Edgar Filing: HEALTHCARE REALTY TRUST INC

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________________________________________

FORM 10-Q

____________________________________________________________

(Mark One)



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

For the quarterly period ended: September 30, 2018



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

For the transition period from to

Commission File Number: 001-11852

____________________________________________________________

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)



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 Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 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 x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o	Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of October 26, 2018, the Registrant had 125,237,283 shares of Common Stock outstanding.

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HEALTHCARE REALTY TRUST INCORPORATED

FORM 10-Q

September 30, 2018

TABLE OF CONTENTS



		Page
Part I—Financial Information
Item 1.	Financial Statements	1
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Income	2
	Condensed Consolidated Statements of Comprehensive Income	3
	Condensed Consolidated Statement of Equity	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to the Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	28
Item 4.	Controls and Procedures	28

Part II—Other Information
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity and Use of Proceeds	29
Item 6.	Exhibits	30

Signature		31

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Healthcare Realty Trust Incorporated

Condensed Consolidated Balance Sheets

(Amounts in thousands, except per share data)



	(Unaudited)
	September 30, 2018			December 31, 2017
ASSETS
Real estate properties:
Land	$	217,322		$	201,283
Buildings, improvements and lease intangibles	3,669,852			3,601,460
Personal property	10,454			10,314
Construction in progress	26,960			5,458
Land held for development	24,645			20,123
	3,949,233			3,838,638
Less accumulated depreciation and amortization	(989,585		)	(897,430		)
Total real estate properties, net	2,959,648			2,941,208
Cash and cash equivalents	10,027			6,215
Assets held for sale, net	8,826			33,147
Other assets, net	222,582			213,015
Total assets	$	3,201,083		$	3,193,585
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes and bonds payable	$	1,344,759		$	1,283,880
Accounts payable and accrued liabilities	72,927			70,995
Liabilities of properties held for sale	141			93
Other liabilities	43,004			48,734
Total liabilities	1,460,831			1,403,702
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value per share; 50,000 shares authorized; none issued and outstanding	—			—
Common stock, $.01 par value per share; 300,000 shares authorized; 125,237 and 125,132 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively	1,252			1,251
Additional paid-in capital	3,181,263			3,173,429
Accumulated other comprehensive income (loss)	473			(1,299		)
Cumulative net income attributable to common stockholders	1,071,804			1,018,348
Cumulative dividends	(2,514,540		)	(2,401,846		)
Total stockholders' equity	1,740,252			1,789,883
Total liabilities and stockholders' equity	$	3,201,083		$	3,193,585

The accompanying notes, together with the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, are an integral part of these financial statements.

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Healthcare Realty Trust Incorporated

Condensed Consolidated Statements of Income

For the Three and Nine Months Ended September 30, 2018 and 2017

(Amounts in thousands, except per share data)

(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
REVENUES
Rental income	$	111,452		$	105,078		$	331,247		$	311,171
Other operating	2,010			1,947			5,973			5,816
	113,462			107,025			337,220			316,987
EXPENSES
Property operating	44,135			40,628			127,691			116,663
General and administrative	8,504			8,021			25,977			24,720
Acquisition and pursuit costs	141			507			538			1,878
Depreciation and amortization	42,061			35,873			121,764			105,148
Bad debts, net of recoveries	(62		)	4			42			175
	94,779			85,033			276,012			248,584
OTHER INCOME (EXPENSE)
Gain (loss) on sales of real estate assets	1,288			(7		)	30,879			39,525
Interest expense	(13,464		)	(14,107		)	(39,202		)	(42,694		)
Impairment of real estate assets	—			(5,059		)	—			(5,387		)
Interest and other income, net	41			354			571			396
	(12,135		)	(18,819		)	(7,752		)	(8,160		)
NET INCOME	$	6,548		$	3,173		$	53,456		$	60,243
Basic earnings per common share	$	0.05		$	0.02		$	0.42		$	0.50
Diluted earnings per common share	$	0.05		$	0.02		$	0.42		$	0.50
Weighted average common shares outstanding - basic	123,300			119,098			123,281			116,181
Weighted average common shares outstanding - diluted	123,352			119,181			123,336			116,277
Dividends declared, per common share, during the period	$	0.30		$	0.30		$	0.90		$	0.90

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Healthcare Realty Trust Incorporated

Condensed Consolidated Statements of Comprehensive Income

For the Three and Nine Months Ended September 30, 2018 and 2017

(Dollars in thousands)

(Unaudited)



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
NET INCOME	$	6,548	$	3,173	$	53,456	$	60,243
Other comprehensive income:
Interest rate swaps:
Reclassification adjustments for losses included in net income (interest expense)	95		43		369		127
Gains arising during the period on interest rate swaps	374		—		1,403		—
Total other comprehensive income	469		43		1,772		127
COMPREHENSIVE INCOME	$	7,017	$	3,216	$	55,228	$	60,370

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Healthcare Realty Trust Incorporated

Condensed Consolidated Statement of Equity

For the Nine Months Ended September 30, 2018

(Dollars in thousands, except per share data)

(Unaudited)



	Common Stock		Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss)			Cumulative Net Income		Cumulative Dividends			Total Stockholders’ Equity
Balance at December 31, 2017	$	1,251	$	3,173,429		$	(1,299	)	$	1,018,348	$	(2,401,846	)	$	1,789,883
Issuance of common stock	—		464			—			—		—			464
Common stock redemptions	—		(719		)	—			—		—			(719		)
Share-based compensation	1		8,089			—			—		—			8,090
Net income	—		—			—			53,456		—			53,456
Reclassification adjustments for losses included in net income (interest expense)	—		—			369			—		—			369
Gains arising during the period on interest rate swaps	—		—			1,403			—		—			1,403
Dividends to common stockholders ($0.90 per share)	—		—			—			—		(112,694		)	(112,694		)
Balance at September 30, 2018	$	1,252	$	3,181,263		$	473		$	1,071,804	$	(2,514,540	)	$	1,740,252

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Healthcare Realty Trust Incorporated

Condensed Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2018 and 2017

(Dollars in thousands)

(Unaudited)



	Nine Months Ended September 30,
	2018			2017
OPERATING ACTIVITIES
Net income	$	53,456		$	60,243
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	121,764			105,148
Other amortization	2,113			3,056
Share-based compensation	8,090			7,496
Amortization of straight-line rent receivable	(3,599		)	(4,867		)
Amortization of straight-line rent liability	1,147			492
Gain on sales of real estate assets	(30,879		)	(39,525		)
Impairment of real estate assets	—			5,387
Equity from unconsolidated joint ventures (income)	(15		)	—
Distributions from unconsolidated joint ventures	182			—
Provision for bad debts, net	42			175
Changes in operating assets and liabilities:
Other assets	(6,891		)	(6,037		)
Accounts payable and accrued liabilities	5,908			(3,301		)
Other liabilities	(638		)	1,098
Net cash provided by operating activities	150,680			129,365
INVESTING ACTIVITIES
Acquisitions of real estate	(67,445		)	(72,934		)
Development of real estate	(21,059		)	(11,753		)
Additional long-lived assets	(59,802		)	(52,305		)
Proceeds from sales of real estate	64,271			119,425
Proceeds from notes receivable repayments	8			15
Net cash used in investing activities	(84,027		)	(17,552		)
FINANCING ACTIVITIES
Net borrowings (repayments) on unsecured credit facility	56,000			(107,000		)
Repayments of notes and bonds payable	(3,808		)	(4,654		)
Dividends paid	(112,694		)	(104,860		)
Net proceeds from issuance of common stock	459			248,384
Common stock redemptions	(2,673		)	(1,125		)
Debt issuance and assumption costs	(125		)	(84		)
Net cash (used in) provided by financing activities	(62,841		)	30,661
Increase in cash and cash equivalents	3,812			142,474
Cash and cash equivalents at beginning of period	6,215			54,507
Cash and cash equivalents at end of period	$	10,027		$	196,981

Supplemental Cash Flow Information:
Interest paid	$	30,463		$	42,136
Invoices accrued for construction, tenant improvements and other capitalized costs	$	5,680		$	6,842
Mortgage notes payable assumed upon acquisition (adjusted to fair value)	$	7,995		$	12,460
Capitalized interest	$	684		$	681

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Healthcare Realty Trust Incorporated

Notes to the Condensed Consolidated Financial Statements

September 30, 2018

(Unaudited)

Note 1. Summary of Significant Accounting Policies

Business Overview

Healthcare Realty Trust Incorporated (the "Company") is a 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. As of September 30, 2018, the Company had gross investments of approximately $3.9 billion in 201 real estate properties located in 27 states totaling approximately 14.8 million square feet. The Company provided leasing and property management services to approximately 11.1 million square feet nationwide.

Basis of Presentation

The Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. They do not include all of the information and footnotes required by GAAP for complete financial statements. However, except as disclosed herein, management believes there has been no material change in the information disclosed in the Notes to the Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2017. All material intercompany transactions and balances have been eliminated in consolidation.

This interim financial information should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. Management believes that all adjustments of a normal, recurring nature considered necessary for a fair presentation have been included. In addition, the interim financial information does not necessarily represent or indicate what the operating results will be for the year ending December 31, 2018 for many reasons including, but not limited to, acquisitions, dispositions, capital financing transactions, changes in interest rates and the effects of other trends, risks and uncertainties.

Use of Estimates in the Condensed Consolidated Financial Statements

Preparation of the Condensed Consolidated Financial Statements in accordance with GAAP requires management to make estimates and assumptions that affect amounts reported in the Condensed Consolidated Financial Statements and accompanying notes. Actual results may differ from those estimates.

Revenue from Contracts with Customers (Topic 606)

The Company recognizes certain revenue under the core principle of Topic 606. This requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Lease revenue is not within the scope of Topic 606. To achieve the core principle, the Company applies the five step model specified in the guidance. See the New Accounting Pronouncements section below for additional information.

Revenue that is accounted for under Topic 606 is segregated on the Company’s Condensed Consolidated Statements of Income in the Other operating line item. This line item includes parking income, rental lease guaranty income, management fee income and other miscellaneous income. Below is a detail of the amounts by category:



(in thousands)	Three Months Ended September 30,				Nine Months Ended September 30,
Type of Revenue	2018		2017		2018		2017
Parking income	$	1,752	$	1,669	$	5,197	$	4,907
Rental lease guaranty	168		168		488		545
Management fee income	68		70		205		237
Miscellaneous	22		40		83		127
	$	2,010	$	1,947	$	5,973	$	5,816

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The Company’s three major types of revenue that are accounted for under Topic 606 that are listed above are all accounted for as the performance obligation is satisfied. The performance obligations that are identified for each of these items are satisfied over time and the Company recognizes revenue monthly based on this principle.

Reclassifications

Condensed Consolidated Statements of Income

Certain reclassifications have been made on the Company's Condensed Consolidated Statements of Income. After the adoption of Accounting Standards Update ("ASU") 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity," the Company's dispositions have not met the updated definition to be reported as discontinued operations. The Company had some residual impact from properties that were identified as discontinued operations prior to the adoption of ASU 2014-08. These amounts are considered immaterial and have been reclassified for the prior year presentation on the Company's Condensed Consolidated Statements of Income.



	Three months ended September 30, 2017						Nine months ended September 30, 2017
(in thousands)	As Previously Reported			As Reclassified			As Previously Reported			As Reclassified
EXPENSES
Property operating expense	$	40,626		$	40,628		$	116,644		$	116,663
Bad debt, net	14			4			185			175

OTHER INCOME (EXPENSE)
Gain on sales of properties	(7		)	(7		)	39,519			39,525

INCOME FROM CONTINUING OPERATIONS	$	3,165		$	3,173		$	60,247		$	60,243

DISCONTINUED OPERATIONS
Income (loss) from discontinued operations	$	8		$	—		$	(9	)	$	—
Gain on sales of properties	—			—			5			—
INCOME (LOSS) FROM DISCONTINUED OPERATIONS	$	8		$	—		$	(4	)	$	—

New Accounting Pronouncements

Accounting Standards Update No. 2014-09 and No. 2015-14

In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-09, "Revenue from Contracts with Customers," a comprehensive new revenue recognition standard that supersedes most existing revenue recognition guidance, including sales of real estate. This standard's core principle is that a company will recognize revenue when it transfers goods or services to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods and services. However, leasing contracts, representing the major source of the Company's revenues, are not within the scope of the new standard and will continue to be accounted for under other standards.

In August 2015, the FASB issued ASU No. 2015-14, "Revenue from Contracts with Customers (Topic 606); Deferral of the Effective Date." This standard was effective for the Company for annual and interim periods beginning after December 15, 2017 with early adoption permitted only as of annual reporting periods beginning after December 15, 2016, including interim periods within that year.

The Company adopted this standard by using the full retrospective adoption method beginning on January 1, 2018. The Company's revenue-producing contracts are primarily leases that are not within the scope of this standard. As a result, the adoption of this standard did not have a material impact on the timing and measurement of the Company's leasing revenues. The Company has determined that parking income, rental lease guaranty income and management fee income are within the scope of Topic 606. However, these items were determined to have the same pattern of revenue recognition that the Company

had historically recognized. The Company reclassified these amounts along with all other items that are accounted for within the scope of Topic 606 into the Other operating line item on the Company's Condensed Consolidated Statements of Income. This line item historically contained the revenue associated with rental lease guaranty income, management fee income and other non-lease revenue. The Company reclassified parking income from rental income to other operating income.

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The following table represents the impact of the adoption of this standard on the Company's Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2017:



	Three months ended September 30, 2017				Nine months ended September 30, 2017
(in thousands)	As Reported		As Reclassified		As Reported		As Reclassified
REVENUES
Rental income	$	106,561	$	105,078	$	315,519	$	311,171
Other operating	392		1,947		1,249		5,816
	$	106,953	$	107,025	$	316,768	$	316,987

OTHER INCOME (EXPENSE)
Interest and other income, net	$	426	$	354	$	616	$	396

NET INCOME	$	3,173	$	3,173	$	60,243	$	60,243

Accounting Standards Update No. 2016-02, No. 2018-01 and No. 2018-11

In February 2016, the FASB issued ASU 2016-02, "Leases." In January 2018, the FASB issued ASU 2018-01, "Leases - Land Easement Practical Expedient for Transition to Topic 842," and in July 2018, the FASB issued ASU 2018-10, "Codification Improvements to Topic 842, Leases" and ASU 2018-11, "Leases - Targeted Improvements." These accounting standard updates are collectively referred to as "Topic 842."

Topic 842 provides several practical expedients that the Company expects to elect. These are (a) the package of practical expedients offered that allows an entity not to reassess upon adoption (i) whether an expired or existing contract contains a lease, (ii) lease classification related to expired or existing lease arrangements, and (iii) whether costs incurred on expired or existing leases qualify as initial direct costs, and (b) the practical expedient not to separate certain non-lease components, such as common area maintenance, from the lease component if (i) the timing and pattern of transfer are the same for the non-lease component and associated lease component, and (ii) the lease component would be classified as an operating lease if accounted for separately.

For lessees, the new standard establishes a right-of-use ("ROU") model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with the classification affecting the pattern of expense recognition in the income statement. The Company expects that most of the leases where the Company is the lessee will be recorded on the Company's balance sheet as operating leases. These leases are primarily ground leases, but also include the Company's corporate office lease, management office leases in third party buildings and certain copier and postage machine leases. The impact to the Company's Consolidated Balance Sheets has not yet been determined. The Company is in the process of working with consultants to determine the appropriate discount rate required to calculate the present value of the future lease payments for ground leases that have lease terms longer than typical secured financing allows.

For lessors, the new standard requires a lessor to classify leases as either sales-type, direct-financing or operating. A lease will be treated as a sale if it is considered to transfer control of the underlying asset, to the lessee. A lease will be classified as direct-financing if risks and rewards are conveyed without the transfer of control. Otherwise, the lease is treated as an operating lease. Lessor accounting remains largely unchanged with some exceptions including the concept of separating lease and nonlease components. Nonlease components, such as common area maintenance, will be accounted for under Topic 606 and separated from the lease payments. However, the Company will elect the lessor practical expedient allowing the Company to not separate these components when certain conditions are met. The Company does not expect a material impact from the adoption of Topic 842 related to leases where the Company is the lessor.

The new standard is effective for the Company on January 1, 2019. Topic 842 provides two transition alternatives. The Company expects to choose the optional transition method available to apply the guidance in Accounting Standards Codification Topic 840 in the comparative periods presented in the year Topic 842 is adopted. Topic 842 includes extensive quantitative and qualitative disclosures as compared to Topic 840, Leases, for both lessees and lessors. The Company is continuing to evaluate the impact from the adoption of this new standard on the Consolidated Financial Statements and related notes.

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Accounting Standards Update No. 2016-13

In June 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments." This update is intended to improve financial reporting by requiring timelier recognition of credit losses on loans and other financial instruments that are not accounted for at fair value through net income, including loans held for investment, held-to-maturity debt securities, trade and other receivables, net investment in leases and other such commitments. This update requires that financial statement assets measured at an amortized cost and certain other financial instruments be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. This standard is effective for annual and interim periods beginning after December 15, 2019 with early adoption permitted. The Company is in the initial stages of evaluating the impact from the adoption of this new standard on the Consolidated Financial Statements and related notes.

Accounting Standards Update No. 2017-04

In January 2017, the FASB issued ASU 2017-04, "Simplifying the Test for Goodwill Impairment." This update eliminates Step 2 of the goodwill impairment test. As such, an entity will perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize a goodwill impairment charge for the amount by which the reporting unit's carrying amount exceeds its fair value. This standard is effective for the Company for annual and interim periods beginning after December 15, 2019. The Company does not expect a material impact on the Consolidated Financial Statements and related notes from the adoption of this standard.

Accounting Standards Update No. 2017-05

In February 2017, the FASB issued ASU 2017-05, "Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets." This update defines an in-substance nonfinancial asset, unifies guidance related to partial sales of nonfinancial assets, eliminates rules specifically addressing the sales of real estate, removes exceptions to the financial asset derecognition model and clarifies the accounting for contributions of nonfinancial assets to joint ventures. The Company adopted this standard as of January 1, 2018 on the full retrospective adoption method. The adoption of this standard did not have a material impact to the Consolidated Financial Statements and related notes.

Accounting Standards Update No. 2017-09

In May 2017, the FASB issued ASU 2017-09, "Compensation - Stock Compensation - Scope of Modification Accounting." This update provides guidance about which changes to the terms and conditions of share-based awards require an entity to apply modification accounting in Topic 718. The Company adopted this standard on January 1, 2018. The adoption of this standard did not have a material impact to the Consolidated Financial Statements and related notes.

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Note 2. Real Estate Investments

2018 Acquisitions

The following table details the Company's acquisitions for the nine months ended September 30, 2018:



(Dollars in millions)	Type ⁽¹⁾	Date Acquired	Purchase Price		Mortgage Notes Payable Assumed ⁽²⁾			Cash Consideration⁽³⁾		Real Estate		Other ⁽⁴⁾			Square Footage (Unaudited)
Seattle, Washington	MOB	5/4/18	$	7.8	$	—		$	7.8	$	7.8	$	—		13,314
Denver, Colorado ⁽⁵⁾	MOB, OFC	5/18/18	25.0		(8.0		)	16.6		25.1		(0.4		)	187,861
Oklahoma City, Oklahoma	MOB	5/21/18	11.4		—			11.4		11.5		(0.1		)	82,647
Seattle, Washington	MOB	6/29/18	26.2		—			26.2		26.7		(0.5		)	86,942
Denver, Colorado	MOB	8/24/18	4.1		—			4.2		4.2		—			17,084
			$	74.5	$	(8.0	)	$	66.2	$	75.3	$	(1.0	)	387,848

______


(1)	MOB = medical office building; OFC = office


(2)	The mortgage note payable assumed in the acquisition does not reflect the fair value premium totaling $0.1 million recorded by the Company upon acquisition (included in Other).


(3)	Cash consideration excludes prorations of revenue and expense due to/from seller at the time of the acquisition.


(4)	Includes other assets acquired, liabilities assumed, intangibles recognized at acquisition and fair value adjustments on debt assumed.


(5)	Includes two properties.

2018 Dispositions

The following table details the Company's dispositions for the nine months ended September 30, 2018:



(Dollars in millions)	Type ⁽¹⁾	Date Disposed	Sales Price		Closing Adjustments			Net Proceeds		Net Real Estate Investment		Other (including receivables) ⁽²⁾		Gain		Square Footage (Unaudited)
Virginia ⁽³⁾ ⁽⁴⁾	MOB, OFC	4/26/18	$	46.2	$	—		$	46.2	$	23.9	$	—	$	22.3	460,881
Michigan ^{(3) (5)}	SNF	6/27/18	9.5		(0.7		)	8.8		3.4		—		5.4		121,672
Missouri	MOB	8/30/18	9.8		(0.5		)	9.3		7.5		0.5		1.3		70,893
Total dispositions			$	65.5	$	(1.2	)	$	64.3	$	34.8	$	0.5	$	29.0	653,446

______


(1)	MOB = medical office building; OFC = office; SNF = skilled nursing facility


(2)	Includes straight-line rent receivables and leasing commissions.


(3)	Previously classified as held for sale.


(4)	Includes seven properties, comprised of five single-tenant net lease buildings and two multi-tenant buildings. These buildings were sold pursuant to the exercise of a fixed-price purchase option.


(5)	Includes five skilled nursing facilities. Sales price includes $0.5 million of forfeited earnest money from a prior terminated transaction.

Non-monetary Exchange

On June 29, 2018, the Company completed the swap of a non-revenue producing garage that was built by the Company in 2012 located in Denver, Colorado for 20.5 acres of land adjacent to the Catholic Health Initiative’s St. Anthony Hospital campus. A portion of this land, approximately 4.6 acres, has been allocated to an existing medical office building that was developed by the Company in 2017. This building is located on land previously ground leased from the hospital. The remaining land has been recorded in land held for development. The land acquired was appraised for $5.8 million. The Company had a net investment of $3.9 million in the parking garage and recognized a gain of $1.9 million in connection with this transaction.

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Assets Held for Sale

As of December 31, 2017, the Company had eight properties classified as held for sale. The following changes to assets held for sale have occurred during 2018:


•	The Company reclassified five single-tenant net leased properties to held for sale as of March 31, 2018.


•	In April 2018, the Company sold seven properties, comprised of five single-tenant net leased properties and two multi-tenanted properties. The Company recognized a gain on disposition of approximately $22.3 million.


•	In June 2018, the Company sold five single-tenant net leased properties. The Company recognized a gain on disposition of approximately $5.4 million.

As of September 30, 2018, the Company had one property remaining classified as held for sale.

The table below reflects the assets and liabilities of the properties classified as held for sale as of September 30, 2018 and December 31, 2017:



(Dollars in thousands)	September 30, 2018			December 31, 2017
Balance Sheet data:
Land	$	1,125		$	4,636
Buildings, improvements and lease intangibles	18,231			63,654
Personal property	—			82
	19,356			68,372
Accumulated depreciation	(10,657		)	(35,790		)
Real estate assets held for sale, net	8,699			32,582
Other assets, net	127			565
Assets held for sale, net	$	8,826		$	33,147

Accounts payable and accrued liabilities	$	119		$	38
Other liabilities	22			55
Liabilities of properties held for sale	$	141		$	93

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Note 3. Notes and Bonds Payable

The table below details the Company’s notes and bonds payable.



	Maturity Dates	Balance as of				Effective Interest Rate as of
(Dollars in thousands)	Maturity Dates	September 30, 2018		December 31, 2017		September 30, 2018
Unsecured Credit Facility	7/20	$	245,000	$	189,000	3.26	%
Unsecured Term Loan Facility, net of issuance costs ⁽¹⁾	12/22	149,132		148,994		3.41	%
Senior Notes due 2023, net of discount and issuance costs	4/23	248,013		247,703		3.95	%
Senior Notes due 2025, net of discount and issuance costs ⁽²⁾	5/25	248,219		248,044		4.08	%
Senior Notes due 2028, net of discount and issuance costs	1/28	295,087		294,757		3.84	%
Mortgage notes payable, net of discounts and issuance costs and including premiums	12/18-5/40	159,308		155,382		4.83	%
		$	1,344,759	$	1,283,880

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(1)	The effective interest rate includes the impact of interest rate swaps on $25.0 million and $50.0 million of the outstanding balance at a rate of 2.18% and 2.46%, respectively (plus the applicable margin rate, currently 110 basis points).


(2)	The effective interest rate includes the impact of the $1.7 million settlement of a forward-starting interest rate swap that is included in Accumulated other comprehensive income (loss) on the Company's Condensed Consolidated Balance Sheets.

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Note 4. Derivative Financial Instruments

Risk Management Objective of Using Derivatives

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the

receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s borrowings.

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt.

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in Accumulated other comprehensive income (loss) and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in Accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt.

As of September 30, 2018, the Company had four outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:



Derivative Instrument	Number of Instruments	Notional Amount (in millions)
Interest rate swaps	4	$75.0

Tabular Disclosure of Fair Values of Derivative Instruments on the Balance Sheet

The table below presents the fair value of the Company's derivative financial instruments, as well as their classification on the Condensed Consolidated Balance Sheet as of September 30, 2018.



	Asset Derivatives
	Balance at September 30, 2018
(Dollars in thousands)	Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
Interest rate swaps	Other assets	$	1,579
Total derivatives designated as hedging instruments		$	1,579

Tabular Disclosure of the Effect of Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income (Loss)

The table below presents the effect of cash flow hedge accounting on Accumulated Other Comprehensive Income (Loss) ("OCI") during the nine months ended September 30, 2018 and 2017 related to the Company's outstanding interest rate swaps.



	Amount of Gain Recognized in OCI on Derivative			Amount of Loss Reclassified from OCI into Income
(Dollars in thousands)	2018			2018		2017
Interest rate products	$	1,403	Interest expense	$	243	$	—
Settled interest rate swaps	—		Interest expense	126		127
	$	1,403	Total interest expense	$	369	$	127

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Credit-risk-related Contingent Features

The Company's agreements with each of its derivative counterparties contain a cross-default provision under which the Company could be declared in default of its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company's default on the indebtedness.

The Company estimates that $0.2 million related to active interest rate swaps will be reclassified from OCI as a decrease to interest expense over the next 12 months, and that $0.2 million related to settled interest rate swaps will be amortized from OCI as an increase to interest expense over the next 12 months.

Note 5. Commitments and Contingencies

Legal Proceedings

The Company is, from time to time, involved in litigation arising in the ordinary course of business. 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.

Redevelopment Activity

The Company is redeveloping a medical office building in Charlotte, North Carolina, which includes a 38,000 square foot vertical expansion. As of September 30, 2018, the Company has funded approximately $9.2 million on the redevelopment of this property. The project is expected to be completed in the first quarter of 2019.

Development Activity

The Company began the development of a 151,000 square foot medical office building in Seattle, Washington during 2017. As of September 30, 2018, the Company has funded approximately $18.0 million on the development. The Company expects the project to be completed in the second quarter of 2019.

Note 6. Stockholders' Equity

Common Stock

The following table provides a reconciliation of the beginning and ending shares of common stock outstanding for the nine months ended September 30, 2018 and the year ended December 31, 2017:



	September 30, 2018	December 31, 2017
Balance, beginning of period	125,131,593	116,416,900
Issuance of common stock	20,395	8,395,607
Nonvested share-based awards, net of withheld shares	85,196	319,086
Balance, end of period	125,237,184	125,131,593

At-The-Market Equity Offering Program

No shares were sold under the Company's At-the-Market Equity Offering Program during the nine months ended September 30, 2018. The Company had 5,868,697 authorized shares remaining available to be sold under the current sales agreements as of October 26, 2018.

Common Stock Dividends

During the nine months ended September 30, 2018, the Company declared and paid common stock dividends totaling $0.90 per share. On October 30, 2018, the Company declared a quarterly common stock dividend in the amount of $0.30 per share payable on November 30, 2018 to stockholders of record on November 15, 2018.

Accumulated Other Comprehensive Income (Loss)

As of September 30, 2018, the Company had four outstanding interest rate swaps to hedge the variable cash flows associated with existing variable-rate debt. The Company continues to amortize the 2015 settlement of forward-starting interest rate swaps that were entered into in connection with the issuance of the Company's Senior Notes due 2025. This amount will be reclassified out of OCI impacting net income over the 10-year term of the associated senior note issuance. See Note 4 for more information regarding the Company's derivative instruments.

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The following table represents the changes in balances of each component and the amounts reclassified out of OCI related to the Company during the nine months ended September 30, 2018 and 2017:



	Forward-starting Interest Rate Swaps
(Dollars in thousands)	2018			2017
Beginning balance	$	(1,299	)	$	(1,401	)
Gains arising during the period related to active interest rate swaps	1,403			—
Amounts reclassified from accumulated other comprehensive (income) loss	369			127
Net accumulated other comprehensive income	1,772			127
Ending balance	$	473		$	(1,274	)

The following table represents the details regarding the reclassifications from OCI during the nine months ended September 30, 2018:



Details about accumulated other comprehensive income (loss) components	Amount reclassified from accumulated other comprehensive income (loss)		Affected line item in the statement where net income is presented
(Dollars in thousands)
Amounts reclassified from accumulated other comprehensive income (loss) related to settled interest rate swaps	$	126	Interest Expense
Amounts reclassified from accumulated other comprehensive income (loss) related to current interest rate swaps	243		Interest Expense
	$	369

Earnings Per Common Share

The Company uses the two-class method of computing net earnings per common shares. The Company's nonvested share-based awards are considered participating securities pursuant to the two-class method. The following table sets forth the computation of basic and diluted earnings per common share for the three and nine months ended September 30, 2018 and 2017.



	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands, except per share data)	2018			2017			2018			2017
Weighted average Common Shares outstanding
Weighted average Common Shares outstanding	125,233,462			120,895,835			125,206,342			117,981,159
Nonvested shares	(1,933,653		)	(1,797,686		)	(1,925,589		)	(1,800,180		)
Weighted average Common Shares outstanding—Basic	123,299,809			119,098,149			123,280,753			116,180,979
Weighted average Common Shares outstanding—Basic	123,299,809			119,098,149			123,280,753			116,180,979
Dilutive effect of employee stock purchase plan	52,147			83,242			54,763			96,260
Weighted average Common Shares outstanding—Diluted	123,351,956			119,181,391			123,335,516			116,277,239
Net Income	$	6,548		$	3,173		$	53,456		$	60,243
Dividends paid on nonvested share-based awards	(580		)	(538		)	(1,740		)	(1,609		)
Net income applicable to common stockholders	$	5,968		$	2,635		$	51,716		$	58,634
Basic earnings per common share - Net income	$	0.05		$	0.02		$	0.42		$	0.50
Diluted earnings per common share - Net income	$	0.05		$	0.02		$	0.42		$	0.50

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Incentive Plans

A summary of the activity under the Company's share-based incentive plans for the three and nine months ended September 30, 2018 and 2017 is included in the table below.



	Three Months Ended September 30,			Nine Months Ended September 30,
	2018		2017	2018		2017
Share-based awards, beginning of period	1,938,100		1,797,686	1,907,645		1,786,497
Granted	—		—	107,751		103,615
Vested	(5,051	)	—	(82,347	)	(92,426	)
Share-based awards, end of period	1,933,049		1,797,686	1,933,049		1,797,686

During the nine months ended September 30, 2018 and 2017, the Company withheld 22,555 and 16,581 shares of common stock, respectively, from participants to pay estimated withholding taxes related to shares that vested.

In addition to the share-based incentive plans, the Company maintains the 2000 Employee Stock Purchase Plan (the "Purchase Plan"). A summary of the activity under the Purchase Plan for the three and nine months ended September 30, 2018 and 2017 is included in the table below.



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Outstanding and exercisable, beginning of period	350,535		344,572		318,100		316,321
Granted	—		—		203,836		206,824
Exercised	(2,531	)	(5,452	)	(13,236	)	(24,482	)
Forfeited	(9,583	)	(9,291	)	(34,489	)	(36,524	)
Expired	—		—		(135,790	)	(132,310	)
Outstanding and exercisable, end of period	338,421		329,829		338,421		329,829

Note 7. Fair Value of Financial Instruments

The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practical to estimate that value.

Cash and cash equivalents - The carrying amount approximates fair value due to the short term maturity of these investments.

Borrowings under the unsecured credit facility due 2020 and unsecured term loan facility due 2022 - The carrying amount approximates fair value because the borrowings are based on variable market interest rates.

Senior Notes and Mortgage Notes payable - The fair value of notes and bonds payable is estimated using cash flow analyses, based on the Company’s current interest rates for similar types of borrowing arrangements.

Interest rate swap agreements - Interest rate swap agreements are recorded in other liabilities on the Company's Consolidated Balance Sheets at fair value. Fair value is estimated by utilizing pricing models that consider forward yield curves and discount rates.

The table below details the fair values and carrying values for notes and bonds payable at September 30, 2018 and December 31, 2017.



	September 30, 2018				December 31, 2017
(Dollars in millions)	Carrying Value		Fair Value		Carrying Value		Fair Value
Notes and bonds payable ⁽¹⁾	$	1,344.8	$	1,300.2	$	1,283.9	$	1,269.7

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(1)	Level 2 – model-derived valuations in which significant inputs and significant value drivers are observable in active markets.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Disclosure Regarding Forward-Looking Statements

This report and other materials the Company has filed or may file with the Securities and Exchange Commission, as well as information included in oral statements or other written statements made, or to be made, by 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," "budget" 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, including the risks described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, that could significantly affect the Company’s current plans and expectations and future financial condition and results.

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.

For a detailed discussion of the Company’s risk factors, please refer to the Company’s filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 31, 2017.

Liquidity and Capital Resources

Sources and Uses of Cash

The Company’s primary sources of cash include rent receipts from its real estate portfolio based on contractual arrangements with its tenants and sponsors, borrowings under the Company's unsecured credit facility due 2020, proceeds from the sales of real estate properties and proceeds from public or private debt or equity offerings.

The Company expects to continue to meet its liquidity needs, including funding additional investments, paying dividends, and funding debt service, through cash on hand, cash flows from operations, and the cash flow sources described above. The Company had unencumbered real estate assets with a gross book value of approximately $3.5 billion at September 30, 2018, 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.

Investing Activities

Cash flows used in investing activities for the nine months ended September 30, 2018 were approximately $84.0 million. Below is a summary of significant investing activities.

2018 Acquisitions

The following table details the Company's acquisitions for the nine months ended September 30, 2018:



(Dollars in millions)	Health System Affiliation	Date Acquired	Purchase Price		Mortgage Notes Payable Assumed			Square Footage	Cap Rate		Hospital Campus Location ⁽¹⁾
Seattle, Washington	Overlake Health	5/4/18	$	7.8	$	—		13,314	5.0	%	ADJ
Denver, Colorado⁽²⁾	CHI	5/18/18	25.0		(8.0		)	187,861	6.4	%	ADJ
Oklahoma City, Oklahoma	Integris Health	5/21/18	11.4		—			82,647	5.9	%	ADJ
Seattle, Washington	MultiCare Health	6/29/18	26.2		—			86,942	5.7	%	On
Denver, Colorado	CHI	8/24/18	4.1		—			17,084	6.0	%	ADJ
			$	74.5	$	(8.0	)	387,848	5.9	%

______


(1)	On = Located on a hospital campus; ADJ = adjacent to a hospital campus. The Company defines an adjacent property as being no more than 0.25 miles from a hospital campus.


(2)	Includes two properties (a medical office building and an office building).

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Capital Funding

The following table details the Company's capital funding for the nine months ended September 30, 2018:



(Dollars in millions)	Nine Months Ended September 30, 2018
Redevelopment and development	$	28.7
1st generation tenant improvements & planned capital expenditures for acquisitions	9.7
2nd generation tenant improvements	20.6
Capital expenditures	17.5
Total capital funding	$	76.5

2018 Dispositions

The Company disposed of 13 properties during the nine months ended September 30, 2018 for a total sales price of $65.5 million, including cash proceeds of $64.3 million and $1.2 million of closing costs and related adjustments. The following table details these dispositions for the nine months ended September 30, 2018:



(Dollars in millions)	Date Disposed	Sales Price		Square Footage	3Q 2018 NOI		Disposition Cap Rate		Property Type ⁽¹⁾
Virginia ⁽²⁾	4/26/18	$	46.2	460,881	$	—	13.3	%	MOB, OFC
Michigan ⁽³⁾	6/27/18	9.5		121,672	—		25.5	%	SNF
Missouri	8/30/18	9.8		70,893	0.1		4.3	%	MOB
Total dispositions		$	65.5	653,446	$	0.1	13.7	%

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(1)	MOB = medical office building; OFC = office; SNF = skilled nursing facility


(2)	Includes seven properties, comprised of five single-tenant net lease buildings and two multi-tenant buildings. These buildings were sold pursuant to the exercise of a fixed-price purchase option.


(3)	Includes five skilled nursing facilities. Sales price includes $0.5 million of forfeited earnest money from a prior terminated transaction.

Financing Activities

Cash flows used in financing activities for the nine months ended September 30, 2018 were approximately $62.8 million. Inflows from equity related to the Company's common stock issuances, dividend reinvestment program, and employee stock purchase plan and net borrowings totaled $56.5 million, net of issuance costs incurred. Aggregate cash outflows totaled approximately $119.3 million primarily associated with dividends paid to common stockholders. See Notes 3 and 6 to the Condensed Consolidated Financial Statements for more information about capital markets and financing activities.

Operating Activities

Cash flows provided by operating activities increased from $129.4 million for the nine months ended September 30, 2017 to $150.7 million for the nine months ended September 30, 2018. Items impacting cash flows from operations include, but are not limited to, cash generated from property operations, interest payments and the timing related to the payment of invoices and other expenses and receipts of tenant rent.