its Board of Trustees authorized and the Trust declared a cash dividend of $0.225 per common share for the quarterly period ended June 30, 2016. The distribution was paid on July 18, 2016 to common shareholders and OP Unit holders of record as of the close of business on July 5, 2016.
 
Purchase of Investment Properties
 
A property acquired not subject to an existing lease is treated as an asset acquisition and recorded at its purchase price, inclusive of acquisition costs, allocated between the acquired tangible and intangible assets and assumed liabilities based upon their relative fair values at the date of acquisition. A property acquired with an existing lease is accounted for as a business combination pursuant to the acquisition method in accordance with ASC Topic 805, Business Combinations (“ASC 805”), and assets acquired and liabilities assumed, including identified intangible assets and liabilities, are recorded at fair value.
 
The determination of fair value involves the use of significant judgment and estimation. The Trust makes estimates of the fair value of the tangible and intangible acquired assets and assumed liabilities using information obtained from multiple sources as a result of pre-acquisition due diligence and may include the assistance of a third party appraiser. The Trust estimates the fair value of buildings acquired on an “as-if-vacant” basis and depreciates the building value over the estimated remaining life of the building. The Trust determines the allocated value of other fixed assets, such as site improvements, based upon the replacement cost and depreciates such value over the assets’ estimated remaining useful lives as determined at the applicable acquisition date. The fair value of land is determined either by considering the sales prices of similar properties in recent transactions or based on internal analyses of recently acquired and existing comparable properties within the Trust’s portfolio.
 
In recognizing identified intangible assets and liabilities in connection with a business combination, the value of above-or-below market leases is estimated based on the present value (using an interest rate which reflected the risks associated with the leases acquired) of the difference between contractual amounts to be received pursuant to the leases and management’s estimate of market lease rates measured over a period equal to the estimated remaining term of the lease. The capitalized above-market or below-market lease intangibles are amortized as a reduction or addition to rental income over the estimated remaining term of the respective leases plus the term of any renewal options that the lessee would be economically compelled to exercise.
 
In determining the value of in-place leases, management considers current market conditions and costs to execute similar leases in arriving at an estimate of the carrying costs during the expected lease-up period from vacant to existing occupancy. In estimating carrying costs, management includes real estate taxes, insurance, other operating expenses, estimates of lost rental revenue during the expected lease-up periods, and costs to execute similar leases, including leasing commissions, tenant improvements, legal, and other related costs based on current market demand. The values assigned to in-place leases are amortized to amortization expense over the estimated remaining term of the lease. If a lease terminates prior to its scheduled expiration, all unamortized costs related to that lease are written off, net of any required lease termination payments.
 
The Trust calculates the fair value of any long-term debt assumed by discounting the remaining contractual cash flows on each instrument at the current market rate for those borrowings, which the Trust approximates based on the rate at which it would expect to incur on a replacement instrument on the date of acquisition, and recognizes any fair value adjustments related to long-term debt as effective yield adjustments over the remaining term of the instrument.
 

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Based on these estimates, the Trust recognizes the acquired assets and assumed liabilities at their estimated fair values, which are generally determined using Level 3 inputs, such as market rental rates, capitalization rates, discount rates, or other available market data. Initial valuations are subject to change until the information is finalized, no later than 12 months from the acquisition date. The Trust expenses transaction costs associated with acquisitions accounted for as business combinations in the period incurred.

Impairment of Intangible and Long-Lived Assets
 
The Trust periodically evaluates its long-lived assets, primarily consisting of investments in real estate, for impairment indicators or whenever events or changes in circumstances indicate that the recorded amount of an asset may not be fully recoverable. If indicators of impairment are present, the Trust evaluates the carrying value of the related real estate properties in relation to the undiscounted expected future cash flows of the underlying operations. In performing this evaluation, management considers market conditions and current intentions with respect to holding or disposing of the real estate property. The Trust adjusts the net book value of real estate properties to fair value if the sum of the expected future undiscounted cash flows, including sales proceeds, is less than book value. The Trust recognizes an impairment loss at the time it makes any such determination. If the Trust determines that an asset is impaired, the impairment to be recognized is measured as the amount by which the recorded amount of the asset exceeds its fair value. Fair value is typically determined using a discounted future cash flow analysis or other acceptable valuation techniques, which are based, in turn, upon Level 3 inputs, such as revenue and expense growth rates, capitalization rates, discount rates, or other available market data.
 
The Trust did not record impairment charges in the three and six month periods ended June 30, 2016 and 2015.
 
Investments in Unconsolidated Entities
 
The Trust reports investments in unconsolidated entities over whose operating and financial policies it has the ability to exercise significant influence under the equity method of accounting. Under this method of accounting, the Trust’s share of the investee’s earnings or losses is included in its consolidated statements of income. The initial carrying value of investments in unconsolidated entities is based on the amount paid to purchase the equity interest.
 
Real Estate Loans Receivable
 
Real estate loans receivable consists of seven mezzanine loans and a term loan. Each mezzanine loan is collateralized by an ownership interest in the respective borrower, while the term loan is secured by an equity interest in one medical office building development. Interest income on the loans are recognized as earned based on the terms of the loans subject to evaluation of collectability risks and are included in the Trust’s consolidated statements of income.
 
Rental Revenue
 
Rental revenue is recognized on a straight-line basis over the terms of the related leases when collectability is reasonably assured. Recognizing rental revenue on a straight-line basis for leases may result in recognizing revenue for amounts more or less than amounts currently due from tenants. Amounts recognized in excess of amounts currently due from tenants are included in other assets and were approximately $22.8 million and $15.6 million as of June 30, 2016 and December 31, 2015, respectively. If the Trust determines that collectability of straight-line rents is not reasonably assured, the Trust limits future recognition to amounts contractually owed and, where appropriate, establishes an allowance for estimated losses. Rental revenue is adjusted by amortization of lease inducements and above or below market rents on certain leases. Lease inducements and above or below market rents are amortized over the remaining life of the lease.
 
Expense Recoveries
 
Expense recoveries relate to tenant reimbursement of real estate taxes, insurance, and other operating expenses that are recognized as expense recovery revenue in the period the applicable expenses are incurred. The reimbursements are recorded at gross, as the Trust is generally the primary obligor with respect to real estate taxes and purchasing goods and services from third-party suppliers, has discretion in selecting the supplier, and bears the credit risk of tenant reimbursement.
 
The Trust has certain tenants with absolute net leases. Under these lease agreements, the tenant is responsible for operating and building expenses. For absolute net leases, the Trust does not recognize expense recoveries.


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Income Taxes
 
The Trust elected to be taxed as a REIT for federal tax purposes commencing with the filing of its tax return for the short taxable year ending December 31, 2013. The Trust had no taxable income prior to electing REIT status. To qualify as a REIT, the Trust must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of its annual REIT taxable income to its shareholders (which is computed without regard to the dividends paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP). As a REIT, the Trust generally will not be subject to federal income tax to the extent it distributes qualifying dividends to its shareholders. If the Trust fails to qualify as a REIT in any taxable year, it will be subject to federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate income tax rates and generally will not be permitted to qualify for treatment as a REIT for federal income tax purposes for the four taxable years following the year during which qualification is lost, unless the Internal Revenue Service grants the Trust relief under certain statutory provisions. Such an event could materially adversely affect the Trust’s net income and net cash available for distribution to shareholders. However, the Trust intends to continue to operate in such a manner as to continue qualifying for treatment as a REIT. Although the Trust continues to qualify for taxation as a REIT, the Trust may be subject to state and local taxes on its income and property and federal income and excise taxes on its undistributed income.
 
Management Estimates
 
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the amounts of revenue and expenses reported in the period. Significant estimates are made for the fair value assessments with respect to purchase price allocations, impairment assessments, stock-based compensation, and the valuation of financial instruments. Actual results could differ from these estimates.
 
Contingent Liabilities
 
The Trust records a liability for contingent consideration (included in accrued expenses and other liabilities on its consolidated balance sheets) at fair value as of the acquisition date and reassesses the fair value at the end of each reporting period, with any changes being recognized in earnings. Increases or decreases in the fair value of contingent consideration can result from changes in discount periods, discount rates, and probabilities that contingencies will be met.
 
Reclassifications
 
Certain prior period amounts have been reclassified to conform to the current financial statement presentation, with no effect on the previously reported consolidated financial position or consolidated results of operations.
 
New Accounting Pronouncements
 
In May 2014, the FASB issued ASU 2014-9, Revenue from Contracts with Customers, which creates a new Topic, Accounting Standards Codification Topic 606. The standard is principle-based and provides a five-step model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This standard is effective for interim or annual periods beginning after December 15, 2017 and allows for either full retrospective or modified retrospective adoption. Early adoption of this standard is permitted for reporting periods beginning after December 15, 2016. The Trust is currently evaluating the impact the adoption of Topic 606 will have on its consolidated financial statements.

In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis. ASU 2015-02 requires entities to evaluate whether they should consolidate certain legal entities. Principally, the new consolidation standard modified the evaluation of whether limited partnerships and similar legal entities are variable interest entities ("VIE") or voting interest entities. The Trust adopted ASU 2015-02 on January 1, 2016. Based on the Trust’s review and subsequent analysis of the structure of the Trust’s legal entities, the Trust has concluded that the Operating Partnership is a VIE because the limited partners of the Operating Partnership do not have substantive kick-out or participating rights. The Trust is the general partner and controlling owner of approximately 97.2% of the Operating Partnership and will continue to consolidate the Operating Partnership under this new guidance. With respect to the Trust’s investment in unconsolidated joint ventures, the new consolidation standard did not have an impact on previous consolidation conclusions.
 

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In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which changes the presentation of debt issuance costs in financial statements. ASU 2015-03 requires an entity to present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs will continue to be reported as interest expense. ASU 2015-03 is effective for annual reporting periods beginning after December 15, 2016. Early adoption is permitted. The new guidance has been applied retrospectively to each prior period presented. The Trust adopted ASU 2015-03 on January 1, 2016. As a result of the adoption of ASU 2015-03, the Trust reclassified $6.0 million from net deferred costs to the related liabilities within the December 31, 2015 Consolidated Balance Sheet.
 
In February 2016, the FASB issued ASU 2016-02, Leases. The update amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. The standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. ASU 2016-02 will be effective for annual reporting periods beginning after December 15, 2018. Early adoption is permitted. The Trust is currently evaluating the impact of adopting the new leases standard on its consolidated financial statements.

Note 3. Acquisitions and Dispositions
 
During the six months ended June 30, 2016, the Trust completed acquisitions of 71 operating healthcare properties and 2 condominium units located in 20 states for an aggregate purchase price of approximately $878.4 million. In addition, the Trust completed $3.5 million of loan transactions, resulting in total investment activity of $881.9 million.

These figures include the completed acquisition of 46 of the properties in the CHI Portfolio for an aggregate purchase price of $615.5 million. This aggregate purchase price does not include near-term capital expenditure commitments of $12.9 million and committed tenant improvement allowances of $8.9 million.

Investment activity for the three months ended June 30, 2016 is summarized below:
Property (1)
 
 
 
Location
 
Acquisition
Date
 
Purchase
Price
(in thousands)
Tinseltown - Loan Draws
 
 
 
Jacksonville, FL
 
 
 
$
1,638

Gardendale Surgery Center
(2)
 
 
Gardendale, AL
 
April 11, 2016
 
7,450

HealthEast - Curve Crest
(2)
 
 
Stillwater, MN
 
April 14, 2016
 
4,144

HealthEast - Victor Gardens
(2)
 
 
Hugo, MN
 
April 14, 2016
 
6,025

NOMS - Clyde
(3)
 
 
Clyde, OH
 
May 10, 2016
 
6,342

Blandford MOB
(3)
(4)
 
Little Rock, AR
 
May 11, 2016
 
2,580

Cardwell MOB
(2)
(4)
 
Lufkin, TX
 
May 11, 2016
 
8,444

Dacono Neighborhood Health
(3)
(4)
 
Dacono, CO
 
May 11, 2016
 
5,152

Franciscan Health
(3)
(4)
 
Tacoma, WA
 
May 11, 2016
 
9,772

Grand Island Specialty Clinic
(3)
(4)
 
Grand Island, NE
 
May 11, 2016
 
2,891

Hot Springs MOB
(2)
(4)
 
Hot Springs Village, AR
 
May 11, 2016
 
3,626

Jewish Medical Center East
(3)
(4)
 
Louisville, KY
 
May 11, 2016
 
85,000

Jewish Medical Center South MOB - 1
(3)
(4)
 
Shepherdsville, KY
 
May 11, 2016
 
17,021

Jewish Medical Plaza I
(2)
(4)
 
Louisville, KY
 
May 11, 2016
 
9,650

Jewish Medical Plaza II
(2)
(4)
 
Louisville, KY
 
May 11, 2016
 
6,124

Jewish OCC
(3)
(4)
 
Louisville, KY
 
May 11, 2016
 
35,600

Lakeside Three Professional Center
(2)
(4)
 
Omaha, NE
 
May 11, 2016
 
1,581

Lexington Surgery Center
(2)
(4)
 
Lexington, KY
 
May 11, 2016
 
20,169

Medical Arts Pavilion
(2)
(4)
 
Lufkin, TX
 
May 11, 2016
 
6,304

Memorial Outpatient Center
(3)
(4)
 
Lufkin, TX
 
May 11, 2016
 
4,958

Midlands Two Professional Center
(2)
(4)
 
Papillion, NE
 
May 11, 2016
 
1,341

Parkview MOB
(2)
(4)
 
Little Rock, AR
 
May 11, 2016
 
5,060

Peak One ASC
(2)
(4)
 
Frisco, CO
 
May 11, 2016
 
6,587


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Physicians Medical Center
(2)
(4)
 
Tacoma, WA
 
May 11, 2016
 
6,782

St. Alexius - Minot Medical Plaza
(3)
(4)
 
Minot, ND
 
May 11, 2016
 
26,570

St. Clare Medical Pavilion
(2)
(4)
 
Lakewood, WA
 
May 11, 2016
 
10,617

St. Joseph Medical Pavilion
(2)
(4)
 
Tacoma, WA
 
May 11, 2016
 
13,320

St. Joseph Office Park
(2)
(4)
 
Lexington, KY
 
May 11, 2016
 
17,228

St. Mary - Caritas Medical II
(2)
(4)
 
Louisville, KY
 
May 11, 2016
 
5,603

St. Mary - Caritas Medical III
(2)
(4)
 
Louisville, KY
 
May 11, 2016
 
842

Thornton Neighborhood Health
(3)
(4)
 
Thornton, CO
 
May 11, 2016
 
3,875

Medical Village at Kissimmee
(2)
 
 
Kissimmee, FL
 
May 26, 2016
 
4,923

Medical Village at Leesburg
(2)
 
 
Leesburg, FL
 
May 26, 2016
 
4,576

St. Francis MOB
(2)
(4)
 
Federal Way, WA
 
June 2, 2016
 
14,287

Children's Hospital MOB
(2)
 
 
Milwaukee, WI
 
June 3, 2016
 
5,850

Jewish Medical Center South MOB - 2
(2)
 
 
Shepherdsville, KY
 
June 8, 2016
 
4,343

Good Samaritan North Annex Building
(3)
(4)
 
Kearney, NE
 
June 28, 2016
 
2,874

NE Heart Institute Medical Building
(3)
(4)
 
Lincoln, NE
 
June 28, 2016
 
19,600

St. Vincent West MOB
(3)
(4)
 
Little Rock, AR
 
June 29, 2016
 
14,120

Meridan MOB
(3)
(4)
 
Englewood, CO
 
June 29, 2016
 
17,329

St. Mary - Caritas Medical I
(2)
(4)
 
Louisville, KY
 
June 29, 2016
 
8,864

St. Alexius - Medical Arts Pavilion
(3)
(4)
 
Bismarck, ND
 
June 29, 2016
 
12,983

St. Alexius - Mandan Clinic
(3)
(4)
 
Mandan, ND
 
June 29, 2016
 
8,390

St. Alexius - Orthopaedic Center
(2)
(4)
 
Bismarck, ND
 
June 29, 2016
 
14,727

St. Alexius - Rehab Center
(3)
(4)
 
Bismarck, ND
 
June 29, 2016
 
6,215

St. Alexius - Tech & Ed
(3)
(4)
 
Bismarck, ND
 
June 29, 2016
 
16,680

Good Samaritan MOB
(2)
(4)
 
Kearney, NE
 
June 29, 2016
 
24,198

Lakeside Two Professional Building
(2)
(4)
 
Omaha, NE
 
June 29, 2016
 
13,691

Lakeside Wellness Center
(3)
(4)
 
Omaha, NE
 
June 29, 2016
 
10,138

McAuley Center
(3)
(4)
 
Omaha, NE
 
June 29, 2016
 
18,382

Memorial Health Center
(3)
(4)
 
Grand Island, NE
 
June 29, 2016
 
34,317

Missionary Ridge MOB
(2)
(4)
 
Chattanooga, TN
 
June 29, 2016
 
7,635

Pilot Medical Center
(3)
 
 
Birmingham, AL
 
June 29, 2016
 
17,351

St. Joseph Medical Clinic
(2)
(4)
 
Tacoma, WA
 
June 30, 2016
 
16,444

Woodlands Medical Arts Center
(2)
(4)
 
The Woodlands, TX
 
June 30, 2016
 
21,227

FESC MOB
(3)
(4)
 
Tacoma, WA
 
June 30, 2016
 
16,748

Mezzanine Loan - Catalyst
 
 
 
Pensacola, FL
 
June 30, 2016
 
1,340

 
 
 
 
 
 
 
 
$
679,528

(1)
“MOB” means medical office building. “ASC” means ambulatory surgery center.
(2)
The Trust accounted for these acquisitions as business combinations pursuant to the acquisition method and expensed total acquisition costs of $3.3 million.
(3)
The Trust accounted for these acquisitions as asset acquisitions and capitalized total acquisition costs of $1.7 million.
(4)
These acquisitions are part of the CHI Portfolio.

 For the three months ended June 30, 2016, the Trust recorded revenues and net income from its 2016 acquisitions of $10.4 million and $2.4 million, respectively. For the six months ended June 30, 2016, the Trust recorded revenues and net income from its 2016 acquisitions of $12.2 million and $3.0 million, respectively.
 

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The following table summarizes the acquisition date fair values of the assets acquired and the liabilities assumed, which the Trust determined using Level 2 and Level 3 inputs (in thousands):
 
1st Quarter
 
2nd Quarter
 
Total
Land
$
9,240

 
$
19,565

 
$
28,805

Building and improvements
168,570

 
623,247

 
791,817

In-place lease intangible
19,158

 
12,911

 
32,069

Above market in-place lease intangible
2,407

 
1,265

 
3,672

Below market in-place lease intangible
(469
)
 
(2,920
)
 
(3,389
)
Above market in-place ground lease
(218
)
 
(348
)
 
(566
)
Below market in-place ground lease
2,057

 
20,953

 
23,010

Lease inducement
1,284

 
3,586

 
4,870

Contingent consideration
—

 
(156
)
 
(156
)
Receivables
—

 
104

 
104

Issuance of OP Units
(2,869
)
 
—

 
(2,869
)
Net assets acquired
$
199,160


$
678,207

 
$
877,367


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

Unaudited Pro Forma Financial Information
 
The following table illustrates the effect on net income and earnings per share - basic and diluted as if the Trust had acquired the above acquisitions as of January 1, 2015 (in thousands, except per share amounts):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2016
 
2015
 
2016
 
2015
Revenue
$
72,239

 
$
53,399

 
$
139,493

 
$
108,515

Net income
14,827

 
8,680

 
28,978

 
15,586

Net income available to common shareholders
14,020

 
7,157

 
26,968

 
14,627

Earnings per share - basic
$
0.11

 
$
0.05

 
$
0.23

 
$
0.12

Earnings per share - diluted
$
0.10

 
$
0.05

 
$
0.22

 
$
0.12

Weighted average number of shares outstanding - basic
131,481,329

 
131,481,329

 
117,092,668

 
117,092,668

Weighted average number of shares outstanding - diluted
135,944,722

 
135,944,722

 
121,575,247

 
121,575,247



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Note 4. Intangibles
 
The following is a summary of the carrying amount of intangible assets and liabilities as of June 30, 2016 and December 31, 2015 (in thousands):
 
June 30, 2016
 
December 31, 2015
 
Cost
 
Accumulated
Amortization
 
Net
 
Cost
 
Accumulated
Amortization
 
Net
Assets
 

 
 

 
 

 
 

 
 

 
 

In-place leases
$
195,797

 
$
(39,137
)
 
$
156,660

 
$
163,728

 
$
(26,702
)
 
$
137,026

Above market leases
30,459

 
(5,220
)
 
25,239

 
26,787

 
(3,174
)
 
23,613

Leasehold interest
712

 
(94
)
 
618

 
712

 
(64
)
 
648

Below market ground lease
36,951

 
(209
)
 
36,742

 
13,941

 
(68
)
 
13,873

Total
$
263,919


$
(44,660
)

$
219,259


$
205,168


$
(30,008
)

$
175,160

Liabilities
 

 
 

 
 

 
 

 
 

 
 

Below market lease
$
9,457

 
$
(1,347
)
 
$
8,110

 
$
6,068

 
$
(799
)
 
$
5,269

Above market ground lease
1,267

 
(29
)
 
1,238

 
701

 
(20
)
 
681

Total
$
10,724


$
(1,376
)

$
9,348


$
6,769


$
(819
)

$
5,950

 
The following is a summary of the acquired lease intangible amortization for the three and six month periods ended June 30, 2016 and 2015, respectively (in thousands):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2016
 
2015
 
2016
 
2015
Amortization expense related to in-place leases
$
6,746

 
$
3,397

 
$
12,435

 
$
5,871

Decrease of rental income related to above-market leases
1,059

 
577

 
2,046

 
929

Decrease of rental income related to leasehold interest
15

 
14

 
30

 
29

Increase of rental income related to below-market leases
322

 
138

 
548

 
264

Decrease of operating expense related to above market ground leases
5

 
4

 
9

 
8

Increase in operating expense related to below market ground lease
94

 
4

 
141

 
5


Future aggregate net amortization of the acquired lease intangibles as of June 30, 2016, is as follows (in thousands):
 
Net Decrease in 
Revenue
 
Net Increase in 
Expenses
2016
$
(1,141
)
 
$
14,782

2017
(1,812
)
 
27,144

2018
(1,824
)
 
22,779

2019
(1,922
)
 
18,294

2020
(2,181
)
 
15,869

Thereafter
(8,867
)
 
93,306

Total
$
(17,747
)

$
192,174

 
As of June 30, 2016, the weighted average amortization period for asset lease intangibles and liability lease intangibles are 18 and 11 years, respectively.
 

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Note 5. Other Assets
 
Other assets consisted of the following as of June 30, 2016 and December 31, 2015 (in thousands):
 
 
June 30,
2016
 
December 31,
2015
Straight line rent receivable
$
22,848

 
$
15,584

Lease inducements, net
9,590

 
4,970

Escrows
4,682

 
4,788

Earnest deposits
1,372

 
343

Note receivable
16,618

 
20,620

Leasing commissions, net
1,072

 
1,052

Prepaid expenses and other
8,018

 
5,926

Total
$
64,200


$
53,283

 
Note 6. Debt
 
The following is a summary of debt as of June 30, 2016 and December 31, 2015 (in thousands):
 
June 30,
2016
 
December 31,
2015
 
Fixed interest mortgage notes
$
81,104

(1)
$
89,664

(2)
Variable interest mortgage note
33,233

(3)
4,262

(4)
Total mortgage debt
114,337


93,926

 
$850 million unsecured revolving credit facility bearing variable interest of LIBOR plus 1.20%, due September 2020
378,000

 
395,000

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

 
—

 
Total principal
642,337


488,926

 
Unamortized deferred financing cost
(9,351
)
 
(5,985
)
 
Unamortized fair value adjustment
556

 
674

 
Total debt
$
633,542


$
483,615

 
(1)
Fixed interest mortgage notes, bearing interest from 4.71% to 6.58%, with a weighted average interest rate of 5.40%, and due in 2017, 2019, 2020, 2021, and 2022 collateralized by 10 properties with a net book value of $134,727.
(2)
Fixed interest mortgage notes, bearing interest from 4.71% to 6.58%, with a weighted average interest rate of 5.40%, and due in 2016, 2017, 2019, 2020, 2021, and 2022 collateralized by 11 properties with a net book value of $145,038.
(3)
Variable interest mortgage notes, bearing variable interest of LIBOR plus 2.25% to 3.25%, with a weighted average interest rate of 3.4% and due in 2017 and 2018, collateralized by four properties with a net book value of $46,596.
(4)
Variable interest mortgage note bearing variable interest of LIBOR plus 2.75% and due in 2017, collateralized by one property with a net book value of $5,994.

On June 10, 2016, the Operating Partnership, as borrower, and the Trust entered into an amended and restated Credit Agreement with KeyBank National Association, as administrative agent, KeyBanc Capital Markets Inc., BMO Capital Markets, and Citizens Bank N.A., as joint lead arrangers and co-book runners, BMO Capital Markets and Citizens Bank N.A., as co-syndication agents, and the lenders party thereto (the “Credit Agreement”) which increased the maximum principal amount available under an unsecured revolving credit facility from $750 million to $850 million. The Credit Agreement contains a term loan feature allowing the Operating Partnership to borrow in a single drawing before July 11, 2016 up to $250 million, increasing the borrowing capacity to an aggregate $1.1 billion.

The Credit Agreement has a maturity date of September 18, 2020 and includes a one year extension option. Borrowings under the Credit Agreement bear interest on the outstanding principal amount at a rate which is determined by the Trust’s credit rating, currently equal to LIBOR plus 1.20%. In addition, the Credit Agreement includes a facility fee equal to 0.25% per annum, which is determined by the Trust’s investment grade rating under the Credit Agreement.


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The Credit Agreement includes a swingline loan commitment for up to 10% of the maximum principal amount and provides an accordion feature allowing the Trust to increase borrowing capacity by up to an additional $500 million, subject to customary terms and conditions, resulting in a maximum borrowing capacity of $1.6 billion.
 
The Credit Agreement contains financial covenants that, among other things, require compliance with leverage and coverage ratios and maintenance of minimum tangible net worth, as well as covenants that may limit the Trust’s and the Operating Partnership’s ability to incur additional debt or make distributions. The Trust may, at any time, voluntarily prepay any revolving or swingline loan under the Credit Agreement in whole or in part without premium or penalty. Prepayments of term borrowings require payment of premiums of up to 2.0% of the amount of prepayment, dependent on date of such prepayment. As of June 30, 2016, the Trust was in compliance with all financial covenants.
 
The Credit Agreement includes customary representations and warranties by the Operating Partnership and the Trust 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.
 
The Credit Agreement provides for revolving credit and term loans to the Operating Partnership. Base Rate Loans, Adjusted LIBOR Rate Loans, and Letters of Credit (each, as defined in the Credit Agreement) will be subject to interest rates, based upon the investment grade rating of the Trust and the Operating Partnership as follows:
Credit Rating
 
Margin for Revolving Loans: Adjusted LIBOR Rate Loans
and Letter of Credit Fee
 
Margin for Revolving Loans: Base Rate Loans
 
Margin for Term Loans: Adjusted LIBOR Rate Loans
and Letter of Credit Fee
 
Margin for Term Loans: Base Rate Loans
At Least A- or A3
 
LIBOR + 0.85%
 
—
%
 
LIBOR + 1.40%
 
0.40
%
At Least BBB+ or BAA1
 
LIBOR + 0.90%
 
—
%
 
LIBOR + 1.45%
 
0.45
%
At Least BBB or BAA2
 
LIBOR + 1.00%
 
0.10
%
 
LIBOR + 1.55%
 
0.55
%
At Least BBB- or BAA3
 
LIBOR + 1.20%
 
0.20
%
 
LIBOR + 1.80%
 
0.80
%
Below BBB- or BAA3
 
LIBOR + 1.55%
 
0.60
%
 
LIBOR + 2.25%
 
1.25
%
 
As of June 30, 2016, there were $378.0 million of borrowings outstanding under the unsecured revolving credit facility and $472.0 million available for the Trust to borrow without adding additional properties to the unencumbered borrowing base of assets, as defined by the Credit Agreement. As of June 30, 2016 the Trust had no borrowings under the term loan.

On January 7, 2016, the Operating Partnership issued and sold $150.0 million aggregate principal amount of senior notes, comprised of (i) $15.0 million aggregate principal amount of 4.03% Senior Notes, Series A, due January 7, 2023 (the “Series A Notes”), (ii) $45.0 million aggregate principal amount of 4.43% Senior Notes, Series B, due January 7, 2026 (the “Series B Notes”), (iii) $45.0 million aggregate principal amount of 4.57% Senior Notes, Series C, due January 7, 2028 (the “Series C Notes”) and (iv) $45.0 million aggregate principal amount of 4.74% Senior Notes, Series D, due January 7, 2031 (the “Series D Notes,” and together with the Series A Notes, the Series B Notes, and the Series C Notes, the “Notes”).
 
Certain properties have mortgage debt that contain financial covenants. As of June 30, 2016, the Trust was in compliance with all mortgage debt financial covenants.

Scheduled principal payments due on debt as of June 30, 2016, are as follows (in thousands):
2016
$
1,168

2017
40,928

2018
29,986

2019
20,081

2020
383,522

Thereafter
166,652

Total Payments
$
642,337

 
As of June 30, 2016, the Trust had total consolidated indebtedness of approximately $642.3 million. The weighted average interest rate on consolidated indebtedness was 2.89% (based on the 30-day LIBOR rate as of June 30, 2016, of 0.45%).

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Table of Contents


For the three month periods ended June 30, 2016 and 2015, the Trust incurred interest expense on its debt of $3.8 million and $1.9 million, respectively. For the six month periods ended June 30, 2016 and 2015, the Trust incurred interest expense on its debt of $7.5 million and $3.3 million, respectively.
 
Note 7. Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities consisted of the following as of June 30, 2016 and December 31, 2015 (in thousands):
 
June 30,
2016
 
December 31,
2015
 Embedded derivatives
$
6,211

 
$
8,149

 Security deposits
4,227

 
4,038

 Real estate taxes payable
6,133

 
2,349

 Prepaid rent
8,456

 
2,778

 Contingent consideration
2,075

 
2,559

 Accrued interest
3,627

 
22

 Accrued expenses and other
7,864

 
4,578

Total
$
38,593

 
$
24,473


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

Restricted Common Shares:
 
The Committee has broad discretion in administering the terms of the 2013 Plan. Restricted common shares granted under the 2013 Plan are eligible for dividends as well as the right to vote. In the six month period ended June 30, 2016, the Trust granted a total of 149,879 restricted common shares with a total value of $2.7 million to its officers and certain of its employees, which have a one-year vesting period for officer award-recipients and a three-year vesting period for employee award-recipients.


18
Table of Contents

A summary of the status of the Trust’s non-vested restricted common shares as of June 30, 2016 and changes during the six month period then ended follow:
 
Common Shares
 
Weighted
Average Grant
Date Fair Value
Non-vested at December 31, 2015
311,839

 
$
14.17

Granted
149,879

 
17.85

Vested
(84,736
)
 
15.93

Forfeited
(326
)
 
15.36

Non-vested at June 30, 2016
376,656

 
$
15.24

 
For all service awards, the Trust records compensation expense for the entire award on a straight-line basis (or, if applicable, on the accelerated method) over the requisite service period. For the three month periods ended June 30, 2016 and 2015, the Trust recognized non-cash share compensation of $1.1 million and $0.8 million, respectively. For the six month periods ended June 30, 2016 and 2015, the Trust recognized non-cash share compensation of $1.9 million and $1.5 million, respectively. Unrecognized compensation expense at June 30, 2016 was $2.8 million. The Trust’s compensation expense recorded in connection with grants of restricted common shares reflects an initial estimated cumulative forfeiture rate of 0% over the requisite service period of the awards. That estimate will be revised if subsequent information indicates that the actual number of awards expected to vest is likely to differ from previous estimates.
 
Restricted Share Units:
 
In March 2016, under the 2013 Plan, the Trust granted restricted share units at a target level of 141,337 to its officers and trustees, which are subject to certain performance, timing, and market conditions and a three-year and two-year service period for officers and trustees, respectively. In addition, each restricted share unit contains one dividend equivalent. The recipient will accrue dividend equivalents on awarded share units equal to the cash dividend that would have been paid on the awarded share unit had the awarded share unit been an issued and outstanding common share on the record date for the dividend.
 
Approximately 80% of the restricted share units issued to officers vest based on certain market conditions. The market conditions were valued with the assistance of independent valuation specialists. The Trust utilized a Monte Carlo simulation to calculate the weighted average grant date fair value of $28.50 per unit for the March 2016 grant using the following assumptions:
 
Volatility
20.3
%
Dividend assumption
reinvested

Expected term in years
2.8

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

 
The remaining 20% of the restricted share units issued to officers, and 100% of restricted share units issued to trustees, vest based upon certain performance or timing conditions. With respect to the performance conditions of the March 2016 grant, the grant date fair value of $17.67 per unit was based on the share price at the date of grant. The combined weighted average grant date fair value of the March 2016 restricted share units issued to officers is $26.33 per unit.
 
The following is a summary of the activity in the Trust’s restricted share units during the six months ended June 30, 2016: 
 
Restricted 
Share Units
 
Weighted
Average Grant
Date Fair Value
Non-vested at December 31, 2015
171,886

 
$
18.48

Granted
141,337

 
24.08

Vested
(20,481
)
 
15.87

Non-vested at June 30, 2016
292,742

 
$
21.37



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Table of Contents

For the three month periods ended June 30, 2016 and 2015, the Trust recognized non-cash share unit compensation expense of $0.5 million and $0.3 million, respectively. For the six month periods ended June 30, 2016 and 2015, the Trust recognized non-cash share unit compensation expense of $0.9 million and $0.5 million, respectively. Unrecognized compensation expense at June 30, 2016 was $4.0 million.
 
Note 9. Fair Value Measurements
 
ASC Topic 820, Fair Value Measurement (“ASC 820”), requires certain assets and liabilities be reported and/or disclosed at fair value in the financial statements and provides a framework for establishing that fair value. The framework for determining fair value is based on a hierarchy that prioritizes the valuation techniques and inputs used to measure fair value.
 
In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that the Trust has the ability to access. Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.
 
Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset. These Level 3 fair value measurements are based primarily on management’s own estimates using pricing models, discounted cash flow methodologies, or similar techniques taking into account the characteristics of the asset or liability. In instances where inputs used to measure fair value fall into different levels of the fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability.
 
The Trust has one derivative instrument at June 30, 2016, consisting of one embedded derivative as detailed in the Redeemable Noncontrolling Interests - Operating Partnership and Partially Owned Properties section of Note 2 (Summary of Significant Accounting Policies).
 
The Trust’s embedded derivative is not traded on an exchange. The Trust’s derivative liabilities are recorded at fair value based on a variety of observable inputs including contractual terms, interest rate curves, yield curves, measure of volatility, and correlations of such inputs. The Trust measures its derivative at fair value on a recurring basis. The fair values are based on Level 2 inputs described above.
 
The Trust also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. This generally includes assets subject to impairment. There were no such assets measured at fair value as of June 30, 2016.
 
The carrying amounts of cash and cash equivalents, tenant receivables, payables, and accrued interest are reasonable estimates of fair value because of the short term maturities of these instruments. Fair values for real estate loans receivable and mortgage debt are estimated based on rates currently prevailing for similar instruments of similar maturities and are based primarily on Level 2 inputs.
 
The following table presents the fair value of the Trust’s financial instruments (in thousands): 
 
June 30,
2016
 
December 31,
2015
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Real estate loans receivable
$
38,774

 
$
38,774

 
$
39,349

 
$
39,349

Notes receivable
$
16,618

 
$
16,618

 
$
20,620

 
$
20,620

Credit facility
$
(378,000
)
 
$
(378,000
)
 
$
(395,000
)
 
$
(395,000
)
Notes payable
$
(150,000
)
 
$
(150,000
)
 
$
—

 
$
—

Mortgage debt
$
(114,893
)
 
$
(117,553
)
 
$
(94,600
)
 
$
(95,275
)
Derivative liabilities
$
(6,211
)
 
$
(6,211
)
 
$
(8,216
)
 
$
(8,216
)


20
Table of Contents

Note 10. Tenant Operating Leases
 
The Trust is lessor of medical office buildings and other healthcare facilities. Leases have expirations from 2016 through 2045. As of June 30, 2016, the future minimum rental payments on non-cancelable leases, exclusive of expense recoveries, were as follows (in thousands):
2016
$
95,497

2017
187,223

2018
180,668

2019
175,456

2020
170,704

Thereafter
1,157,732

Total
$
1,967,280

 
Note 11. Rent Expense
 
The Trust leases the rights to parking structures at three of its properties, the air space above one property, and the land upon which fifty-two of its properties are located from third party land owners pursuant to separate leases. The leases require fixed rental payments and may also include escalation clauses and renewal options. These leases have terms of up to 90 years remaining, excluding extension options. As of June 30, 2016, the future minimum lease obligations under non-cancelable parking, air, and ground leases were as follows (in thousands):
2016
$
1,049

2017
2,134

2018
2,189

2019
2,239

2020
2,290

Thereafter
57,404

Total
$
67,305

 
Rent expense for the parking, air, and ground leases of $0.4 million for the three month periods ended both June 30, 2016 and 2015, and $0.8 million for the six month periods ended both June 30, 2016 and 2015, are reported in operating expenses in the consolidated statements of income.


21
Table of Contents

Note 12. Earnings Per Share
 
The following table shows the amounts used in computing the Trust’s basic and diluted earnings per share (in thousands, except share and per share data):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2016
 
2015
 
2016
 
2015
Numerator for earnings per share - basic:
 

 
 

 
 

 
 

Net income
$
7,184

 
$
3,297

 
$
12,608

 
$
2,849

Net income attributable to noncontrolling interests:
 
 
 
 
 
 
 
Operating Partnership
(201
)
 
(157
)
 
(374
)
 
(133
)
Partially owned properties
(60
)
 
(144
)
 
(377
)
 
(176
)
Preferred distributions
(437
)
 
(425
)
 
(985
)
 
(491
)
Numerator for earnings per share - basic
$
6,486


$
2,571


$
10,872

 
$
2,049

Numerator for earnings per share - diluted:
 
 
 
 
 
 
 
Numerator for earnings per share - basic
$
6,486

 
$
2,571

 
$
10,872

 
$
2,049

Operating Partnership net income
201

 
157

 
374

 
133

Numerator for earnings per share - diluted
$
6,687


$
2,728


$
11,246

 
$
2,182

Denominator for earnings per share - basic and diluted:
 
 
 
 
 
 
 
Weighted average number of shares outstanding - basic
131,481,329

 
70,376,959

 
117,092,668

 
68,026,278

Effect of dilutive securities:
 

 
 

 
 
 
 

Noncontrolling interest - Operating Partnership units
3,870,343

 
3,698,364

 
3,858,401

 
3,598,355

Restricted common shares
199,698

 
169,425

 
193,084

 
196,470

Restricted share units
393,352

 
22,535

 
431,094

 
41,146

Denominator for earnings per share - diluted common shares:
135,944,722

 
74,267,283

 
121,575,247

 
71,862,249

Earnings per share - basic
$
0.05

 
$
0.04

 
$
0.09

 
$
0.03

Earnings per share - diluted
$
0.05

 
$
0.04

 
$
0.09

 
$
0.03

 
Note 13. Subsequent Events
 
On July 7, 2016, the Operating Partnership borrowed $250 million under the 7-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 LIBOR + 1.80%. The Trust simultaneously entered into a pay-fixed receive-variable rate swap for the full borrowing amount, fixing the LIBOR component of the borrowing rate to 1.07%, for an all-in fixed rate of 2.87%.
    
Since June 30, 2016, the Trust, through subsidiaries of its Operating Partnership, closed on the below acquisitions:    
Property
 
 
Location
 
Acquisition
Date
 
Purchase
Price
(in thousands)
Prairie Care MOB
 
 
Maplewood, MN
 
July 6, 2016
 
$
4,886

Real Estate Loan - Chihuahua Development LLC
 
 
El Paso, TX
 
July 7, 2016
 
1,300

Springwoods MOB
(1)
 
Spring, TX
 
July 21, 2016
 
19,925

Mezzanine Loan - Hazelwood MOB
 
 
Maplewood, MN
 
July 29, 2016
 
3,375

Jackson, Tennessee Land Purchase
 
 
Jackson, TN
 
August 2, 2016
 
1,000

 
 
 
 
 
 
 
$
30,486

(1) This acquisition is part of the CHI Portfolio.


22
Table of Contents

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 II, Item 1A (Risk Factors) of this report, Part I, Item 1A (Risk Factors) of our Annual Report, and Part II, Item 1A (Risk Factors) of the First Quarter Report.
 
Overview
 
We are a self-managed healthcare real estate company organized in April 2013 to acquire, selectively develop, own, and manage healthcare properties that are leased to physicians, hospitals, and healthcare delivery systems. We invest in real estate that is integral to providing high quality healthcare services. Our properties are typically located on a campus with a hospital or other healthcare facilities or strategically located and affiliated with a hospital or other healthcare facilities. We believe the impact of government programs and continuing trends in the healthcare industry create attractive opportunities for us to invest in healthcare related real estate. Our management team has significant public healthcare REIT experience and has long established relationships with physicians, hospitals, and healthcare delivery system decision makers that we believe will provide quality investment and growth opportunities. Our principal investments include medical office buildings, outpatient treatment facilities, acute and post-acute care hospitals, as well as other real estate integral to health care providers. We seek to invest in stabilized medical facility assets with initial cash yields of 6% to 9%. We seek to generate attractive risk-adjusted returns for our shareholders through a combination of stable and increasing dividends and potential long-term appreciation in the value of our properties and our common shares. 

As of June 30, 2016, our portfolio consisted of 222 properties located in 29 states with approximately 9,586,638 net leasable square feet, which were approximately 95.7% leased with a weighted average remaining lease term of approximately 8.6 years. As of June 30, 2016, approximately 79.4% of the net leasable square footage of our portfolio was affiliated with a healthcare delivery system or located within approximately 1/4 mile of a hospital campus. We expect to acquire between $1.0 billion to $1.25 billion of real estate during 2016, including the 2016 acquisitions described in this report.

We receive a cash rental stream from these healthcare providers under our leases. Approximately 84.8% of the annualized base rent payments from our properties as of June 30, 2016 are from triple-net leases, pursuant to which the tenants are responsible for all operating expenses relating to the property, including but not limited to real estate taxes, utilities, property insurance, routine maintenance and repairs, and property management. This structure helps insulate us from increases in certain operating expenses and provides more predictable cash flow. Approximately 12.0% of the annualized base rent payments from our properties as of June 30, 2016 are from modified gross base stop leases which allow us to pass through certain increases in future operating expenses (e.g., property tax and insurance) to tenants for reimbursement, thus protecting us from increases in such operating expenses. We seek to structure our triple-net leases to generate attractive returns on a long-term basis. Our leases typically have initial terms of 5 to 15 years and include annual rent escalators of approximately 1.5% to 3.0%. Our operating results depend significantly upon the ability of our tenants to make required rental payments. We believe that our portfolio of medical office buildings and other healthcare facilities will enable us to generate stable cash flows over time because of the diversity of our tenants, staggered lease expiration schedule, long-term leases, and low historical occurrence of tenants defaulting under their leases. As of June 30, 2016, leases representing 2.0%, 4.4%, and 4.9% of leasable square feet in our portfolio will expire in 2016, 2017, and 2018, respectively.

We have entered into an unsecured credit facility in the maximum principal amount of $1.1 billion and intend to use borrowings under the facility to finance future acquisitions and developments, fund tenant improvements, fund leasing commissions to third parties, fund capital expenditures, provide for working capital, and provide for other general corporate purposes. The unsecured credit facility contains a term loan feature allowing us to borrow in a single drawing before July 11, 2016 up to $250 million, and also includes a swingline loan commitment for up to 10% of the maximum principal amount and provides an accordion feature allowing us to increase borrowing capacity by up to an additional $500 million, subject to customary terms and conditions, resulting in a maximum borrowing capacity of $1.6 billion. As of June 30, 2016, we had approximately $114.3 million of mortgage indebtedness outstanding, secured by first mortgages on certain of our properties, $378.0 million of outstanding borrowings under our unsecured credit facility, and $150.0 million of outstanding notes payable.
 

23
Table of Contents

On April 5, 2016, we and our Operating Partnership entered into a series of purchase and sale agreements with regional health systems controlled by Catholic Health Initiatives to acquire 52 medical office facilities (which we now treat as 53 medical office facilities because we consider a certain condominium property as being separate from a nearby surgical center) (the “CHI Portfolio”) containing 3,159,495 rentable square feet located in 10 states (the “CHI Acquisition”). As of June 30, 2016, we have completed the acquisition of 46 of the properties in the CHI Portfolio representing 2,816,986 net leasable square feet. We have elected not to complete the acquisition of 2 of the properties in the CHI Portfolio and we expect to complete the acquisition of 4 of the remaining properties during the third quarter of 2016 and 1 in early 2017.

During the quarterly period ended June 30, 2016, we completed acquisitions of 55 operating healthcare properties, including those in the CHI Portfolio, located in 13 states with approximately 3,034,240 net leasable square feet for an aggregate purchase price of approximately $676.6 million.

In addition, we funded loan investments totaling $3.0 million. Acquisitions are detailed in Note 3 to our consolidated financial statements included in Item 1 of this report.

We have grown our portfolio of gross real estate investments from approximately $124 million at the time of our IPO in July 2013 to approximately $2.5 billion as of June 30, 2016. As of August 1, 2016, we have 134,576,075 common shares outstanding.

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

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

On April 11, 2016, we completed a follow-on public offering of 25,875,000 common shares of beneficial interest, including 3,375,000 common shares issued upon exercise of the underwriters’ overallotment option, resulting in net proceeds to us of approximately $442.8 million. We contributed the net proceeds of this offering to our Operating Partnership in exchange for 25,875,000 OP Units, and our Operating Partnership used the net proceeds of the public offering to repay borrowings under our unsecured revolving credit facility, for general corporate and working capital purposes, for funding acquisitions, and to fund a portion of the purchase price for the CHI Acquisition.

On June 23, 2016, we announced that our Board of Trustees authorized and declared a cash distribution of $0.225 per common share for the quarterly period ended June 30, 2016. The distribution was paid on July 18, 2016 to common shareholders and OP Unit holders of record as of the close of business on July 5, 2016.

We are a Maryland real estate investment trust and elected to be taxed as a REIT for U.S. federal income tax purposes beginning with our short taxable year ended December 31, 2013. We conduct our business through an UPREIT structure in which our properties are owned by our Operating Partnership directly or through limited partnerships, limited liability companies or other subsidiaries. We are the sole general partner of our Operating Partnership and, as of June 30, 2016, own approximately 97.2% of the OP Units.
 
Recent Developments

On July 7, 2016, the Operating Partnership borrowed $250 million under the 7-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 LIBOR + 1.80%. The Trust simultaneously entered into a pay-fixed receive-variable rate swap for the full borrowing amount, fixing the LIBOR component of the borrowing rate to 1.07%, for an all-in fixed rate of 2.87%.


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Investment Activity
 
Since June 30, 2016, we completed acquisitions of 3 healthcare properties, including 1 land-only acquisition, located in 3 states with approximately 115,200 net leasable square feet for an aggregate purchase price of approximately $25.8 million. Additionally, we completed two loan transactions totaling $4.7 million. Investment activity since June 30, 2016 is summarized below:
Property
 
 
Location
 
Acquisition
Date
 
Purchase
Price
(in thousands)
Prairie Care MOB
 
 
Maplewood, MN
 
July 6, 2016
 
$
4,886

Real Estate Loan - Chihuahua Development LLC
 
 
El Paso, TX
 
July 7, 2016
 
1,300

Springwoods MOB
(1)
 
Spring, TX
 
July 21, 2016
 
19,925

Mezzanine Loan - Hazelwood MOB
 
 
Maplewood, MN
 
July 29, 2016
 
3,375

Jackson, Tennessee Land Purchase
 
 
Jackson, TN
 
August 2, 2016
 
1,000

 
 
 
 
 
 
 
$
30,486

(1) This acquisition is part of the CHI Portfolio.

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

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Operating Expenses. Operating expenses include property operating expenses such as real estate taxes, property insurance, routine maintenance and repairs, utilities, and third party property management expenses, some of which are reimbursed to us by tenants under the terms of triple net leases.
 
Depreciation and amortization. We incur depreciation and amortization expense on all of our long-lived assets. This non-cash expense is designed under generally accepted accounting principles, or GAAP, to reflect the economic useful lives of our assets.

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


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Results of Operations

Three Months Ended June 30, 2016 compared to the three months ended June 30, 2015.
 
The following table summarizes our results of operations for the three months ended June 30, 2016 and the three months ended June 30, 2015 (in thousands):
 
 
2016
 
2015
 
Change
 
%
Revenues:
 

 
 

 
 

 
 

Rental revenues
$
42,196

 
$
23,625

 
$
18,571

 
78.6
%
Expense recoveries
9,552

 
4,908

 
4,644

 
94.6
%
Interest income on real estate loans and other
1,468

 
1,150

 
318

 
27.7
%
Total revenues
53,216

 
29,683

 
23,533

 
79.3
%
Expenses:
 

 
 

 
 

 
 

Interest expense
4,279

 
2,193

 
2,086

 
95.1