PHYSICIANS REALTY TRUST The following discussion should be read in conjunction with our unaudited consolidated financial statements, including the notes to those statements, included in Part I, Item 1 of this report, and the Section entitled "Cautionary Statement Regarding Forward-Looking Statements" in this report. As discussed in more detail in the Section entitled "Cautionary Statement Regarding Forward-Looking Statements," this discussion contains forward-looking statements, which involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause those differences include those discussed in Part I, Item 1 (Business) and Part I, Item 1A (Risk Factors) of our 2021 Annual Report.
Company Highlights
•Reported second quarter 2022 total revenue of$132.2 million , an increase of 17.0% over the prior year period. •Generated second quarter net income per share of$0.07 on a fully diluted basis. •Generated second quarter Normalized Funds From Operations (Normalized FFO) of$0.27 per share on a fully diluted basis compared to$0.26 per share for the same period last year. •Completed$46.9 million of investments and previous construction loan commitments during the second quarter. •Second quarter MOB Same-Store Cash Net Operating Income growth was 1.9% year-over-year. •Declared a quarterly dividend of$0.23 per share and OP Unit for the second quarter 2022, paid onJuly 19, 2022 . •Disposed of one property for$6.4 million and recognized a net gain on the sale of approximately$3.7 million . •Sold 977,800 common shares pursuant to the ATM program at a weighted average price of$18.61 during the second quarter, resulting in net proceeds of$18.0 million .
Subsequent Event Highlights:
•Disposed of three related facilities inGreat Falls, Montana onJuly 14, 2022 which included two medical office buildings and one hospital for$116.3 million and recognized a net gain on the sale of approximately$53.9 million . These assets were classified as held for sale as ofJune 30, 2022 .
Overview
We are a self-managed health care real estate company organized inApril 2013 to acquire, selectively develop, own, and manage health care properties that are leased to physicians, hospitals, and health care delivery systems. We invest in real estate that is integral to providing high quality health care services. Our properties are typically located on a campus with a hospital or other health care facilities or strategically affiliated with a hospital or other health care facilities. We believe the impact of government programs and continuing trends in the health care industry create attractive opportunities for us to invest in health care related real estate. In particular, we believe the demand for health care will continue to increase as a result of the aging population as older persons generally utilize health care services at a rate well in excess of younger people. Our management team has significant public health care REIT experience and has long-established relationships with physicians, hospitals, and health care delivery system decision makers that we believe will provide quality investment and growth opportunities. Our principal investments include medical office buildings, outpatient treatment facilities, as well as other real estate integral to health care providers. In recent years, we have seen increased competition for health care properties and we expect this trend to continue. We seek to generate attractive risk-adjusted returns for our shareholders through a combination of stable and increasing dividends and potential long-term appreciation in the value of our properties and our common shares. We grew our portfolio of gross real estate investments from approximately$124 million at the time of our IPO inJuly 2013 to approximately$5.8 billion as ofJune 30, 2022 . As ofJune 30, 2022 , our consolidated portfolio consisted of 276 health care properties (which excludes three assets, representing approximately 185,085 leasable square feet, classified as held for sale) located in 32 states with approximately 15,451,325 net leasable square feet, which were approximately 95% leased with a weighted average remaining lease term of approximately 5.9 years. As ofJune 30, 2022 , approximately 90% of the net leasable square footage of our portfolio was either on the campus of a hospital or strategically affiliated with a health system. We receive a cash rental stream from the health care providers under our leases. Approximately 95% of the annualized base rent payments from our properties as ofJune 30, 2022 , excluding our three assets held for sale, are from absolute and triple-net leases pursuant to which the tenants are responsible for operating expenses relating to the property, including but not limited to real estate taxes, utilities, property insurance, routine maintenance and repairs, and property management. This structure helps insulate us from increases in certain operating expenses and provides more predictable cash flow. Approximately 4% of the annualized base rent payments from our properties as ofJune 30, 2022 , excluding our three assets held for sale, are from modified gross base stop leases which allow us to pass through certain increases in future operating 23 -------------------------------------------------------------------------------- Table of Contents expenses (e.g., property tax and insurance) to tenants for reimbursement, thus protecting us from increases in such operating expenses. We seek to structure our triple-net leases to generate attractive returns on a long-term basis. Our leases typically have initial terms of 5 to 15 years and include annual rent escalators of approximately 1.5% to 4.0%, with an annual weighted average rent escalator of approximately 2.4%. Certain of the Company's leases include provisions indexing annual rent escalators to changes in Consumer Price Index ("CPI"), often with a floor or ceiling. As ofJune 30, 2022 , approximately 6.5% of the Company's annual rent escalators have CPI provisions. Our operating results depend significantly upon the ability of our tenants to make required rental payments. We believe that our portfolio of medical office buildings and other health care facilities will enable us to generate stable cash flows over time because of the diversity of our tenants, staggered lease expiration schedule, long-term leases, and low historical occurrence of tenants defaulting under their leases. As ofJune 30, 2022 , leases representing approximately 1.9%, 4.8%, and 6.8% of leased square feet will expire in 2022, 2023, and 2024, respectively. We intend to grow our portfolio of high-quality health care properties leased to physicians, hospitals, health care delivery systems, and other health care providers primarily through acquisitions of existing health care facilities that provide stable revenue growth and predictable long-term cash flows. We may also selectively finance the development of new health care facilities through joint venture or fee arrangements with health care real estate developers or health system development professionals. Generally, we expect to make investments in new development properties when approximately 80% or more of the development property has been pre-leased before construction commences. We seek to invest in properties where we can develop strategic alliances with financially sound health care providers and health care delivery systems that offer need-based health care services in sustainable health care markets. We focus our investment activity on medical office buildings and ambulatory surgery centers. We believe that trends such as shifting consumer preferences, limited space in hospitals, the desire of patients and health care providers to limit non-essential services provided in a hospital setting, and cost considerations, continue to drive the industry towards performing more procedures in outpatient facilities versus the hospital setting. As these trends continue, we believe that demand for medical office buildings and similar health care properties away from hospital settings and in convenient locations to patients will continue to rise. We intend to exploit this trend and seek outpatient properties consistent with our investment philosophy and strategies. While not our focus, we may choose to invest opportunistically in life science facilities, senior housing properties, skilled nursing facilities, specialty hospitals, and treatment centers. Consistent with our qualification as a REIT, we may also opportunistically invest in companies that provide health care services, and in joint venture entities with operating partners, structured to comply with the REIT Investment Diversification Act of 2007. The Trust is aMaryland real estate investment trust and elected to be taxed as a REIT forU.S. federal income tax purposes. We conduct our business through an UPREIT structure in which our properties are owned by ourOperating Partnership directly or through limited partnerships, limited liability companies, or other subsidiaries. The Trust is the sole general partner of ourOperating Partnership and, as ofJune 30, 2022 , owned approximately 95.0% of the OP Units. As ofJuly 27, 2022 , there were 226,320,806 common shares outstanding.
Key Transactions in Second Quarter 2022
Investment Activity
During the three months endedJune 30, 2022 , the Company completed the acquisition of one medical office facility for a purchase price of$27.7 million , and funded one mezzanine loan for$5.8 million , one term loan for$7.5 million , and$0.4 million of previous construction loan commitments. The Company also paid$1.1 million of additional purchase consideration under an earn-out agreement and invested$4.4 million in funds managed by a real estate technology private equity fund, resulting in total investment activity of approximately$46.9 million .
During the three months ended
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On
Recent Events
SinceJune 30, 2022 , the Company funded a$4.1 million term loan and disposed of three related facilities inGreat Falls, Montana including two medical office buildings and one hospital classified as held for sale as ofJune 30, 2022 for approximately$116.3 million . The Company recognized a net gain on the sale of approximately$53.9 million .
Results of Operations
Three months ended
The following table summarizes our results of operations for the three months
ended
2022 2021 Change %
Revenues:
Rental and related revenues$ 127,728 $ 107,748 $ 19,980 18.5 % Interest income on real estate loans and other 4,439 5,177 (738) (14.3) % Total revenues 132,167 112,925 19,242 17.0 % Expenses: Interest expense 17,234 13,541 3,693 27.3 % General and administrative 10,028 9,117 911 10.0 % Operating expenses 42,681 33,456 9,225 27.6 % Depreciation and amortization 47,702 38,105 9,597 25.2 % Total expenses 117,645 94,219 23,426 24.9 % Income before equity in loss of unconsolidated entities and gain on sale of investment properties, net: 14,522 18,706 (4,184) (22.4) % Equity in loss of unconsolidated entities (224) (403) 179 44.4 % Gain on sale of investment properties, net 3,634 378 3,256 NM Net income$ 17,932 $ 18,681 $ (749) (4.0) % NM = Not Meaningful Revenues Total revenues increased$19.2 million , or 17.0%, for the three months endedJune 30, 2022 as compared to the three months endedJune 30, 2021 . An analysis of selected revenues follows.
Rental and related revenues. Rental and related revenues increased
2022 2021 Change %
Rental revenues $ 91,892 $ 80,572 $ 11,320 14.0 %
Expense recoveries 35,836 27,176 8,660 31.9 %
Rental and related revenues $ 127,728 $ 107,748 $ 19,980 18.5 %
Rental revenues increased $11.3 million , or 14.0%, for the three months ended
June 30, 2022 compared to the three months ended June 30, 2021 . Rental revenues
increased $13.0 million from properties acquired in 2022 and 2021, including
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$9.5 million related to the 14 medical office buildings acquired on December 20,
2021 from Landmark Healthcare Facilities LLC (the "Landmark Portfolio"). These
increases were partially offset by a decrease of $1.8 million related to
properties sold in 2022 and 2021.
Expense recoveries increased $8.7 million , or 31.9%, for the three months ended
June 30, 2022 compared to the three months ended June 30, 2021 . Expense
recoveries increased $6.4 million from properties acquired in 2022 and 2021,
including $4.8 million related to the Landmark Portfolio in 2021, and $2.6
million due to an increase in reimbursable operating expenses from our existing
portfolio, explained below. These increases were partially offset by a decrease
of $0.1 million related to properties sold in 2022 and 2021.
Interest income on real estate loans and other. Interest income on real estate
loans and other decreased $0.7 million , or 14.3%, for the three months ended
June 30, 2022 as compared to the three months ended June 30, 2021 . Interest
income on real estate loans and other decreased due to lower average real estate
loan balances in 2022 compared to 2021.
Expenses
Total expenses increased$23.4 million , or 24.9%, for the three months endedJune 30, 2022 as compared to the three months endedJune 30, 2021 . An analysis of selected expenses follows. Interest expense. Interest expense increased$3.7 million , or 27.3%, for the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 . The issuance of the 2031 Senior Notes resulted in an increase of$3.4 million , new mortgage debt resulted in an increase of$0.9 million , and increased borrowings on our credit facility resulted in an increase of$0.6 million . These increases were partially offset by theOctober 2021 pay off and extinguishment of our$250.0 million term loan feature of the Credit Agreement and the associated pay-fixed receive-variable rate swaps which resulted in a decrease of$0.7 million and$0.5 million , respectively. General and administrative. General and administrative expenses increased$0.9 million , or 10.0%, for the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 . The increase was primarily due to higher travel and administrative costs of$0.5 million and non-cash compensation of$0.3 million . Operating expenses. Operating expenses increased$9.2 million , or 27.6%, for the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 . Net operating expenses from properties acquired in 2022 and 2021 increased by$6.8 million , including$5.2 million related to the Landmark Portfolio in 2021. Operating expenses on the existing portfolio increased by$2.6 million , or 7.9% quarter over quarter, mainly due to additional building maintenance costs of$0.9 million , utilities costs of$0.6 million , property management costs of$0.3 million , taxes of$0.3 million , and insurance costs of$0.2 million . Depreciation and amortization. Depreciation and amortization increased$9.6 million , or 25.2%, for the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 . Depreciation and amortization increased$10.6 million for properties purchased in 2022 and 2021, including$7.7 million related to the Landmark Portfolio in 2021. These increases were partially offset by$0.8 million related to properties sold during 2022 and 2021. Equity in loss of unconsolidated entities. The change in equity in loss of unconsolidated entities for the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 is primarily due to our additional investments in the Davis Joint Venture. Gain on sale of investment properties, net. During the three months endedJune 30, 2022 , we sold one property representing 17,213 net leasable square feet located inOhio for approximately$6.4 million , realizing a net gain of approximately$3.7 million . During the three months endedJune 30, 2021 , we sold one property representing 19,800 net leasable square feet located inAlabama and three parcels of vacant land inTexas for approximately$3.8 million , realizing a net gain of approximately$0.4 million . 26
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Six months ended
The following table summarizes our results of operations for the six months
ended
2022 2021 Change %
Revenues:
Rental and related revenues$ 254,404 $ 215,703 $ 38,701 17.9 % Interest income on real estate loans and other 8,153 10,561 (2,408) (22.8) % Total revenues 262,557 226,264 36,293 16.0 % Expenses: Interest expense 34,057 27,256 6,801 25.0 % General and administrative 20,321 18,582 1,739 9.4 % Operating expenses 84,433 67,390 17,043 25.3 % Depreciation and amortization 94,962 76,081 18,881 24.8 % Total expenses 233,773 189,309 44,464 23.5 % Income before equity in loss of unconsolidated entities and gain on sale of investment properties, net: 28,784 36,955 (8,171) (22.1) % Equity in loss of unconsolidated entities (390) (823) 433 52.6 % Gain on sale of investment properties, net 3,481 354 3,127 NM Net income$ 31,875 $ 36,486 $ (4,611) (12.6) % Revenues
Total revenues increased
Rental and related revenues. Rental and related revenues increased$38.7 million , or 17.9%, for the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 . Rental and related revenues were comprised of the following based on contractual billing terms (in thousands): 2022 2021 Change % Rental revenues$ 183,442 $ 160,967 $ 22,475 14.0 % Expense recoveries 70,962 54,736 16,226 29.6 % Rental and related revenues$ 254,404 $ 215,703 $ 38,701 17.9 % Rental revenues increased$22.5 million , or 14.0%, for the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 . Rental revenues increased$26.1 million from properties acquired in 2022 and 2021, including$18.9 million related to the Landmark Portfolio in 2021. This increase was partially offset by a decrease of$3.7 million related to properties sold in 2022 and 2021. Expense recoveries increased$16.2 million , or 29.6%, for the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 . Expense recoveries increased$12.6 million from properties acquired in 2022 and 2021, including$9.1 million related to the Landmark Portfolio in 2021, and$3.8 million due to an increase in reimbursable operating expenses from our existing portfolio, explained below. Interest income on real estate loans and other. Interest income on real estate loans and other decreased$2.4 million , or 22.8%, for the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 . Interest income on real estate loans and other decreased due to lower average real estate loan balances in 2022 compared to 2021. Expenses Total expenses increased by$44.5 million , or 23.5%, for the six months endedJune 30, 2022 as compared to the six months endedJune 30, 2021 . An analysis of selected expenses follows. 27 -------------------------------------------------------------------------------- Table of Contents Interest expense. Interest expense increased$6.8 million , or 25.0%, for the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 . The increase was primarily attributable to the issuance of the 2031 Senior Notes which resulted in an increase of$6.8 million . General and administrative. General and administrative expenses increased$1.7 million , or 9.4%, for the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 . The increase was primarily attributable to increased non-cash compensation of$0.9 million and higher travel and marketing costs of$0.9 million . Operating expenses. Operating expenses increased$17.0 million , or 25.3%, for the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 . Net operating expenses from properties acquired in 2022 and 2021 increased by$13.5 million , including$10.0 million related to the Landmark Portfolio in 2021. Operating expenses on the existing portfolio increased by$3.8 million , or 5.7% year over year, mainly due to additional utility charges of$1.6 million , building maintenance costs of$1.5 million , and property management costs of$0.5 million . Depreciation and amortization. Depreciation and amortization increased$18.9 million , or 24.8%, for the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 . Depreciation and amortization increased$21.2 million for properties purchased in 2022 and 2021, including$15.4 million related to the Landmark Portfolio in 2021. These increases were partially offset by$1.6 million from properties sold during 2022 and 2021, and an additional decrease of$0.7 million from our existing portfolio. Equity in loss of unconsolidated entities. The change in equity in loss of unconsolidated entities for the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 is primarily due to our additional investments in the Davis Joint Venture. Gain on sale of investment properties, net. During the six months endedJune 30, 2022 we sold two properties representing 27,210 net leasable square feet located in two states for approximately$8.4 million , realizing a net gain of approximately$3.5 million . During the six months endedJune 30, 2021 , across three states we sold two properties with 63,889 net leasable square feet and three parcels of vacant land for approximately$4.3 million , recognizing a net gain of$0.4 million . Cash Flows
Six months ended
2022 2021
Cash provided by operating activities $ 139,498 $ 122,345
Cash used in investing activities (47,211) (41,431)
Cash used in financing activities (101,762) (81,911)
Decrease in cash and cash equivalents $ (9,475) $ (997)
Cash flows from operating activities. Cash flows provided by operating
activities was $139.5 million during the six months ended June 30, 2022 compared
to $122.3 million during the six months ended June 30, 2021 , representing an
increase of $17.2 million . Net cash provided by operating activities increased
primarily due to the impact of our 2022 and 2021 acquisitions, including the
Landmark Portfolio, and contractual rent increases. These increases were
partially offset by the impact of our 2022 and 2021 dispositions.
Cash flows from investing activities. Cash flows used in investing activities
was $47.2 million during the six months ended June 30, 2022 compared to cash
flows used in investing activities of $41.4 million during the six months ended
June 30, 2021 , representing a change of $5.8 million . The increase in cash flows
used in investing activities was primarily due to cash spent on capital
expenditures which increased by $8.0 million and net increase of $1.7 million of
cash spent on the acquisitions of investment properties and unconsolidated
entities. This was partially offset by proceeds on sales of investment
properties which increased cash by $3.8 million .
Cash flows from financing activities. Cash flows used in financing activities
was $101.8 million during the six months ended June 30, 2022 compared to $81.9
million during the six months ended June 30, 2021 , representing an increase of
$19.9 million . The change in cash used in financing activities was primarily due
to a decrease in net proceeds from the sale of common shares pursuant to the
applicable ATM Program of $111.7 million . Further, $6.3 million of additional
dividends were paid to shareholders in 2022 compared to 2021, and $2.9 million
of additional distributions were paid to noncontrolling interests of the
operating partnership. These fluctuations were partially offset by a decrease in
net paydowns under the credit
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facility of $84.0 million in 2022 compared to 2021 and a decrease in additional
principal payments on mortgage debt of $6.5 million . Further, cash used in the
redemption of Series A Preferred Units decreased $4.7 million because no
redemptions were made in 2022, and cash used in the redemption of OP Units
decreased by $5.1 million .
Non-GAAP Financial Measures
This report includes Funds From Operations (FFO), Normalized FFO, Normalized Funds Available For Distribution (FAD), Net Operating Income (NOI), Cash NOI, MOB Same-Store Cash NOI, Earnings Before Interest, Taxes, Depreciation and Amortization for Real Estate (EBITDAre) and Adjusted EBITDAre, which are non-GAAP financial measures. For purposes of Item 10(e) of Regulation S-K promulgated under the Securities Act, a non-GAAP financial measure is a numerical measure of a company's historical or future financial performance, financial position or cash flows that excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the most directly comparable financial measure calculated and presented in accordance with GAAP in the statement of operations, balance sheet or statement of cash flows (or equivalent statements) of the company, or includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable financial measure so calculated and presented. As used in this report, GAAP refers to generally accepted accounting principles inthe United States of America . Pursuant to the requirements of Item 10(e) of Regulation S-K promulgated under the Securities Act, we have provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures.
FFO and Normalized FFO
We believe that information regarding FFO is helpful to shareholders and potential investors because it facilitates an understanding of the operating performance of our properties without giving effect to real estate depreciation and amortization, which assumes that the value of real estate assets diminishes ratably over time. We calculate FFO in accordance with standards established by theNational Association of Real Estate Investment Trusts (Nareit). Nareit defines FFO as net income or loss (computed in accordance with GAAP) before noncontrolling interests of holders of OP units, excluding preferred distributions, gains (or losses) on sales of depreciable operating property, impairment write-downs on depreciable assets, plus real estate related depreciation and amortization (excluding amortization of deferred financing costs). Our FFO computation includes our share of required adjustments from our unconsolidated joint ventures and may not be comparable to FFO reported by other REITs that do not compute FFO in accordance with the Nareit definition or that interpret the Nareit definition differently than we do. The GAAP measure that we believe to be most directly comparable to FFO, net income, includes depreciation and amortization expenses, gains or losses on property sales, impairments, and noncontrolling interests. In computing FFO, we eliminate these items because, in our view, they are not indicative of the results from the operations of our properties. To facilitate a clear understanding of our historical operating results, FFO should be examined in conjunction with net income (determined in accordance with GAAP) as presented in our financial statements. FFO does not represent cash generated from operating activities in accordance with GAAP, should not be considered to be an alternative to net income or loss (determined in accordance with GAAP) as a measure of our liquidity and is not indicative of funds available for our cash needs, including our ability to make cash distributions to shareholders. We use Normalized FFO, which excludes from FFO net change in fair value of derivative financial instruments, acceleration of deferred financing costs, net change in fair value of contingent consideration, and other normalizing items. Our Normalized FFO computation includes our share of required adjustments from our unconsolidated joint ventures and our use of the term Normalized FFO may not be comparable to that of other real estate companies as they may have different methodologies for computing this amount. Normalized FFO should not be considered as an alternative to net income or loss (computed in accordance with GAAP), as an indicator of our financial performance or of cash flow from operating activities (computed in accordance with GAAP), or as an indicator of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to make distributions. Normalized FFO should be reviewed in connection with other GAAP measurements. 29 -------------------------------------------------------------------------------- Table of Contents The following is a reconciliation from net income, the most direct financial measure calculated and presented in accordance with GAAP, to FFO and Normalized FFO (in thousands, except per share data): Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 Net income$ 17,932 $
18,681
$ 0.07 $
0.08
Net income$ 17,932 $
18,681
(155) (151) (314) (303)
Preferred distributions - - - (13)
Depreciation and amortization expense 47,589 38,000 94,738 75,877
Depreciation and amortization expense - partially
owned properties (70) (70) (140) (140)
Gain on sale of investment properties, net (3,634) (378) (3,481) (354)
Proportionate share of unconsolidated joint
venture adjustments 2,350 2,141 4,733 4,338
FFO applicable to common shares $ 64,012 $
58,223
Proportionate share of unconsolidated joint venture adjustments (270) - (278) -
Normalized FFO applicable to common shares
58,223
FFO per common share - diluted $ 0.27 $
0.26
0.26
Weighted average common shares outstanding - diluted 239,006,973 222,660,502 238,738,465 220,053,306
Normalized Funds Available for Distribution (FAD)
We define Normalized FAD, a non-GAAP measure, which excludes from Normalized FFO
non-cash share compensation expense, straight-line rent adjustments,
amortization of acquired above-market or below-market leases and assumed debt,
amortization of lease inducements, amortization of deferred financing costs, and
loan reserve adjustments, including our share of all required adjustments from
unconsolidated joint ventures. We also adjust for recurring capital expenditures
related to tenant improvements and leasing commissions, and cash payments from
seller master leases and rent abatement payments, including our share of all
required adjustments for unconsolidated joint ventures. Other REITs or real
estate companies may use different methodologies for calculating Normalized FAD,
and accordingly, our computation may not be comparable to those reported by
other REITs. Although our computation of Normalized FAD may not be comparable to
that of other REITs, we believe Normalized FAD provides a meaningful
supplemental measure of our performance due to its frequency of use by analysts,
investors, and other interested parties in the evaluation of our performance as
a REIT. Normalized FAD should not be considered as an alternative to net income
or loss attributable to controlling interest (computed in accordance with GAAP)
or as an indicator of our financial performance. Normalized FAD should be
reviewed in connection with other GAAP measurements.
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The following is a reconciliation from net income, the most direct financial
measure calculated and presented in accordance with GAAP, to Normalized FAD (in
thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
Net income $ 17,932 $ 18,681 $ 31,875 $ 36,486
Normalized FFO applicable to common shares $ 63,742 $
58,223
Normalized FFO applicable to common shares$ 63,742 $ 58,223 $ 127,133 $ 115,891 Non-cash share compensation expense 3,798 3,468 8,051 7,175 Straight-line rent adjustments (1,727) (2,380) (3,881) (5,105) Amortization of acquired above/below-market leases/assumed debt 1,301 860 2,640 1,724 Amortization of lease inducements 225 264 450 528 Amortization of deferred financing costs 579 582 1,158 1,163 TI/LC and recurring capital expenditures (6,868) (5,673) (12,531) (11,311) Loan reserve adjustments 4 (84) 7 (131)
Proportionate share of unconsolidated joint venture adjustments
(66) (214) (497) (425)
Normalized FAD applicable to common shares $ 60,988 $
55,046
Net Operating Income (NOI), Cash NOI, and MOB Same-Store Cash NOI
NOI is a non-GAAP financial measure that is defined as net income or loss,
computed in accordance with GAAP, generated from our total portfolio of
properties and other investments before general and administrative expenses,
depreciation and amortization expense, interest expense, net change in the fair
value of derivative financial instruments, gain or loss on the sale of
investment properties, and impairment losses, including our share of all
required adjustments from our unconsolidated joint ventures. We believe that NOI
provides an accurate measure of operating performance of our operating assets
because NOI excludes certain items that are not associated with management of
the properties. Our use of the term NOI may not be comparable to that of other
real estate companies as they may have different methodologies for computing
this amount.
Cash NOI is a non-GAAP financial measure which excludes from NOI straight-line
rent adjustments, amortization of acquired above and below market leases, and
other non-cash and normalizing items, including our share of all required
adjustments from unconsolidated joint ventures. Other non-cash and normalizing
items include items such as the amortization of lease inducements, loan reserve
adjustments, payments received from seller master leases and rent abatements,
and changes in fair value of contingent consideration. We believe that Cash NOI
provides an accurate measure of the operating performance of our operating
assets because it excludes certain items that are not associated with management
of the properties. Additionally, we believe that Cash NOI is a widely accepted
measure of comparative operating performance in the real estate community. Our
use of the term Cash NOI may not be comparable to that of other real estate
companies as such other companies may have different methodologies for computing
this amount.
MOB Same-Store Cash NOI is a non-GAAP financial measure which excludes from Cash
NOI assets not held for the entire preceding five quarters, non-MOB assets, and
other normalizing items not specifically related to the same-store property
portfolio. Management considers MOB Same-Store Cash NOI a supplemental measure
because it allows investors, analysts, and Company management to measure
unlevered property-level operating results. Our use of the term MOB Same-Store
Cash NOI may not be comparable to that of other real estate companies, as such
other companies may have different methodologies for computing this amount.
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The following is a reconciliation from the Trust's net income, the most direct
financial measure calculated and presented in accordance with GAAP, to NOI, Cash
NOI, and MOB Same-Store Cash NOI (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
Net income $ 17,932 $ 18,681 $ 31,875 $ 36,486
General and administrative 10,028 9,117 20,321 18,582
Depreciation and amortization expense 47,702 38,105 94,962 76,081
Interest expense 17,234 13,541 34,057 27,256
Gain on sale of investment properties, net (3,634) (378) (3,481) (354)
Proportionate share of unconsolidated joint venture
adjustments 3,404 3,561 6,826 7,072
NOI $ 92,666 $ 82,627 $ 184,560 $ 165,123
NOI $ 92,666 $ 82,627 $ 184,560 $ 165,123
Straight-line rent adjustments (1,727) (2,380) (3,881) (5,105)
Amortization of acquired above/below-market leases 1,301 875 2,650 1,755
Amortization of lease inducements 225 264 450 528
Loan reserve adjustments 4 (84) 7 (131)
Proportionate share of unconsolidated joint venture
adjustments (99) (145) (170) (316)
Cash NOI $ 92,370 $ 81,157 $ 183,616 $ 161,854
Cash NOI $ 92,370 $ 81,157 Assets not held for all periods or held for sale (14,396)
(3,552) Hospital Cash NOI (2,850) (2,474) Lease termination fees (182) (157) Interest income on real estate loans (2,248)
(3,907)
Joint venture and other income (3,566) (3,241) MOB Same-Store Cash NOI$ 69,128 $ 67,826
Earnings Before Interest, Taxes, Depreciation and Amortization for Real Estate (EBITDAre) and Adjusted EBITDAre
We calculate EBITDAre in accordance with standards established by Nareit and
define EBITDAre as net income or loss computed in accordance with GAAP plus
depreciation and amortization, interest expense, gain or loss on the sale of
investment properties, and impairment loss, including our share of all required
adjustments from unconsolidated joint ventures. We define Adjusted EBITDAre,
which excludes from EBITDAre non-cash share compensation expense, non-cash
changes in fair value, pursuit costs, non-cash intangible amortization, the pro
forma impact of investment activity, and other normalizing items. We consider
EBITDAre and Adjusted EBITDAre important measures because they provide
additional information to allow management, investors, and our current and
potential creditors to evaluate and compare our core operating results and our
ability to service debt.
32
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Table of Contents
The following is a reconciliation from the Trust's net income, the most direct
financial measure calculated and presented in accordance with GAAP, to EBITDAre
and Adjusted EBITDAre (in thousands):
Three Months Ended
June 30,
2022 2021
Net income $ 17,932 $ 18,681
Depreciation and amortization expense 47,702 38,105
Interest expense 17,234 13,541
Gain on sale of investment properties, net (3,634) (378)
Proportionate share of unconsolidated joint venture adjustments 3,674 3,498
EBITDAre $
82,908
Non-cash share compensation expense 3,798 3,468 Pursuit costs 93 70 Non-cash intangible amortization 1,525 1,126 Proportionate share of unconsolidated joint venture adjustments (270) - Pro forma adjustments for investment activity 280 125 Adjusted EBITDAre$ 88,334 $ 78,236
Liquidity and Capital Resources
InMarch 2020 , theSecurities and Exchange Commission (SEC) adopted amendments to Rule 3-10 of Regulation S-X and created Rule 13-01 to simplify disclosure requirements related to certain registered securities. The rule is effectiveJanuary 4, 2021 but earlier compliance is permitted. As a result of the amendments to Rule 3-10 of Regulation S-X, subsidiary issuers of obligations guaranteed by the parent are not required to provide separate financial statements, provided that the subsidiary obligor is consolidated into the parent company's consolidated financial statements, the parent guarantee is "full and unconditional" and the alternative disclosure required by Rule 13-01 is provided, which includes narrative disclosure and summarized financial information. Accordingly, separate consolidated financial statements of theOperating Partnership have not been presented. Furthermore, as permitted under Rule 13-01(a)(4)(vi), the Company has excluded the summarized financial information for theOperating Partnership as the assets, liabilities, and results of operations of the Company and theOperating Partnership are not materially different than the corresponding amounts presented in the consolidated financial statements of the Company, and management believes such summarized financial information would be repetitive and not provide incremental value to investors.
Our short-term liquidity requirements consist primarily of operating and interest expenses and other expenditures directly associated with our properties, including:
•property expenses; •interest expense and scheduled principal payments on outstanding indebtedness; •general and administrative expenses; and •capital expenditures for tenant improvements and leasing commissions.
In addition, we will require funds for future distributions expected to be paid
to our common shareholders and OP Unit holders in our
As ofJune 30, 2022 , we had a total of$0.4 million of cash and cash equivalents and$736.0 million of near-term availability on our unsecured revolving credit facility. Our primary sources of cash include rent we collect from our tenants, borrowings under our unsecured credit facility, and financings of debt and equity securities. We believe that our existing cash and cash equivalents, cash flow from operating activities, and borrowings available under our unsecured revolving credit facility will be adequate to fund any existing contractual obligations to purchase properties and other obligations through the next year. However, because of the 90% distribution requirement under the REIT tax rules under the Code, we may not be able to fund all of our future capital needs from cash retained from operations, including capital needed to make investments and to satisfy or refinance maturing obligations. As a result, we expect to rely upon external sources of capital, including debt and equity financing, to fund future capital needs. If we are unable to obtain needed capital on satisfactory terms or at all, we may not be able to make the investments needed to expand our business or to meet our obligations and commitments as they mature. 33 -------------------------------------------------------------------------------- Table of Contents We will rely upon external sources of capital to fund future capital needs, and, if we encounter difficulty in obtaining such capital, we may not be able to make future acquisitions necessary to grow our business or meet maturing obligations. Our long-term liquidity needs consist primarily of funds necessary to pay for acquisitions, recurring and non-recurring capital expenditures, and scheduled debt maturities. We expect to satisfy our long-term liquidity needs through cash flow from operations, unsecured borrowings, issuances of equity and debt securities, proceeds from select property dispositions and joint venture transactions, and, in connection with acquisitions of additional properties, the issuance of OP Units of ourOperating Partnership . Our ability to access capital in a timely and cost-effective manner is essential to the success of our business strategy as it affects our ability to satisfy existing obligations, including repayment of maturing indebtedness, and to make future investments and acquisitions. Factors such as general market conditions, interest rates, credit ratings on our debt and equity securities, expectations of our potential future earnings and cash distributions, and the market price of our common shares, each of which are beyond our control and vary or fluctuate over time, all impact our access to and cost of capital. In particular, to the extent interest rates continue to rise, we may experience a decline in the trading price of our common shares, which may impact our decision to conduct equity offerings for capital raising purposes. We will likely also experience higher borrowing costs as interest rates rise, which may also impact our decisions to incur additional indebtedness, or to engage in transactions for which we may need to fund through borrowing. We expect to continue to utilize equity and debt financings to support our future growth and investment activity. We also continuously evaluate opportunities to finance future investments. New investments are generally funded from temporary borrowings under our primary unsecured credit facility and the proceeds from financing transactions such as those discussed above. Our investments generate cash from net operating income and principal payments on loans receivable. Permanent financing for future investments, which generally replaces funds drawn under our primary unsecured credit facility, has historically been provided through a combination of the issuance of debt and equity securities and the incurrence or assumption of secured debt. We intend to invest in additional properties as suitable opportunities arise and adequate sources of financing are available. We are currently evaluating additional potential investments consistent with the normal course of our business. There can be no assurance as to whether or when any portion of these investments will be completed. Our ability to complete investments is subject to a number of risks and variables, including our ability to negotiate mutually agreeable terms with sellers and our ability to finance the investment. We may not be successful in identifying and consummating suitable acquisitions or investment opportunities, which may impede our growth and negatively affect our results of operations and may result in the use of a significant amount of management's resources. We expect that future investments in properties will depend on and will be financed by, in whole or in part, our existing cash, borrowings, including under our unsecured revolving credit facility, or the proceeds from additional issuances of equity or debt securities.
We currently do not expect to sell any of our properties to meet our liquidity needs, although we may do so in the future.
We currently are in compliance with all debt covenants on our outstanding indebtedness.
Credit Facility
OnSeptember 24, 2021 , theOperating Partnership , as borrower, and the Trust, as guarantor, executed the Credit Agreement which extended the maturity date of the revolving credit facility under the Credit Agreement toSeptember 24, 2025 and reduced the interest rate margin applicable to borrowings. The Credit Agreement includes an unsecured revolving credit facility of$1.0 billion and contains a term loan feature of$250 million , bringing total borrowing capacity to$1.3 billion . The Credit Agreement also includes a swingline loan commitment for up to 10% of the maximum principal amount and provides an accordion feature allowing the Trust to increase borrowing capacity by up to an additional$500 million , subject to customary terms and conditions, resulting in a maximum borrowing capacity of$1.75 billion . The revolving credit facility under the Credit Agreement also includes two six-month extension options. OnOctober 13, 2021 , the Company used the proceeds from the 2031 Senior Notes to pay off a$250.0 million term loan feature of the Credit Agreement.The Operating Partnership simultaneously terminated the existing pay-fixed receive-variable rate swaps associated with the full term loan borrowing of$250.0 million . As part of the termination, the Company made total cash payments of$3.3 million to the counterparties of the swap agreements. As defined by the Credit Agreement, the term loan feature is no longer available to the Company. 34 -------------------------------------------------------------------------------- Table of Contents As ofJune 30, 2022 , the Company had$264.0 million of borrowings outstanding under its unsecured revolving credit facility. As defined by the Credit Agreement,$736.0 million is available to borrow without adding additional properties to the unencumbered borrowing base of assets. See Note 6 (Debt) to our accompanying consolidated financial statements for a further discussion of our credit facility. Senior Notes As ofJune 30, 2022 , we had$1.5 billion aggregate principal amount of senior notes issued and outstanding by theOperating Partnership , comprised of$15.0 million maturing in 2023,$25.0 million maturing in 2025,$70.0 million maturing in 2026,$425.0 million maturing in 2027,$395.0 million maturing in 2028, and$545.0 million maturing in 2031. See Note 6 (Debt) to our accompanying consolidated financial statements for a further discussion of our senior notes.
ATM Program
InMay 2021 , the Company entered into the Sales Agreement, pursuant to which the Trust may issue and sell, from time to time, its common shares having an aggregate offering price of up to$500 million . In accordance with the Sales Agreement, the Trust may offer and sell its common shares through the Agents, from time to time, by any method deemed to be an "at the market offering" as defined in Rule 415 under the Securities Act of 1933, as amended, which includes sales made directly on theNew York Stock Exchange or other existing trading market, or sales made to or through a market maker. During the quarters endedMarch 31, 2022 andJune 30, 2022 , the Trust issued and sold common shares through the ATM Program as follows (net proceeds in thousands): Common Net shares sold Weighted average price proceeds Quarter ended March 31, 2022 259,977 $
18.93
Quarter ended June 30, 2022 977,800 18.61 18,020 Year to date 1,237,777 $ 18.68$ 22,891
As of
Dividend Reinvestment and Share Purchase Plan
In
•existing shareholders may purchase additional common shares by reinvesting all or a portion of the dividends paid on their common shares and by making optional cash payments of not less than$50 and up to a maximum of$10,000 per month; •new investors may join the DRIP by making an initial investment of not less than$1,000 and up to a maximum of$10,000 ; and •once enrolled in the DRIP, participants may authorize electronic deductions from their bank account for optional cash payments to purchase additional shares. The DRIP is administered by our transfer agent,Computershare Trust Company, N.A. Our common shares sold under the DRIP are newly issued or purchased in the open market, as further described in the DRIP. As ofJune 30, 2022 , the Company had issued 195,803 common shares under the DRIP since its inception. 35 -------------------------------------------------------------------------------- Table of Contents Critical Accounting Policies Our consolidated financial statements included in Part I, Item 1 of this report are prepared in conformity with GAAP for interim financial information set forth in the ASC, as published by theFinancial Accounting Standards Board , which require us to make estimates and assumptions regarding future events that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. We base these estimates on our experience and assumptions we believe to be reasonable under the circumstances. However, if our judgment or interpretation of the facts and circumstances relating to various transactions or other matters had been different, we may have applied a different accounting treatment, resulting in a different presentation of our financial statements. We periodically reevaluate our estimates and assumptions, and in the event they prove to be different from actual results, we make adjustments in subsequent periods to reflect more current estimates and assumptions about matters that are inherently uncertain. Please refer to our 2021 Annual Report for further information regarding the critical accounting policies that affect our more significant estimates and judgments used in the preparation of our consolidated financial statements included in Part I, Item 1 of this report.
REIT Qualification Requirements
We are subject to a number of operational and organizational requirements necessary to qualify and maintain our qualification as a REIT. If we fail to qualify as a REIT or fail to remain qualified as a REIT in any taxable year, our income would be subject to federal income tax at regular corporate rates and potentially increased state and local taxes and we could incur substantial tax liabilities which could have an adverse impact upon our results of operations, liquidity, and distributions to our shareholders.
Off-Balance Sheet Arrangements
As ofJune 30, 2022 , we have investments in two unconsolidated joint ventures with ownership interests of 49.0% and 12.3%, respectively. The aggregate carrying amount of debt, including both our and our partners' share, incurred by these ventures was approximately$793.7 million (of which our proportionate share is approximately$144.0 million ). See Note 2 (Summary of Significant Accounting Policies) of Part II, Item 8 (Financial Statements and Supplementary Data) of our 2021 Annual Report for the fiscal year endedDecember 31, 2021 for additional information. We have no other off-balance sheet arrangements that we expect would materially affect our liquidity and capital resources.
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