Edgar Filing: HEALTHCARE REALTY TRUST INC

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________________________

Form 10-K

(Mark One)



ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended: December 31, 2016



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period to

Commission File Number: 001-11852

__________________________________________________

HEALTHCARE REALTY TRUST INCORPORATED

(Exact name of Registrant as specified in its charter)



Maryland		62-1507028
(State or other jurisdiction of Incorporation or organization)		(I.R.S. Employer Identification No.)

3310 West End Avenue

Suite 700

Nashville, Tennessee 37203

(Address of principal executive offices)

(615) 269-8175

(Registrant’s telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act:



Title of Each Class		Name of Each Exchange on Which Registered
Common stock, $0.01 par value per share		New York Stock Exchange

Securities Registered Pursuant to Section 12(g) of the Act:

None

(Title of Class)

__________________________________________________

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý

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

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b -2 of the Exchange Act. (Check one):



	Large accelerated filer	ý	Accelerated filer	o

	Non-accelerated filer	o	Smaller reporting company	o
(Do not check if a smaller reporting company)

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

Yes o No ý

The aggregate market value of the shares of common stock of the Registrant (based upon the closing price of these shares on the New York Stock Exchange on June 30, 2016) held by non-affiliates on June 30, 2016 was $3,650,133,357.

As of January 27, 2017, there were 116,440,289 shares of the Registrant’s common stock outstanding.

________________________________

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 9, 2017 are incorporated by reference into Part III of this Report.

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HEALTHCARE REALTY TRUST INCORPORATED

FORM 10-K

December 31, 2016

TABLE OF CONTENTS



		Page
Part I
Item 1.	Business	1
Item 1A.	Risk Factors	5
Item 1B.	Unresolved Staff Comments	13
Item 2.	Properties	13
Item 3.	Legal Proceedings	13
Item 4.	Mine Safety Disclosures	13

Part II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	14
Item 6.	Selected Financial Data	16
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	43
Item 8.	Financial Statements and Supplementary Data	44
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	86
Item 9A.	Controls and Procedures	86

Part III
Item 10.	Directors, Executive Officers and Corporate Governance	88
Item 11.	Executive Compensation	90
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	90
Item 13.	Certain Relationships and Related Transactions, and Director Independence	90
Item 14.	Principal Accountant Fees and Services	90
Item 15.	Exhibits and Financial Statement Schedules	91
Item 16.	Form 10-K Summary	96

Signatures		98

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PART I

Item 1. Business

Overview

Healthcare Realty Trust Incorporated (“Healthcare Realty” or the “Company”) is a self-managed and self-administered real estate investment trust (“REIT”) that owns, leases, manages, acquires, finances, develops and redevelops income-producing real estate properties associated primarily with the delivery of outpatient healthcare services throughout the United States. The Company was incorporated in Maryland in 1992 and listed on the New York Stock Exchange in 1993.

The Company operates so as to qualify as a REIT for federal income tax purposes. As a REIT, the Company is not subject to corporate federal income tax with respect to taxable income distributed to its stockholders. See “Risk Factors” in Item 1A for a discussion of risks associated with qualifying as a REIT.

Real Estate Properties

The Company had gross investments of approximately $3.6 billion in 202 real estate properties, construction in progress, land held for development and corporate property at December 31, 2016. The Company provided property management services for 146 healthcare-related properties nationwide, totaling approximately 10.3 million square feet as of December 31, 2016. The Company’s real estate property investments by geographic area are detailed in Note 2 to the Consolidated Financial Statements. The following table details the Company's owned properties by facility type as of December 31, 2016:



	Number of Properties	Gross Investment		Square Feet	Percentage of Square Feet		Occupancy⁽¹⁾
(Dollars and square feet in thousands)	Number of Properties	Gross Investment		Square Feet	Percentage of Square Feet		December 31, 2016		December 31, 2015
Medical office/outpatient	182	$	3,165,868	13,245	90.8	%	87.4	%	86.7	%
Inpatient	10	344,051		818	5.6	%	100.0	%	100.0	%
Other	10	80,941		518	3.6	%	83.1	%	85.9	%
Sub-Total	202	$	3,590,860	14,581	100.0	%	87.9	%	87.6	%
Construction in progress	—	11,655
Land held for development	—	20,123
Corporate property	—	5,583
Total	202	$	3,628,221

______

(1)

The occupancy columns represent the percentage of total rentable square feet leased (including month-to-month and holdover leases), excluding properties classified as held for sale (two properties as of December 31, 2016 and one property as of December 31, 2015). Properties under property operating or single-tenant net lease agreements are included at 100% occupancy. Upon expiration of these agreements, occupancy reflects underlying tenant leases in the building.

Revenue Concentrations

The Company’s real estate portfolio is leased to a diverse tenant base. For the year ended December 31, 2016, the Company did not have any tenants that accounted for 10% or more of the Company’s consolidated revenues, including revenues from discontinued operations. The largest revenue concentration is with Baylor Scott & White Health and its affiliates which accounted for 9.8% of the Company's consolidated revenues. These arrangements are spread over 166 leases and 20 buildings. The next largest concentration is with Mercy (St. Louis) at 4.4%.

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Expiring Leases

As of December 31, 2016, the weighted average remaining years to maturity pursuant to the Company’s leases were approximately 4.4 years, with expirations through 2036. The table below details the Company’s lease maturities as of December 31, 2016, excluding two properties classified as held for sale.



Expiration Year	Number of Leases	Square Feet	Percentage of Square Feet
2017⁽¹⁾	604	2,325,443	18.2	%
2018	387	1,400,606	11.0	%
2019	463	2,344,770	18.3	%
2020	289	1,374,086	10.7	%
2021	278	1,089,943	8.5	%
2022	107	727,731	5.7	%
2023	128	738,186	5.8	%
2024	105	663,874	5.2	%
2025	60	552,119	4.3	%
2026	55	198,128	1.6	%
Thereafter	60	1,373,607	10.7	%

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(1)	Includes 50 leases totaling 186,441 square feet that expired prior to December 31, 2016 and are currently on month-to-month terms.

See Trends and Matters Impacting Operating Results as part of Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information regarding the Company's leases and leasing efforts.

Liquidity

The Company believes that its liquidity and sources of capital are adequate to satisfy its cash requirements. The Company expects to meet its liquidity needs through cash on hand, cash flows from operations, property dispositions, equity and debt issuances in the public or private markets and borrowings under commercial credit facilities.

Business Strategy

The Company owns and operates healthcare properties that facilitate the delivery of care in primarily outpatient settings. To execute its strategy, the Company engages in a broad spectrum of integrated services including leasing, management, acquisition, financing, development and redevelopment of such properties. The Company seeks to generate stable, growing income and lower the long-term risk profile of its portfolio of properties by focusing on facilities located on or near the campuses of large, acute care hospitals associated with leading health systems. The Company seeks to reduce financial and operational risk by owning properties in diverse geographic locations with a broad tenant mix that includes over 30 physician specialties, as well as surgery, imaging, cancer and diagnostic centers.

2016 Investment Activity

The Company acquired 10 medical office buildings during 2016 for a total purchase price of $241.9 million, including the assumption of mortgage notes payable of $13.2 million. The weighted average capitalization rate for the 10 medical office buildings was 5.6%. The Company calculates the capitalization rate for an acquisition as the forecasted first year net operating income divided by the purchase price plus acquisition costs and expected capital additions.

The Company disposed of six properties during 2016 for a total sales price of $94.7 million, including $68.0 million for three inpatient rehabilitation facilities. The weighted average capitalization rate for these properties was 8.2%.

In 2016, the Company funded $45.3 million toward development and redevelopment of properties, with two projects underway at December 31, 2016. The Company received a certificate of occupancy for one redevelopment project during the fourth quarter of 2016. This project added 49,089 square feet to one of the Company's existing medical office buildings. Funding of tenant improvements for this project will continue through the first half of 2017 as tenants take occupancy.

See the Company's discussion regarding the 2016 acquisitions and dispositions activity in Note 4 to the Consolidated Financial Statements and development activity in Note 15 to the Consolidated Financial Statements. Also, please refer to the Company's

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discussion in Trends and Matters Impacting Operating Results as part of Management's Discussion and Analysis of Financial Condition and Results of Operations.

Competition

The Company competes for the acquisition and development of real estate properties with private investors, healthcare providers, other REITs, real estate partnerships and financial institutions, among others. The business of acquiring and developing new healthcare facilities is highly competitive and is subject to price, construction and operating costs, and other competitive pressures. Some of the Company's competitors may have lower costs of capital.

The financial performance of all of the Company’s properties is subject to competition from similar properties. The extent to which the Company’s properties are utilized depends upon several factors, including the number of physicians using or referring patients to an associated healthcare facility, healthcare employment, competitive systems of healthcare delivery, and the area’s population, size and composition. Private, federal and state health insurance programs and other laws and regulations may also have an effect on the utilization of the properties. The Company’s properties operate in a competitive environment, and patients and referral sources, including physicians, may change their preferences for a healthcare facility from time to time.

Government Regulation

The facilities owned by the Company are utilized by medical tenants which are required to comply with extensive regulation at the federal, state and local levels, including the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, the "Affordable Care Act") and laws intended to combat fraud and waste such as the Anti-Kickback Statute, Stark Law, False Claims Act and Health Insurance Portability and Accountability Act of 1996. These laws and regulations establish, among other things, requirements for state licensure and criteria for medical tenants to participate in government-sponsored reimbursement programs, such as the Medicare and Medicaid programs. The Company's leases generally require the tenant to comply with all applicable laws relating to the tenant's use and occupation of the leased premises. Although lease payments to the Company are not directly affected by these laws and regulations, changes in these programs or the loss by a tenant of its license or ability to participate in government-sponsored reimbursement programs could have a material adverse effect on the tenant's ability to make lease payments to the Company.

The Medicare and Medicaid programs are highly regulated and subject to frequent evaluation and change. Government healthcare spending has increased over time; however, changes from year to year in reimbursement methodology, rates and other regulatory requirements have resulted in a challenging operating environment for healthcare providers. Substantial changes to the Medicare and Medicaid programs may cause the profitability of providing care to Medicare and Medicaid patients to decline, which could adversely affect tenants' ability to make lease payments to the Company.

The Affordable Care Act was intended to provide for comprehensive reform of the United States' healthcare system and extend health insurance benefits to the uninsured population, with the potential to alleviate high uncompensated care expense to healthcare providers. However, the law also increased regulatory scrutiny of providers and insurers by federal and state administrative authorities; lowered annual increases in Medicare payment rates; and implemented cost-saving measures and shared risk-and-reward payment models to promote value and savings, rather than payment for volume of services. These initiatives may slow the growth of healthcare spending over time, but also require providers to expand access and quality of care, presenting the industry and its individual participants with uncertainty and greater financial risk.

The Affordable Care Act continues to be the subject of legal and legislative challenges, including its potential repeal in 2017 by the Republican-led Congress and President Trump’s administration. The repeal of the law, in whole or in part, along with potential health reform replacement legislation, could affect the market for individual health insurance and, indirectly, the economic performance of some or all of the Company's tenants and borrowers. The Company cannot predict the degree to which any changes may affect indirectly the economic performance of the Company, positively or negatively.

Section 603 of the Bipartisan Budget Act of 2015 lowered Medicare rates effective January 1, 2017 for services provided in off-campus, provider-based outpatient departments to the same level of rates for physician-office settings for those facilities not grandfathered-in under the current Medicare rates as of the law’s date of enactment, November 2, 2015. This legislation reflects the movement by the Center for Medicare and Medicaid Services toward reimbursement “site-neutrality,” or equalizing Medicare rates across different facility-type settings. While these changes are expected to lower overall Medicare spending, the Company’s medical office buildings that are located on hospital campuses could become more valuable as hospital tenants will keep their higher Medicare rates for on-campus outpatient services. However, the Company cannot predict the amount of benefit from these measures or if other federal health policy or regulation will ultimately require cuts to reimbursement rates for services provided in other facility-type settings. The Company cannot predict the degree to which these changes, or changes to federal healthcare programs in general, may affect the economic performance of some or all of the Company's tenants, positively or negatively.

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Legislative Developments

Each year, legislative proposals for health policy are introduced in Congress and state legislatures, and regulatory changes are enacted by government agencies. These proposals, individually or in the aggregate, could significantly change the delivery of healthcare services, either nationally or at the state level, if implemented. Examples of significant legislation recently enacted or in the process of implementation include:

•

the repeal of the Affordable Care Act and related actions concerning the expansion of Medicaid benefits and the implementation of health insurance exchanges, whether run by the state or by the federal government, whereby individuals and small businesses purchase health insurance, including government-funded plans, many assisted by federal subsidies that are subject to ongoing legal and legislative challenges;


•	quality control, cost containment, and payment system reforms for Medicaid and Medicare, such as expansion of pay-for-performance criteria, bundled provider payments, accountable care organizations, increased patient cost-sharing, geographic payment variations, comparative effectiveness research, and lower payments for hospital readmissions;

•

implementation of the Medicare Access and CHIP Reauthorization Act of 2015 (“MACRA”), which, if not amended in future legislation, will eventually replace the traditional fee-for-service payment model for physicians with a new value-based payment initiative in which physicians can participate in one of two reimbursement tracks - a merit-based incentive payment system or an advanced alternative payment model; in its final rule for 2017 physician Medicare reimbursement rates, the Center for Medicare and Medicaid Services exempted approximately one-third of physician practices from MACRA compliance in 2017;

•

equalization of Medicare payment rates across different facility-type settings; Section 603 of the Bipartisan Budget Act of 2015 lowered Medicare payment rates, effective January 1, 2017 for services provided in off-campus, provider-based outpatient departments to the same level of rates for physician-office settings for those facilities not grandfathered under the current Medicare rates as of the law’s date of enactment, November 2, 2015;


•	the continued adoption by providers of federal standards for the meaningful-use of electronic health records;


•	anti-trust scrutiny of health insurance company mergers; and


•	consideration of significant cost-saving overhauls of Medicare and Medicaid, including capped federal Medicaid payments to states, premium-support models to provide for a fixed amount of Medicare benefits per enrollee, and an increase in the eligibility age for Medicare.

The Company cannot predict whether any proposals will be fully implemented, adopted, repealed, or amended, or what effect, whether positive or negative, such proposals might have on the Company's business.

Environmental Matters

Under various federal, state and local environmental laws, ordinances and regulations, an owner of real property (such as the Company) may be liable for the costs of removal or remediation of certain hazardous or toxic substances at, under, or disposed of in connection with such property, as well as certain other potential costs (including government fines and injuries to persons and adjacent property) relating to hazardous or toxic substances. Most, if not all, of these laws, ordinances and regulations contain stringent enforcement provisions including, but not limited to, the authority to impose substantial administrative, civil, and criminal fines and penalties upon violators. Such laws often impose liability, without regard to whether the owner knew of, or was responsible for, the presence or disposal of such substances, and may be imposed on the owner in connection with the activities of a tenant or operator of the property. The cost of any required remediation, removal, fines or personal or property damages and the owner’s liability therefore could exceed the value of the property and/or the aggregate assets of the owner. In addition, the presence of such substances, or the failure to properly dispose of or remediate such substances, may adversely affect the owner’s ability to sell or lease such property or to borrow using such property as collateral. A property can also be negatively impacted either through physical contamination, or by virtue of an adverse effect on value, from contamination that has or may have emanated from other properties.

Operations of the properties owned, developed or managed by the Company are and will continue to be subject to numerous federal, state, and local environmental laws, ordinances and regulations, including those relating to the following: the generation, segregation, handling, packaging and disposal of medical wastes; air quality requirements related to operations of generators, incineration devices, or sterilization equipment; facility siting and construction; disposal of non-medical wastes and ash from incinerators; and underground storage tanks. Certain properties owned, developed or managed by the Company contain, and others may contain or at one time may have contained, underground storage tanks that are or were used to store waste oils, petroleum products or other hazardous substances. Such underground storage tanks can be the source of releases of

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hazardous or toxic materials. Operations of nuclear medicine departments at some properties also involve the use and handling, and subsequent disposal of, radioactive isotopes and similar materials, activities which are closely regulated by the Nuclear Regulatory Commission and state regulatory agencies. In addition, several of the Company's properties were built during the period that asbestos was commonly used in building construction and other such facilities may be acquired by the Company in the future. The presence of such materials could result in significant costs in the event that any asbestos-containing materials requiring immediate removal and/or encapsulation are located in or on any facilities or in the event of any future renovation activities.

The Company has had environmental site assessments conducted on substantially all of the properties that it currently owns. These site assessments are limited in scope and provide only an evaluation of potential environmental conditions associated with the property, not compliance assessments of ongoing operations. While it is the Company’s policy to seek indemnification from tenants relating to environmental liabilities or conditions, even where leases do contain such provisions, there can be no assurance that the tenant will be able to fulfill its indemnification obligations. In addition, the terms of the Company’s leases or financial support agreements do not give the Company control over the operational activities of its tenants or healthcare operators, nor will the Company monitor the tenants or healthcare operators with respect to environmental matters.

Insurance

The Company carries comprehensive liability insurance and property insurance covering its owned and managed properties, including those held under long-term ground leases. In addition, tenants under long-term single-tenant net leases are required to carry property insurance covering the Company’s interest in the buildings.

Employees

At December 31, 2016, the Company employed 261 people. The employees are not members of any labor union, and the Company considers its relations with its employees to be excellent.

Available Information

The Company makes available to the public free of charge through its Internet website the Company’s Proxy Statement, Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after the Company electronically files such reports with, or furnishes such reports to, the Securities and Exchange Commission ("SEC"). The Company’s Internet website address is www.healthcarerealty.com.

The public may read and copy any materials that the Company files with the SEC at the SEC’s Public Reference Room located at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains electronic versions of the Company’s reports on its website at www.sec.gov.

Corporate Governance Principles

The Company has adopted Corporate Governance Principles relating to the conduct and operations of the Board of Directors. The Corporate Governance Principles are posted on the Company’s website (www.healthcarerealty.com) and are available in print to any stockholder who requests a copy.

Committee Charters

The Board of Directors has an Audit Committee, Compensation Committee, Corporate Governance Committee and Executive Committee. The Board of Directors has adopted written charters for each committee, except for the Executive Committee, which are posted on the Company’s website (www.healthcarerealty.com) and are available in print to any stockholder who requests a copy.

Executive Officers

Information regarding the executive officers of the Company is set forth in Part III, Item 10 of this report and is incorporated herein by reference.

Item 1A. Risk Factors

The following are some of the risks and uncertainties that could negatively affect the Company’s consolidated financial condition, results of operations, business and prospects. These risk factors are grouped into three categories: risks relating to the Company’s business and operations; risks relating to the Company’s capital structure and financings; and risks arising from the Company’s status as a REIT and the regulatory environment in which it operates.

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These risks, as well as the risks described in Item 1 under the headings “Competition,” “Government Regulation,” “Legislative Developments,” and “Environmental Matters,” and in Item 7 under the heading “Disclosure Regarding Forward-Looking Statements” should be carefully considered before making an investment decision regarding the Company. The risks and uncertainties described below are not the only ones facing the Company, and there may be additional risks that the Company does not presently know of or that the Company currently considers not likely to have a significant impact. If any of the events underlying the following risks actually occurred, the Company’s business, consolidated financial condition, operating results and cash flows, including distributions to the Company's stockholders, could suffer, and the trading price of its common stock could decline.

Risk relating to our business and operations

The Company's expected results may not be achieved.

The Company's expected results may not be achieved, and actual results may differ materially from expectations. This may be the result of various factors, including, but not limited to: changes in the economy; the availability and cost of capital at favorable rates; increases in property taxes, changes to facility-related healthcare regulations; changes in interest rates; competition for quality assets; negative developments in the operating results or financial condition of the Company's tenants, including, but not limited to, their ability to pay rent and repay loans; the Company's ability to reposition or sell facilities with profitable results; the Company's ability to re-lease space at similar rates as vacancies occur; the Company's ability to timely reinvest proceeds from the sale of assets at similar yields; government regulations affecting tenants' Medicare and Medicaid reimbursement rates and operational requirements; unanticipated difficulties and/or expenditures relating to future acquisitions and developments; changes in rules or practices governing the Company's financial reporting; and other legal and operational matters.

The Company’s revenues depend on the ability of its tenants under its leases to generate sufficient income from their operations to make rent, loan and lease guaranty payments to the Company.

The Company’s revenues are subject to the financial strength of its tenants and associated health systems. The Company has no operational control over the business of these tenants and associated health systems who face a wide range of economic, competitive, government reimbursement and regulatory pressures and constraints. Any slowdown in the economy, decline in the availability of financing from the capital markets, and changes in healthcare regulations may adversely affect the businesses of the Company’s tenants to varying degrees. Such conditions may further impact such tenants’ abilities to meet their obligations to the Company and, in certain cases, could lead to restructurings, disruptions, or bankruptcies of such tenants. In turn, these conditions could adversely affect the Company’s revenues and could increase allowances for losses and result in impairment charges, which could decrease net income attributable to common stockholders and equity, and reduce cash flows from operations.

The Company may decide or may be required under purchase options to sell certain properties. The Company may not be able to reinvest the proceeds from sales at rates of return equal to the return received on the properties sold. Uncertain market conditions could result in the Company selling properties at unfavorable rates or at losses in the future.

The Company had approximately $173.7 million, or 4.8% of the Company’s real estate property investments, that were subject to purchase options held by lessees that were exercisable as of December 31, 2016 or could become exercisable in 2017. Other properties have purchase options that will become exercisable in future periods. Properties with options exercisable in 2017 produced aggregate net operating income (operating revenues, such as property operating revenue, single-tenant net lease revenue, and property lease guaranty revenue, less property operating expense) of approximately $17.8 million in 2016. The exercise of these purchase options exposes the Company to reinvestment risk and a reduction in investment return. Certain properties subject to purchase options are producing returns above the rates of return the Company expects to achieve with new investments. If the Company is unable to reinvest the sale proceeds at rates of return equal to the return received on the properties that are sold, it may experience a decline in lease revenues and profitability and a corresponding material adverse effect on the Company’s business and financial condition, the Company’s ability to make distributions to its stockholders, and the market price of its common stock. For more specific information concerning the Company’s purchase options, see “Purchase Options” in the “Trends and Matters Impacting Operating Results” section of this report.

Owning real estate and indirect interests in real estate is subject to inherent risks.

The Company’s operating performance and the value of its real estate assets are subject to the risk that if its properties do not generate revenues sufficient to meet its operating expenses, including debt service, the Company’s cash flow and ability to pay dividends to stockholders will be adversely affected.

The Company may incur impairment charges on its real estate properties or other assets.

The Company performs an impairment review on its real estate properties every year. In addition, the Company assesses the potential for impairment of identifiable intangible assets and long-lived assets, including real estate properties, whenever events occur or a change in circumstances indicates that the recorded value might not be fully recoverable. The decision to sell a property also requires the Company to assess the potential for impairment. At some future date, the Company may determine that an impairment has occurred in the value of one or more of its real estate properties or other assets. In such an event, the

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Company may be required to recognize an impairment which could have a material adverse effect on the Company’s consolidated financial condition and results of operations.

If the Company is unable to promptly re-let its properties, if the rates upon such re-letting are significantly lower than the previous rates or if the Company is required to undertake significant expenditures to attract new tenants, then the Company’s business, consolidated financial condition and results of operations would be adversely affected.

A portion of the Company’s leases will expire over the course of any year. For more specific information concerning the Company’s expiring leases, see "Multi-Tenant Leases" and "Single-Tenant Net Leases" in the Trends and Matters Impacting Operating Results as part of Management's Discussion and Analysis of Financial Condition and Results of Operations. The Company may not be able to re-let space on terms that are favorable to the Company or at all. Further, the Company may be required to make significant capital expenditures to renovate or reconfigure space to attract new tenants. If unable to promptly re-let its properties, if the rates upon such re-letting are significantly lower than the previous rates, or if the Company is required to undertake significant capital expenditures in connection with re-letting units, the Company’s business, consolidated financial condition and results of operations, the Company’s ability to make distributions to the Company’s stockholders and the trading price of the Company’s common stock may be materially and adversely affected.

Certain of the Company’s properties are special purpose healthcare facilities and may not be easily adaptable to other uses.

Some of the Company’s properties are specialized medical facilities. If the Company or the Company’s tenants terminate the leases for these properties or the Company’s tenants lose their regulatory authority to operate such properties, the Company may not be able to locate suitable replacement tenants to lease the properties for their specialized uses. Alternatively, the Company may be required to spend substantial amounts to adapt the properties to other uses. Any loss of revenues and/or additional capital expenditures occurring as a result may have a material adverse effect on the Company’s business, financial condition and results of operations, the Company’s ability to make distributions to its stockholders, and the market price of the Company’s common stock.

The Company has, and in the future may have more, exposure to fixed rent escalators, which could lag behind inflation.

The Company receives a significant portion of its revenues by leasing assets subject to fixed rent escalations. Eighty percent of leases have increases that are based upon fixed percentages, fourteen percent of leases have increases based on the Consumer Price Index and six percent have no increase. If the fixed percentage increases begin to lag behind inflation, the Company's growth and profitability would be negatively impacted.

The Company’s real estate investments are illiquid and the Company may not be able to sell properties strategically targeted for disposition.

Because real estate investments are relatively illiquid, the Company’s ability to adjust its portfolio promptly in response to economic or other conditions is limited. Certain significant expenditures generally do not change in response to economic or other conditions, including debt service (if any), real estate taxes, and operating and maintenance costs. This combination of variable revenue and relatively fixed expenditures may result in reduced earnings and could have an adverse effect on the Company’s financial condition. In addition, the Company may not be able to sell properties targeted for disposition, including properties held for sale, due to adverse market conditions. This may negatively affect, among other things, the Company’s ability to sell properties on favorable terms, execute its operating strategy, repay debt, pay dividends or maintain its REIT status.

The Company is subject to risks associated with the development and redevelopment of properties.

The Company expects development and redevelopment of properties will continue to be a key component of its growth plans. The Company is subject to certain risks associated with the development and redevelopment of properties including the following:


•	The construction of properties generally requires various government and other approvals that may not be received when expected, or at all, which could delay or preclude commencement of construction;


•	Opportunities that the Company pursued but later abandoned could result in the expensing of pursuit costs, which could impact the Company’s consolidated results of operations;


•	Construction costs could exceed original estimates, which could impact the building’s profitability to the Company;


•	Operating expenses could be higher than forecasted;


•	Time required to initiate and complete the construction of a property and to lease up a completed property may be greater than originally anticipated, thereby adversely affecting the Company’s cash flow and liquidity;

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•	Occupancy rates and rents of a completed development property may not be sufficient to make the property profitable to the Company; and


•	Favorable capital sources to fund the Company’s development and redevelopment activities may not be available when needed.

The Company may make material acquisitions and undertake developments and redevelopments that may involve the expenditure of significant funds and may not perform in accordance with management’s expectations.

The Company regularly pursues potential transactions to acquire, develop or redevelop real estate assets. Future acquisitions could require the Company to issue equity securities, incur debt or other contingent liabilities or amortize expenses related to other intangible assets, any of which could adversely impact the Company’s consolidated financial condition or results of operations. In addition, equity or debt financing required for such acquisitions may not be available at favorable times or rates.

The Company’s acquired, developed and existing real estate properties may not perform in accordance with management’s expectations because of many factors including the following:


•	The Company’s purchase price for acquired facilities may be based upon a series of market or building-specific judgments which may be incorrect;


•	The costs of any maintenance or improvements for properties might exceed estimated costs;


•	The Company may incur unexpected costs in the acquisition, construction or maintenance of real estate assets that could impact its expected returns on such assets; and


•	Leasing may not occur at all, within expected time frames or at expected rental rates.

Further, the Company can give no assurance that acquisition, development and redevelopment opportunities that meet management’s investment criteria will be available when needed or anticipated.

The Company is exposed to risks associated with geographic concentration.

As of December 31, 2016, the Company had investment concentrations of greater than 5% of its total investments in the Dallas, Texas (13.4%) and Seattle, Washington (11.2%) markets. These concentrations increase the exposure to adverse conditions that might affect these markets, including natural disasters, local economic conditions, local real estate market conditions, increased competition, state and local regulation, including property taxes, and other localized events or conditions.

Many of the Company’s leases are dependent on the viability of associated health systems. Revenue concentrations relating to these leases expose the Company to risks related to the financial condition of the associated health systems.

The Company’s revenue concentrations with tenants are diversified, with the largest revenue concentration relating to Baylor Scott & White Health and its affiliates, which accounted for 9.8% of the Company's consolidated revenues. The next largest concentration is with Mercy (St. Louis) at 4.4%.

Most of the Company’s properties on or adjacent to hospital campuses are largely dependent on the viability of the health system’s campus where they are located, whether or not the hospital or health system is a tenant in such properties. The viability of these health systems depends on factors such as the quality and mix of healthcare services provided, competition, demographic trends in the surrounding community, market position and growth potential. If one of these hospitals is unable to meet its financial obligations, is unable to compete successfully, or is forced to close or relocate, the Company’s properties on or near such hospital campus could be adversely impacted.

Many of the Company’s properties are held under ground leases. These ground leases contain provisions that may limit the Company’s ability to lease, sell, or finance these properties.

As of December 31, 2016, the Company had 99 properties that were held under ground leases, including one property with construction in progress, representing an aggregate gross investment of approximately $1.8 billion. The weighted average remaining term of the Company's ground leases is approximately 69.4 years, including renewal options. The Company’s ground lease agreements with hospitals and health systems typically contain restrictions that limit building occupancy to physicians on the medical staff of an affiliated hospital and prohibit tenants from providing services that compete with the services provided by the affiliated hospital. Ground leases may also contain consent requirements or other restrictions on sale or assignment of the Company’s leasehold interest, including rights of first offer and first refusal in favor of the lessor. These ground lease provisions may limit the Company’s ability to lease, sell, or obtain mortgage financing secured by such properties which, in turn, could adversely affect the income from operations or the proceeds received from a sale. As a ground lessee, the Company is also exposed to the risk of reversion of the property upon expiration of the ground lease term, or an earlier breach by the Company of the ground lease, which may have a material adverse effect on the Company’s business, consolidated

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financial condition and results of operations, the Company’s ability to make distributions to the Company’s stockholders and the trading price of the Company’s common stock.

The Company may experience uninsured or underinsured losses related to casualty or liability.

The Company carries comprehensive liability insurance and property insurance covering its owned and managed properties. In addition, tenants under long-term single-tenant net leases are required to carry property insurance covering the Company’s interest in the buildings. Some types of losses may be uninsurable or too expensive to insure against. Should an uninsured loss or a loss in excess of insured limits occur, the Company could lose all or a portion of the capital it has invested in a property, as well as the anticipated future revenue from the property. In such an event, the Company might remain obligated for any mortgage debt or other financial obligation related to the property. The Company cannot give assurance that material losses in excess of insurance proceeds will not occur in the future.

The Company is subject to cyber security risks.

A cyber-attack that bypasses the Company's information technology (“IT”) security systems causing an IT security breach may lead to a material disruption of the Company's IT business systems and/or the loss of business information resulting in an adverse business impact. Risks may include:


•	future results could be adversely affected due to the theft, destruction, loss, misappropriation or release of confidential data or intellectual property;


•	operational or business delays resulting from the disruption of IT systems and subsequent clean-up and mitigation activities; and/or


•	negative publicity resulting in reputation or brand damage with the Company's tenants, health systems or other operators.

Risks relating to our capital structure and financings

The Company has incurred significant debt obligations and may incur additional debt and increase leverage in the future.

As of December 31, 2016, the Company had approximately $1.3 billion of outstanding indebtedness and the Company’s leverage ratio [debt divided by (debt plus stockholders’ equity less intangible assets plus accumulated depreciation)] was 33.9%. Covenants under the Credit Agreement, dated as of October 14, 2011, among the Company and Wells Fargo Bank, National Association, as Administrative Agent, and the other lenders that are party thereto, as amended (“Unsecured Credit Facility”), the Term Loan Agreement, dated as of February 27, 2014, among the Company, Wells Fargo Bank, National Association, as Administrative Agent, and the other lenders that are party thereto, as amended (the “Unsecured Term Loan due 2019”) and the indentures governing the Company’s senior notes permit the Company to incur substantial, additional debt, and the Company may borrow additional funds, which may include secured borrowings. A high level of indebtedness would require the Company to dedicate a substantial portion of its cash flows from operations to service the debt, thereby reducing the funds available to implement the Company’s business strategy and to make distributions to stockholders. A high level of indebtedness could also:


•	limit the Company’s ability to adjust rapidly to changing market conditions in the event of a downturn in general economic conditions or in the real estate and/or healthcare industries;


•	impair the Company’s ability to obtain additional debt financing or require potentially dilutive equity to fund obligations and carry out its business strategy; and


•	result in a downgrade of the rating of the Company’s debt securities by one or more rating agencies, which would increase the costs of borrowing under the Unsecured Credit Facility and the cost of issuance of new debt securities, among other things.

In addition, from time to time, the Company secures or assumes mortgages to partially fund its investments. If the Company is unable to meet its mortgage payments, then the encumbered properties could be foreclosed upon or transferred to the mortgagee with a consequent loss of income and asset value. A foreclosure on one or more of the Company's properties could have a material adverse effect on the Company’s consolidated financial condition and results of operations.

Covenants in the Company’s debt instruments limit its operational flexibility, and a breach of these covenants could materially affect the Company’s consolidated financial condition and results of operations.

The terms of the Unsecured Credit Facility, the Unsecured Term Loan due 2019, the indentures governing the Company’s outstanding senior notes and other debt instruments that the Company may enter into in the future are subject to customary financial and operational covenants. These provisions include, among other things: a limitation on the incurrence of additional indebtedness; limitations on mergers, investments, acquisitions, redemptions of capital stock, transactions with affiliates; and

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maintenance of specified financial ratios. The Company’s continued ability to incur debt and operate its business is subject to compliance with these covenants, which limit operational flexibility. Breaches of these covenants could result in defaults under applicable debt instruments, even if payment obligations are satisfied. Financial and other covenants that limit the Company’s operational flexibility, as well as defaults resulting from a breach of any of these covenants in its debt instruments, could have a material adverse effect on the Company’s consolidated financial condition and results of operations.

A change to the Company’s current dividend payment may have an adverse effect on the market price of the Company’s common stock.

The ability of the Company to pay dividends is dependent upon its ability to maintain funds from operations and cash flow, to make accretive new investments and to access capital. There can be no assurance that the Company will continue to pay dividends at current amounts, or at all. A failure to maintain dividend payments at current levels could result in a reduction of the market price of the Company’s common stock.

If lenders under the Unsecured Credit Facility fail to meet their funding commitments, the Company’s operations and consolidated financial position would be negatively impacted.

Access to external capital on favorable terms is critical to the Company’s success in growing and maintaining its portfolio. If financial institutions within the Unsecured Credit Facility were unwilling or unable to meet their respective funding commitments to the Company, any such failure would have a negative impact on the Company’s operations, consolidated financial condition and ability to meet its obligations, including the payment of dividends to stockholders.

The unavailability of equity and debt capital, volatility in the credit markets, increases in interest rates, or changes in the Company’s debt ratings could have an adverse effect on the Company’s ability to meet its debt payments, make dividend payments to stockholders or engage in acquisition and development activity.

A REIT is required by the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), to make dividend distributions, thereby retaining less of its capital for growth. As a result, a REIT typically requires new capital to invest in real estate assets. However, there may be times when the Company will have limited access to capital from the equity and/or debt markets. Changes in the Company’s debt ratings could have a material adverse effect on its interest costs and financing sources. The Company’s debt rating can be materially influenced by a number of factors including, but not limited to, acquisitions, investment decisions, and capital management activities. In recent years, the capital and credit markets have experienced volatility and at times have limited the availability of funds. The Company’s ability to access the capital and credit markets may be limited by these or other factors, which could have an impact on its ability to refinance maturing debt, fund dividend payments and operations, acquire healthcare properties and complete development and redevelopment projects. If the Company is unable to refinance or extend principal payments due at maturity of its various debt instruments, its cash flow may not be sufficient to repay maturing debt and, consequently, make dividend payments to stockholders. If the Company defaults in paying any of its debts or satisfying its debt covenants, it could experience cross-defaults among debt instruments, the debts could be accelerated and the Company could be forced to liquidate assets for less than the values it would otherwise receive.

The Company is exposed to increases in interest rates, which could adversely impact its ability to refinance existing debt, sell assets or engage in acquisition and development activity.

The Company receives a significant portion of its revenues by leasing its assets under long-term leases in which the rental rate is generally fixed, subject to annual rent escalators. A significant portion of the Company’s debt may be subject to floating rates, based on LIBOR or other indices. The generally fixed nature of revenues and the variable rate of certain debt obligations create interest rate risk for the Company. Increases in interest rates could make the financing of any acquisition or investment activity more costly. Rising interest rates could limit the Company’s ability to refinance existing debt when it matures or cause the Company to pay higher rates upon refinancing. An increase in interest rates also could have the effect of reducing the amounts that third parties might be willing to pay for real estate assets, which could limit the Company’s ability to sell assets at times when it might be advantageous to do so.

The Company may enter into swap agreements from time to time that may not effectively reduce its exposure to changes in interest rates.

The Company has entered into swap agreements in the past and may enter into such agreements to manage some of its exposure to interest rate volatility. These swap agreements involve risks, such as the risk that counterparties may fail to honor their obligations under these arrangements. In addition, these arrangements may not be effective in reducing the Company’s exposure to changes in interest rates. When the Company uses forward-starting interest rate swaps, there is a risk that it will not complete the long-term borrowing against which the swap is intended to hedge. If such events occur, the Company’s results of operations may be adversely affected.

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Risks relating to government regulations

If a healthcare tenant loses its licensure or certification, becomes unable to provide healthcare services, cannot meet its financial obligations to the Company or otherwise vacates a facility, the Company would have to obtain another tenant for the affected facility.

If the Company loses a tenant or sponsoring health system because such tenant loses its license or certification, becomes unable to provide healthcare services, cannot meet its financial obligations to the Company or otherwise vacates a facility, and the Company is unable to attract another healthcare provider on a timely basis and on acceptable terms, the Company’s cash flows and results of operations could suffer. Transfers of operations of healthcare facilities are often subject to regulatory approvals not required for transfers of other types of commercial operations and real estate.

Adverse trends in the healthcare service industry may negatively affect the Company’s lease revenues and the values of its investments.

The healthcare service industry may be affected by the following:


•	trends in the method of delivery of healthcare services;


•	competition among healthcare providers;


•	consolidation of large health insurers;


•	lower reimbursement rates from government and commercial payors, high uncompensated care expense, investment losses and limited admissions growth pressuring operating profit margins for healthcare providers;


•	availability of capital;


•	credit downgrades;


•	liability insurance expense;


•	regulatory and government reimbursement uncertainty resulting from the Affordable Care Act and other healthcare reform laws;


•	efforts to repeal, replace or modify the Affordable Care Act in whole or in part;


•	health reform initiatives to address healthcare costs through expanded value-based purchasing programs, bundled provider payments, health insurance exchanges, increased patient cost-sharing, geographic payment variations, comparative effectiveness research, lower payments for hospital readmissions, and shared risk-and-reward payment models such as accountable care organizations;


•	federal court decisions on cases challenging the legality of certain aspects of the Affordable Care Act;


•	federal and state government plans to reduce budget deficits and address debt ceiling limits by lowering healthcare provider Medicare and Medicaid payment rates, while requiring increased patient access to care;


•	equalizing Medicare payment rates across different settings;


•	heightened health information technology security standards and the meaningful use of electronic health records by healthcare providers; and


•	potential tax law changes affecting non-profit providers.

These changes, among others, can adversely affect the economic performance of some or all of the tenants and sponsoring health systems who provide financial support to the Company’s investments and, in turn, negatively affect the lease revenues and the value of the Company’s property investments.

If the Company fails to remain qualified as a REIT, the Company will be subject to significant adverse consequences, including adversely affecting the value of its common stock.

The Company intends to operate in a manner that will allow it to continue to qualify as a REIT for federal income tax purposes. Although the Company believes that it qualifies as a REIT, it cannot provide any assurance that it will continue to qualify as a

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REIT for federal income tax purposes. The Company’s continued qualification as a REIT will depend on the satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. The Company’s ability to satisfy the asset tests depends upon the characterization and fair market values of its assets. The Company’s compliance with the REIT income and quarterly asset requirements also depends upon the Company’s ability to successfully manage the composition of the Company’s income and assets on an ongoing basis. Accordingly, there can be no assurance that the Internal Revenue Service (“IRS”) will not contend that the Company has operated in a manner that violates any of the REIT requirements.

If the Company were to fail to qualify as a REIT in any taxable year, the Company would be subject to federal income tax, including any applicable alternative minimum tax, on its taxable income at regular corporate rates and possibly increased state and local taxes (and the Company might need to borrow money or sell assets in order to pay any such tax). Further, dividends paid to the Company’s stockholders would not be deductible by the Company in computing its taxable income. Any resulting corporate tax liability could be substantial and would reduce the amount of cash available for distribution to the Company’s stockholders, which in turn could have an adverse impact on the value of, and trading prices for, the Company’s common stock. In addition, in such event the Company would no longer be required to pay dividends to maintain REIT status, which could adversely affect the value of the Company’s common stock. Unless the Company were entitled to relief under certain provisions of the Internal Revenue Code, the Company also would continue to be disqualified from taxation as a REIT for the four taxable years following the year in which the Company failed to qualify as a REIT.

Even if the Company remains qualified for taxation as a REIT, the Company is subject to certain federal, state and local taxes on its income and assets, including taxes on any undistributed taxable income, and state or local income, franchise, property and transfer taxes. These tax liabilities would reduce the Company’s cash flow and could adversely affect the value of the Company’s common stock. For more specific information on state income taxes paid, see Note 16 to the Consolidated Financial Statements.

The Company’s Articles of Incorporation contain limits and restrictions on transferability of the Company’s common stock which may have adverse effects on the value of the Company’s common stock.

In order to qualify as a REIT, no more than 50% of the value of the Company’s outstanding shares may be owned, directly or indirectly, by five or fewer individuals (as defined in the Internal Revenue Code to include certain entities) during the last half of a taxable year. To assist in complying with this REIT requirement, the Company’s Articles of Incorporation contain provisions restricting share transfers where the transferee (other than specified individuals involved in the formation of the Company, members of their families and certain affiliates, and certain other exceptions) would, after such transfer, own (a) more than 9.9% either in number or value of the outstanding common stock of the Company or (b) more than 9.9% either in number or value of any outstanding preferred stock of the Company. If, despite this prohibition, stock is acquired increasing a transferee’s ownership to over 9.9% in value of either the outstanding common stock or any preferred stock of the Company, the stock in excess of this 9.9% in value is deemed to be held in trust for transfer at a price that does not exceed what the purported transferee paid for the stock, and, while held in trust, the stock is not entitled to receive dividends or to vote. In addition, under these circumstances, the Company has the right to redeem such stock. These restrictions on transfer of the Company’s shares could have adverse effects on the value of the Company’s common stock.

Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.

The federal tax rate applicable to income from “qualified dividends” payable to certain domestic stockholders that are individuals, trusts and estates is currently the preferential tax rate applicable to long-term capital gains. Dividends payable by REITs, however, are generally not qualified dividends and do not qualify for the preferential tax rate. The more favorable rates applicable to regular corporate qualified dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the stock of REITs, including the Company’s common stock.

Complying with the REIT requirements may cause the Company to forego otherwise attractive opportunities.

To qualify as a REIT for federal income tax purposes, the Company must continually satisfy tests concerning, among other things, the sources of its income, the nature of its assets, the amounts it distributes to its stockholders and the ownership of its stock. The Company may be unable to pursue investments that would be otherwise advantageous to the Company in order to satisfy the source-of-income or distribution requirements for qualifying as a REIT. Thus, compliance with the REIT requirements may hinder the Company’s ability to make certain attractive investments.

Qualifying as a REIT involves highly technical and complex provisions of the Internal Revenue Code.

Qualification as a REIT involves the application of highly technical and complex provisions of the Internal Revenue Code for which only limited judicial and administrative authorities exist. Even a technical or inadvertent violation could jeopardize the Company’s REIT qualification. The Company’s continued qualification as a REIT will depend on the Company’s satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. In

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addition, the Company’s ability to satisfy the requirements to qualify as a REIT depends in part on the actions of third parties over which the Company has no control or only limited influence, including in cases where the Company owns an equity interest in an entity that is classified as a partnership for U.S. federal income tax purposes.

New legislation or administrative or judicial action, in each instance potentially with retroactive effect, could make it more difficult or impossible for the Company to qualify as a REIT.

The present federal income tax treatment of REITs may be modified, possibly with retroactive effect, by legislative, judicial or administrative action at any time, which could affect the federal income tax treatment of an investment in the Company. The federal income tax rules that affect REITs are constantly under review by persons involved in the legislative process, the IRS and the U.S. Treasury Department, which results in statutory changes as well as frequent revisions to regulations and interpretations. Revisions in federal tax laws and interpretations thereof could cause the Company to change its investments and commitments and affect the tax considerations of an investment in the Company. There can be no assurance that new legislation, regulations, administrative interpretations or court decisions will not change the tax laws significantly with respect to the Company’s qualification as a REIT or with respect to the federal income tax consequences of qualification.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

In addition to the properties described in Item 1, “Business,” in Note 2 to the Consolidated Financial Statements, and in Schedule III of Item 15 of this Annual Report on Form 10-K, the Company leases office space from an unrelated third party for its headquarters, which are located at 3310 West End Avenue in Nashville, Tennessee. The Company’s corporate office lease currently covers approximately 36,653 square feet of rented space and expires on October 31, 2020. Annual base rent on the corporate office lease increases approximately 3.25% annually. The Company’s base rent for 2016 was approximately $0.9 million.

Item 3. Legal Proceedings

The Company is not aware of any pending or threatened litigation that, if resolved against the Company, would have a material adverse effect on the Company's consolidated financial position, results of operations, or cash flows.

Item 4. Mine Safety Disclosures

Not applicable.

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PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Shares of the Company’s common stock are traded on the New York Stock Exchange under the symbol “HR.” At December 31, 2016, there were 1,076 stockholders of record. The following table sets forth the high and low sales prices per share of common stock, and the dividends declared and paid per share of common stock related to the periods indicated.



	High		Low		Dividends Declared and Paid per Share
2016
First Quarter	$	31.09	$	27.50	$	0.30
Second Quarter	35.00		29.42		0.30
Third Quarter	36.60		32.80		0.30
Fourth Quarter (Dividend payable on February 28, 2017)	34.28		26.66		0.30

2015
First Quarter	$	31.20	$	26.03	$	0.30
Second Quarter	28.39		23.10		0.30
Third Quarter	25.24		22.01		0.30
Fourth Quarter	28.51		24.64		0.30

Future dividends will be declared and paid at the discretion of the Board of Directors. The Company’s ability to pay dividends is dependent upon its ability to generate funds from operations and cash flows, and to make accretive new investments.

Equity Compensation Plan Information

The following table provides information as of December 31, 2016 about the Company’s common stock that may be issued as restricted stock and upon the exercise of options, warrants and rights under all of the Company’s existing compensation plans, including the 2015 Stock Incentive Plan and the 2000 Employee Stock Purchase Plan.



Plan Category	Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights (1)	Weighted Average Exercise Price of Outstanding Options, Warrants and Rights (1)	Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in the First Column)
Equity compensation plans approved by security holders	316,321	—	2,538,951
Equity compensation plans not approved by security holders	—	—	—
Total	316,321	—	2,538,951

______

(1)

The outstanding rights relate only to the 2000 Employee Stock Purchase Plan. The Company is unable to ascertain with specificity the number of securities to be issued upon exercise of outstanding rights under the 2000 Employee Stock Purchase Plan or the weighted average exercise price of outstanding rights under that plan. The 2000 Employee Stock Purchase Plan provides that shares of common stock may be purchased at a per share price equal to 85% of the fair market value of the common stock at the beginning of the offering period or a purchase date applicable to such offering period, whichever is lower.

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Issuer Purchases of Equity Securities

During the year ended December 31, 2016, the Company withheld shares of Company common stock to satisfy minimum employee tax withholding obligations payable upon the vesting of non-vested shares, as follows:



Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
January 1 - January 31	13,838	$	28.32	—	—
February 1 - February 29	40	28.71		—	—
March 1 - March 31	—	—		—	—
April 1 - April 30	564	30.28		—	—
May 1 - May 31	—	—		—	—
June 1 - June 30	—	—		—	—
July 1 - July 31	—	—		—	—
August 1 - August 31	—	—		—	—
September 1 - September 30	—	—		—	—
October 1 - October 31	12,817	31.89		—	—
November 1 - November 30	1,634	30.05		—	—
December 1 - December 31	19,535	30.32		—	—
Total	48,428

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Item 6. Selected Financial Data

The following table sets forth financial information for the Company, which is derived from the Consolidated Financial Statements:



	Year Ended December 31,
(Amounts in thousands except per share data)	2016			2015			2014			2013 ⁽¹⁾			2012 ⁽¹⁾
Statement of Income Data:
Total revenues	$	411,630		$	388,471		$	370,855		$	330,949		$	297,682
Total expenses	309,932			283,541			267,100			243,331			224,592
Other income (expense)	(15,942		)	(46,094		)	(69,776		)	(100,710		)	(73,982		)
Income (loss) from continuing operations	$	85,756		$	58,836		$	33,979		$	(13,092	)	$	(892	)
Income (loss) from discontinued operations	(185		)	10,600			(1,779		)	20,075			6,427
Net income attributable to common
stockholders	$	85,571		$	69,436		$	31,887		$	6,946		$	5,465

Diluted earnings per common share:
Income (loss) from continuing operations	$	0.78		$	0.59		$	0.35		$	(0.14	)	$	(0.01	)
Income (loss) from discontinued operations	0.00			0.11			(0.02		)	0.22			0.08
Net income attributable to common
stockholders	$	0.78		$	0.70		$	0.33		$	0.08		$	0.07
Weighted average common shares outstanding -
Diluted	109,387			99,880			96,759			90,941			78,845

Balance Sheet Data (as of the end of the period):
Real estate properties, gross	$	3,628,221		$	3,380,908		$	3,258,279		$	3,067,187		$	2,821,323
Real estate properties, net	$	2,787,382		$	2,618,982		$	2,557,608		$	2,435,078		$	2,240,706
Mortgage notes receivable	$	—		$	—		$	1,900		$	125,547		$	162,191
Assets held for sale and discontinued
operations, net	$	3,092		$	724		$	9,146		$	6,852		$	3,337
Total assets ⁽²⁾	$	3,040,647		$	2,810,224		$	2,757,510		$	2,729,662		$	2,539,972
Notes and bonds payable ⁽²⁾	$	1,264,370		$	1,424,992		$	1,403,692		$	1,348,459		$	1,293,044
Total stockholders' equity	$	1,653,414		$	1,242,747		$	1,221,054		$	1,245,286		$	1,120,944

Other Data:
Funds from operations - Diluted ⁽³⁾	$	174,420		$	124,571		$	146,493		$	92,166		$	105,955
Funds from operations per common share - Diluted ⁽³⁾	$	1.59		$	1.25		$	1.51		$	1.00		$	1.32
Cash flows from operations	$	151,272		$	160,375		$	125,370		$	120,797		$	116,397
Dividends paid	$	131,759		$	120,266		$	116,371		$	111,571		$	96,356
Dividends declared and paid per common share	$	1.20		$	1.20		$	1.20		$	1.20		$	1.20

______


(1)	The Company did not have any dispositions that met the criteria for presentation as discontinued operations in 2015 or 2016. However, the years ended December 31, 2013 and 2012 were restated to conform to the discontinued operations presentation for 2014. See Note 5 to the Consolidated Financial Statements for more information on the Company’s discontinued operations as of December 31, 2016.

(2)

The Company adopted ASU No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs" and ASU No. 2015-15 "Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of -Credit Arrangements", as of January 1, 2016. Balance Sheet data for the years ending December 31, 2016 and 2015 shown above reflect this reclassification. Balance Sheet data for the years ending December 31, 2014, 2013, and 2012 have not been restated. See Note 1 to the Consolidated Financial Statements for more information.


(3)	See "Management’s Discussion and Analysis of Financial Condition and Results of Operations" for a discussion of funds from operations (“FFO”), including why the Company presents FFO and a reconciliation of net income attributable to common stockholders to FFO.

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Item 7. Management's Discussions and Analysis of Financial Condition and Results of Operations

Disclosure Regarding Forward-Looking Statements

This report and other materials Healthcare Realty has filed or may file with the Securities and Exchange Commission (“SEC”), as well as information included in oral statements or other written statements made, or to be made, by senior management of the Company, contain, or will contain, disclosures that are “forward-looking statements.” Forward-looking statements include all statements that do not relate solely to historical or current facts and can be identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “target,” “intend,” “plan,” “estimate,” “project,” “continue,” “should,” “could” and other comparable terms. These forward-looking statements are based on the current plans and expectations of management and are subject to a number of risks and uncertainties that could significantly affect the Company’s current plans and expectations and future financial condition and results.

Such risks and uncertainties as more fully discussed in Item 1A “Risk Factors” of this report and in other reports filed by the Company with the SEC from time to time include, among other things, the following:


•	The Company's expected results may not be achieved;


•	The Company’s revenues depend on the ability of its tenants under its leases to generate sufficient income from their operations to make rent, loan and lease guaranty payments to the Company;


•	The Company may decide or may be required under purchase options to sell certain properties. The Company may not be able to reinvest the proceeds from sale at rates of return equal to the return received on the properties sold. Uncertain market conditions could result in the Company selling properties at unfavorable rates or at losses in the future;


•	Owning real estate and indirect interests in real estate is subject to inherent risks;


•	The Company may incur impairment charges on its real estate properties or other assets;


•	If the Company is unable to promptly re-let its properties, if the rates upon such re-letting are significantly lower than the previous rates or if the Company is required to undertake significant expenditures to attract new tenants, then the Company’s business, financial condition and results of operations would be adversely affected;


•	Certain of the Company’s properties are special purpose healthcare facilities and may not be easily adaptable to other uses;


•	The Company has, and may have more in the future, exposure to fixed rent escalators, which could lag behind inflation;


•	The Company’s real estate investments are illiquid and the Company may not be able to sell properties strategically targeted for disposition;


•	The Company is subject to risks associated with the development and redevelopment of properties;


•	The Company may make material acquisitions and undertake developments that may involve the expenditure of significant funds and may not perform in accordance with management’s expectations;


•	The Company is exposed to risks associated with geographic concentration;


•	Many of the Company’s leases are dependent on the viability of associated health systems. Revenue concentrations relating to these leases expose the Company to risks related to the financial condition of the associated health systems;


•	Many of the Company’s properties are held under ground leases. These ground leases contain provisions that may limit the Company’s ability to lease, sell, or finance these properties;


•	The Company may experience uninsured or underinsured losses related to casualty or liability;


•	The Company is subject to cyber security risks;


•	The Company has incurred significant debt obligations and may incur additional debt and increase leverage in the future;


•	Covenants in the Company’s debt instruments limit its operational flexibility, and a breach of these covenants could materially affect the Company’s consolidated financial condition and results of operations;

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•	A change to the Company’s current dividend payment may have an adverse effect on the market price of the Company’s common stock;


•	If lenders under the Unsecured Credit Facility fail to meet their funding commitments, the Company’s operations and consolidated financial position would be negatively impacted;


•	The unavailability of equity and debt capital, volatility in the credit markets, increases in interest rates, or changes in the Company’s debt ratings could have an adverse effect on the Company’s ability to meet its debt payments, make dividend payments to stockholders or engage in acquisition and development activity;


•	The Company is exposed to increases in interest rates, which could adversely impact its ability to refinance existing debt, sell assets or engage in acquisition and development activity;


•	The Company may enter into swap agreements from time to time that may not effectively reduce its exposure to changes in interest rates;


•	If a healthcare tenant loses its licensure or certification, becomes unable to provide healthcare services, cannot meet its financial obligations to the Company or otherwise vacates a facility, the Company would have to obtain another tenant for the affected facility;


•	Adverse trends in the healthcare service industry may negatively affect the Company’s lease revenues and the values of its investments;


•	If the Company fails to remain qualified as a REIT, the Company will be subject to significant adverse consequences, including adversely affecting the value of its common stock;


•	The Company's Articles of Incorporation contain limits and restrictions on transferability of the Company's common stock which may have adverse effects on the value of the Company's common stock;


•	Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends;


•	Complying with the REIT requirements may cause the Company to forego otherwise attractive opportunities;


•	Qualifying as a REIT involves highly technical and complex provisions of the Internal Revenue Code; and


•	New legislation or administrative or judicial action, in each instance potentially with retroactive effect, could make it more difficult or impossible for the Company to qualify as a REIT.

The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Stockholders and investors are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in the Company’s filings and reports, including, without limitation, estimates and projections regarding the performance of development projects the Company is pursuing.

The purpose of this Management's Discussion and Analysis of Financial Condition and Results of Operations is to provide an understanding of the Company's consolidated financial condition, results of operations and cash flows by focusing on the changes in key measures from year to year. This section is provided as a supplement to, and should be read in conjunction with, the Company's Consolidated Financial Statements and accompanying notes. This section is organized in the following sections:


•	Overview


•	Liquidity and Capital Resources


•	Trends and Matters Impacting Operating Results


•	Results of Operations


•	Non-GAAP Financial Measures and Key Performance Indicators


•	Off-balance Sheet Arrangements


•	Contractual Obligations


•	Application of Critical Accounting Policies to Accounting Estimates

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Overview

Liquidity and Capital Resources

The Company monitors its liquidity and capital resources and relies on several key indicators in its assessment of capital markets for financing acquisitions and other operating activities as needed, including the following:

•Leverage ratios and lending covenants;

•Dividend payout percentage; and

•Interest rates, underlying treasury rates, debt market spreads and equity markets.

The Company uses these indicators and others to compare its operations to its peers and to help identify areas in which the Company may need to focus its attention.

Sources and Uses of Cash

The Company's revenues are derived from its real estate property portfolio based on contractual arrangements with its tenants and sponsoring health systems. These sources of revenue represent the Company's primary source of liquidity to fund its dividends and its operating expenses, including interest incurred on debt, general and administrative costs, capital expenditures and other expenses incurred in connection with managing its existing portfolio and investing in additional properties. To the extent additional investments are not funded by these sources, the Company will fund its investment activity generally through equity or debt issuances either in the public or private markets, property dispositions or through proceeds from its Unsecured Credit Facility.

The Company expects to continue to meet its liquidity needs, including capital for additional investments, dividend payments and debt service funds through cash on hand, cash flows from operations and the cash flow sources addressed above. The Company also had unencumbered real estate assets with a gross book value of approximately $3.3 billion at December 31, 2016, of which a portion could serve as collateral for secured mortgage financing. The Company believes that its liquidity and sources of capital are adequate to satisfy its cash requirements. The Company cannot, however, be certain that these sources of funds will be available at a time and upon terms acceptable to the Company in sufficient amounts to meet its liquidity needs.

The Company has some exposure to variable interest rates and its common stock price is impacted by the volatility in the stock markets. However, the Company’s leases, which provide its main source of income and cash flow, have terms of approximately one to 20 years and have lease rates that generally increase on an annual basis at fixed rates or based on consumer price indices.

Operating Activities

Cash flows provided by operating activities for the three years ended December 31, 2016, 2015 and 2014 were $151.3 million, $160.4 million and $125.4 million, respectively. Several items impact cash flows from operating activities including, but not limited to, cash generated from property operations, interest payments and the timing related to the payment of invoices and other expenses and receipt of tenant rent.

The Company may sell additional properties and redeploy cash from property sales into new investments. To the extent revenues related to the properties being sold exceed income from these new investments, the Company's consolidated results of operations and cash flows could be adversely affected.

See "Trends and Matters Impacting Operating Results" for additional information regarding the Company's operating activities.

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Investing Activities

A summary of the significant transactions impacting investing activities for the year ended December 31, 2016 is listed below. See Note 4 to the Consolidated Financial Statements for more detail on these activities.

Outflows

The Company acquired 10 medical office buildings during 2016 for a total purchase price of $241.9 million, including cash consideration of $224.9 million, purchase price credits of $1.0 million, capital commitments of $2.8 million and the assumption of mortgage notes payable of $13.2 million (excluding a $0.8 million fair value premium recorded at closing). The following table details the acquisitions for the year ended December 31, 2016:



(Dollars in millions)	Health System Affiliation	Date Acquired	Purchase Price		Mortgage Notes Payable Assumed			Square Footage	Hospital Campus Location
Seattle, Washington	UW Medicine	3/31/16	$	38.3	$	—		69,712	Adjacent
Seattle, Washington	UW Medicine	4/29/16	21.6		—			46,637	On
Los Angeles, California	HCA	5/13/16	20.0		(13.2		)	63,012	On
Seattle, Washington	UW Medicine	9/12/16	53.1		—			87,462	On
Washington, D.C.	Inova Health System	9/26/16	45.2		—			103,783	On
Baltimore, Maryland ⁽¹⁾	University of Maryland	10/11/16	36.2		—			113,631	On
Seattle, Washington	Providence Health	10/17/16	9.8		—			29,753	On
Seattle, Washington	Providence Health	12/21/16	5.1		—			20,740	On
St. Paul, Minnesota	HealthEast Care System	12/21/16	12.6		—			48,281	On
			$	241.9	$	(13.2	)	583,011

______

(1) Includes two properties

In 2016, the Company funded $56.9 million at its owned real estate properties, including first generation tenant improvement allowances and planned capital expenditures for acquisitions. The following table details these expenditures for the year ended December 31, 2016:



(Dollars in millions)	2016
1st generation tenant improvements & planned capital expenditures for acquisitions	$	16.1
2nd generation tenant improvements	23.7
Capital expenditures	17.1
Total capital funding	$	56.9

In 2016, the Company funded $45.3 million toward development and redevelopment of properties.

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Inflows

The Company disposed of six properties in 2016 for a total sales price of $94.7 million, including cash proceeds of $93.3 million, and $1.4 million of closing costs and related adjustments. The following table details these dispositions for the year ended December 31, 2016:



(Dollars in millions)	Date Disposed	Sales Price		Square Footage	Property Type ⁽¹⁾
Kansas City, Kansas	10/14/16	$	15.1	70,908	MOB
Nashville, Tennessee	10/28/16	8.8		45,274	MOB
Altoona, Pennsylvania	12/20/16	21.5		64,032	IRF
Harrisburg, Pennsylvania	12/20/16	24.2		79,836	IRF
Phoenix, Arizona	12/20/16	22.3		51,903	IRF
Atlanta, Georgia	12/22/16	2.8		8,749	MOB
Total dispositions		$	94.7	320,702

______


(1)	MOB = medical office building, IRF = inpatient rehabilitation hospital

Financing Activities

Below is a summary of the significant financing activity for the year ended December 31, 2016. See Notes 9 and 11 to the Consolidated Financial Statements for more information on the capital markets and financing activities.

Debt Activity

The following table details the Company's debt balances as of December 31, 2016:



	Balance as of December 31, 2016	Weighted Years to Maturity	Effective Interest Rate
Senior Notes due 2021, net of discount	$397,147	4.0	5.97	%
Senior Notes due 2023, net of discount	247,296	6.3	3.95	%
Senior Notes due 2025, net of discount	247,819	8.3	4.08	%
Total Senior Notes Outstanding	$892,262	5.9	4.89	%
Unsecured credit facility due 2020	107,000	3.6	1.82	%
Unsecured term loan due 2019	149,491	2.2	1.77	%
Mortgage notes payable, net	115,617	6.8	5.14	%
Total Outstanding Notes and Bonds Payable	$1,264,370	5.3	4.28	%

On July 29, 2016, the Company entered into an amendment to its Unsecured Credit Facility that extended the maturity date from April 2017 to July 2020, reduced the spread over LIBOR that the Company pays for borrowing, and revised financial covenants to provide the Company with increased flexibility. Amounts outstanding under the Unsecured Credit Facility bear interest at LIBOR plus an applicable margin rate. The margin rate, which depends on the Company's credit ratings, ranges from 0.83% to 1.55% (1.00% as of December 31, 2016). In addition, the Company pays a facility fee per annum on the aggregate amount of commitments ranging from 0.13% to 0.30% (0.20% as of December 31, 2016). In connection with the amendment, the Company paid up-front fees to the lenders and other costs of approximately $4.4 million which will be amortized over the term of the Unsecured Credit Facility. As of December 31, 2016, the Company had $107.0 million outstanding under the Unsecured Credit Facility with a weighted average interest rate of approximately 1.8% and a remaining borrowing capacity of approximately $593.0 million.

On July 29, 2016, the Company entered into an amendment to the Unsecured Term Loan due 2019. This amendment was for the purpose of conforming the financial covenants in the Unsecured Term Loan due 2019 to those in the amendment to the Unsecured Credit Facility due 2019. The amendment did not impact the maturity date or cost of borrowing under the Unsecured Term Loan due 2019.

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The following table details the mortgage note payable activity for the year ended December 31, 2016:



(Dollars in millions)	Transaction Date		Borrowing (Repayment)			Encumbered Square Footage	Contractual Interest Rate
Borrowings:
Los Angeles, California	01/05/16		$	11.5		90,607	3.6	%
Los Angeles, California ⁽¹⁾	05/13/16		13.2			63,012	4.8	%
Total borrowings			$	24.7		153,619

Repayments:
Charlotte, North Carolina	2/11/16		$	(10.2	)	90,633	5.9	%
Richmond, Virginia	4/29/16		(7.3		)	42,957	6.0	%
Seattle, Washington	9/1/16	`	(15.7		)	70,623	6.0	%
Nashville, Tennessee	10/18/16		(0.1		)	45,274	7.6	%
Total repayments			$	(33.3	)	249,487

______


(1)	Assumed upon acquisition.

Debt Covenant Information

As of December 31, 2016, 96.6% of the Company’s debt balances were due after 2017. Also, as of December 31, 2016, the Company’s stockholders’ equity totaled approximately $1.7 billion and its leverage ratio [debt divided by (debt plus stockholders’ equity less intangible assets plus accumulated depreciation)] was approximately 33.9%. The Company’s fixed charge ratio, calculated in accordance with Item 503 of Regulation S-K, includes only income from continuing operations which is reduced by depreciation and amortization and the operating results of properties currently classified as held for sale, as well as other income from discontinued operations (see Note 5 to the Consolidated Financial Statements). In accordance with this definition, the Company’s earnings from continuing operations as of December 31, 2016 were sufficient to cover its fixed charges with a ratio of 2.4 to 1.0. Calculated in accordance with the fixed charge covenant ratio under its Unsecured Credit Facility, the Company’s earnings covered its fixed charges at a ratio of 3.8 to 1.0.

The Company’s various debt agreements contain certain representations, warranties, and financial and other covenants customary in such debt agreements. Among other things, these provisions require the Company to maintain certain financial ratios and impose certain limits on the Company’s ability to incur indebtedness and create liens or encumbrances. As of December 31, 2016, the Company was in compliance with the financial covenant provisions under all of its various debt instruments.

The Company plans to manage its capital structure to maintain compliance with its debt covenants consistent with its current profile. Downgrades in ratings by the rating agencies could have a material adverse impact on the Company’s cost and availability of capital, which could in turn have a material adverse impact on consolidated results of operations, liquidity and/or financial condition.

Common Stock Issuances

On February 19, 2016, the Company entered into sales agreements with five investment banks to allow sales under its at-the-market equity offering program of up to 10,000,000 shares of common stock. During the year ended December 31, 2016, the Company sold a total of 4,795,601 shares of common stock under its at-the-market equity offering program, including 664,298 shares of common stock under a previous sales agreement. The sales generated $144.6 million in net proceeds at prices ranging from $28.31 to $33.66 per share (weighted average of $30.61 per share). The Company has 5,868,697 authorized shares remaining available to be sold under the current sales agreements as of February 15, 2017. The Company used the net proceeds from the at-the-market equity offering program for general corporate purposes, including the acquisition and development of healthcare facilities, funding of mortgage loans and the repayment of debt.

On July 5, 2016, the Company issued 9,200,000 shares of common stock at $33.13 per share in an underwritten public offering pursuant to the Company's shelf registration statement. The net proceeds of the offering, after offering expenses, were approximately $304.6 million. A portion of the proceeds was used to repay indebtedness and fund investment activity.

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Dividends Payable

The Company is required to pay dividends to its stockholders at least equal to 90% of its taxable income in order to maintain its qualification as a REIT. Common stock cash dividends paid during or related to 2016 are shown in the table below:



Quarter	Quarterly Dividend		Date of Declaration	Date of Record	Date Paid/*Payable
4th Quarter 2015	$	0.30	February 2, 2016	February 18, 2016	February 29, 2016
1st Quarter 2016	$	0.30	May 3, 2016	May 16, 2016	May 31, 2016
2nd Quarter 2016	$	0.30	August 2, 2016	August 17, 2016	August 31, 2016
3rd Quarter 2016	$	0.30	November 1, 2016	November 16, 2016	November 30, 2016
4th Quarter 2016	$	0.30	January 31, 2017	February 14, 2017	* February 28, 2017

The ability of the Company to pay dividends is dependent upon its ability to generate funds from operations and cash flows and to make accretive new investments.

Trends and Matters Impacting Operating Results

Management monitors factors and trends important to the Company and the REIT industry in order to gauge their potential impact on the operations of the Company. Discussed below are some of the factors and trends that management believes may impact future operations of the Company.

Acquisitions and Dispositions

The Company acquired 10 medical office buildings during 2016 for a total purchase price of $241.9 million, including cash consideration of $224.9 million and the assumption of mortgage notes payable of $13.2 million (excluding $0.8 million fair value adjustment premiums recorded upon acquisition). The weighted average capitalization rate of the 2016 acquisitions was 5.6%.

The Company disposed of six properties during 2016 for a total sales price of $94.7 million, including cash proceeds of $93.3 million and $1.4 million of closing costs and adjustments. The weighted average capitalization rate of the 2016 dispositions was 8.2%.

A component of the Company's strategy is to continually monitor its portfolio for opportunities to improve the overall quality. Properties that are located off-campus, in smaller markets or not associated with the delivery of outpatient healthcare may be sold for higher capitalization rates than properties acquired to replace them. Properties that meet the Company's investment criteria sell for lower capitalization rates because of their lower-risk profile and higher internal growth potential.

See the Company's discussion regarding the 2016 acquisitions and dispositions activity in Note 4 to the Consolidated Financial Statements.

Development and Redevelopment Activity

In 2016, the Company funded $45.3 million toward development and redevelopment of properties, with two projects underway at December 31, 2016. The Company received a certificate of occupancy for one redevelopment project in Nashville, Tennessee during the fourth quarter of 2016. This project added 49,089 square feet to one of the Company's existing medical office buildings. Funding of tenant improvements for this project will continue through the first half of 2017 as tenants take occupancy.

The Company expects to begin development of a 151,000 square foot medical office building in Seattle, Washington. The total development budget is estimated to be $64.1 million. Construction is expected to begin in the second half of 2017 and be completed by the end of 2018.

The Company is in the planning stages with several health systems and developers regarding new development and redevelopment opportunities and expects one or more to begin in 2017. Total costs to develop or redevelop a typical medical office building can vary depending on the scope of the project, market rental terms, parking configuration, building amenities, asset type and geographic location.

The Company’s ability to complete and stabilize these facilities in a given period of time will impact the Company’s results of operations and cash flows. More favorable completion dates, stabilization periods and rental rates will result in improved results of operations and cash flows, while lagging completion dates, stabilization periods and rental rates will result in less favorable

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results of operations and cash flows. The Company’s disclosures regarding projections or estimates of completion dates and leasing may not reflect actual results. See Note 15 to the Consolidated Financial Statements for more information on the Company’s development and redevelopment activities.

Security Deposits and Letters of Credit

As of December 31, 2016, the Company held approximately $10.6 million in letters of credit and security deposits for the benefit of the Company in the event the obligated tenant fails to perform under the terms of its respective lease. Generally, the Company may, at its discretion and upon notification to the tenant, draw upon these instruments if there are any defaults under the leases.

Multi-Tenant Leases

The Company expects that approximately 15% to 20% of the leases in its multi-tenant portfolio will expire each year. In-place multi-tenant leases have a weighted average lease term of 7.7 years and a weighted average remaining lease term of 3.7 years. During 2016, 447 leases totaling 1.4 million square feet in the Company's multi-tenant portfolio expired, of which 369 leases totaling 1.2 million square feet were renewed or the tenants continue to occupy the space. Demand for well-located real estate with complementary practice types and services remains consistent, and the Company's 2016 quarterly tenant retention statistics ranged from 82% to 88%. In 2017, 549 leases totaling 1.8 million square feet in the Company's multi-tenant portfolio are scheduled to expire. Of those leases, 93% are in on-campus buildings, which tend to have a high tenant retention rate.

The Company continues to emphasize revenue growth for its in-place leases. In 2016, the Company experienced contractual rental rate growth which averaged 2.9% for in-place leases compared to 3.0% in 2015. In addition, the Company saw increases in its quarterly weighted average rental rate growth for renewing leases ("cash leasing spread"). In 2016, quarterly cash leasing spreads ranged from 3.3% to 6.6% compared to 2.3% to 4.3% in 2015.

In a further effort to maximize revenue growth and reduce its exposure to uncontrollable expenses such as taxes and utilities, the Company carefully manages its balance of lease types. Gross leases, wherein the Company has full exposure to all operating expenses, comprise 15% of its lease portfolio. Generally, the Company seeks higher rental increases for gross leases to mitigate exposure to operating expenses. Modified gross or base year leases, in which the Company and tenant both pay a share of operating expenses, comprise 30% of the Company's leased portfolio. Net leases, in which tenants pay all allowable operating expenses, total 55% of the leased portfolio.

Capital Additions

As a part of the Company's leasing practice, the Company seeks to earn a return on capital additions when determining asking lease rates for each property by considering gross investment, inclusive of any actual or expected capital additions. The Company invested $17.1 million, or $1.17 per square foot, in capital additions in 2016 and $16.0 million, or $1.12 per square foot, in capital additions in 2015.

Capital additions are long-term investments made to maintain and improve the physical and aesthetic attributes of the Company's owned properties. Examples of such improvements include, but are not limited to, material changes to, or the full replacement of, major building systems (exterior facade, building structure, roofs, elevators, mechanical systems, electrical systems, energy management systems, upgrades to existing systems for improved efficiency) and common area improvements (furniture, signage and artwork, bathroom fixtures and finishes, exterior landscaping, parking lots or garages). These additions are capitalized into the gross investment of a property and then depreciated over their estimated useful lives, typically ranging from 7 to 20 years. Capital additions specifically do not include recurring maintenance expenses, whether direct or indirect, related to the upkeep and maintenance of major building systems or common area improvements. Capital additions also do not include improvements related to a specific tenant suite, unless the improvement is part of a major building system or common area improvement.

Tenant Improvements

The Company may provide a tenant improvement allowance in new or renewal leases for the purpose of refurbishing or renovating tenant space. Shorter-term leases (one to two years) generally do not include a tenant improvement allowance. In instances where the Company negotiates a renewal lease but does not increase the rental rate in the first year of the renewal term, it limits or eliminates a tenant's improvement allowance.

Tenant improvements spending totaled approximately $39.8 million in 2016, of which $16.1 million pertained to first generation space. Tenant improvements spending in 2015 totaled $25.2 million, of which $11.8 million pertained to first generation space. If tenants spend more than the allowance, the Company generally offers the tenant the option to amortize the overage over the lease term with interest or reimburse the overage to the Company in a lump sum. In either case, such overages are amortized by the Company as rental income over the term of the lease. Interest earned on tenant overages is included in other operating income in the Company's Consolidated Statements of Income and totaled approximately $0.5 million in 2016,

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$0.6 million in 2015, and $0.7 million in 2014. The tenant overage amount amortized to rent totaled approximately $4.6 million in 2016, $4.5 million in 2015, and $4.2 million in 2014.

Second generation, multi-tenant tenant improvement commitments in 2016 for renewals averaged $1.55 per square foot per lease year, ranging quarterly from $1.04 to 1.84. In 2015, these commitments averaged $1.21 per square foot per lease year, ranging quarterly from $0.78 to $1.80.

Second generation, multi-tenant tenant improvement commitments in 2016 for new leases averaged $4.74 per square foot per lease year, ranging quarterly from $3.79 to $5.55. In 2015, these commitments averaged $3.41 per square foot per lease year, ranging quarterly from $2.79 to $3.75.

Leasing Commissions

In certain markets, the Company may pay leasing commissions to real estate brokers who represent either the Company's properties or prospective tenants, with commissions generally equating to 4% to 6% of the gross lease value for new leases and 2% to 4% of the gross lease value for renewal leases. In 2016, the Company paid leasing commissions of approximately $5.2 million, or $0.36 per square foot, of which $0.6 million pertained to the leases for first generation space. In 2015, the Company paid leasing commissions of approximately $7.5 million, or $0.53 per square foot, of which $0.6 million pertained to the leases for first generation space. The amount of leasing commissions amortized over the term of the applicable leases and included in property operating expense in the Company's Consolidated Statements of Income totaled $4.2 million, $3.4 million and $3.0 million for the years ended December 31, 2016, 2015 and 2014, respectively.

Rent Abatements

Rent abatements, which generally take the form of deferred rent, are sometimes used to help induce a potential tenant to lease space in the Company's properties. Such abatements, when made, are amortized by the Company on a straight-line basis against rental income over the lease term. Rent abatements for 2016 totaled approximately $3.5 million, or $0.24 per square foot, of which $1.2 million pertained to leases for first generation space. Rent abatements for 2015 totaled approximately $2.8 million, or $0.20 per square foot, of which $1.1 million pertained to leases for first generation space. Rent abatements for 2014 totaled approximately $3.8 million, or $0.27 per square foot, of which $2.4 million pertained to leases for first generation space.

Single-Tenant Net Leases

Two single-tenant net leases expired during the year ended December 31, 2016. One tenant entered into a new 11-year lease agreement and the Company sold this building in December 2016. The other lease was not renewed, but a new tenant signed a 20-year lease that commenced in June 2016 and resulted in an initial annual rent reduction of $0.8 million.

The Company received notice in October 2016 from an affiliate of LifeCare Management Services that it had ceased admitting new patients and planned to close a 78,731 square foot, long term acute care hospital in Pittsburgh, Pennsylvania that it leases from the Company. The Company and the tenant agreed to terminate the lease effective January 31, 2017 and the Company received substantially all outstanding rent due through December 31, 2016. The Company expects a quarterly decrease in rental income of approximately $0.5 million as a result of this lease termination, effective with the first quarter of 2017. The Company intends to sell or lease the property to another health care provider.

In the fourth quarter of 2016, the Company recorded a reserve of $0.3 million for past due rent associated with a tenant that operates a wellness center. The Company is in negotiations with the tenant to terminate the lease and enter into a new 12-year lease for the same property with an investment-grade acute care hospital. The new lease is expected to result in an annual rent reduction of $0.4 million.

Five single-tenant net leases expire on December 31, 2017. The Company expects each of these leases to be renewed or the properties to be sold to the lessee under its applicable purchase option. The purchase option prices are greater than the Company's net investment in the properties.

As of December 31, 2016, the Company has a total of 30 single-tenant net leases with a weighted average lease term of 13.3 years and a weighted average remaining lease term of 8.1 years.

Property Operating Agreement Expirations

Two of the Company’s 202 owned real estate properties as of December 31, 2016 were covered under property operating agreements between the Company and a sponsoring health system. Three other property operating agreements expired during 2016 resulting in reduced revenue of approximately $0.7 million. These agreements contractually obligate the sponsoring health system to provide to the Company a minimum return on the Company’s investment in the property in exchange for the right to be involved in the operating decisions of the property, including tenancy. If the minimum return is not achieved through

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normal operations of the property, the Company calculates and accrues to property lease guaranty revenue, each quarter, any shortfalls due from the sponsoring health systems under the terms of the property operating agreement. One agreement expired in January 2017 and is expected to decrease property lease guaranty revenue by $0.2 million per quarter. The last agreement expires in February 2019.

Operating Leases

As of December 31, 2016, the Company was obligated under operating lease agreements consisting primarily of the Company’s corporate office lease and ground leases related to 49 real estate investments, excluding those ground leases the Company has prepaid. Rental expense relating to the operating leases for the years ended December 31, 2016, 2015 and 2014 was $5.7 million, $5.1 million and $4.9 million, respectively. At December 31, 2016, the Company had 99 properties totaling 8.0 million square feet that were held under ground leases with a remaining weighted average term of 69.4 years, including renewal options, at December 31, 2016. These ground leases typically have initial terms of 50 to 75 years with one to two renewal options extending the terms to 75 to 100 years, with expiration dates through 2115.

Purchase Options

The Company had approximately $173.7 million in real estate properties as of December 31, 2016 that were subject to exercisable purchase options or purchase options that become exercisable during 2017. The Company has approximately $409.3 million in real estate properties that are subject to purchase options that will become exercisable after 2017. Additional information about the amount and basis for determination of the purchase price is detailed in the table below (dollars in thousands):



		Gross Real Estate Investment as of December 31, 2016
Year Exercisable	Number of Properties	Fair Market Value Method ⁽¹⁾		Non Fair Market Value Method ⁽²⁾		Total
Current	6	$	124,668	$	—	$	124,668
2017	6	—		49,039		49,039
2018	—	—		—		—
2019	2	41,521		—		41,521
2020	—	—		—		—
2021	1	—		14,984		14,984
2022	1	19,356		—		19,356
2023	—	—		—		—
2024	—	—		—		—
2025	5	18,883		221,929		240,812
2026	—	—		—
2027 and thereafter	3	92,649		—		92,649
Total	24	$	297,077	$	285,952	$	583,029

_____

(1) The purchase option price includes a fair market value component that is determined by an appraisal process.

(2) Includes properties with stated purchase prices or prices based on fixed capitalization rates. These properties have purchase prices that are on average 13% greater than the Company's current gross investment.

Equity Issuances

On February 19, 2016, the Company entered into sales agreements with five investment banks to allow sales under its at-the-market equity offering program of up to 10,000,000 shares of common stock. During the year ended December 31, 2016, the Company sold a total of 4,795,601 shares of common stock under this program, including 664,298 shares of common stock under a previous sales agreement. The sales generated $144.6 million in net proceeds at prices ranging from $28.31 to $33.66 per share (weighted average of $30.61 per share). The Company has 5,868,697 authorized shares remaining available to be sold under the current sales agreements as of February 15, 2017.

Debt Management

The Company maintains a conservative and flexible capital structure that allows it to fund new investments and operate its existing portfolio. In addition to its unsecured senior notes, Unsecured Credit Facility, and Unsecured Term Loan due 2019, the Company has approximately $114.9 million of mortgage notes payable, most of which were assumed when the Company

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acquired properties. In 2017, approximately $0.2 million of these mortgage notes payable will mature. The Company intends to repay the mortgage notes upon maturity.

Impact of Inflation

The Company is subject to the risk of inflation as most of its revenues are derived from long-term leases. Most of the Company's leases provide for fixed increases in base rents or increases based on the Consumer Price Index, and require the tenant to pay all or some portion of increases in operating expenses. The Company believes that these provisions mitigate the impact of inflation. However, there can be no assurance that the Company's ability to increase rents or recover operating expenses will always keep pace with inflation. The following table shows the percentage of the Company's leases that provide for fixed or CPI-based rent increases by type:



	As of December 31, 2016
Annual increase
CPI	11.6	%
Fixed	74.5	%
Non-annual increase
CPI	2.5	%
Fixed	5.4	%
No increase
Term < 1 year	3.6	%
Term > 1 year	2.5	%

Defined Benefit Pension Plan

During 2015, the Company terminated its pension plan under which three of the Company’s founding officers were eligible to receive retirement benefits upon retirement (the “Executive Retirement Plan”). The Company recognized a total benefit obligation of $19.6 million in connection with the termination and recorded a charge of approximately $5.3 million, inclusive of the acceleration of $2.5 million recorded in accumulated other comprehensive loss on the Company's Consolidated Balance Sheets that was being amortized. The one-time lump sum payment was paid in cash in May 2016. See Note 12 to the Consolidated Financial Statements for additional information.

New Accounting Pronouncements

See Note 1 to the Condensed Consolidated Financial Statements for information on new accounting standards including both standards that the Company adopted during the year and those that have not yet been adopted. The Company continues to evaluate the impact of the new standards that have not yet been adopted.

Other Items Impacting Operations

General and administrative expenses will fluctuate quarter-to-quarter and the Company typically has higher general and administrative costs in the first quarter of every year as a result of the expenses related to the grant of employee stock purchase plan options and contributions to healthcare savings accounts. These items will likely increase general and administrative expenses by approximately $0.3 million in the first quarter of 2017. General and administrative expense is expected to be greater in 2017 compared to 2016 due in part to an expected increase of approximately $2.8 million related to the amortization of non-vested stock awards granted in December 2016. These grants include performance-based awards and one-time awards associated with the Chief Executive Officer transition.

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Results of Operations

Year Ended December 31, 2016 Compared to Year Ended December 31, 2015

The Company’s consolidated results of operations for 2016 compared to 2015 were significantly impacted by acquisitions, dispositions, extinguishments of debt, gains on sale and impairment charges recorded on real estate properties.

Revenues

Rental income increased $24.1 million, or 6.3%, to approximately $407.5 million compared to $383.3 million in the prior year and is comprised of the following:



					Change
(Dollars in thousands)	2016		2015		$			%
Property operating	$	336,409	$	306,550	$	29,859		9.7	%
Single-tenant net lease	63,871		67,238		(3,367		)	(5.0	)%
Straight-line rent	7,201		9,545		(2,344		)	(24.6	)%
Total Rental income	$	407,481	$	383,333	$	24,148		6.3	%

Property operating income increased $29.9 million, or 9.7%, from the prior year primarily as a result of the following activity:


•	Acquisitions in 2015 and 2016 contributed $19.3 million.


•	Net leasing activity including contractual rent increases and renewals contributed $13.4 million.


•	Dispositions in 2015 accounted for a decrease of $2.9 million.

Single-tenant net lease income decreased $3.4 million, or 5.0%, from the prior year primarily as a result of the following activity:


•	Contractual rent increases contributed $0.6 million.


•	Reduction in lease revenue of $0.6 million upon expiration and execution of new leases and reserves (see Trends and Matters Impacting Operating Results for additional information).


•	Dispositions in 2015 and 2016 accounted for a decrease of $3.3 million.

Straight-line rent income decreased $2.3 million, or 24.6%, from the prior year primarily as a result of the following activity:


•	Acquisitions in 2015 and 2016 contributed $1.1 million.


•	Dispositions in 2015 and 2016 caused a decrease of $0.4 million.


•	The effect of prior year rent abatements that expired and net leasing activity caused a decrease of $3.0 million.

Expenses

Property operating expenses increased $6.3 million, or 4.5%, for the year ended December 31, 2016 compared to the prior year primarily as a result of the following activity:


•	Acquisitions in 2015 and 2016 accounted for an increase of $7.5 million.


•	Dispositions in 2015 and 2016 accounted for a decrease of $2.3 million.


•	The Company experienced overall increases in the following:


◦	maintenance and repair expense of $0.4 million;


◦	portfolio property taxes of $0.4 million;


◦	leasing commission and legal fee expense of $0.2 million;


◦	compensation-related expense of $0.7 million; and


◦	janitorial expense of $0.2 million.


•	The Company experienced an overall decrease in utility expense of $0.8 million.

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General and administrative expenses increased approximately $8.9 million, or 33.0%, for the year ended December 31, 2016 compared to the prior year primarily as a result of the following activity:


•	Increase in performance-based compensation expense totaling $5.1 million, including $1.5 million of non-cash stock-based award amortization.


•	Increase in expenses related to potential acquisitions and developments of $2.2 million.


•	Other net increases, including telecommunication expense and compensation-related expense, of $1.6 million.

Depreciation expense increased $10.0 million, or 9.3%, for the year ended December 31, 2016 compared to the prior year primarily as a result of the following activity:


•	Properties acquired in 2015 and 2016 and developments completed and commencing operations contributed a combined increase of $6.6 million.


•	Various building and tenant improvement expenditures caused an increases of $6.9 million.


•	Dispositions in 2015 caused a decrease of $2.6 million.


•	Assets that became fully depreciated resulted in a decrease of $0.9 million.

Other Income (Expense)

Other income (expense), a net expense, decreased $30.2 million, or 65.4%, for the year ended December 31, 2016 compared to the prior year mainly due to the following activity:

Gain on Sales of Real Estate Properties

Gain on sales of real estate properties excluding those classified within discontinued operations, totaling approximately $41.0 million and $56.6 million are associated with the sales of six and seven real estate properties during 2016 and 2015, respectively.

Interest Expense

Interest expense decreased $8.2 million for the year ended December 31, 2016 compared to the prior year. The components of interest expense are as follows:



(Dollars in thousands)	2016			2015			Change			Percentage Change
Contractual interest	$	55,666		$	62,215		$	(6,549	)	(10.5	)%
Net discount/premium accretion	(45		)	376			(421		)	(112.0	%)
Deferred financing costs amortization	2,820			3,067			(247		)	(8.1	%)
Amortization of interest rate swap settlement	168			115			53			46.1	%
Interest cost capitalization	(1,258		)	(239		)	(1,019		)	426.4	%
Total interest expense	$	57,351		$	65,534		$	(8,183	)	(12.5	)%

Contractual interest decreased $6.5 million, or 10.5%, primarily as a result of the following activity:


•	The Unsecured Credit Facility and Unsecured Term Loan due 2019 accounted for a net decrease of $1.0 million.


•	Unsecured senior notes due 2025 in an aggregate amount of $250.0 million (the "Senior Notes due 2025") were issued in the second quarter of 2015 and accounted for an increase of $3.0 million.


•	The unsecured senior notes due 2017 (the "Senior Notes due 2017") were repaid in the second quarter of 2015 and accounted for a decrease of $7.3 million.


•	Mortgage notes assumed upon acquisition of real properties and mortgage notes refinanced accounted for an increase of $1.7 million, and mortgage notes repayments accounted for a decrease of $3.1 million.


•	Scheduled monthly interest payments related to the Company's mortgage notes payable increased $0.2 million.

Loss on Extinguishments of Debt

Loss on extinguishment of debt of approximately $28.0 million is associated with the 2015 redemption of the Senior Notes due 2017. See Note 9 to the Consolidated Financial Statements for more information.

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Pension Termination

Pension termination expense of approximately $5.3 million represents the effect of the Company's termination of the Executive Retirement Plan in 2015. See Note 12 to the Consolidated Financial Statements for more information.

Impairment of Real Estate Assets

Impairment of real estate assets excluding those classified within discontinued operations, totaling approximately $3.6 million is associated with the sale of two real estate properties during 2015.

Impairment of Internally-Developed Software

The Company recognized an impairment of internally-developed software of approximately $0.7 million in 2015, which was abandoned for a third party program that was previously unavailable.

Discontinued Operations

Loss from discontinued operations totaled $0.2 million and income from discontinued operations totaled $10.6 million, respectively, for the years ended December 31, 2016 and 2015, which includes the results of operations, impairments and gains on sale related to assets classified as held for sale as of December 31, 2014. None of the Company's 2015 or 2016 dispositions met the definition of a discontinued operation as amended in Accounting Standards Update No. 2014-08, which the Company adopted in 2015. The Company disposed of one real estate property in 2015 that was classified as held for sale at December 31, 2014 and one property remains classified as held for sale as of December 31, 2016.

Year Ended December 31, 2015 Compared to Year Ended December 31, 2014

The Company’s consolidated results of operations for 2015 compared to 2014 were significantly impacted by acquisitions, dispositions, development conversion properties, gains on sale and impairment charges recorded on real estate properties.

Revenues

Rental income increased $21.8 million, or 6.0%, to approximately $383.3 million compared to $361.5 million in the prior year and is comprised of the following:



					Change
(Dollars in thousands)	2015		2014		$			%
Property operating	$	306,550	$	285,304	$	21,246		7.4	%
Single-tenant net lease	67,238		65,252		1,986			3.0	%
Straight-line rent	9,545		10,969		(1,424		)	(13.0	)%
Total Rental income	$	383,333	$	361,525	$	21,808		6.0	%

Property operating income increased $21.2 million, or 7.4%, from the prior year as a result of the following activity:


•	Acquisitions in 2014 and 2015 contributed $13.6 million.


•	Net leasing activity including contractual rent increases and renewals contributed $9.4 million.


•	Conversion from single-tenant net lease caused an increase of $0.9 million.


•	Conversion to single-tenant net lease caused a decrease of $1.3 million.


•	Dispositions in 2015 and 2016 caused a decrease of $1.4 million.

Single-tenant net lease income increased $2.0 million, or 3.0%, from the prior year as a result of the following activity:


•	Acquisitions in 2014 and 2015 contributed $2.8 million.


•	New leasing activity including contractual rent increases contributed $1.8 million.


•	Conversion from property operating income caused an increase of $1.8 million.


•	Conversion to property operating income caused a decrease of $1.3 million.


•	Dispositions in 2015 accounted for a decrease of $3.1 million.

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Straight-line rent income decreased $1.4 million, or 13.0%, from the prior year as a result of the following activity:


•	Acquisitions in 2014 and 2015 contributed $0.7 million.


•	New leasing activity including contractual rent increases and the effects of current year rent abatements contributed $0.3 million.


•	The effects of prior year rent abatements that expired caused a decrease of $2.4 million.

Mortgage interest income decreased $3.6 million, or 97.5%, from the prior year primarily as a result of the following activity:


•	Acquisition in 2014 of a property in Oklahoma affiliated with Mercy Health previously funded under a construction mortgage note receivable resulted in a decrease of $2.4 million.


•	The Company's 2014 receipt of a deed in lieu of foreclosure related to a mortgage note receivable on a property in Iowa resulted in a decrease of $1.0 million.

Expenses

Property operating expenses increased $6.1 million, or 4.6%, for the year ended December 31, 2015 compared to the prior year as a result of the following activity:


•	Acquisitions in 2014 and 2015 accounted for an increase of $4.9 million.


•	Dispositions in 2015 accounted for a decrease of $0.7 million.


•	The Company experienced an overall increase in portfolio property taxes of $2.5 million, leasing commission and legal fee expense of $0.7 million and janitorial expense of $0.2 million.


•	The Company experienced an overall decrease in maintenance and repair of approximately $0.7 million and utilities expense of $0.8 million.

General and administrative expenses increased approximately $4.1 million, or 18.1%, for the year ended December 31, 2015 compared to the prior year primarily as a result of the following activity:


•	Increase in performance-based compensation expense totaling $3.4 million, including $1.7 million of non-cash stock-based award amortization.


•	Increase in pension expense of $0.4 million.


•	Increase in expenses related to potential acquisitions and developments of $0.5 million.


•	Decrease in expenses related to state income taxes of $0.2 million.

Depreciation expense increased $7.1 million, or 7.2%, for the year ended December 31, 2015 compared to the prior year. Properties acquired in 2014 and 2015 and developments completed and commencing operations contributed a combined increase of $5.1 million. The remaining $2.0 million increase is related to various building and tenant improvement expenditures.

Other Income (Expense)

Other income (expense), a net expense, decreased $23.7 million, or 33.9%, for the year ended December 31, 2015 compared to the prior year mainly due to the following activity:

Interest Expense

Interest expense decreased $6.9 million for the year ended December 31, 2015 compared to the prior year. The components of interest expense are as follows:



(Dollars in thousands)	2015			2014		Change			Percentage Change
Contractual interest	$	62,215		$	68,327	$	(6,112	)	(8.9	)%
Net discount/premium accretion	376			954		(578		)	(60.6	)%
Deferred financing costs amortization	3,067			3,132		(65		)	(2.1	)%
Amortization of interest rate swap settlement	115			—		115			—	%
Interest cost capitalization	(239		)	—		(239		)	—	%
Total interest expense	$	65,534		$	72,413	$	(6,879	)	(9.5	)%

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Contractual interest decreased $6.1 million, or 8.9%, primarily as a result of the following activity:


•	The Unsecured Credit Facility and Unsecured Term Loan due 2019 accounted for a net increase of $0.9 million.


•	Senior Notes due 2025 were issued in the second quarter of 2015 and accounted for an increase of $6.6 million.


•	Senior Notes due 2017 were repaid in the second quarter of 2015 and accounted for a decrease of $12.2 million.


•	Mortgage notes assumed upon acquisition of real properties accounted for an increase of $1.2 million, and mortgage notes repayments accounted for a decrease of $2.4 million.


•	Scheduled monthly interest payments related to the Company's mortgage notes payable decreased $0.2 million.

Loss on Extinguishments of Debt

Loss on extinguishment of debt of approximately $28.0 million is associated with the redemption of the Senior Notes due 2017. See Note 9 to the Consolidated Financial Statements for more information.

Pension Termination

Impairment of Real Estate Assets

Impairment of real estate assets excluding those classified within discontinued operations, totaling approximately $3.6 million is associated with the sale of two real estate properties during 2015.

Impairment of Internally-Developed Software

The Company recognized an impairment of internally-developed software of approximately $0.7 million in 2015, which was abandoned for a third party program that was previously unavailable.

Interest and Other Income, Net

Interest and other income decreased primarily due to a refund received in 2014 of the overpayment of prior year expenses of approximately $1.9 million.

Discontinued Operations

Income from discontinued operations totaled $10.6 million and loss from discontinued operations totaled $1.8 million, respectively, for the years ended December 31, 2015 and 2014, which includes the results of operations, impairments and gains on sale related to assets classified as held for sale as of December 31, 2014. None of the Company's 2015 dispositions

initiated in 2015 met the definition of a discontinued operation as amended in Accounting Standards Update No. 2014-08, which the Company adopted in 2015. The Company disposed of one real estate property in 2015 that was classified as held for sale at December 31, 2014 and nine real estate properties in 2014 that were included in discontinued operations. One property remains classified as held for sale as of December 31, 2016.

Non-GAAP Financial Measures and Key Performance Indicators

Management considers certain non-GAAP financial measures and key performance indicators to be useful supplemental measures of the Company's operating performance. A non-GAAP financial measure is generally defined as one that purports to measure historical or future financial performance, financial position or cash flows, but excludes or includes amounts that would not be so adjusted in the most comparable measure determined in accordance with generally accepted accounting principles ("GAAP"). Set forth below are descriptions of the non-GAAP financial measures management considers relevant to the Company's business and useful to investors, as well as reconciliations of these measures to the most directly comparable GAAP financial measures.

The non-GAAP financial measures and key performance indicators presented herein are not necessarily identical to those presented by other real estate companies due to the fact that not all real estate companies use the same definitions. These measures should not be considered as alternatives to net income, as indicators of the Company's financial performance, or as alternatives to cash flow from operating activities as measures of the Company's liquidity, nor are these measures necessarily indicative of sufficient cash flow to fund all of the Company's needs. Management believes that in order to facilitate a clear understanding of the Company's historical consolidated operating results, these measures should be examined in conjunction with net income and cash flows from operations as presented in the Consolidated Financial Statements and other financial data included elsewhere in this Annual Report on Form 10-K.

Funds from Operations ("FFO"), Normalized FFO and Funds Available for Distribution ("FAD")

FFO and FFO per share are operating performance measures adopted by the National Association of Real Estate Investment Trusts (“NAREIT”). NAREIT defines FFO as the most commonly accepted and reported measure of a REIT’s operating

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performance equal to “net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures.”

Management believes FFO and FFO per share provide an understanding of the operating performance of the Company’s properties without giving effect to certain significant non-cash items, primarily depreciation and amortization expense. Historical cost accounting for real estate assets in accordance with GAAP assumes that the value of real estate assets diminishes predictably over time. However, real estate values instead have historically risen or fallen with market conditions. The Company believes that by excluding the effect of depreciation, amortization, impairments and gains or losses from sales of real estate, all of which are based on historical costs and which may be of limited relevance in evaluating current performance, FFO and FFO per share can facilitate comparisons of operating performance between periods. The Company reports FFO and FFO per share because these measures are observed by management to also be the predominant measures used by the REIT industry and by industry analysts to evaluate REITs and because FFO per share is consistently reported, discussed, and compared by research analysts in their notes and publications about REITs. For these reasons, management has deemed it appropriate to disclose and discuss FFO and FFO per share. However, FFO does not represent cash generated from operating activities determined in accordance with GAAP and is not necessarily indicative of cash available to fund cash needs. FFO should not be considered as an alternative to net income attributable to common stockholders as an indicator of the Company’s operating performance or as an alternative to cash flow from operating activities as a measure of liquidity.

In addition to FFO, the Company presents Normalized FFO and FAD. Normalized FFO is presented by adding to FFO acquisition-related costs, acceleration of deferred financing costs, debt extinguishment costs and other Company-defined normalizing items to evaluate operating performance. FAD is presented by adding to Normalized FFO non-real estate depreciation and amortization, deferred financing fees amortization, share-based compensation expense and provision for bad debts, net; and subtracting maintenance capital expenditures, including second generation tenant improvements and leasing commissions paid and straight-line rent income, net of expense. The Company's definition of these terms may not be comparable to that of other real estate companies as they may have different methodologies for computing these amounts. Normalized FFO and FAD should not be considered as an alternative to net income as an indicator of the Company's financial performance or to cash flow from operating activities as an indicator of the Company's liquidity. Normalized FFO and FAD should be reviewed in connection with GAAP financial measures.

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The table below reconciles net income attributable to common stockholders to FFO, Normalized FFO and FAD for the years ended December 31, 2016, 2015, and 2014.



	Year Ended December 31,
(Amounts in thousands, except per share data)	2016			2015			2014
Net income attributable to common stockholders	$	85,571		$	69,436		$	31,887
Gain on sales of real estate properties	(41,044		)	(67,172		)	(9,283		)
Impairments	121			4,325			12,029
Real estate depreciation and amortization	129,772			117,982			111,860
Total adjustments	88,849			55,135			114,606
Funds from Operations Attributable to Common Stockholders	$	174,420		$	124,571		$	146,493
Acquisition costs	3,414			1,394			708
Write-off of deferred financing costs upon amendment of line of credit facility	81			—			—
Pension termination	4			5,260			—
Loss on extinguishment of debt	—			27,998			—
Impairment of internally-developed software	—			654			—
Severance expense	—			141			—
Security deposit recognized upon sale	—			—			(407		)
Reversal of restricted stock amortization upon director / officer resignation	—			(40		)	(560		)
Revaluation of awards upon retirement	89			—			—
Refund of prior year overpayment of certain operating expenses	—			—			(1,919		)
Normalized Funds from Operations Attributable to Common Stockholders	$	178,008		$	159,978		$	144,315
Non-real estate depreciation and amortization	5,475			5,830			4,190
Provision for bad debt, net	(21		)	(194		)	34
Straight-line rent receivable, net	(7,134		)	(8,829		)	(10,329		)
Stock-based compensation	7,509			6,069			5,011
Provision for deferred post-retirement benefits	—			385			30
Non-cash items included in cash flows from operating activities	5,829			3,261			(1,064		)
2nd Generation TI	(23,692		)	(12,068		)	(18,551		)
Leasing commissions paid	(5,210		)	(7,504		)	(7,001		)
Capital additions	(17,122		)	(16,242		)	(12,591		)
Funds Available for Distribution	$	137,813		$	127,425		$	105,108
Funds from Operations per Common Share - Diluted	$	1.59		$	1.25		$	1.51
Normalized Funds from Operations per Common Share - Diluted	$	1.63		$	1.60		$	1.49
Weighted average common shares outstanding - Diluted	109,387			99,880			96,759

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Same Store NOI

Net operating income ("NOI") and same store NOI are key performance indicators. Management considers same store NOI a supplemental measure because it allows investors, analysts and Company management to measure unlevered property-level operating results. The Company defines NOI as operating revenues (property operating revenue, single-tenant net lease revenue, and property lease guaranty revenue) less property operating expenses related specifically to the property portfolio. NOI excludes straight-line rent, general and administrative expenses, interest expense, depreciation and amortization, gains and losses from property sales, property management fees and other revenues and expenses not specifically related to the property portfolio. Same store NOI is historical and not necessarily indicative of future results.

The following table reflects the Company's same store NOI for the years ended December 31, 2016 and 2015.



				Same Store NOI for the
				Year Ended December 31,
(Dollars in thousands)	Number of Properties⁽¹⁾	Gross Investment at December 31, 2016		2016		2015
Multi-tenant Properties	139	$	2,438,564	$	173,905	$	162,736
Single-tenant Net Lease Properties	30	617,908		58,582		58,741
Total	169	$	3,056,472	$	232,487	$	221,477

______


(1)	Properties are based on the same store definition included below and exclude assets classified as held for sale.

Properties included in the same store analysis are stabilized properties that have been included in operations and were consistently reported as leased and stabilized properties for the duration of the year-over-year comparison period presented. Accordingly, properties that were recently acquired or disposed of, properties classified as held for sale, and properties in stabilization or conversion from stabilization are excluded from the same store analysis. In addition, the Company excludes properties that meet any of the following Company-defined criteria to be included in the reposition property group:


•	Properties having less than 60% occupancy that is expected to last at least two quarters;


•	Properties that experience a loss of occupancy over 30% in a single quarter;


•	Properties with negative net operating income that is expected to last at least two quarters; or


•	Condemnation.

Any recently acquired property will be included in the same store pool once the Company has owned the property for eight full quarters. Development properties will be included in the same store pool eight full quarters after substantial completion. Any property included in the reposition property group will be included in the same store analysis once occupancy has increased to 60% or greater with positive net operating income and has remained at that level for eight full quarters.

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The following tables reconcile same store NOI to the respective line items in the Consolidated Statements of Income and the same store property count to the total owned real estate portfolio:

Reconciliation of Same Store NOI:

	Year Ended December 31,
(Dollars in thousands)	2016			2015
Net income	$	85,571		$	69,436
Loss (income) from discontinued operations	185			(10,600		)
Income from continuing operations	85,756			58,836
General and administrative	35,805			26,925
Depreciation	116,483			106,530
Amortization	11,207			10,084
Bad debts, net of recoveries	(21		)	(193		)
Gain on sales of real estate properties	(41,038		)	(56,602		)
Interest expense	57,351			65,534
Loss on extinguishment of debt	—			27,998
Pension termination	4			5,260
Impairment of real estate assets	—			3,639
Impairment of internally-developed software	—			654
Interest and other income, net	(375		)	(389		)
Mortgage interest	—			(91		)
Straight-line rent (component of Rental income)	(7,201		)	(9,545		)
Interest and other income (a)	(1,091		)	(1,157		)
NOI	256,880			237,483
NOI not included in same store	(24,393		)	(16,006		)
Same store NOI	$	232,487		$	221,477

(a) Other operating income reconciliation
Other operating	$	4,149		$	5,047
Less: Rental lease guaranty	(3,058		)	(3,890		)
Interest and other income	$	1,091		$	1,157

Reconciliation of Same Store Property Count:

	Property Count as of December 31, 2016
Same store properties	169
Acquisitions	18
Development Completions	1
Reposition	14
Total owned real estate properties	202

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements that are reasonably likely to have a current or future material effect on its consolidated financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

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Contractual Obligations

The Company monitors its contractual obligations to manage the availability of funds necessary to meet obligations when due. The following table represents the Company’s long-term contractual obligations for which the Company was making payments as of December 31, 2016, including interest payments due where applicable. The Company is also required to pay dividends to its stockholders at least equal to 90% of its taxable income in order to maintain its qualification as a REIT under the Internal Revenue Code. The Company's material contractual obligations are included in the table below. As of December 31, 2016, the Company had no long-term capital lease obligations.



	Payments Due by Period
(Dollars in thousands)	Total		Less than 1 Year		1 -3 Years		3 - 5 Years		More than 5 Years
Long-term debt obligations, including interest⁽¹⁾	$	1,554,775	$	52,690	$	276,293	$	619,815	$	605,977
Operating lease commitments⁽²⁾	390,065		5,719		11,778		10,902		361,666
Construction in progress⁽³⁾	16,130		12,885		3,245		—		—
Tenant improvements ⁽⁴⁾	19,088		19,088		—		—		—
Total contractual obligations	$	1,980,058	$	90,382	$	291,316	$	630,717	$	967,643

______

(1)

The amounts shown include estimated interest on total debt other than the Unsecured Credit Facility and Unsecured Term Loan due 2019, whose balance and interest rate may fluctuate from day to day. Excluded from the table above are the discounts on the Company's outstanding senior notes of approximately $3.1 million, net premiums totaling approximately $1.1 million on 14 mortgage notes payable, and deferred financing costs totaling approximately $5.1 million which are included in notes and bonds payable on the Company’s Consolidated Balance Sheet as of December 31, 2016. The Company’s long-term debt principal obligations are presented in more detail in the table below.



(In millions)	Principal Balance at Dec. 31, 2016		Principal Balance at Dec. 31, 2015		Maturity Date	Contractual Interest Rates at December 31, 2016		Principal Payments	Interest Payments
Unsecured Credit Facility	$	107.0	$	206.0	7/20	LIBOR + 1.00%		At maturity	Quarterly
Unsecured Term Loan due 2019	150.0		200.0		2/19	LIBOR + 1.20%		At maturity	Quarterly
Senior Notes due 2021	400.0		400.0		1/21	5.75	%	At maturity	Semi-Annual
Senior Notes due 2023	250.0		250.0		4/23	3.75	%	At maturity	Semi-Annual
Senior Notes due 2025	250.0		250.0		5/25	3.88	%	At maturity	Semi-Annual
Mortgage notes payable	114.9		128.2		5/17-5/40	3.60%-6.88%		Monthly	Monthly
	$	1,271.9	$	1,434.2


(2)	Includes primarily the corporate office and ground leases, with expiration dates through 2115, related to various real estate investments for which the Company is currently making payments.


(3)	Includes cash flow projections related to the construction of one building. This amount includes $1.3 million of invoices that were accrued and included in construction in progress on the Company's Consolidated Balance Sheet as of December 31, 2016.


(4)	The Company has remaining tenant improvement allowances of approximately $19.1 million. The Company expects to fund these improvements in 2017.

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Application of Critical Accounting Policies to Accounting Estimates

The Company’s Consolidated Financial Statements are prepared in accordance with GAAP and the rules and regulations of the SEC. In preparing the Consolidated Financial Statements, management is required to exercise judgment and make assumptions that impact the carrying amount of assets and liabilities and the reported amounts of revenues and expenses reflected in the Consolidated Financial Statements.

Management routinely evaluates the estimates and assumptions used in the preparation of its Consolidated Financial Statements. These regular evaluations consider historical experience and other reasonable factors and use the seasoned judgment of management personnel. Management has reviewed the Company’s critical accounting policies with the Audit Committee of the Board of Directors.

Management believes the following paragraphs in this section describe the application of critical accounting policies by management to arrive at the critical accounting estimates reflected in the Consolidated Financial Statements. The Company’s accounting policies are more fully discussed in Note 1 to the Consolidated Financial Statements.

Principles of Consolidation

The Company’s Consolidated Financial Statements include the accounts of the Company, its wholly owned subsidiaries, joint ventures, partnerships and consolidated variable interest entities (“VIE”) where the Company controls the operating activities. All material intercompany accounts and transactions have been eliminated.

Management relies on a qualitative analysis based on power and benefits regarding the Company’s level of influence or control over an entity to determine whether or not the Company is the primary beneficiary of a variable interest entity. Consideration of various factors includes, but is not limited to, the Company’s ability to direct the activities that most significantly impact the entity’s economic performance, the Company’s form of ownership interest, the Company’s representation on the entity’s governing body, the size and seniority of the Company’s investment, the Company’s ability and the rights of other investors to participate in policy making decisions, the Company’s ability to replace the manager and/or liquidate the entity. Management’s ability to correctly assess its influence or control over an entity when determining the primary beneficiary of a VIE affects the presentation of these entities in the Company’s Consolidated Financial Statements.

If it is determined that the Company is the primary beneficiary of a VIE, the Company’s Consolidated Financial Statements would include the operating results of the VIE rather than the results of the variable interest in the VIE. The Company would also incorporate the VIE in its internal controls over financial reporting. Untimely or inaccurate financial information provided to the Company or deficiencies in the VIE's internal controls over financial reporting could impact the Consolidated Financial Statements and its internal control over financial reporting.

Capitalization of Costs

GAAP generally allows for the capitalization of various types of costs. The rules and regulations on capitalizing costs and the subsequent depreciation or amortization of those costs versus expensing them in the period incurred vary depending on the type of costs and the reason for capitalizing the costs.

Direct costs of a development project generally include construction costs, professional services such as architectural and legal costs, travel expenses, and land acquisition costs as well as other types of fees and expenses. These costs are capitalized as part of the basis of an asset to which such costs relate. Indirect costs include capitalized interest and overhead costs. Indirect costs are capitalized during construction and on the unoccupied space in a property for up to one year after the certificate of substantial completion is received. Capitalized interest is calculated using the weighted average interest rate of the Company's unsecured debt or the interest rate on project specific debt, if applicable. The Company’s overhead costs are based on overhead load factors that are charged to a project based on direct time incurred. The Company computes the overhead load factors annually for its acquisition and development departments, which have employees who are involved in the projects. The overhead load factors are computed to absorb that portion of indirect employee costs (payroll and benefits, training, and similar costs) that are attributable to the productive time the employee incurs working directly on projects. The employees in the Company’s development departments who work on these projects maintain and report their hours daily, by project. Employee costs that are administrative, such as vacation time, sick time, or general and administrative time, are expensed in the period incurred.

Acquisition-related costs include finder’s fees, advisory, legal, accounting, valuation, other professional or consulting fees, and certain general and administrative costs are expensed in the period incurred for acquisitions accounted for as a business combination under Accounting Standards Codification Topic 805, Business Combinations. These costs associated with asset acquisitions are capitalized in accordance with GAAP.

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Management’s judgment is also exercised in determining whether costs that have been previously capitalized to a project should be reserved for or written off if or when the project is abandoned or circumstances otherwise change that would call the project’s viability into question. The Company follows a standard and consistently applied policy of classifying pursuit activity as well as reserving for these types of costs based on their classification.

The Company classifies its pursuit projects into two categories relating to development. The first category includes pursuits of developments that have a remote chance of producing new business. Costs for these projects are expensed in the period incurred. The second category includes those pursuits of developments that are either probable or highly probable to result in a project or contract. Since the Company believes it is probable that these pursuits will result in a project or contract, it capitalizes these costs in full and records no reserve.

Each quarter, all capitalized pursuit costs are again reviewed carefully for viability or a change in classification, and a management decision is made as to whether any additional reserve is deemed necessary. If necessary and considered appropriate, management would record an additional reserve at that time. Capitalized pursuit costs, net of the reserve, are carried in other assets in the Company’s Consolidated Balance Sheets, and any reserve recorded is charged to general and administrative expenses on the Consolidated Statements of Income. All pursuit costs will ultimately be written off to expense or capitalized as part of the constructed real estate asset.

As of December 31, 2016 and 2015, the Company's Consolidated Balance Sheets include capitalized pursuit costs relating to potential developments totaling $2.1 million and $0.3 million, respectively. The Company expensed costs related to acquisitions totaling $4.2 million, $1.7 million and $1.2 million for the years ended December 31, 2016, 2015 and 2014, respectively. In addition, the Company expensed costs related to the pursuit of developments totaling $0.3 million, $0.7 million and $0.7 million for the years ended December 31, 2016, 2015 and 2014, respectively.

Valuation of Long-Lived and Intangible Assets and Goodwill

Long-Lived Assets Held and Used

The Company assesses the potential for impairment of identifiable intangible assets and long-lived assets, primarily real estate properties, whenever events occur or a change in circumstances indicates that the carrying value might not be recoverable. Important factors that could cause management to review for impairment include significant underperformance of an asset relative to historical or expected operating results; significant changes in the Company's use of assets or the strategy for its overall business; plans to sell an asset before its depreciable life has ended; the expiration of a significant portion of leases in a property; or significant negative economic trends or negative industry trends for the Company or its operators. In addition, the Company reviews for possible impairment those assets subject to purchase options and those impacted by casualties, such as tornadoes and hurricanes. Management remains continuously alert to the factors above, and others, that could indicate an impairment exists.

The Company may, from time to time, be approached by a third party with interest in purchasing one or more of the Company's operating real estate properties that was otherwise not for sale. Alternatively, the Company may explore disposing of an operating real estate property but without specific intent to sell the property and without the property meeting the criteria to be classified as held for sale (see discussion below). In such cases, the Company and a potential buyer typically negotiate a letter of intent followed by a purchase and sale agreement that includes a due diligence time line for completion of customary due diligence procedures. Anytime throughout this period the transaction could be terminated by the parties. The Company views the execution of a purchase and sale agreement as a circumstance that warrants an impairment assessment and must include its best estimates of the impact of a potential sale in the recoverability test discussed in more detail below.

A property value is considered impaired only if management's estimate of current and projected (undiscounted and unleveraged) operating cash flows of the property is less than the net carrying value of the property. These estimates of future cash flows include only those that are directly associated with and that are expected to arise as a direct result of the use and eventual disposition of the property based on its estimated remaining useful life. These estimates, including the useful life determination which can be affected by any potential sale of the property, are based on management's assumptions about its use of the property. Therefore, significant judgment is involved in estimating the current and projected cash flows.

When the Company executes a purchase and sale agreement for a held and used property, the Company performs the cash flow estimation described above. This assessment gives consideration to all available information, including an assessment of the likelihood the potential transaction will be consummated under the terms and conditions set forth in the purchase and sale agreement. Management will re-evaluate the recoverability of the property if and when significant changes occur as the transaction proceeds toward closing. Normally sale transactions will close within 15 to 30 days after the due diligence period expires. Upon expiration of the due diligence period, management will again re-evaluate the recoverability of the property, updating its assessment based on the status of the potential sale.

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Whenever management determines that the carrying value of an asset that has been tested may not be recoverable, then an impairment charge would be recognized to the extent the current carrying value exceeds the current fair value of the asset. Significant judgment is also involved in making a determination of the estimated fair value of the asset.

The Company also performs an annual goodwill impairment review. The Company's reviews are performed as of December 31 of each year. The Company's 2016 and 2015 reviews indicated that no impairment had occurred with respect to the Company's $3.5 million goodwill asset.

Long-Lived Assets to be Disposed of by Planned Sale

From time to time management affirmatively decides to sell certain real estate properties under a plan of sale. The Company reclassifies the property or disposal group as held for sale when all the following criteria for a qualifying plan of sale are met:


•	Management, having the authority to approve the action, commits to a plan to sell the property or disposal group;