| Physicians Realty Trust | Large accelerated filer | ýAccelerated filer o | |
Non-accelerated filer | Smaller reporting company oEmerging growth company o | ||
| Physicians Realty L.P. | Large accelerated filer o Accelerated filer o Non-accelerated filer ý (Do not check if a smaller reporting company) Smaller reporting company o Emerging growth company o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Physicians Realty Trust o Physicians Realty L.P. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Physicians Realty Trust Yes o No ýPhysicians Realty L.P. Yes o No ý
As of February 23, 2018, there were 181,758,250 shares of Physicians Realty Trust’s common shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Annual Report on Form 10-K, to the extent not set forth in this Form 10-K, is incorporated herein by reference from Physicians Realty Trust’s definitive proxy statement relating to the annual meeting of shareholders to be held on May 7, 2015, which was3, 2018, to be filed with the Securities and Exchange Commission on March 25, 2015.within 120 days after the end of the Registrant’s fiscal year ended December 31, 2017.
EXPLANATORY NOTE
Delaware limited partnership. Unless otherwise indicated or unless the context requires otherwise, all references in this report to “we,” “us,” “our,” “our company,” or the “Company”“Company,” and “Physicians Realty” refer to the Operating Partnership,Trust, together with its consolidated subsidiaries, including the Operating Partnership, and the historical business and operations of four healthcare real estate private equity funds, organized as limited liability companies under the laws of Delaware, managed by B.C. Ziegler & Company, that we have classified for accounting purposes as our “Predecessor” and which we sometimes refer to as the “Ziegler Funds.Funds,” and references to the “Operating Partnership” mean collectively the Operating Partnership together with its consolidated subsidiaries. In this report, all references to “common shares” refer to the common shares of the Trust and references to “the“our shareholders” refer to shareholders of the common shares of the Trust, and the term “OP Units” refers to partnership interests of the Operating Partnership and the term “Series A Preferred Units” refers to Series A Participating
Redeemable Preferred Units of the Operating Partnership. As of February 23, 2018, 104,172 Series A Preferred Units were outstanding.
The Trust is a self-managed real estate investment trust (“REIT”) formed primarily to acquire, selectively develop, own, and manage healthcare properties that are leased to physicians, hospitals, and healthcare delivery systems. The Trust operates in an umbrella partnership REIT structure (“UPREIT”) in which the Operating Partnership and its subsidiaries hold substantially all of the assets. The Trust’s operations are conducted through the Operating Partnership and wholly-owned and majority-owned subsidiaries of the Operating Partnership. The Trust, as the general partner of the Operating Partnership, controls the Operating Partnership and consolidates the assets, liabilities, and results of operations of the Operating Partnership.
The Trust conducts substantially all of its operations through the Operating Partnership. As of December 31, 2017, the Trust held a 97.1% interest in the Operating Partnership and owns no Series A Preferred Units. Apart from this ownership interest, the Trust has no independent operations.
Noncontrolling interests in the Operating Partnership, shareholders’ equity of the Trust and partners’ capital of the Operating Partnership are the primary areas of difference between the consolidated financial statements of the Trust and those of the Operating Partnership. OP Units not owned by the Trust are accounted for as limited partners’ capital in the Operating Partnership’s consolidated financial statements and as noncontrolling interests in the Trust’s consolidated financial statements. The differences between the Trust’s shareholders’ equity and the Operating Partnership’s partners’ capital are due to the differences in the equity issued by the Trust and the Operating Partnership, respectively.
The Company believes combining the Annual Reports of the Trust and the Operating Partnership, including the notes to the consolidated financial statements, into this single report results in the following benefits:
a combined report enhances investors’ understanding of the Trust and the Operating Partnership by enabling investors to view the business as a whole in the same manner as management views and operates the business;
a combined report eliminates duplicative disclosure and provides a more streamlined and readable presentation, as a substantial portion of the Company’s disclosure applies to both the Trust and the Operating Partnership; and
a combined report creates time and cost efficiencies through the preparation of one combined report instead of two separate reports.
To help investors understand the significant differences between the Trust and the Operating Partnership, this report presents the following separate sections for each of the Trust and the Operating Partnership:
the market for registrant’s common equity, related stockholder matters and issuer purchases of equity securities in Item 5 of this report;
selected financial data in Item 6 of this report;
the consolidated financial statements in Item 8 and Item 15 of this report;
certain accompanying notes to the consolidated financial statements, including Note 3 (Acquisitions and Dispositions), Note 14 (Earnings Per Share and Earnings Per Unit) and Note 16 (Quarterly Data);
controls and procedures in Item 9A of this report; and
the certifications of the Chief Executive Officer and the Chief Financial Officer included as Exhibits 31 and 32 to this report.
PHYSICIANS REALTY TRUST AND PHYSICIANS REALTY L.P.
Annual Report on Form 10-K for the Year Ended December 31, 20142017
Table of Contents
| Page | |
Forward-Looking Statements
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements made pursuant to safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts may be forward-looking statements.statements within the meaning of the federal securities laws. In particular, statements pertaining to our capital resources, property performance and results of operations contain forward-looking statements. Likewise, all of our statements regarding anticipated growth in our funds from operations and anticipated market conditions, demographics and results of operations are forward-looking statements. You can identify forward-looking statements by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “pro forma,” “estimates” or “anticipates” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans, expectations or intentions.
These forward-looking statements reflect the views of our management regarding current expectations and projections about future events and are based on currently available information. These forward-looking statements are not guarantees of future performance and involve numerous risks and uncertainties and thus, you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise and we may not be able to realize them. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:
general economic conditions;
adverse economic or real estate developments, either nationally or in the markets in whichwhere our properties are located;
our failure to generate sufficient cash flows to service our outstanding indebtedness, or our ability to pay down or refinance our indebtedness;
fluctuations in interest rates and increased operating costs;
the availability, terms and deployment of debt and equity capital, including our unsecured revolving credit facility;
our ability to make distributions toon our OP Unit holders;
common shares;general volatility of the market price of our limited operating history;
common shares;our increased vulnerability economically due to the concentration of our investments in healthcare properties;
our geographic concentrationsconcentration in Texas and metro Atlanta, Georgia causes us to be particularly exposed to downturns in these local economiesthe Texas economy or other changes in local real estateTexas market conditions;
changes in our business or strategy;
our dependence upon our general partner's key personnel whose continued service is not guaranteed;
our general partner's ability to identify, hire and retain highly qualified personnel in the future;
the degree and nature of our competition;
changes in governmental regulations, tax rates and similar matters;
defaults on or non-renewal of leases by tenants;
decreased rental rates or increased vacancy rates;
difficulties in identifying healthcare properties to acquire and completecompleting acquisitions;
competition for investment opportunities;
any adverse effects to the business, financial position or results of operations of Catholic Health Initiatives (“CHI”), or one or more of the CHI-affiliated tenants, that impact the ability of CHI-affiliated tenants to pay us rent;
the impact of our investment in joint ventures;
the financial condition and liquidity of, or disputes with, any joint venture and development partners with whom we may make co-investments in the future;
cybersecurity incidents could disrupt our business and result in the compromise of confidential information;
our ability to operate as a public company;
changes in accounting principles generally accepted in the United States (or GAAP)(GAAP);
lack of or insufficient amounts of insurance;
other factors affecting the real estate industry generally;
our failure to maintain our qualification as a real estate investment trust (or REIT) for U.S. federal income tax purposes;
limitations imposed on our business as a result ofand our general partner's compliance withability to satisfy complex rules in order for itus to qualify as a REIT for U.S. federal income tax purposes;
changes in governmental regulations or interpretations thereof, such as real estate and zoning laws and increases in real property tax rates and taxation of REITs; and
our issuance of OP Unitsequity securities or the perception that such issuance might occur;
future debt;
failure of securities analysts to publish research or reports about us or our industry; and
While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. You should not place undue reliance on any forward-looking statements, which speak only as of the date of this report. We disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events or other changes after the date of this report, except as required by applicable law. You should not place undue reliance on any forward-looking statements that are based on information currently available to us or the third parties making the forward-looking statements. For a further discussion of these and other factors that could impact our future results, performance or transactions, see “Part I, Item 1A. Risk Factors.”Factors” of this report.
3
PART I
ITEM 1. BUSINESS
Overview
We had no business operations prior to the Trust's completionhave grown our portfolio of its IPO and the related formation transactions on July 24, 2013. Our Predecessor, which is not a legal entity, is comprised of the four healthcaregross real estate funds managed by B.C. Ziegler & Company (“Ziegler”) that owned directly or indirectly interests in entities that ownedinvestments from approximately $124 million at the initial properties that we acquired on July 24, 2013 in connection with completiontime of our general partner's IPO and related formation transactions.
2017. As of December 31, 2014,2017, our portfolio consisted of 87280 healthcare properties located in 1930 states with approximately 3,100,70113,996,802 net leasable square feet, which were approximately 94.6%96.6% leased with a weighted average remaining lease term of approximately 9.6 years and8.3 years. As of December 31, 2017, approximately 76.5%85.1% of the net leasable square footage of our portfolio was either on campus with a hospital or other healthcare facility or strategically located and affiliated with a hospital or other healthcare delivery system or located within approximately 1/4 mile of a hospital campus.facility.
We receive a cash rental stream from these healthcare providers under our leases. Approximately 85%90.8% of the annualized base rent payments from our properties as of December 31, 20142017 are from absolute and triple-net leases, pursuant to which the tenants are responsible for all operating expenses relating to the property, including but not limited to real estate taxes, utilities, property insurance, routine maintenance and repairs, and property management. This structure helps insulate us from increases in certain operating expenses and provides morerelatively predictable cash flow. Approximately 15% of the annualized base rent payments from our properties as of December 31, 2014 are from modified gross base stop leases which allow us to pass through certain increases in future operating expenses (e.g., property tax and insurance), to tenants for reimbursement, thus protecting us from increases in such operating expenses. We seek to structure our triple-nettriple net leases to generate attractive returns on a long-term basis. Our leases typically have initial terms of five to 15 years and include annual rent escalators of approximately 1.5% to 3.0%. Our operating results depend significantly upon the ability of our tenants to make required rental payments. We believe that our portfolio of medical office buildings and other healthcare facilities will enable us to generate stable cash flows over time because of the diversity of our tenants, staggered lease expiration schedule, long-term leases, and low historical occurrence of tenants defaulting under their leases. As of December 31, 2014,2017, leases representing a percentage of our portfolio on the basis of leasable square feet will expire as follows:
| Year | Portfolio Lease Expirations | Portfolio Lease Expirations | ||
| 2015 | 2.8% | |||
| 2016 | 3.6% | |||
| 2017 | 2.2% | |||
| MTM (1) | 0.5% | |||
| 2018 | 6.6% | 2.9% | ||
| 2019 | 6.5% | 3.9% | ||
| 2020 | 1.6% | 3.6% | ||
| 2021 | 2.4% | 4.9% | ||
| 2022 | 3.4% | 4.9% | ||
| 2023 | 5.7% | 4.2% | ||
| 2024 | 16.9% | 6.2% | ||
| 2025 | 7.3% | |||
| 2026 | 25.6% | |||
| 2027 | 9.7% | |||
| Thereafter | 42.8% | 22.9% | ||
| Total | 96.6% | |||
| (1) | “MTM” means month-to-month. This line also includes 4 leases which expired on December 31, 2017, representing 0.1% of portfolio leasable square feet. |
We invest in real estate that is integral to providing high quality healthcare services. Our properties are typically located on a campus with a hospital or other healthcare facilities or strategically located and affiliated with a hospital or other healthcare facilities.system. We believe the impact of government programs and continuing trends in the healthcare industry create
attractive opportunities for us to invest in health care relatedhealthcare-related real estate. Our management team has significant public healthcare REIT experience and has long established relationships with physicians, hospitals and healthcare delivery system decision makers that we believe will provide quality investment and growth opportunities. Our principal investments include medical
office buildings, outpatient treatment facilities, acute and post-acute care hospitals, as well as other real estate integral to health care providers. We seek to invest in stabilized medical facility assets with initial cash yields of 6%5.0% to 10%.9.0%, although we invested in certain medical facility assets in 2017 with anticipated initial cash yields below 5.0% and we may invest in other medical facility assets with initial cash yields outside of this range. 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 OP Units.common shares.
We had no business operations prior to completion of the IPO and the related formation transactions on July 24, 2013. Our Predecessor, which is not a legal entity, is comprised of the four healthcare real estate private equity funds, organized as limited liability companies under the laws of Delaware, managed by B.C. Ziegler & Company, which we refer to as the Ziegler Funds, that owned directly or indirectly interests in entities that owned our initial properties we acquired on July 24, 2013 in connection with completion of our IPO and related formation transactions.
The Trust is a Maryland real estate investment trust and has elected to be taxed as a REIT for U.S. federal income tax purposes. We conduct our business through an umbrella partnership REIT structure in which our properties are owned by the Operating Partnership directly or through limited partnerships, limited liability companies, or other subsidiaries. The Trust is the sole general partner of the Operating Partnership and, as of February 23, 2018, owned approximately 97.1% of the partnership interests in the Operating Partnership (“OP Units”).
Our Objectives and Growth Strategy
Overview
Our principal business objective is to provide attractive risk-adjusted returns to our OP Unit holdersshareholders through a combination of (i) sustainable and increasing rental revenue and cash flow that generate reliable, increasing dividends, and (ii) potential long-term appreciation in the value of our properties and our OP Units.common shares. Our primary strategies to achieve our business objective are to leverage our physician and hospital relationships nationwide to invest in off-market assets that maximize risk-adjusted returns to our shareholders, to invest in, own, and manage a diversified portfolio of high quality healthcare properties, and to pay careful attention to our tenants’ real estate strategies, which we believe will drive high retention, high occupancy and reliable, increasing rental revenue and cash flow.
We intend to grow our portfolio of high-quality healthcare properties leased to physicians, hospitals, healthcare delivery systems, and other healthcare providers primarily through acquisitions of existing healthcare facilities that provide stable revenue growth and predictable long-term cash flows. We may also selectively finance the development of new healthcare facilities through joint venture or fee arrangements with premier healthcare real estate developers. Generally, we only expect to make investments in new development properties when approximately 70% 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 healthcare providers and healthcare delivery systems that offer need-based healthcare services in sustainable healthcare markets. We focus our investment activity on the following types of healthcare properties:
We believe that shifting consumer preferences, limited space in hospitals, the desire of patients and healthcare providers to limit non-essential services provided in a hospital setting, and cost considerations, among other trends, continue to drive the industry trend of performing procedures in outpatient facilities that have traditionally been performed in hospitals, such as surgeries and other invasive medical procedures. As these trends continue, we believe that demand for medical office buildings and similar healthcare properties will continue to rise, and that our investment strategy accounts for these trends.
We may invest opportunistically in life science facilities, assisted living, and independent senior living facilities and in the longer term, senior housing properties, including skilled nursing. Consistent with the intent of our general partner to qualifyTrust’s qualification as a REIT, we may also opportunistically invest in companies that provide healthcare services, and in joint venture entities with operating partners structured to comply with the REIT Investment Diversification Act of 2007 (“RIDEA”).
In connection with our review and consideration of healthcare real estate investment opportunities, we generally take into account a variety of market considerations, including:
whether the property is anchored by a financially-sound healthcare delivery system or whether tenants have strong affiliation to a healthcare delivery system;
demand for medical office buildings and healthcare related facilities, current and future supply of competing properties, and occupancy and rental rates in the market;
ability to achieve economies of scale with our existing medical office buildings and healthcare related facilities or anticipated investment opportunities; and
In addition, our management team has maintained a conservative balance sheet while investing over $4.3 billion as of December 31, 2017 in real estate assets since our IPO in July 2013. For short-term purposes, we may borrow on our primary unsecured credit facility. From time to time, we replace these borrowings with long-term capital such as senior unsecured notes and equity. We selectively utilize capital market transactions in furtherance of our investment strategy, including, during 2017, the issuance by the Operating Partnership of $750.0 million of senior notes through two public debt offerings, and the raising of an additional $721.5 million of equity through two follow-on offerings and $122.5 million of equity through sales under our ATM Program (as hereinafter defined).
Business Strategy
We are focused on building and maintaining a portfolio of high-quality healthcare properties leased to physicians, hospitals, healthcare delivery systems, and other healthcare providers. Our investment strategy includes a focus on investments with the following key attributes:
We seek to invest in properties serving healthcare systems with dominant market share, high credit quality and those who are investing capital into their campuses. In particular, we seek to own off-market or selectively marketed assets with attractive demographics, economic growth, and high barriers to entry. We seek to invest in and maintain well occupied properties that we believe are critical to the delivery of healthcare.
We emphasize ensuring an appropriate and balanced mix of tenants to provide synergies within both individual buildings and the broader health system campus. Our primary tenants are healthcare systems, academic medical centers and leading physician groups. These groups typically have strong and stable financial performance. We believe this helps ensure stability in our rental income and tenant retention over time.
We seek to maintain a core, critical portfolio of properties and to build our reputation as a dedicated leading MOB owner and operator.
We seek to maintain or increase our average rental rates, and focus on actively leasing our vacant space and reducing leasing concessions.
In addition, we seek to invest in properties where we can develop strategic alliances with financially sound healthcare providers and healthcare delivery systems that offer need-based healthcare services in sustainable healthcare markets, and consider long-term relationship building when assessing acquisition potential.
Finally, we actively manage our balance sheet to maintain our investment grade credit rating, to maintain an appropriate level of leverage and to preserve financing flexibility for funding of future acquisitions. In particular, we:
Continue to maintain a high level of liquidity, including borrowing availability under our unsecured revolving credit facility.
Maintain access to multiple sources of capital, including private debt issuances, public bond offerings, public equity offerings, unsecured bank loans, and secured property level debt.
Closely monitor our existing debt maturities and average interest rates.
6
2017 Highlights and Other Recent Developments
Investment Activity
For the full year 2017, we completed acquisitions of 40 operating healthcare properties, 2 condominium units, and 1 parking deck, located in 15 states for an aggregate purchase price of approximately $1.37 billion. In addition, we funded $42.9 million of other investments, including the issuance of loans and buyouts of noncontrolling interests, resulting in total investments of $1.41 billion.
During 2017, we completed acquisitions of 8 healthcare properties as a result of the exercise of certain rights of first refusal by the sellers. These properties comprising approximately 1,402,872 net leasable square feet in three states for an aggregate purchase price of $677.7 million.
Since January 1, 2018, we have completed acquisitions of 2 healthcare properties for an aggregate purchase price of $98.7 million containing an aggregate of 220,140 net leasable square feet. One of these properties was partially funded by issuing an aggregate of 104,172 preferred operating partnership units valued at approximately $22.7 million on the date of issuance.
Assets Slated for Disposition
We consider 10 properties in four states, representing an aggregate of approximately 391,014 square feet of gross leasable area, to be slated for disposition as of December 31, 2017. These assets consist of five assets leased to entities who have succeeded to the interests of certain Foundation Healthcare, Inc. affiliates (“Former Foundation Assets”) and five additional properties which we believe no longer meet our core business strategy from a size, age, geography, or line of business perspective.
Capital Markets and Dividends
In August 2016, we entered into separate At Market Issuance Sales Agreements with each of KeyBanc Capital Markets Inc., Credit Agricole Securities (USA) Inc., JMP Securities LLC, Raymond James & Associates, Inc. and Stifel Nicolaus & Company, Incorporated (the “Agents”), pursuant to which we may issue and sell, from time to time, our common shares having an aggregate offering price of up to $300.0 million, through the Agents (the “ATM Program”). During the fiscal year-ended December 31, 2017, we issued and sold pursuant to the ATM Program 6,347,914 common shares at a weighted average price of $19.48 per share, resulting in net proceeds to us of approximately $122.5 million.
In March 2017, the Operating Partnership issued and sold $400.0 million in aggregate principal amount of its 4.30% Senior Notes which will mature on March 15, 2027. Our net proceeds from the offering, after deducting underwriting discounts and expenses, were approximately $396.1 million. We used the net proceeds of the public debt offering to repay a portion of the outstanding indebtedness under our unsecured revolving credit facility and for general corporate purposes, including working capital and funding acquisitions.
In March 2017, we completed a follow-on public offering of 17,250,000 common shares of beneficial interest, including 2,250,000 common shares issued upon exercise of the underwriters’ overallotment option, resulting in net proceeds to us of approximately $300.8 million. We contributed the net proceeds of this offering to the Operating Partnership in exchange for 17,250,000 OP Units, and the Operating Partnership used the net proceeds of the public offering to repay borrowings under its unsecured revolving credit facility and for general corporate purposes, including working capital and funding acquisitions.
In July 2017, we completed a follow-on public offering of 21,500,000 common shares of beneficial interest, including 1,500,000 common shares issued upon partial exercise of the underwriters’ option to purchase additional shares, resulting in net proceeds to us of approximately $420.7 million. We contributed the net proceeds of this offering to the Operating Partnership in exchange for 21,500,000 OP Units, and the Operating Partnership used the net proceeds of the public offering to repay borrowings under its unsecured revolving credit facility and for general corporate purposes, including working capital and funding acquisitions.
On December 1, 2017, the Operating Partnership issued and sold $350.0 million in aggregate principal amount of its 3.95% Senior Notes which will mature on January 15, 2028. Our net proceeds from the offering, after deducting underwriting discounts and expenses, were approximately $347.0 million. We used the net proceeds of the public debt offering to repay outstanding indebtedness under our unsecured revolving credit facility and for general corporate purposes, including working capital and funding acquisitions.
The Board of Trustees authorized and the Trust declared a cash dividend of $0.225 per common share and OP Unit for the quarterly period ended March 31, 2017, which was paid on April 18, 2017 to common shareholders and OP Unit holders of record as of the close of business on April 5, 2017. The Board of Trustees authorized and the Trust declared a cash dividend of $0.23 per common share and OP Unit for the quarterly period ended June 30, 2017, which was paid on July 18, 2017 to common shareholders and OP Unit holders of record as of the close of business on July 3, 2017. The Board of Trustees authorized and the Trust declared a cash dividend of $0.23 per common share and OP Unit for the quarterly period ended September 30, 2017, which was paid on October 18, 2017 to common shareholders and OP Unit holders of record as of the close of business on October 3, 2017. The Board of Trustees authorized and the Trust declared a cash dividend of $0.23 per common share and OP Unit for the quarterly period ended December 31, 2017, which was paid on January 18, 2018 to common shareholders and OP Unit holders of record as of the close of business on January 3, 2018.
$3.3 Trillion Healthcare Industry Projected to Grow to $5.7 Trillion (and 19.7% of U.S. GDP) by 2026
According to the U.S. Department of Health and Human Services (“HHS”), healthcare spending accounted for 17.9% of U.S. gross domestic product (“GDP”) in 2016. The general aging of the population, driven by the Baby Boomer generation and advances in medical technology and services which increase life expectancy, are key drivers of the growth in healthcare expenditures. The anticipated continuing increase in demand for healthcare services, together with an evolving complex and costly regulatory environment, changes in medical technology and reductions in government reimbursements are expected to pressure capital-constrained healthcare providers to find cost effective solutions for their real estate needs.
We believe the demand by healthcare providers for healthcare real estate will increase as healthcare spending in the United States continues to increase. According to the Centers for Medicare & Medicaid Services’ National Health Expenditure Projections 2017-2026, national healthcare expenditures continue to rise and are projected to grow from an estimated $3.5 trillion in 2017 to $5.7 trillion by 2026, representing an average annual rate of growth of 5.5%, reaching a projected 19.7% of GDP in 2026.
Source: Centers for Medicare & Medicaid Services, Office of the Actuary
Aging Population
The aging of the U.S. population has a direct effect on the demand for healthcare as older persons generally utilize healthcare services at a rate well in excess of younger people. According to the U.S. Census Bureau, the U.S. population over 65 years of age is projected to more than double from 47.8 million to nearly 98.2 million and the 85 and older population is expected to more than triple, from 6.3 million to 19.7 million, between 2015 and 2060. Also according to the U.S. Census Bureau, the number of older Americans is growing as a percentage of the total U.S. population with the number of persons older than 65 estimated to comprise 14.9% of the total U.S. population in 2015 and projected to grow to 23.6% by 2060.
We believe that healthcare expenditures for the population over 65 years of age will continue to rise as a disproportionate share of healthcare dollars is spent on older Americans. To illustrate, in 2012 the elderly (65+ years old) represented only 14% of the population while accounting for 34% of all healthcare-related spending. We believe the older population group increasingly will require treatment and management of chronic and acute health ailments and that this increased demand for healthcare services will create a substantial need for additional medical office buildings and other facilities that serve the healthcare industry in many regions of the United States. Additionally, we believe there will likely be a focus on lowering the cost of outpatient care to support the aging U.S. population, which will continue to support medical office and outpatient facility property demand in the long term. We believe these trends will result in a substantial increase in the number of properties meeting our investment criteria.
We believe advances in medical technology will continue to enable healthcare providers to identify and treat once fatal illnesses and improve the survival rate of critically ill and injured patients who will require continuing medical care. Along with these technical innovations, the U.S. population is growing older and living longer.
Source: U.S. Census Bureau
Affordable Care Act
The Affordable Care Act (as hereinafter defined) constituted a significant overhaul of many aspects of healthcare regulations and health insurance, and created the framework for healthcare services over the near term. It required every American to have health insurance or be subjected to a tax. Those who cannot afford health insurance are offered insurance subsidies or Medicaid coverage. The U.S. Census Bureau estimated that approximately 50 million Americans did not have healthcare insurance in 2009, before the Affordable Care Act was enacted. The HHS reported that approximately 28.1 million Americans did not have health insurance in 2016. The Affordable Care Act and subsequent legislation, executive orders and events, as well as their potential impact on our business, are discussed more fully under Item I, “Business,” under the caption “Certain Government Regulations.”
We believe the increase in the number of Americans with access to health insurance will result in an increase in physician office visits and an overall rise in healthcare utilization which in turn will drive a need for expansion of medical, outpatient, and smaller specialty hospital facilities. We also believe the increased dissemination of health research through media outlets, marketing of healthcare products, and availability of advanced screening techniques and medical procedures have contributed to a more engaged population of healthcare users and has created increased demand for customized facilities providing specialized, preventive and integrative healthcare services.
We further believe the provisions of the Affordable Care Act that are designed to lower certain reimbursement amounts under Medicare and tie reimbursement levels to the quality of services provided will increase the pressure on healthcare providers to become more efficient in their business models, invest capital in their businesses, lower costs and improve the quality of care, which in turn will drive healthcare systems to monetize their real estate assets and create demand for new, modern and specialized facilities.
Clinical Care Continues to Shift to Outpatient Care
According to the American Hospital Association, procedures traditionally performed in hospitals, such as certain types of surgery, are increasingly moving to outpatient facilities driven by advances in clinical science, shifting consumer preferences, limited or inefficient space in existing hospitals, and lower costs in the outpatient environment. This continuing shift toward delivering healthcare services in an outpatient environment rather than a traditional hospital environment increases the need for additional outpatient facilities and smaller, more specialized and efficient hospitals. Studies by the Medicare Payment Advisory Commission and others have shown that healthcare is delivered more cost effectively and with higher patient satisfaction when it is provided on an outpatient basis. Increasingly, hospital admissions are reserved for the critically ill, and less critical patients are treated on an outpatient basis with recuperation in their own homes. We believe healthcare market trends toward outpatient care will continue to push healthcare services out of larger, older, inefficient hospitals and into newer, more efficient and conveniently located outpatient facilities and smaller specialized hospitals. We believe that increased specialization within the medical field is also driving demand for medical facilities designed specifically for particular specialties and that physicians want to locate their practices in medical office space that is in or adjacent to these facilities.
Impact of BBA on Outpatient Care
Section 603 Assets: Section 603 of the Bipartisan Budget Act of 2015 (the “2015 BBA”) generally prohibits hospital outpatient departments (“HOPDs”) from charging preferential hospital outpatient department rates for Medicare patients treated in “off-campus” locations on or after January 1, 2017, potentially impacting their profitability. These preferential Medicare rates are only permitted if the hospital provides HOPD services in a building within 250 yards of the hospital’s main inpatient location, unless the hospital’s HOPD service location is grandfathered by the 2015 BBA. A hospital’s HOPD locations, and thus the legislative right to bill at the higher HOPD rates, are grandfathered in all locations in existence as of November 2, 2015, as long as the hospital was billing services in that location on a HOPD basis as of November 2, 2015 and continues to provide those services in that location. “Grandfathered” hospitals providing HOPD services in our portfolio are referred to as 603 assets in our SEC reports and other public disclosures.
We own a number of assets that will continue to be reimbursed at hospital inpatient rates, which we refer to as “603 assets” after the applicable section of the BBA. Rent derived from these 603 assets accounts for approximately 19.7% of our total portfolio annualized base rent as of December 31, 2014, we had 14 full-time employees, none2017. Depending upon the implementation of whom are subjectthe regulations, the BBA may enhance the value of these 603 assets because existing HOPDs may lose their higher reimbursements rates should they choose to a collective bargaining agreement.change locations.
Portfolio Summary
Please see “Item 2. Properties” for a table that summarizes our portfolio as of December 31, 2014.2017.
Geographic Concentration
As a result of this geographic concentration, we are particularly exposed to downturns in these local economiesthe Texas economy or other changes in local real estate market conditions. Any material change in the current payment programs or regulatory, economic, environmental, or competitive conditions in either of these areasTexas could have a disproportionate effect on our overall business results. In the event of negative economic or other changes in either of these markets,the Texas market, our business, financial condition, and results of operations, our ability to make distributions to the Trustour shareholders and the tradingmarket price of the Trust'sour common shares may be adversely affected. See each of the discussion under Item 1A, “Risk Factors,” under the caption, “Economic“Economic and other conditions that negatively affect geographic areas in which we conduct business, and in particular Texas, and other areas to which a greater percentage of our revenue is attributed could materially adversely affect our business, results of operations, and financial condition.condition.”
Customer Concentration
We receive substantially all of our revenue as rent payments from tenants under leases of space in our healthcare properties, with our five largest tenants based upon rental revenue representing approximately $17.2$49.4 million, or 26.1%17.4%, of the annualized base rent from our properties as of December 31, 2014.2017. No one tenant represents more than 7.1%5.6% of our total annualized rent.base rent; however, 18.7% of our total annualized base rent as of December 31, 2017 is from tenants affiliated with CHI. We have no control over the success or failure of our tenants’ businesses and, at any time, any of our tenants may experience a downturn in its business that may weaken its financial condition. Our business, financial position, or results of operation could be materially adversely affected if CHI were to experience a material adverse effect on its business, financial position, or results of operations.
Competition
We compete with many other entities engaged in real estate investment activities for acquisitions of healthcare properties, including national, regional and local operators, acquirers, and developers of healthcare-related real estate properties.properties and other investors such as private equity firms, some of whom may have greater financial resources and lower costs of capital than we do. The competition for healthcare-related real estate properties may significantly increase the price that we must pay for healthcare properties or other assets that we seek to acquire, and our competitors may succeed in acquiring those properties or assets themselves. In addition, our potential acquisition targets may find our competitors to be more attractive because they may have greater resources, may be willing to pay more for the properties or may have a more compatible operating philosophy. In particular, larger REITs that target healthcare properties may enjoy significant competitive advantages that result from, among other things, a lower cost of capital, enhanced operating efficiencies, more personnel, and market penetration and familiarity with markets. In addition, the number of entities and the amount of funds competing for suitable investment properties may increase. Increased competition would result in increased demand for the same assets and therefore increase prices paid for them. Those higher prices for healthcare properties or other assets may adversely affect our returns from our investments.
Seasonality
Our business has not been, and we do not expect it to become, subject to material seasonal fluctuations.
Employees
At December 31, 2017, we had 63 full-time employees, none of whom are subject to a collective bargaining agreement. We believe that relations with our employees are positive.
Environmental Matters
As an owner of real estate, we are subject to various federal, state, and local environmental laws, regulations, and ordinances and also could be liable to third parties as a result of environmental contamination or noncompliance at our properties even if we no longer own such properties. See the discussion under Item 1A, “Risk Factors,” under the caption “Environmental compliance costs and liabilities associated with owning, leasing, developing and operating our properties may affect our results of operations.”
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Certain Government Regulations
Overview
Our tenants and operators are typically subject to extensive and complex federal, state, and local healthcare laws and regulations relating to fraud and abuse practices, government reimbursement, licensure, and certificate of need and similar laws governing the operation of healthcare facilities, and we expect that the healthcare industry, in general, will continue to face increased regulation and pressure in the areas of fraud, waste and abuse, cost control, healthcare management, and provision of services, among others. These regulations are wide-ranging and can subject our tenants and operators to civil, criminal and administrative sanctions. Affected tenants and operators may find it increasingly difficult to comply with this complex and evolving regulatory environment because of a relative lack of guidance in many areas as certain of our healthcare properties are subject to oversight from several government agencies and the laws may vary from one jurisdiction to another. Changes in laws and regulations, reimbursement enforcement activity and regulatory non-compliance by our tenants and operators can all have a significant effect on their operations and financial condition, which in turn may adversely impact us, as detailed below and set forth under Item 1A, “Risk Factors,” under the caption “The healthcare industry is heavily regulated, and new laws or regulations, changes to existing laws or regulations, loss of licensure, or failure to obtain licensure could adversely impact our company and result in the inability of our tenants to make rent payments to us.”
in turn, their ability to satisfy their contractual obligations, including making rental payments under and otherwise complying with the terms of our leases.
The following is a discussion of certain laws and regulations generally applicable to our operators, and in certain cases, to us.
Healthcare Legislation
Health Reform Laws. On March 23, 2010, President Obama signed into law the Patient Protection and Affordable Care Act of 2010 (the “Affordable Care Act”) and the Health Care and Education Reconciliation Act of 2010, which amends the Affordable Care Act (collectively with other subsequently enacted federal health care laws and regulations, the “Health Reform Laws”). The Health Reform Laws contain various provisions that may directly impact us or the operators and tenants of our properties. Some provisions of the Health Reform Laws may have a positive impact on our operators’ or tenants’ revenues, by, for example, increasing coverage of uninsured individuals, while others may have a negative impact on the reimbursement of our operators or tenants by, for example, altering the market basket adjustments for certain types of health care facilities. The Health Reform Laws also enhance certain fraud and abuse penalty provisions that could apply to our operators and tenants, in the event of one or more violations of the federal health care regulatory laws. In addition, there are provisions that impact the health coverage that we and our operators and tenants provide to our respective employees. The Health Reform Laws also provide additional Medicaid funding to allow states to carry out the expansion of Medicaid coverage to certain financially-eligible individuals beginning in 2014, and have also permitted states to expand their Medicaid coverage to these individuals since April 1, 2010, if certain conditions are met. On June 28, 2012, the United States Supreme Court upheld the individual mandate of the Health Reform Laws but partially invalidated the expansion of Medicaid. The ruling on Medicaid expansion allows states not to participate in the expansion-and to forego funding for the Medicaid expansion-without losing their existing Medicaid funding. As of December 31, 2017, 18 states have pursued this option. The participation by states in the Medicaid expansion could have the dual effect of increasing our tenants’ revenues, through new patients, but could also further strain state budgets. While the federal government paid for approximately 100% of those additional costs from 2014 to 2016, states now are expected to pay for part of those additional costs.
Challenges to the Health Reform Laws and Potential Repeal and/or Further Reforms under Trump Administration. Since the enactment of the Health Care Laws, there have been multiple attempts through legislative action and legal challenge to repeal or amend the Health Reform Laws, including the case that was before the U.S. Supreme Court, King v. Burwell. Although the Supreme Court in Burwell upheld the use of subsidies to individuals in federally-facilitated health care exchanges on June 25, 2015, which ultimately did not disrupt significantly the implementation of the Health Reform Laws, we cannot predict whether other current or future efforts to repeal, amend or challenge the validity of all or part of the Health Reform
Laws will be successful, nor can we predict the impact that such a repeal, amendment or challenge would have on our operators or tenants and their ability to meet their obligations to us.
In 2017, President Trump and Congress unsuccessfully sought to repeal and replace the Affordable Care Act. On January 20, 2017, President Trump issued an Executive Order stating that it is the administration’s official policy to repeal the Affordable Care Act and instructing the Secretary of Health and Human Services and the heads of all other executive departments and agencies with authority and responsibility under the Affordable Care Act to, among other matters, delay implementation of or grant an exemption from any provision of the Affordable Care Act that would impose a fiscal burden on any state or a cost, fee, tax, penalty, or regulatory burden on individuals, families, healthcare providers, health insurers, patients, and others. On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law. The Tax Act, among other things, reduces the Affordable Care Act’s individual mandate penalty to zero beginning in 2019. The elimination of the penalties does not remove the requirement to obtain healthcare coverage; however, without penalties there effectively will be no enforcement. It is expected that Congress will continue to consider other legislation to repeal the Affordable Care Act or repeal and replace some or all elements of the Affordable Care Act.
We cannot predict the effect of either the Executive Order or the Tax Act’s 2019 repeal of the individual mandate penalty on the Affordable Care Act, or whether Congress’ attempt to repeal or repeal and replace the law will be successful. Further, we cannot predict how the Affordable Care Act might be amended or modified, either through the legislative or judicial process, and how any such modification might impact our tenants’ operations or the net effect of this law on us. If the operations, cash flows or financial condition of our operators and tenants are materially adversely impacted by any repeal or modification of the law, our revenue and operations may be materially adversely affected as well.
Fraud and Abuse Enforcement
There are various extremely complex federal and state laws and regulations governing healthcare providers’ relationships and arrangements and prohibiting fraudulent and abusive practices by such providers. These laws include (i) federal and state false claims acts, which, among other things, prohibit providers from filing false claims or making false statements to receive payment from Medicare, Medicaid or other federal or state healthcare programs, (ii) federal and state anti-kickback and fee-splitting statutes, including the Medicare and Medicaid anti-kickback statute, which prohibit the payment or receipt of remuneration to induce referrals or recommendations of healthcare items or services, (iii) federal and state physician self-referral laws (commonly referred to as the “Stark Law”), which generally prohibit referrals by physicians to entities with which the physician or an immediate family member has a financial relationship, (iv) the federal Civil Monetary Penalties Law, which prohibits, among other things, the knowing presentation of a false or fraudulent claim for certain healthcare services and (v) federal and state privacy laws, including the privacy and security rules contained in the Health Insurance Portability and Accountability Act of 1996, which provide for the privacy and security of personal health information. Violations of healthcare fraud and abuse laws carry civil, criminal and administrative sanctions, including punitive sanctions, monetary penalties, imprisonment, denial of Medicare and Medicaid reimbursement, and potential exclusion from Medicare, Medicaid or other federal or state healthcare programs. These laws are enforced by a variety of federal, state, and local agencies and can also be enforced by private litigants through, among other things, federal and state false claims acts, which allow private litigants to bring qui tam or “whistleblower” actions. Many of our operators and tenants are subject to these laws, and some of them may in the future become the subject of governmental enforcement actions if they fail to comply with applicable laws.
Reimbursement
Sources of revenue for many of our tenants and operators include, among other sources, governmental healthcare programs, such as the federal Medicare program and state and Medicaid programs,program, and non-governmental payors, such as insurance carriers and HMOs. As federal and state governments focus on healthcare reform initiatives, and as the federal government and many states face significant budget deficits, efforts to reduce costs by these payors will likely continue, which may result in reduced or slower growth in reimbursement for certain services provided by some of our tenants and operators.
We cannot predict whether future Congressional proposals will seek to reduce physician reimbursements. Efforts by other payors to reduce healthcare costs are likely to continue, which may result in reductions or slower growth in reimbursement for certain services provided by some of our tenants. Further, revenue realizable under third-party payor agreements can change after examination and retroactive adjustment by payors during the claims settlement process or as a result of post-payment audits. For example, payors may disallow requests for reimbursement based on determinations that certain costs are not reimbursable or reasonable, because additional documentation is necessary or because certain services were not covered or were not medically necessary. The Healthcare Reform Laws and regulatory changes could impose further limitations on government and private payments to healthcare providers. In some cases, states have enacted or are considering enacting measures designed to reduce their Medicaid expenditures and to make changes to private healthcare insurance. In
addition, the failure of any of our tenants to comply with various laws and regulations could jeopardize their ability to continue participating in Medicare, Medicaid and other government sponsored payment programs. The financial impact on our tenants’ failure to comply with such laws and regulations could restrict their ability to make rent payments to us.
Healthcare Licensure and Certificate of Need
Certain healthcare facilities in our portfolio are subject to extensive federal, state and local licensure, certification and inspection laws, and regulations. In addition, various licenses and permits are required to dispense narcotics, operate pharmacies and laboratories, handle radioactive materials, and operate equipment. Many states require certain healthcare providers to obtain a certificate of need, which requires prior approval for the construction, expansion, and closure of certain healthcare facilities. The
approval process related to state certificate of need laws may impact some of our tenants’ and operators’ abilities to expand or change their businesses.
Available Information
In addition, the Trust'sTrust’s board of trustees has established a Code of Business Conduct and Ethics that applies to the Trust'sour officers, including itsour Chief Executive Officer and President and Chief Financial Officer, its trustees, and its employees. The Code of Business Conduct and Ethics provides a statement of the Company’s policies and procedures for conducting business legally and ethically. A copy of the Code of Business Conduct and Ethics is available in the Investor Relations section of the Trust'sour website (www.docreit.com) under the tab “Governance Documents.” Any amendments to or waivers from the Code of Business Conduct and Ethics will be disclosed on the Trust'sour website. Information contained on the Trust'sour website is not part of this report.
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ITEM 1A. RISK FACTORS
The following summarizes the material risks of purchasing or owning our securities. Additional unknown risks may also impair our financial performance and business operations. Our business, financial condition, and/or results of operation may be materially adversely affected by the nature and impact of these risks. In such case, the market value of our securities could be detrimentally affected, and investors may lose part or all of the value of their investment. You should carefully consider the risks and uncertainties described below.
We have grouped these risk factors into the following general categories:
Risks Related To Our Business
Our real estate investments are concentrated in healthcare properties, making us more vulnerable economically than if our investments were diversified in other segments of the economy.
We acquire, own, manage, operate and selectively develop properties for lease primarily to physicians, hospitals, and healthcare delivery systems. We are subject to risks inherent in concentrating investments in real estate, and further from the risks resulting from a lackconcentration of diversification become even greater as a result of our business strategy to concentrate our investments in the healthcare sector. Any adverse effects that result from these risks could be more pronounced than if we diversified our investments outside of healthcare properties. Given our concentration in this sector, our tenant base is especially concentrated and dependent upon the healthcare industry generally, and any industry downturn could adversely affect the ability of our tenants to make lease payments and our ability to maintain current rental and occupancy rates. Our tenant mix could become even more concentrated if a significant portion of our tenants practice in a particular medical field or are reliant upon a particular healthcare delivery system. Accordingly, a downturn in the healthcare industry generally, or in the healthcare relatedhealthcare-related facility specifically, could adversely affect our business, financial condition, and results of operations, our ability to make distributions to our OP Unit holdersshareholders, and the tradingmarket price of our general partner's common shares.
Economic and other conditions that negatively affect geographic areas in which we conduct business, and in particular Texas, and other areas to which a greater percentage of our revenue is attributed could materially adversely affect our business, results of operations, and financial condition.condition.
Our operating results depend upon our ability to maintain and increase occupancy levels and rental rates at our properties. Adverse economic or other conditions in the geographic markets in which we operate, including periods of economic slowdown or recession, industry slowdowns, periods of deflation, relocation of businesses, changing demographics, earthquakes and other natural disasters, fires, terrorist acts, civil disturbances or acts of war, and other man-made disasters which may result in uninsured or underinsured losses, and changes in tax, real estate, zoning, and other laws and regulations, may lower our occupancy levels and limit our ability to increase rents or require us to offer rental concessions. The failure
For the year ended December 31, 2017, approximately 1.9 million of our gross leasable area and $46.9 million of our total annualized base rent was derived from properties located in Texas (13.8% of our gross leasable area and 16.4% of our total annualized base rent). As a result of these geographic concentrations, we are particularly exposed to generate revenues sufficient to meet our cash requirements, including operating anddownturns in the Texas economy or other expenses, debt service and capital expenditures, maychanges in local real estate market conditions. Any material change in the current payment programs or regulatory, economic, environmental, or competitive conditions in Texas could have an adversea disproportionate effect on our overall business results. In the event of negative economic or other changes in any of the markets in which we conduct business, our business, financial condition, and results of operations, our ability to make distributions to our OP Unit holdersshareholders, and the tradingmarket price of our general partner's common shares.shares may be adversely affected.
Our healthcare properties and tenants face competition from nearby hospitals and other healthcare properties, and we may not realize the benefits that we anticipate from focusing on healthcare properties that are strategically aligned with a healthcare delivery system and from the relationships established through such strategic alignments. Further, we may not be able to maintain or expand our relationships with our existing and future hospital and healthcare delivery system clients.
As part of our business strategy, we focus on healthcare properties that are strategically aligned with a healthcare delivery system by (i) seeking to acquire, own, manage, and develop healthcare properties that are located on medical campuses where the underlying land is owned by a healthcare delivery system or by us, or (ii) seeking to acquire, own, manage, and develop healthcare properties located in close proximity to a healthcare delivery system or strategically aligned with a healthcare delivery system through leasing or other arrangements. We may not realize the benefits that we anticipate as a result of these strategic relationships, such as increased rents and reduced tenant turnover rates as compared to healthcare properties that are not strategically aligned. Moreover, building a portfolio of healthcare properties that are strategically aligned does not assure the success of any given property. The associated healthcare delivery system may not be successful and the strategic alignment that we seek for our healthcare properties could dissolve, and we may not succeed in replacing them. In addition, our healthcare properties, the associated healthcare delivery systems with which our healthcare properties are strategically aligned, and our tenants may be unable to compete successfully with nearby hospitals, medical practices, other healthcare properties that provide comparable services, pharmacies and other retailers that may initiate or expand healthcare clinic operations and services to compete with our tenants. Any of our properties may be materially and adversely affected if the healthcare delivery system with which it is strategically aligned is unable to compete successfully. If we do not realize the benefits that we anticipate from our business strategy and our strategic alignments dissolve and we are not successful in replacing them, our reputation, business, financial results, and prospects may be adversely affected.
The success of our business depends, to a large extent, on our current and future relationships with hospital and healthcare delivery system clients. We invest a significant amount of time to develop, maintain and be responsive to these relationships, and our relationships have helped us to secure acquisition and development opportunities, as well as other advisory, property management, and projects, with both new and existing clients. If our relationships with hospital or health system clients deteriorate, if a conflict of interest or non-compete arrangement prevents us from expanding these relationships, or if a hospital on or near whose campus one of our properties is located fails or becomes unable to meet its financial obligations, the business of our tenants could be adversely affected or our ability to secure new acquisition and development opportunities or other advisory, property management, and hospital project management projects could be adversely impacted and our professional reputation within the industry could be damaged.
Any failure, inability, or unwillingness by our tenants to pay rent or other amounts under leases could materially adversely affect our financial results; we may have difficulty finding suitable replacement tenants in the event of a tenant default or non-renewal of our leases, especially for our properties located in smaller markets.
Our portfolio of healthcare properties is leased to physicians, hospitals, healthcare delivery systems, and other healthcare providers. We cannot provide assurance that our tenants will have sufficient assets, income and access to financing to enable them to satisfy their respective obligations to us, and any failure, inability or unwillingness by our tenants to do so could adversely affect our financial results. We have had tenants pay us rent late or fail to pay rent, which has adversely affected our financial results.
We cannot predict whether our tenants will renew or extend existing leases beyond their current terms. Nearly all of our properties are subject to leases which have multi-year terms. As of December 31, 2014,2017, leases representing 2.8%, 3.6%2.9% and 2.2%3.9% of leasable square feet at our properties will expire in the 2015, 20162018 and 2017, respectively.2019, respectively, and leases representing 0.1% of leasable square feet had expired as of December 31, 2017. If any of our leases are not renewed or extended, or if a tenant defaults under the terms of its lease or becomes insolvent, we would attempt to leaserelet those spaces or properties to another tenant.other tenants or new tenants. In case of non-renewal, we generally have advance notice before expiration of the lease term to arrange for reletting or repositioning of the spaces or the properties and our tenants are required to continue to perform all of their obligations (including the payment of all rental amounts) forunder the non-renewed assetsleases until such expiration. However, following expiration of a lease term or if we exercise our right to replace a tenant in default, rental payments on the related properties could decline or cease altogether while we relet or reposition the spaces or the properties with a suitable replacement tenant.tenants. We also might not be successful in identifying suitable replacement tenants or entering into leases with new tenants on a timely basis or on terms as favorable to us as our current leases, or at all, and we may be required to fund certain expenses and obligations (e.g., real estate taxes, debt costs, and maintenance expenses) to preserve the value of, and avoid the imposition of liens on, our properties while they are being relet or repositioned. Our ability to relet or reposition our properties, or spaces within our properties, with a suitable tenanttenants could be significantly delayed or limited by state licensing, receivership, certificate of need or other laws, as well as by the Medicare and Medicaid change-of-ownership rules. We could also incur substantial additional expenses in connection with any licensing, receivership, or change-of-ownership proceedings. In addition, our ability
to locate suitable replacement tenants could be impaired by the specialized healthcare uses or contractual restrictions on use of the properties, and we may be required to spend substantial amounts to adapt the properties to other uses. Any such delays, limitations and expenses could adversely impact our ability to collect rent, obtain possession of leased properties, or otherwise exercise remedies for tenant default and could have a material adverse effect on us or cause us to take an impairment charge on a property.
All of these risks may be greater in smaller markets, where there may be fewer potential replacement tenants, making it more difficult to replace tenants, especially for specialized spaces, like hospital or outpatient treatment facilities located in our properties, and could have a material adverse effect on us.
As of December 31, 2017, approximately 18.7% of our total annualized base rent is from tenants affiliated with CHI.
Failure by CHI’s subsidiaries and affiliates to comply with the market priceterms of our general partner's common shares.
We may not be successful in identifying and completing off-market acquisitions and other suitable acquisitions or investment opportunities, which may impede our growth and adversely affect our business, financial condition, and results of operations and our ability to make distributions to our OP Unit holders.shareholders.
An important component of our growth strategy is to acquire “off-market” properties before they are widely marketed by the owners. Facilities that are acquired off-market are typically more attractive to us as a purchaser because of the absence of a formal marketing process, which could lead to higher prices or other unattractive terms. If we cannot obtain off-market deal flow in the future, our ability to locate and acquire facilities at attractive prices could be adversely affected. We expect to compete with many other entities engaged in real estate investment activities for acquisitions of healthcare properties, including national, regional, and local operators, acquirers and developers of healthcare-related real estate properties.properties, and other investors such as private equity firms, some of whom may have greater financial resources and lower costs of capital than we do. The competition for healthcare-related real estate properties may significantly increase the price that we must pay for healthcare properties or other assets that we seek to acquire, and our competitors may succeed in acquiring those properties or assets themselves. In addition, our potential acquisition targets may find our competitors to be more attractive because they may have greater resources, may be willing to pay more for the properties, or may have a more compatible operating philosophy. In particular, larger REITs that target healthcare properties may enjoy significant competitive advantages that result from, among other things, a lower cost of capital, enhanced operating efficiencies, more personnel and market penetration, and familiarity with markets. In addition, the number of entities and the amount of funds competing for suitable investment properties may increase. Increased competition would result in increased demand for these assets and therefore likely would increase prices
paid for them. Those higher prices for healthcare properties or other assets may adversely affect our returns from our investments.
During 2017, we saw an increased level of competition for healthcare properties and, as a result, an increase in prices paid for them. In turn, this has had a negative impact on the initial cash yields on potential asset acquisitions. We seek to invest in stabilized medical facility assets with initial cash yields of 5.0% to 9.0%, although we invested in certain medical facility assets in 2017 with anticipated initial cash yields below 5.0% and we may invest in other medical facility assets with initial cash yields outside of this range.
Some of our existing properties and properties we acquire in the future are and may be subject to ground lease or other restrictions on the use of the space. If we are required to undertake significant capital expenditures to procure new tenants, then our business and results of operations may suffer.
Uninsured losses or losses in excess of our insurance coverage could adversely affect our financial condition and our cash flows.
We maintain comprehensive liability, fire, flood, earthquake, wind (as deemed necessary or as required by our lenders), extended coverage, and rental loss insurance with respect to our initial properties. Certain types of losses, however, may be either uninsurable or not economically insurable, such as losses due to earthquakes, riots, acts of war, or terrorism. Should an uninsured loss occur, we could lose both our investment in and anticipated profits and cash flows from a healthcare relatedhealthcare-related facility. If any such loss is insured, we may be required to pay a significant deductible on any claim for recovery of such
a loss prior to our insurer being obligated to reimburse us for the loss, or the amount of the loss may exceed our coverage for the loss. In addition, future lenders may require such insurance, and our failure to obtain such insurance could constitute a default under loan agreements. We may determine not to insure some or all of our properties at levels considered customary in our industry, and which would expose us to an increased risk of loss. As a result, our business, financial condition, and results of operations, our ability to make distributions to our OP Unit holdersshareholders, and the tradingmarket price of our general partner's common shares may be adversely affected.
Environmental compliance costs and liabilities associated with owning, leasing, developing, and operating our properties may affect our results of operations.
Under various U.S. federal, state, and local laws, ordinances, and regulations, current and prior owners and tenants of real estate may be jointly and severally liable for the costs of investigating, remediating, and monitoring certain hazardous substances or other regulated materials on or in such property. In addition to these costs, the past or present owner or tenant of a property from which a release emanates could be liable for any personal injury or property damage that results from such releases, including for the unauthorized release of asbestos-containing materials and other hazardous substances into the air, as well as any damages to natural resources or the environment that arise from such releases. These environmental laws often impose such liability without regard to whether the current or prior owner or tenant knew of, or was responsible for, the presence or release of such substances or materials. Moreover, the release of hazardous substances or materials, or the failure to properly remediate such substances or materials, may adversely affect the owner’s or tenant’s ability to lease, sell, develop, or rent such property or to borrow by using such property as collateral. Persons who transport or arrange for the disposal or treatment of hazardous substances or other regulated materials may be liable for the costs of removal or remediation of such substances at a disposal or treatment facility, regardless of whether or not such facility is owned or operated by such person.
Certain environmental laws impose compliance obligations on owners and tenants of real property with respect to the management of hazardous substances and other regulated materials. For example, environmental laws govern the management and removal of asbestos-containing materials and lead-based paint. Failure to comply with these laws can result in penalties or other sanctions. If we incur substantial costs to comply with these environmental laws or we are held liable under these laws,
our business, financial condition, and results of operations, our ability to make distributions to our OP Unit holdersshareholders, and the tradingmarket price of our general partner's common shares may be adversely affected.
Substantially all of our assets are held through the Operating Partnership, which holds substantially all of its properties and assets through subsidiaries. Our Operating Partnership’s cash flow is dependent upon cash distributions to determine our compliance,it by its subsidiaries, and we cannot predictin turn, substantially all of the ultimate costTrust’s cash flow is dependent upon cash distributions to it by the Operating Partnership. The creditors of compliance with the ADA or other legislation. If one or moreeach of our properties is not in compliance with the ADA or other related legislation, then we woulddirect and indirect subsidiaries are entitled to payment of that subsidiary’s obligation to them, as and when due and payable, before distributions may be requiredmade by that subsidiary to incur additional costs to bring the facility into compliance. If we incur substantial costs to comply with the ADA or other related legislation,its equity holders. Therefore, our business, financial condition and results of operations, ourOperating Partnership’s ability to make distributions to ourholders of OP Units depends on its subsidiaries’ ability first to satisfy their obligations to their creditors and then to make distributions to the Operating Partnership. Furthermore, holders of Series A Preferred Units are entitled to receive preferred distributions before payment of distributions to OP Unit holders, including the Trust. Finally, the Trust’s ability to pay dividends to holders of common shares depends upon our Operating Partnership’s ability to first satisfy its obligations to its creditors and then to make distributions to the tradingTrust.
While we expect to make regular quarterly distributions to the holders of our common shares, if sufficient cash is not available for distribution from our operations, we may have to fund distributions from working capital, borrow to provide funds for such distributions, or reduce the amount of such distributions. To the extent we borrow to fund distributions, our future interest costs would increase, thereby reducing our earnings and cash available for distributions from what they otherwise would have been. If cash available for distribution generated by our assets is less than expected, or if such cash available for distribution decreases in future periods from expected levels, our inability to make distributions could result in a decrease in the market price of our general partner's common shares may be adversely affected.
Cybersecurity incidents could disrupt our business and result in the compromise of confidential informationinformation.
Our business is at risk from and may be impacted by cybersecurity attacks, including attempts to gain unauthorized access to our confidential data, and other electronic security breaches. Such cyber attacks can range from individual attempts to gain unauthorized access to our information technology systems to more sophisticated security threats. While we employ a number of measures to prevent, detect and mitigate these threats, there is no guarantee such efforts will be successful in preventing a cyber attack. Cybersecurity incidents could disrupt our business and compromise confidential information and of ours and third parties, including our tenants.
We may not be able to sustain our growth rate level.
Since our inception in 2013 through December 31, 2017, our compounded annual growth rate was 120.0%. This growth rate has contributed significantly to our growth in revenue. While we expect to continue to grow through property acquisitions and investments as our asset base continues to increase, we expect our annual growth rate to decelerate in the future. Over time we may experience a decline in our growth rate as a result of various factors, including changes in the economic and other conditions in geographic markets in which we conduct business, changes in the real estate market, changes in healthcare regulations, and the competitiveness of the real estate market. Additionally, our significant growth has resulted in increased levels of responsibility for our management, who may experience additional demands related to managing our current properties portfolio.
Our ability to issue equity to expand our business will depend, in part, upon the market price of our common shares, and our failure to meet market expectations with respect to our business could negatively affect the market price of our common shares and thereby limit our ability to raise capital and our issuance of equity securities could decrease the per share market price of our common shares.
The availability of equity capital to us will depend, in part, upon the market price of our common shares which, in turn, will depend upon various market conditions and other factors that may change from time to time. Our failure to meet the market’s expectation with regard to future earnings and cash distributions would likely adversely affect the market price of our common shares and, as a result, the cost and availability of equity capital to us.
In addition, the vesting of any restricted shares granted to trustees, executive officers, and other employees under our 2013 Equity Incentive Plan, the issuance of our common shares or OP Units in connection with future property, portfolio or business acquisitions, and other issuances of our common shares may cause dilution to our shareholders and could have an
adverse effect on the per share market price of our common shares and may adversely affect the terms upon which we may be able to obtain additional capital through the sale of equity securities.
Increases in interest rates may increase our interest expense and adversely affect our cash flows, our ability to service our indebtedness and our ability to make distributions to our shareholders, and could cause our stock price to decline. Failure to hedge effectively against interest rate changes may adversely affect our results of operations.
One of the factors that influences the market price of our common shares is the dividend yield on common shares (as a percentage of the price of our common shares) relative to market interest rates. In response to the global financial crisis, the U.S. Federal Reserve took actions which resulted in low interest rates prevailing in the marketplace for a historically long period of time. Since December 2015, the U.S. Federal Reserve has raised its benchmark interest rate by a quarter of a percentage point five times to a range of 1.25% to 1.50% and is projected to raise its benchmark interest rate several times in 2018. Further increases in market interest rates may lead prospective purchasers of our common shares to expect a higher dividend yield (with a resulting decline in the market price of our common shares) and higher interest rates would likely increase our borrowing costs for both our existing and future indebtedness and potentially decrease funds available for distribution. Thus, higher market interest rates could cause the market price of our common shares to decrease.
Additionally, as of December 31, 2017, we had approximately $108.5 million of variable-rate indebtedness outstanding that has not been swapped for a fixed interest rate and we expect that more of our indebtedness in the future, including borrowings under our unsecured revolving credit facility since December 31, 2017 and thereafter, will be subject to variable interest rates. Increases in interest rates on any variable rate indebtedness will increase our interest expense, which could adversely affect our cash flow and our ability to pay distributions to our shareholders.
In certain cases, we may seek to manage our exposure to interest rate volatility by using interest rate hedging arrangements. Hedging involves risks, such as the risk that the counterparty may fail to honor its obligations under an arrangement, that the arrangements may not be effective in reducing our exposure to interest rate changes, and that a court could rule that such an agreement is not legally enforceable. In addition, we may be limited in the type and amount of hedging transactions that we may use in the future by our need to satisfy the REIT income tests under the Code. Failure to hedge effectively against interest rate changes may have an adverse effect on our business, financial condition, results of operations, our ability to make distributions to our shareholders, and the market price of our common shares.
The income from certain of our properties is dependent on the ability of our property managers to successfully manage those properties.
We depend upon the performance of our property managers to effectively manage certain of our properties and real estate assets. We do not control these third party property managers, and are accordingly subject to various risks generally associated with outsourcing of management of day-to-day activities. The income we recognize from any properties managed by third party property managers is dependent on the ability of the property manager of such property to successfully manage the property, which such property management is not within our control. Property managers generally compete with other companies in the management of properties, with respect to the quality of care provided, reputation, physical appearance of the property, and price and location, among other attributes. A property manager’s inability to successfully compete with other companies on one or more of the foregoing aspects could adversely impact our business and results of operations. Additionally, because we do not control third party property managers, any adverse events such as issues related to insufficient internal controls, cybersecurity incidents, or other adverse events may impact the income we recognize from properties managed by such third party property managers. We may be unable to anticipate such events or properly assess the magnitude of any such events because we do not control third party property managers who provide property management services to us.
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Risks Related to the Healthcare Industry
The healthcare industry is heavily regulated, and new laws or regulations, changes to existing laws or regulations, loss of licensure, or failure to obtain licensure could adversely impact our company and result in the inability of our tenants to make rent payments to us.
The healthcare industry is heavily regulated by U.S. federal, state and local governmental authorities. Our tenants generally are subject to laws and regulations covering, among other things, licensure, certification for participation in government programs, billing for services, privacy and security of health information, and relationships with physicians and other referral sources. In addition, new laws and regulations, changes in existing laws and regulations or changes in the interpretation of such laws or regulations could negatively affect our financial condition and the financial condition of our tenants. These changes, in some cases, could apply retroactively. The enactment, timing, or effect of legislative or regulatory changes cannot be predicted.
The Affordable Care Act is changing how healthcare services are covered, delivered, and reimbursed through expanded coverage of uninsured individuals and reduced Medicare program spending. In addition, the new lawit reforms certain aspects of health insurance, expands existing efforts to tie Medicare and Medicaid payments to performance and quality, and contains provisions intended to strengthen fraud and abuse enforcement. The complexities and ramifications of the Affordable Care Act are significant and are being implemented in a phased approach which began in 2010. At this time, it isIt remains difficult to predict the full effects of the Affordable Care Act and its impact on our business, our revenues, and financial condition and those of our tenants due to the law’s complexity, lack of implementing regulations or interpretive guidance, gradual implementation, partial repeal, and possible amendment.full repeal. Further, we are unable to foresee how individuals and businesses will respond to the choices afforded them by the Affordable Care Act.Act, or the effect of any potential changes made to the Affordable Care Act or other healthcare laws and programs. The Affordable Care Act could adversely affect the reimbursement rates received by our tenants, the financial success of our tenants and strategic partners and consequently us.
pay a small percentage of those additional costs beginning in 2017.costs. Because the U.S. federal government substantially funds the Medicaid expansion, it is unclear how many states ultimately will elect this option. As of January 2018, 32 states and Washington, D.C. have elected to participate in the Medicaid expansion. The participation by states in the Medicaid expansion could have the effect of increasing some of our tenants’ revenues but also could be a strain on U.S. federal government and state budgets.
We cannot predict the effect of either the Executive Order or the Tax Act’s 2019 repeal of the individual mandate penalty on the Affordable Care Act, or whether Congress’ attempt to repeal or repeal and replace the law will be successful. Further, we cannot predict how the Affordable Care Act might be amended or modified, either through the legislative or judicial process, and how any such modification might impact our tenants’ operations or the net effect of this law on us. If the operations, cash flows, or financial condition of our operators and tenants are materially adversely impacted by any repeal or modification of the law, our revenue and operations may be materially adversely affected as well.
Recent changes to healthcare laws and regulations, including to government reimbursement programs such as Medicare and reimbursement rates applicable to our current and future tenants, could defaulthave a material adverse effect on their obligation to pay for their health insurance coveragethe financial condition of our tenants and, thusconsequently, their ability to pay for health care services. Such default could adversely affect our tenants and their abilitymeet obligations to pay rent to usus.
Recent amendments to an existing statutory moratorium on the establishment of new long-term care hospitals (“LTCH”), the establishment of new LTCH satellite facilities, and bed increases within such existing facilities, effective for the period April 1, 2014which is in effect through September 30, 2017. The present moratorium is similar to a moratorium that expired December 28, 2012, but unlike the expired moratorium, does not include any exceptions that would allow for bed increases at existing LTCHs or LTCH satellite facilities. Pursuant to the new law, limited exceptions apply to the moratorium on the establishment of new LTCHs and new LTCH satellite facilities. To qualify for the exception, a hospital or entity must have satisfied one of the following: (1) begun its qualifying period for payment as an LTCH; (2) entered into a binding written agreement with an outside, unrelated party for the actual construction, renovation, lease or demolition for an LTCH, and have expended, before April 1, 2014, at least 10 percent of the estimated cost of the project or, if less, $2.5 million; or (3) obtained a certificate of need, as may be required, in a certificate-of-need state. The Centers for Medicare and Medicaid Services (CMS) has issued a proposed rule addressing the moratorium and exceptions thereto but to date no final rule has been implemented. This law directly applies to our existing tenant, LifeCare Hospitals in each of Plano, Texas, Fort Worth, Texas and Pittsburgh, Pennsylvania facilities but does not directly31, 2017, could impact any of our existing facilities, as it only applies to the Medicare participation of facilities that are not already participating in the Medicare program as LTCHs.
The Medicare Access and CHIP Reauthorization Act of 2015 (“MACRA”) reforms Medicare payment policy for services paid under the Medicare physician fee schedule and adopts a series of policy changes affecting a wide range of providers and suppliers. MACRA repeals the sustainable growth rate (the “SGR”) formula effective January 1, 2015, and establishes a new payment framework which may impact payment rates for our tenants, including LTCHs.
The Bipartisan Budget Act of 2013 establishes new payment limits for Medicare patients discharged from an LTCH who do not meet specified criteria. For any Medicare patient who does not meet the new criteria, the LTCH will be paid a lower “site-neutral” payment rate, which may impact the financial condition of tenants affected by the lower payment rate. Additionally, new rules may cause all discharges from LTCHs to be paid at the site-neutral rate if the number of discharges for which payment is made under the site-neutral payment rate is greater than 50% of the total number of discharges from the LTCH.
The Bipartisan Budget Act of 2015 (H.R. 1314) (the “BBA”) provides changes to the requirements for providers who seek “hospital outpatient department” (“HOPD”) reimbursement under Medicare. The 2015 BBA generally requires providers who seek to qualify for HOPD to be located on the campus of the hospital that seeks such HOPD, which generally is higher than reimbursement for providers that do not qualify as HOPD providers. The BBA specifically grandfathers HOPD providers in existence as of November 2, 2015 and does not change such HOPD providers’ eligibility for HOPD reimbursement.
We have a number of existing tenants that may be reimbursed as HOPD providers and but for the grandfathering protection of the BBA, may not be eligible for HOPD reimbursement in the future. Any provider who establishes a new HOPD location after November 2, 2015 will be subject to the BBA requirements and if any such provider does not satisfy the new requirements, then such provider will be reimbursed for claims billed on or after January 1, 2017 at generally lower reimbursement levels. Failure to comply with the BBA requirements could adversely affect the ability of certain of our tenants to make rent payments to us, which may have an adverse effect on our business, financial condition, and results of operations, our ability to make distributions to our shareholders, and the market price of our common shares.
The Affordable Care Act instituted a market basket payment adjustment to LTCHs. In fiscal years 2017 through 2019, the market basket update will be reduced by 0.75%. The Affordable Care Act specifically allows these market basket reductions to result in a less than 0% payment update and payment rates that are less than the prior year. MACRA sets the annual update for fiscal year 2018 at 1% after taking into account the market basket payment reduction of 0.75% mandated by the Affordable Care Act.
These regulatory changes may have an adverse financial impact on the net operating revenues and profitability of many LTCHs for cost reporting periods beginning on or after July 1, 2016, which could have an impact on their ability to pay rent due to us.
Many states also regulate the establishment and construction of healthcare facilities and services, and the expansion of existing healthcare facilities and services through certificate of need, or CON, laws, which by way of example may include regulation of certain types of beds, medical equipment, and capital expenditures. Under such laws, the applicable state regulatory body must determine a need exists for a project before the project can be undertaken. If oneany of our tenants seeks to undertake a CON-regulated project, but isare not authorized by the applicable regulatory body to proceed with the project, the tenant wouldthese tenants could be prevented from operating in itstheir intended manner.manner and could be materially adversely affected.
Adverse trends in healthcare provider operations may negatively affect our lease revenues and our ability to make distributions to our OP Unit holders.shareholders.
The healthcare industry is currently experiencing, among other things:
consolidation and pressure to integrate within the healthcare industry through acquisitions and joint ventures; and
These factors may adversely affect the economic performance of some or all of our tenants and, in turn, our lease revenues, which may have a material adverse effect on our business, financial condition, and results of operations, our ability to make distributions to our OP Unit holdersshareholders, and the tradingmarket price of our general partner's common shares.
Reductions in reimbursement from third party payors, including Medicare and Medicaid, could adversely affect the profitability of our tenants and hinder their ability to make rent payments to us or renew their lease.
Sources of revenue for our tenants typically include the U.S. federal Medicare program, state Medicaid programs, private insurance payors and health maintenance organizations. Healthcare providers continue to face increased government and private payor pressure to control or reduce healthcare costs and significant reductions in healthcare reimbursement, including reduced reimbursements and changes to payment methodologies under the Affordable Care Act. The Congressional Budget Office, or CBO, estimates the reductions required by the Affordable Care Act over the next ten years will include $415 billion in cuts to Medicare fee-for-service payments, the majority of which will come from hospitals, and that some hospitals will become insolvent as a result of the reductions. In some cases, private insurers rely upon all or portions of the Medicare payment systems to determine payment rates which may result in decreased reimbursement from private insurers.
The slowdown in the United States economy has negatively affected state budgets, thereby putting pressure on states to decrease spending on state programs including Medicaid. The need to control Medicaid expenditures may be exacerbated by the potential for increased enrollment in state Medicaid programs due to unemployment and declines in family incomes. Historically, states have often attempted to reduce Medicaid spending by limiting benefits and tightening Medicaid eligibility requirements. Many states have adopted, or are considering the adoption of, legislation designed to enroll Medicaid recipients in managed care programs and/or impose additional taxes on hospitals to help finance or expand the states’ Medicaid systems. Potential reductions to Medicaid program spending in response to state budgetary pressures could negatively impact the ability of our tenants to successfully operate their businesses.
Efforts by payors to reduce healthcare costs will likely continue which may result in reductions or slower growth in reimbursement for certain services provided by some of our tenants. A reduction in reimbursements to our tenants from third party payors for any reason could adversely affect our tenants’ ability to make rent payments to us which may have a material adverse effect on our businesses, financial condition and results of operations, our ability to make distributions to our OP Unit holdersshareholders and the tradingmarket price of our general partner's common shares.
Our tenants and our company are subject to fraud and abuse laws, the violation of which by a tenant may jeopardize the tenant’s ability to make rent payments to us.
There are various federal and state laws prohibiting fraudulent and abusive business practices by healthcare providers who participate in, receive payments from, or are in a position to make referrals in connection with government-sponsored healthcare programs, including the Medicare and Medicaid programs. Our lease arrangements with certain tenants may also be subject to these fraud and abuse laws.
Violations of these laws may result in criminal and/or civil penalties that range from punitive sanctions, damage assessments, penalties, imprisonment, denial of Medicare and Medicaid payments, and/or exclusion from the Medicare and Medicaid programs. In addition, the Affordable Care Act clarifies that the submission of claims for items or services generated in violation of the Anti-Kickback Statute constitutes a false or fraudulent claim under the False Claims Act. The federal
government has taken the position, and some courts have held, that violations of other laws, such as the Stark Law, can also be a violation of the False Claims Act. Additionally, certain laws, such as the False Claims Act, allow for individuals to bring whistleblower actions on behalf of the government for violations thereof. Imposition of any of these penalties upon one of our tenants or strategic partners could jeopardize that tenant’s ability to operate or to make rent payments or affect the level of occupancy in our healthcare properties, which may have a material adverse effect on our business, financial condition, and results of operations, our ability to make distributions to our OP Unit holdersshareholders, and the tradingmarket price of our general partner's common shares. Further, we enter into leases and other financial relationships with healthcare delivery systems that are subject to or impacted by these
laws. We also have other investors who are healthcare providers in certain of our subsidiaries that own our healthcare properties. If any of our relationships, including those related to the other investors in our subsidiaries, are found not to comply with these laws, we and our physicianhealthcare provider investors may be subject to civil and/or criminal penalties.
Our healthcare-related tenants may be subject to significant legal actions that could subject them to increased operating costs and substantial uninsured liabilities, which may affect their ability to pay their rent payments to us, and we could be subject to healthcare industry violations.
As is typical in the healthcare industry, our tenants may often become subject to claims that their services have resulted in patient injury or other adverse effects. Many of these tenants may have experienced an increasing trend in the frequency and severity of professional liability and general liability insurance claims and litigation asserted against them. The insurance coverage maintained by these tenants may not cover all claims made against them nor continue to be available at a reasonable cost, if at all. In some states, insurance coverage for the risk of punitive damages arising from professional liability and general liability claims and/or litigation may not, in certain cases, be available to these tenants due to state law prohibitions or limitations of availability. As a result, these types of tenants of our healthcare properties and healthcare-related facilities operating in these states may be liable for punitive damage awards that are either not covered or are in excess of their insurance policy limits.
We also believe that there has been, and will continue to be, an increase in governmental investigations of certain healthcare providers, particularly in the area of Medicare/Medicaid false claims, as well as an increase in enforcement actions resulting from these investigations. Insurance is not available to cover such losses. Any adverse determination in a legal proceeding or governmental investigation, any settlements of such proceedings, or investigations in excess of insurance coverage, whether currently asserted or arising in the future, could have a material adverse effect on a tenant’s financial condition. If a tenant is unable to obtain or maintain insurance coverage, if judgments are obtained or settlements reached in excess of the insurance coverage, if a tenant is required to pay uninsured punitive damages, or if a tenant is subject to an uninsurable government enforcement action or investigation, the tenant could be exposed to substantial additional liabilities, which may affect the tenant’s ability to pay rent, which in turn could have a material adverse effect on our business, financial condition, and results of operations, our ability to pay distributions to our OP Unit holdersshareholders, and the tradingmarket price of our general partner's common shares. We could also be subject to costly government investigations or other enforcement actions which could have a material adverse effect on our business, financial condition, and results of operations, our ability to pay distributions to our OP Unit holdersshareholders, and the tradingmarket price of our general partner's common shares.
Risks Related to the Real Estate Industry
Our operating performance is subject to risks associated with the real estate industry.
Real estate investments are subject to various risks and fluctuations and cycles in value and demand, many of which are beyond our control. Certain events may decrease cash available for distributions as well as the value of our initial properties. These events include, but are not limited to:
vacancies or our inability to rent space on favorable terms, including possible market pressures to offer tenants rent abatements, tenant improvements, early termination rights, or tenant-favorable renewal options;
competition from other real estate investors with significant capital, including other real estate operating companies, REITs, and institutional private equity or other investment funds;
reductions in the level of demand for healthcare properties and changes in the demand for certain healthcare-related properties;
increases in expenses associated with our real estate operations, including, but not limited to, insurance costs, third party management fees, energy prices, real estate assessments, and other taxes and costs of compliance with laws, regulations and governmental policies, and restrictions on our ability to pass such expenses on to our tenants; and
changes in, and changes in interpretation or enforcement of, laws, regulations, and governmental policies associated with real estate, including, without limitation, health, safety, environmental, real estate and zoning and tax laws, increases in real property tax rates and taxation of REITs, governmental fiscal policies, and the ADA.
In addition, periods of economic slowdown or recession, such as the recent U.S. economic downturn, rising interest rates or declining demand for real estate, or the public perception that any of these events may occur, could result in a general decline in rents or an increased incidence of defaults under existing leases. If we cannot operate our properties to meet our financial expectations, our business, financial condition, results of operations, cash flow, per share tradingmarket price of the general partner'sour common shares, and ability to satisfy our debt service obligations and to make distributions to our OP Unit holdersshareholders could be adversely affected.
Illiquidity of real estate investments could significantly impede our ability to respond to adverse changes in the performance of any of our properties.
Because real estate investments are relatively illiquid, our ability to promptly sell one or more of our properties in response to changing economic, financial, and investment conditions is limited. The real estate market is affected by many factors, such as general economic conditions, availability of financing, interest rates, and other factors, including supply and demand, that are beyond our control. We cannot predict whether we will be able to sell any of our properties for the price or on the terms set by us or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of any of our properties. We may be required to expend funds to correct defects or to make improvements before a property can be sold. We cannot assure you that we will have funds available to correct those defects or to make those improvements.
In acquiring a property, we may agree to transfer restrictions that materially restrict us from selling that property for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed on that property. These transfer restrictions would impede our ability to sell a property even if we deem it necessary or appropriate. These facts and any others that would impede our ability to respond to adverse changes in the performance of our properties may have an adverse effect on our business, financial condition, results of operations, or ability to make distributions to our OP Unit holdersshareholders and the tradingmarket price of the general partner'sour common shares.
Uncertain market conditions could cause us to sell our healthcare properties at a loss in the future.
We intend to hold our various real estate investments until such time as we determine that a sale or other disposition appears to be advantageous to achieve our investment objectives. The Trust'sOur senior management team and itsthe Trust’s board of trustees may exercise their discretion as to whether and when to sell a healthcare related facility, and we will have no obligation to sell our buildings at any particular time. We generally intend to hold our healthcare properties for an extended period of time, and we cannot predict with any certainty the various market conditions affecting real estate investments that will exist at any particular time in the future. Because of the uncertainty of market conditions that may affect the future disposition of our healthcare properties, we may not be able to sell our properties at a profit in the future or at all. In addition, if we are unable to access the capital markets for financing in the future, we may need to sell some of our properties to raise capital. We may incur prepayment penalties in the event that we sell a property subject to a mortgage earlier than we otherwise had planned. Additionally, we could be forced to sell healthcare properties at inopportune times which could result in us selling the affected property at a substantial loss. Accordingly, the extent to which youwe will receivepay cash distributions and realize potential appreciation on our real estate investments will, among other things, be dependent upon fluctuating market conditions. Any inability to sell a healthcare property could adversely impact our ability to make debt payments and our ability distributions to our OP Unit holders.shareholders.
Our assets may be subject to impairment charges.
We will periodically evaluate our real estate investments and other assets for impairment indicators. The judgment regarding the existence of impairment indicators is based upon factors such as market conditions, tenant performance, and legal structure. For example, the termination of a lease by a major tenant may lead to an impairment charge. If we determine that an impairment has occurred, we would be required to make an adjustment to the net carrying value of the asset, which could have an adverse effect on our results of operations in the period in which the impairment charge is recorded. We recognizedrecorded a $0.3
$1.0 million impairment loss on a vacant medical office building in Pickerington, Ohio, and a $1.5 million impairment loss on a medical office building in Lansing, Michigan. Both properties are vacant. The fair market value of the Ohio property was determined based on an accepted arms-length offer to purchase the property and the fair market value of the Lansing, Michigan property was determined by a third party valuation firm. For both properties, the impairment was assessed because the property’s carrying amount exceeded its estimated fair value.Port Charlotte, Florida during 2017.
Our investments in, or originations of, mezzanine and term loans will be subject to specific risks relating to the particular company, and our loan assets will involve greater risks of loss than senior loans secured by income-producing properties.
that owns the interest in the entity owning the property.property or other properties. These types of assets involve a higher degree of risk than long-term senior mortgage lending secured by income producing real property, because the loan may become unsecured as a result of foreclosure by the senior lender and because it is in second position and there may not be adequate equity in the property. In the event of a bankruptcy of the entity providing the pledge of its ownership interests as security, we may not have full recourse to the assets of such entity, or the assets of the entity may not be sufficient to satisfy such mezzanine loan. If a borrower defaults on a mezzanine loan or debt senior to our loan, or in the event of a borrower bankruptcy, such mezzanine loan will be satisfied only after the senior debt. We may be unable to enforce guaranties of payment and/or performance given as security for some mezzanine loans. As a result, we may not recover some or all of our initial expenditure. Mezzanine and term loans may partially finance the construction of real estate projects and so involve additional risks inherent in the construction process, such as adherence to budgets and construction schedules. In addition, mezzanine and term loans may have higher loan-to-value ratios than conventional mortgage loans, resulting in less equity in the property and increasing the risk of loss of principal. Significant losses related to our mezzanine and term loans would result in operating losses for us and may limit our ability to make distributions to our OP Unit holders.shareholders.
Risks Related to Financings
Required payments of principal and interest on borrowings may leave us with insufficient cash to operate our properties or to pay the distributions currently contemplated or necessary for the Trust to qualify as a REIT and may expose us to the risk of default under our debt obligations.
We historically borrow on our unsecured revolving credit facility to acquire properties. Then, as market conditions dictate, we have issued equity or long-term fixed rate debt to repay borrowings under our unsecured revolving credit facility. We are subject to risks associated with debt financing, including the risk that existing indebtedness may not be refinanced or that the terms of refinancing may not be as favorable as the terms of current indebtedness. The majority of our borrowings were completed under indentures or contractual agreements that limit the amount of indebtedness we may incur. Accordingly, in the event that we are unable to raise additional equity or borrow money because of these limitations, our ability to acquire additional properties may be limited.
As of December 31, 2014,2017, we had approximately $78.1$186.7 million of mortgage debt on individual properties. During January 2015, we have assumed an additional $5.8properties and approximately $330.0 million of mortgage debtborrowings outstanding under our unsecured credit facility. In addition, in connection with a property acquisition.January 2016, August 2016, March 2017 and December 2017 we issued and sold $150.0 million, $75.0 million, $400.0 million, and $350.0 million, respectively, aggregate principal amount of senior notes. We expect to incur additional debt in the future. We do not anticipate that our internally generated cash flow will be adequate to repay our existing indebtedness upon maturity, and, therefore, we expect to repay our indebtedness through refinancings and future offerings of equity and debt securities, either of which we may be unable to secure on favorable terms or at all. Our level of debt and the limitations imposed upon us by our debt agreements could have adverse consequences, including the following:
we may be unable to borrow additional funds as needed or on favorable terms, including to make acquisitions;
we may be unable to refinance our indebtedness at maturity or the refinancing terms may be less favorable than the terms of our original indebtedness;
because a portion of our debt bears, or is expected to bear, interest at variable rates, an increase in interest rates could materially increase our interest expense;
we may be forced to dispose of one or more of our properties, possibly on disadvantageous terms if we are able to do so at all;
we may experience increased vulnerability to economic and industry downturns, reducing our ability to respond to changing business and economic conditions;
we may default on our obligations and the lenders or mortgagees may foreclose on our properties that secure their loans and receive an assignment of rents and leases;
we may violate financial covenants contained in our various loan documents which would cause a default on our obligations, giving lenders various remedies, including increased interest rates, foreclosure, and liability for additional expenses;
we may inadvertently violate non-financial restrictive covenants in our loan documents, such as covenants that require us to maintain the existence of entities, maintain insurance policies and provide financial statements, which would entitle the lenders to accelerate our debt obligations; and
our default under any of our mortgage loans with cross-default or cross-collateralization provisions could result in default on other indebtedness and result in the foreclosures of other properties.
The realization of any or all of these risks may have an adverse effect on our business, financial condition, and results of operations, our ability to make distributions to our OP Unit holdersshareholders, and the tradingmarket price of our general partner's common shares.
As of December 31, 2017, we had approximately $330.0 million of borrowings outstanding under our unsecured credit facility (including the term loan feature of our unsecured credit facility), during 2016 and 2017, we issued an aggregate of $975.0 million of debt, and in January 2018 we issued 104,172 Series A Preferred Units of the Operating Partnership (“Series A Preferred Units”), all of which is senior to our common shares upon liquidation, and we may in the future make offerings of debt or preferred equity securities which may be senior to our common shares for purposes of dividend distributions or upon liquidation, any of which may materially adversely affect the per share market price of our common shares.
As of December 31, 2017, there were approximately $330.0 million of borrowings outstanding under our unsecured credit facility (including the term loan feature of our unsecured credit facility), and during 2016 and 2017, we issued $975.0 million of aggregate principal amount of senior notes. In January 2018, we issued 104,172 Series A Preferred Units. In the future, we may attempt to increase our capital resources by making additional offerings of debt or equity securities (or causing the Operating Partnership to issue debt securities), including medium-term notes, senior or subordinated notes, and classes or series of preferred shares. Upon liquidation, holders of our debt securities and preferred shares and lenders with respect to other borrowings will be entitled to receive our available assets prior to distribution to the holders of our common shares. Additionally, any convertible or exchangeable securities that we issue in the future may have rights, preferences, and privileges more favorable than those of our common shares and may result in dilution to owners of our common shares. Holders of our common shares are not entitled to preemptive rights or other protections against dilution. Our preferred shares would have a preference on liquidating distributions or a preference on dividend payments that could limit our ability pay dividends or other distributions to the holders of our common shares. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing, or nature of our future offerings. Thus, our shareholders bear the risk that our future offerings could reduce the per share market price of our common shares and dilute their interest in us.
The derivative instruments that we may use to hedge against interest rate fluctuations may not be successful in mitigating our risks associated with interest rates and could reduce the overall returns on our shareholders’ investment.
We may use derivative instruments to hedge exposure to changes in interest rates on certain of our variable rate loans, but no hedging strategy can protect us completely. We cannot assure our shareholders that our hedging strategy and the derivatives that we use will adequately offset the risk of interest rate volatility or that our hedging of these transactions will not result in losses. Any settlement charges incurred to terminate unused derivative instruments may result in increased interest expense, which may reduce the overall return on our investments. These instruments may also generate income that may not be treated as qualifying REIT income for purposes of the 75% or 95% REIT income tests.
We 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.
In order for the Trust to qualify as a REIT under the Internal Revenue Code it isof 1986, as amended (the “Code”), we are required, among other things, to distribute each year to itsour shareholders at least 90% of itsour taxable income, without regard to the deduction for dividends paid and excluding net capital gain. Because of this distribution requirement, 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. Our access to capital will depend upon a number of factors over which we have little or no control, including general stock and bond market conditions and investor interest, the market’s perception of our current and potential future earnings, analyst reports about us and the REIT industry, cash distributions and the market price of our general partner's common shares.shares, and other factors such as governmental regulatory action and changes in REIT tax laws. We may not be in a position to take advantage of attractive investment opportunities for growth if we are unable to access the capital markets on a timely basis on favorable terms. Moreover, additional equity offerings may result in substantial dilution of our shareholders’ interests, and additional debt
financing may substantially increase our leverage, either of which could cause the per share price of our common shares to decline.
As of December 31, 2014,2017, our indebtedness represented approximately 26.6%35.8% of our total assets. However, our organizational documents contain no limitations on the amount of indebtedness that we may incur. We could alter the balance between our total outstanding indebtedness and the value of our properties at any time. If we become more highly leveraged, the resulting increase in outstanding debt could adversely affect our ability to make debt service payments, to pay our anticipated distributions, and to paymake the distributions required to our OP Unit holders.qualify as a REIT. The occurrence of any of the foregoing risks could adversely affect our business, financial condition, and results of operations, our ability to make distributions to our OP Unit holdersshareholders, and the tradingmarket price of our general partner's common shares.
The terms of the instruments governing our existing indebtedness require us to comply with a number of customary financial and other covenants, such as maintaining certain leverage and coverage ratios and minimum tangible net worth requirements. Our continued ability to incur additional debt and to conduct business in general is subject to our compliance with these covenants, which limit our operational flexibility. Breaches of these covenants could result in defaults under the instruments governing the applicable indebtedness, in addition to any other indebtedness cross-defaulted against such instruments. Any such default could have a material adverse impact on our business, results of operations, and financial condition or our ability to make distributions to our OP Unit holdersshareholders.
A downgrade in our credit ratings could materially adversely affect our business and financial condition.
Our credit rating and the trading pricecredit ratings assigned to our debt securities could change based upon, among other things, our results of operations and financial condition. These ratings are subject to ongoing evaluation by credit rating agencies, and any rating could be changed or withdrawn by a rating agency in the future if, in its judgment, circumstances warrant such action.
If any of the credit rating agencies that have rated our general partner's common shares.
If securities analysts do not publish research or reports about our industry or if they downgrade our common shares and our failure to meet market expectations with respect to our business could negatively affector the healthcare-related real estate sector, the market price of our general partner's common shares and thereby limit our ability to raise capital.could decline.
The availability of equity capital to us will depend,market for our common shares depends in part upon the marketresearch and reports that industry or financial analysts publish about us and our industry. We have no control over these analysts. Furthermore, if one or more of the analysts who do cover us downgrades our shares or our industry, or the stock of any of our competitors, the price of our general partner's common shares could decline. If one or more of these analysts ceases coverage of our company, we could lose attention in the market which in turn will depend upon various market conditions and other factors that may change from time to time, including:
Risks Related to Our Portfolio and Structure
We didhave no direct operations and rely upon funds received from the Operating Partnership to meet our obligations.
The Trust conducts substantially all of its operations through the Operating Partnership. As of February 23, 2018, the Trust owned approximately 97.1% of the OP Units and apart from this ownership interest, the Trust does not use third party appraisals of our initial properties to determine the consideration paid in the formation transactions.have any independent operations. As a result, the value ofTrust relies upon distributions from the consideration paid forOperating Partnership to pay any distributions that the Trust might declare on the Trust’s common shares. We also rely upon distributions from the Operating Partnership to the Trust to meet our initial properties inobligations, including tax liability on taxable income allocated to the formation transactions may exceed their aggregate fair market value.
the Trust, claims of the Trust’s shareholders will be satisfied only after all of the Trust’s and the trading price of our general partner's common shares may be adversely affected.
Our business could be harmed if key personnel terminate their employment with us or if we are unsuccessful in integrating new personnel into our operations.
Our success depends, to a significant extent, on the continued services of Mr. Thomas, theour President and Chief Executive Officer of our general partner,Officer; Mr. Theiler, theour Executive Vice President and Chief Financial Officer ofOfficer; Mr. Taylor, our general partner, Mr. Sweet, the Executive Vice President and Chief Investment Officer of our general partner,– Investments; Mr. Lucey, theour Senior Vice President—PrincipalPresident – Chief Accounting and Reporting Officer of our general partner,Administrative Officer; Mr. Theine, theour Senior Vice President of Asset and Investment Management of our general partner andManagement; Mr. Page, theour Senior Vice President and General Counsel ofCounsel; and Mr. Klein, our general partner. The Trust doesSenior Vice President – Investments and Deputy Chief Investment Officer. We do not maintain key person life insurance on any of theseour officers. Our ability to continue to acquire and develop healthcare properties depends upon the significant relationships that the Trust'sour senior management team has developed over time.many years.
Although the Trust has entered into employment agreements with Messrs. Thomas, Theiler, Sweet,Taylor, Lucey, Theine, Page, and Page,Klein, we cannot provide any assurance that any of them will remain employed by the Trust. TheOur ability to retain theour senior
management team, or to attract suitable replacements should any member of the senior management team leave, is dependent on the competitive nature of the employment market. The loss of services of, or the failure to successfully integrate one or more new members of, theour senior management team could adversely affect our business and our prospects.
In order for us to qualify as a REIT, no more than 50% of the acquired properties, and may require that we agree to protect the contributors’ ability to defer recognition of taxable gain through restrictions on our ability to disposevalue of the acquired propertiesTrust’s outstanding shares of beneficial interest may be owned, beneficially or constructively, by five or fewer individuals at any time during the allocationlast half of partnership debteach taxable year other than our initial REIT taxable year. Subject to certain exceptions, the contributors to maintain their tax bases. These restrictions could limit our ability to sell properties at a time,Trust’s declaration of trust prohibits any shareholder from owning beneficially or on terms, that would be favorable absent such restrictions.
Certain provisions of Maryland law could inhibit changes of control, which may discourage third parties from conducting a tender offer or seeking other change of control transactions that could involve a premium price for our common shares or that our shareholders otherwise believe to be in their best interests.
Certain provisions of the Maryland General Corporation Law, or MGCL, applicable to Maryland real estate investment trusts may have the effect of inhibiting a third party from making a proposal to acquire the Trust (and, indirectly, the Operating Partnership) or of impeding a change of control under circumstances that otherwise could provide the Trust’s common shareholders with the opportunity to realize a premium over the then-prevailing market price of such shares, including:
“business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested shareholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our shares or an affiliate or associate of ours who was the beneficial owner, directly or indirectly, of 10% or more of the voting power of our shares at any time within the two-year period immediately prior to the date in question) or an affiliate thereof for five years after the most recent date on which the shareholder becomes an interested shareholder, and thereafter imposes certain minimum price and/or supermajority shareholder voting requirements on these combinations; and
“control share” provisions that provide that holders of “control shares” of our Trust (defined as shares that, when aggregated with all other shares controlled by the shareholder, entitle the shareholder to exercise one of three increasing ranges of voting power in electing trustees) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of issued and outstanding “control shares,” subject to certain exceptions) have no voting rights with respect to their control shares, except to the extent approved by our shareholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares.
Pursuant to the statute, the Trust’s board of trustees has by resolution exempted any business combination between us and any other person from the business combination provisions of the MGCL, provided that the business combination is first approved by the board of trustees (including a majority of trustees who are not affiliates or associates of such person). In addition, the Trust’s bylaws contain a provision exempting any and all acquisitions of our shares from the control share provisions of the MGCL. However, the board of trustees may at any time alter or repeal the resolution exempting certain businesses from the business combination provisions of the MGCL and we may determineat any time amend or eliminate the provision of our bylaws exempting acquisitions of our shares from the control share provisions of the MGCL.
Certain provisions of the MGCL permit the board of trustees, without shareholder approval and regardless of what is currently provided in the Trust’s declaration of trust or bylaws, to implement certain corporate governance provisions with respect to the Trust, some of which (for example, a classified board) are not currently applicable to us. If implemented, these provisions may have the effect of limiting or precluding a third party from making an unsolicited acquisition proposal for us or of delaying, deferring, or preventing a change in control of us under circumstances that healthcare properties do not offerotherwise could provide our common shareholders with the potential for attractive risk-adjusted returns for an investment strategy. Changesopportunity to realize a premium over the then current market price. Pursuant to our strategies with regardsdeclaration of trust, we have elected to be subject to the foregoingprovisions of Title 3, Subtitle 8 of the MGCL relating to the filling of vacancies on our board of trustees.
We could adversely affectincrease the number of authorized shares, classify and reclassify unissued shares, and issue shares without shareholder approval.
The Trust’s board of trustees, without shareholder approval, has the power under the Trust’s declaration of trust to amend our financial condition, resultsdeclaration of operationstrust to increase or decrease the aggregate number of shares or the number of shares of any class or series of the Trust that we are authorized to issue, and to authorize us to issue authorized but unissued common shares or preferred shares. In addition, under the declaration of trust, the board of trustees has the power to classify or reclassify any unissued common or preferred shares into one or more classes or series of shares and set or change the preference, conversion or other rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications or terms or conditions of redemption for such newly classified or reclassified shares. As a result, we may issue series or classes of common shares or preferred shares with preferences, dividends, powers, and rights, voting or otherwise, that are senior to, or otherwise conflict with, the rights of holders of our abilitycommon shares. Although the board of trustees has no such intention at the present time, it could establish a class or series of preferred shares that could, depending on the terms of such class or series, delay, defer, or prevent a transaction or a change of control that might involve a premium price for our common shares or that our shareholders otherwise believe to make distributions to our OP Unit holders.be in their best interests.
Certain provisions in ourthe partnership agreement of the Operating Partnership may delay or prevent unsolicited acquisitions of us.
Provisions in ourthe partnership agreement of the Operating Partnership may delay, or make more difficult, unsolicited acquisitions of us or changes of our control. These provisions could discourage third parties from making proposals involving an unsolicited acquisition of us or change of our control, although some Trust shareholders might consider such proposals, if made, desirable. These provisions include, among others:
a requirement that the Trust may not be removed as ourthe general partner of the Operating Partnership without itsour consent;
the Trust'sTrust’s ability, as our general partner, in some cases, to amend ourthe partnership agreement and to cause usthe Operating Partnership to issue units with terms that could delay, defer, or prevent a merger or other change of control of usthe Trust or the Operating Partnership without the consent of ourthe limited partners; and
the right of ourthe limited partners to consent to direct or indirect transfers of the general partnership interest, including as a result of a merger or a sale of all or substantially all of our assets, in the event that such transfer requires approval by the Trust'sour common shareholders.
The Trust'sTrust’s declaration of trust and bylaws, Maryland law, and ourthe partnership agreement of the Operating Partnership also contain other provisions that may delay, defer, or prevent a transaction or a change of control that might involve a premium price for the Trust'sour common shares or that the Trust'sour shareholders otherwise believe to be in their best interest.
Risks Related to our General Partner'sOur Qualification and Operation as a REIT
Since our formation, the Trust has been organized and has operated in such a manner as to qualify for taxation as a REIT under the U.S. federal income tax laws, and we intend to continue to operate in such a manner, but no assurances can be given that we will operate in a manner so as to qualify or remain qualified as a REIT.
Failure to qualify as a REIT, or failure to remain qualified as a REIT, would cause us to be taxed as a regular corporation, which would substantially reduce funds available for distributions to our shareholders. If we fail to qualify as a REIT in any taxable year, we would face serious tax consequences that will substantially reduce the funds available for distributions to our shareholders because:
we would not be allowed a deduction for dividends paid to shareholders in computing our taxable income and would be subject to U.S. federal income tax at regular corporate rates;
we could possibly be subject to increased state and local taxes; and
unless we are entitled to relief under certain U.S. federal income tax laws, we could not re-elect REIT status until the fifth calendar year after the year in which we failed to qualify as a REIT.
In addition, if the Trust fails to qualify as a REIT, we will no longer be required to make distributions. As a result of all these factors, the Trust’s failure to qualify as a REIT could impair our ability to expand our business and raise capital, and it would adversely affect the value of our shares of beneficial interest.
Failure to make required distributions would subject us to U.S. federal corporate income tax.
The Trust intends to operate in a manner so as to qualify as a REIT for U.S. federal income tax purposes. In order to qualify as a REIT, we generally are required to distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain, each year to our shareholders. To the extent that we satisfy this distribution requirement, but distribute less than 100% of our REIT taxable income, we will be subject to U.S. federal corporate income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay out to our shareholders in a calendar year is less than a minimum amount specified under the Code.
Complying with REIT requirements may cause us to forego otherwise attractive opportunities or liquidate otherwise attractive investments.
To qualify as a REIT for federal income tax purposes, our general partnerwe must continually satisfy tests concerning, among other things, the sources of itsour income, the nature and diversification of itsour assets, the amounts it distributeswe distribute to itsour shareholders, and the ownership of itsour shares of beneficial interest. In order to enable our general partner to meet these tests, we may be required to forego investments we might otherwise make. Thus, our general partner's compliance with the REIT requirements may hinder our performance.
In particular, we must ensure that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities, and qualified real estate assets. The remainder of our investment in securities (other than government securities, securities of TRSs, and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities, securities of TRSs, and qualified real estate assets) can consist of the securities of any one issuer, and no more than 20% of the value of our total assets can be represented by the securities of one or more TRSs. Further, debt instruments that do not otherwise qualify as real estate assets issued to us by publicly offered REITs will be treated as qualified real estate assets for purposes of the asset test,
but no more than 25% of the value of our total assets may be represented by such debt instruments. If our general partner failswe fail to comply with certain of these requirements at the end of any calendar quarter, itwe must correct these failuresthe failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing itsour REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate otherwise attractive investments. These actions could have the effect of reducing our income and amounts available for distribution to our OP Unit holders.shareholders.
The prohibited transactions tax may limit our ability to dispose of our properties.
A REIT’s net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of property other than “foreclosure property,” held primarily for sale to customers in the ordinary course of business. We may be subject to the prohibited transactions tax equal to 100% of net gain upon a disposition of real property. Although a safe harbor to the characterization of the sale of real property by a REIT as a prohibited transaction is available, we cannot assure you that we can comply with the safe harbor or that we will avoid owning property that may be characterized as held primarily for sale to customers in the ordinary course of business. Consequently, we may choose not to engage in certain sales of our properties or may conduct such sales through any TRS that we may form, which would be subject to federal and state income taxation.
Any ownership of a TRS we may form in the future will be subject to limitations and our transactions with a TRS will cause us to be subject to a 100% penalty tax on certain income or deductions if those transactions are not conducted on arm’s-length terms.
Overall, for taxable years beginning after December 31, 2017, no more than 20% of the value of a REIT’s assets may consist of stock or securities of one or more TRSs. In addition, the Code also imposes a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis, including “redetermined TRS service income” relating to gross income of a TRS attributable to services provided to, or on behalf of, the REIT (less the deductions properly allocable thereto) to the extent the amount of such income (less such deductions) would be increased on distribution, apportionment, or allocation under Code Section 482. We will monitor the value of our respective investments in any TRS that we may form for the purpose of ensuring compliance with TRS ownership limitations and will structure our transactions with any TRS on terms that we believe are arm’s-length to avoid incurring a 100% excise tax on such transactions. There can be no assurance, however, that we will be able to comply with the 20% limitation or avoid application of the 100% excise tax.
If we fail to qualifyleases of our properties are not respected as a partnershiptrue leases for federal income tax purposes, our general partnerwe would ceasefail to qualify as a REIT and suffer other adverse consequences.
To qualify as a REIT, we must satisfy two gross income tax on our income. Instead, eachtests, under which specified percentages of our partners willgross income must be allocated,derived from certain sources, such as “rents from real property.” Rents paid to the Operating Partnership by third party lessees and any TRS lessee that we may be requiredform in the future pursuant to pay tax with respect to, its sharethe leases of our properties will constitute substantially all of our gross income. We cannot assure you, however, thatIn order for such rent to qualify as “rents from real property” for purposes of the IRS will not challenge our statusgross income tests, the leases must be respected as a partnership or any other subsidiary partnership in which we own an interest as a partnershiptrue leases for federal income tax purposes and not be treated as service contracts, joint ventures, or that a court wouldsome other type of arrangement. If our leases are not sustain such a challenge. If the IRS were successful in treating us or any such other subsidiary partnershiprespected as an entity taxable as a corporationtrue leases for federal income tax purposes, our general partnerwe would fail to meet certain
Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.
The maximum tax rate applicable to “qualified dividend income” payable to U.S. shareholders that are taxed at individual rates is 23.8%. Dividends payable by REITs, however, generally are not eligible for the reduced rates on qualified dividend income. The more favorable rates applicable to regular corporate qualified dividends could cause investors who are taxed at individual rates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including our failurecommon shares.
We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of our common shares.
At any time, the U.S. federal income tax laws governing REITs or the failureadministrative interpretations of those laws may be amended. We cannot predict when or if any new U.S. federal income tax law, regulation, or administrative interpretation, or any amendment to any existing U.S. federal income tax law, regulation, or administrative interpretation, will be adopted, promulgated or become effective and any such law, regulation, or interpretation may take effect retroactively. We and our
shareholders could be adversely affected by any such change in the U.S. federal income tax laws, regulations, or administrative interpretations.
On December 22, 2017 the Tax Cuts and Jobs Act was signed into law. The Tax Cuts and Jobs Act makes significant changes to the U.S. federal income tax rules for taxation of individuals and corporations, generally effective for taxable years beginning after December 31, 2017. In addition to reducing corporate and non-corporate tax rates, the Tax Cuts and Jobs Act eliminates or restricts various deductions. Most of the changes applicable to individuals are temporary and apply only to taxable years beginning after December 31, 2017 and before January 1, 2026. The Tax Cuts and Jobs Act makes numerous large and small changes to the tax rules that do not affect REITs directly but may affect our subsidiary partnershipsshareholders and may indirectly affect us.
While the changes in the Tax Cuts and Jobs Act generally appear to qualify as a partnership could causebe favorable with respect to REITs, the extensive changes to non-REIT provisions in the Code may have unanticipated effects on us or such partnership to become subject to federal and state corporate incomeour stockholders. Moreover, Congressional leaders have recognized that the process of adopting extensive tax which would reduce significantly thelegislation in a short amount of cash availabletime without hearings and substantial time for debt servicereview is likely to have led to drafting errors, issues needing clarification, and for distributionunintended consequences that will have to our OP Unit holders.be reviewed in subsequent tax legislation. At this point, it is not clear when Congress will address these issues or when the Internal Revenue Service will be able to issue administrative guidance on the changes made in the Tax Cuts and Jobs Act.
ITEM 1B. UNRESOLVED STAFF COMMENTS
33
ITEM 2. PROPERTIES
The following table below sets forthlists the states in which our properties are located and provides certain information regarding the 87 properties in our portfolioportfolio’s geographic diversification/concentration as of December 31, 2014:
2017:
| PROPERTY | PROPERTY TYPE | PROPERTY LOCATION | YEAR BUILT | % OWNED | NET LEASABLE SQUARE FOOTAGE | % LEASED | ANNUALIZED BASE RENT(1) (thousands) | ANNUALIZED BASE RENT PER LEASED SQUARE FOOT | HEALTHCARE DELIVERY SYSTEM AFFILIATION | PRINCIPAL TENANTS | |||||||||||||||||
| INITIAL PROPERTIES (2) | |||||||||||||||||||||||||||
| Arrowhead Commons | Medical Office Building | Phoenix, AZ | 2,004,000 | 100.0 | % | 12,800 | 85.0 | % | $ | 261 | $ | 24.00 | N/A | Paseo Family Physicians | |||||||||||||
| Aurora Medical Office Building | Medical Office Building | Green Bay, WI | 2,010,000 | 100.0 | % | 9,112 | 100.0 | % | $ | 191 | $ | 20.96 | Aurora Health Care | Aurora Health Care | |||||||||||||
| Austell Medical Office Building | Medical Office Building | Atlanta, GA | 1,971,000 | 100.0 | % | 14,598 | 78.5 | % | $ | 183 | $ | 15.97 | Northside Hospital | Northside Hospital | |||||||||||||
| Canton Medical Office Building | Medical Office Building | Atlanta, GA | 1,994,000 | 51.0 | % | 38,098 | 100.0 | % | $ | 817 | $ | 21.44 | Northside Hospital | Northside Hospital | |||||||||||||
| Decatur Medical Office Building | Medical Office Building | Atlanta, GA | 1,974,000 | 100.0 | % | 13,300 | 100.0 | % | $ | 357 | $ | 26.84 | N/A | Georgia Urology, P.A. | |||||||||||||
| El Paso Medical Office Building | Medical Office Building | El Paso, TX | 1,987,000 | 100.0 | % | 21,777 | 100.0 | % | $ | 374 | $ | 17.17 | HCA | HCA—Del Sol Medical Center | |||||||||||||
| Farmington Professional Pavilion | Medical Office Building | Detroit, MI | 1,972,000 | 100.0 | % | 21,338 | 57.5 | % | $ | 189 | $ | 15.40 | Botsford Hospital | Botsford Hospital, Farmington Dermatology | |||||||||||||
| Firehouse Square | Medical Office Building | Milwaukee, WI | 2,002,000 | 100.0 | % | 17,265 | 100.0 | % | $ | 393 | $ | 22.76 | Aurora Health Care | Aurora Health Care | |||||||||||||
| Hackley Medical Center | Medical Office Building | Grand Rapids, MI | 1,968,000 | 100.0 | % | 44,089 | 85.9 | % | $ | 682 | $ | 18.00 | Trinity Health | Hackley Hospital, Port City Pediatrics | |||||||||||||
| Ingham Regional Medical Center | Medical Office Building | Lansing, MI | 1,994,000 | 100.0 | % | 26,783 | — | % | — | $ | — | N/A | N/A | ||||||||||||||
| MeadowView Professional Center | Medical Office Building | Kingsport, TN | 2,005,000 | 100.0 | % | 64,200 | 100.0 | % | $ | 1,539 | $ | 23.97 | Holston Medical Group | Holston Medical Group | |||||||||||||
| Mid Coast Hospital Medical Office Building | Medical Office Building | Portland, ME | 2,008,000 | 66.3 | % | 44,677 | 100.0 | % | $ | 1,205 | $ | 26.97 | Mid Coast Hospital | Mid Coast Hospital | |||||||||||||
| New Albany Professional Building | Medical Office Building | Columbus, OH | 2,000,000 | 100.0 | % | 17,213 | 75.1 | % | $ | 177 | $ | 13.69 | N/A | Rainbow Pediatrics | |||||||||||||
| Northpark Trail | Medical Office Building | Atlanta, GA | 2,001,000 | 100.0 | % | 14,223 | 37.4 | % | $ | 66 | $ | 12.39 | N/A | Georgia Urology, P.A. | |||||||||||||
| Remington Medical Commons | Medical Office Building | Chicago, IL | 2,008,000 | 100.0 | % | 37,240 | 75.7 | % | $ | 704 | $ | 24.98 | Adventist | Fresenius Dialysis, Gateway Spine and Pain | |||||||||||||
| Stonecreek Family Health Center | Medical Office Building | Columbus, OH | 1,996,000 | 100.0 | % | 20,329 | — | % | — | $ | — | N/A | N/A | ||||||||||||||
| Summit Healthplex | Medical Office Building | Atlanta, GA | 2,002,000 | 100.0 | % | 67,333 | 100.0 | % | $ | 1,720 | $ | 25.54 | Piedmont | Georgia Bone and Joint, Piedmont Hospital | |||||||||||||
| Valley West Hospital Medical Office Building | Medical Office Building | Chicago, IL | 2,007,000 | 100.0 | % | 38,717 | 96.1 | % | $ | 779 | $ | 20.93 | Kish Health System | Valley West Hospital, Midwest Orthopedics | |||||||||||||
| INITIAL PROPERTIES TOTAL/WEIGHTED AVERAGE | 523,092 | 82.6 | % | $ | 9,637 | $ | 22.31 | ||||||||||||||||||||
| Completed Acquisitions Since the IPO (3) | |||||||||||||||||||||||||||
| 21st Century Radiation Oncology Centers — Sarasota | Medical Office Building | Sarasota, FL | 1,975,000 | 100.0 | % | 21,400 | 100.0 | % | $ | 660 | $ | 30.84 | 21st Century Oncology | 21st Century Oncology | |||||||||||||
| 21st Century Radiation Oncology Centers - Venice | Medical Office Building | Venice, FL | 1,987,000 | 100.0 | % | 10,100 | 100.0 | % | $ | 345 | $ | 34.16 | 21st Century Oncology | 21st Century Oncology | |||||||||||||
| 21st Century Radiation Oncology Centers - Engelwood | Medical Office Building | Engelwood, FL | 1,992,000 | 100.0 | % | 7,000 | 100.0 | % | $ | 213 | $ | 30.43 | 21st Century Oncology | 21st Century Oncology | |||||||||||||
| State | Number of Properties | GLA (1) (square feet) | Percent of GLA | Annualized Base Rent (2) (thousands) | Percent of Annualized Base Rent | |||||||||||
| Alabama | 11 | 509,501 | 3.6 | % | $ | 9,825 | 3.4 | % | ||||||||
| Arizona | 13 | 733,791 | 5.2 | % | 15,751 | 5.5 | % | |||||||||
| Arkansas | 8 | 283,440 | 2.0 | % | 4,401 | 1.5 | % | |||||||||
| Colorado | 5 | 129,620 | 1.0 | % | 2,753 | 1.0 | % | |||||||||
| Connecticut | 1 | 72,022 | 0.5 | % | 1,705 | 0.6 | % | |||||||||
| Florida | 24 | 470,914 | 3.4 | % | 12,066 | 4.2 | % | |||||||||
| Georgia | 23 | 1,289,838 | 9.2 | % | 27,457 | 9.6 | % | |||||||||
| Illinois | 4 | 187,673 | 1.3 | % | 3,575 | 1.3 | % | |||||||||
| Indiana | 22 | 1,039,767 | 7.4 | % | 18,283 | 6.4 | % | |||||||||
| Kentucky | 12 | 976,620 | 7.0 | % | 16,028 | 5.6 | % | |||||||||
| Louisiana | 3 | 150,777 | 1.1 | % | 5,680 | 2.0 | % | |||||||||
| Maine | 1 | 44,677 | 0.3 | % | 1,298 | 0.5 | % | |||||||||
| Maryland | 3 | 166,594 | 1.2 | % | 3,782 | 1.3 | % | |||||||||
| Michigan | 8 | 447,794 | 3.2 | % | 9,713 | 3.4 | % | |||||||||
| Minnesota | 18 | 662,416 | 4.7 | % | 13,143 | 4.6 | % | |||||||||
| Mississippi | 2 | 97,294 | 0.7 | % | 2,466 | 0.9 | % | |||||||||
| Missouri | 2 | 69,184 | 0.5 | % | 1,851 | 0.6 | % | |||||||||
| Montana | 3 | 185,085 | 1.3 | % | 5,194 | 1.8 | % | |||||||||
| Nebraska | 13 | 979,303 | 7.0 | % | 17,304 | 6.1 | % | |||||||||
| New Mexico | 2 | 53,029 | 0.4 | % | 1,376 | 0.5 | % | |||||||||
| New York | 13 | 613,496 | 4.4 | % | 14,242 | 5.0 | % | |||||||||
| North Carolina | 1 | 29,422 | 0.2 | % | 634 | 0.2 | % | |||||||||
| North Dakota | 8 | 434,215 | 3.1 | % | 7,612 | 2.7 | % | |||||||||
| Ohio | 12 | 650,319 | 4.6 | % | 13,225 | 4.6 | % | |||||||||
| Oklahoma | 1 | 52,000 | 0.4 | % | 480 | 0.2 | % | |||||||||
| Pennsylvania | 11 | 407,911 | 3.0 | % | 5,518 | 1.9 | % | |||||||||
| Tennessee | 11 | 534,725 | 3.8 | % | 10,149 | 3.6 | % | |||||||||
| Texas | 29 | 1,930,348 | 13.8 | % | 46,850 | 16.4 | % | |||||||||
| Washington | 10 | 589,141 | 4.2 | % | 7,994 | 2.8 | % | |||||||||
| Wisconsin (3) | 6 | 205,886 | 1.5 | % | 5,315 | 1.8 | % | |||||||||
| Total | 280 | 13,996,802 | 100.0 | % | $ | 285,670 | 100.0 | % | ||||||||
| (1) | “GLA” means gross leasable area. |
| (2) | Annualized base rent is calculated by multiplying (a) base rental payments for the month ended December 31, 2017, by (b) 12. |
| (3) | Excludes leases related to the Company’s 108,843 square foot corporate office building. |
| 21st Century Radiation Oncology Centers — Port Charlotte | Medical Office Building | Port Charlotte, FL | 1,996,000 | 100.0 | % | 8,395 | 100.0 | % | $ | 255 | $ | 30.38 | 21st Century Oncology | 21st Century Oncology | |||||||||||||
| Central Ohio Neurosurgical Surgeons Medical Office | Medical Office Building | Columbus, OH | 2,007,000 | 100.0 | % | 38,891 | 100.0 | % | $ | 818 | $ | 21.03 | N/A | CONS | |||||||||||||
| Crescent City Surgical Centre | Hospital | New Orleans, LA | 2,010,000 | 100.0 | % | 60,000 | 100.0 | % | $ | 3,090 | $ | 51.50 | Crescent City Surgical Centre | Crescent City Surgical Centre | |||||||||||||
| Eagles Landing Family Practice Medical Office Building | Medical Office Building | McDonough, GA | 2,007,000 | 100.0 | % | 17,733 | 100.0 | % | $ | 403 | $ | 22.73 | N/A | Eagles Landing Family Practice | |||||||||||||
| Eagles Landing Family Practice Medical Office Building | Medical Office Building | Jackson, GA | 2,006,000 | 100.0 | % | 14,269 | 100.0 | % | $ | 324 | $ | 22.71 | N/A | Eagles Landing Family Practice | |||||||||||||
| Eagles Landing Family Practice Medical Office Building | Medical Office Building | Conyers, GA | 2,008,000 | 100.0 | % | 18,014 | 100.0 | % | $ | 409 | $ | 22.70 | N/A | Eagles Landing Family Practice | |||||||||||||
| Eagles Landing Family Practice Medical Office Building | Medical Office Building | McDonough, GA | 2,010,000 | 100.0 | % | 18,695 | 100.0 | % | $ | 424 | $ | 22.68 | N/A | Eagles Landing Family Practice | |||||||||||||
| East El Paso Medical Office Building | Medical Office Building | El Paso, TX | 2,004,000 | 99.0 | % | 41,007 | 100.0 | % | $ | 591 | $ | 14.41 | Foundation Healthcare Inc. | EEPPMC Partners, LLC | |||||||||||||
| East El Paso Surgical Hospital | Hospital | El Paso, TX | 2,004,000 | 99.0 | % | 77,000 | 100.0 | % | $ | 3,381 | $ | 43.91 | Foundation Healthcare Inc. | East El Paso Physicians Medical Center, LLC | |||||||||||||
| Foundation San Antonio Surgical Hospital | Hospital | San Antonio, TX | 2,007,000 | 100.0 | % | 45,954 | 100.0 | % | $ | 2,300 | $ | 50.05 | Foundation Healthcare Inc. | Foundation Bariatric Hospital of San Antonio, L.L.C | |||||||||||||
| Foundation San Antonio Healthplex | Medical Office Building | San Antonio, TX | 2,007,000 | 100.0 | % | 22,832 | 100.0 | % | $ | 602 | $ | 26.37 | Foundation Healthcare Inc. | Foundation Healthcare Inc. | |||||||||||||
| Foundation Surgical Affiliates Medical Office Building | Medical Office Building | Oklahoma City, OK | 2,004,000 | 99.0 | % | 52,000 | 100.0 | % | $ | 1,273 | $ | 24.48 | Foundation Healthcare Inc. | Foundation Surgical Affiliates | |||||||||||||
| Great Falls Ambulatory Surgery Center | Medical Office Building | Great Falls, MT | 1,999,000 | 100.0 | % | 12,636 | 100.0 | % | $ | 346 | $ | 27.38 | N/A | Great Falls Clinic Surgery Center LLC | |||||||||||||
| LifeCare LTACH — Fort Worth | Post-Acute Hospital | Fort Worth, TX | 1,985,000 | 100.0 | % | 80,000 | 100.0 | % | $ | 2,200 | $ | 27.50 | LifeCare Hospitals | LifeCare Holdings, LLC | |||||||||||||
| LifeCare LTACH — Pittsburgh | Post-Acute Hospital | Pittsburgh, PA | 1,987,000 | 100.0 | % | 154,910 | 100.0 | % | $ | 1,040 | $ | 6.71 | LifeCare Hospitals | LifeCare Holdings, LLC | |||||||||||||
| LifeCare Plano LTACH | Post-Acute Hospital | Plano, TX | 1,987,000 | 100.0 | % | 75,442 | 100.0 | % | $ | 1,457 | $ | 19.31 | LifeCare Hospitals | LifeCare Holdings, LLC | |||||||||||||
| Peachtree Dunwoody Medical Center | Medical Office Building | Atlanta, GA | 1,987,000 | 100.0 | % | 131,368 | 94.7 | % | $ | 3,651 | $ | 29.34 | Northside | Northside Hospital | |||||||||||||
| Pensacola Medical Office Building | Medical Office Building | Pensacola, FL | 2,012,000 | 100.0 | % | 20,319 | 100.0 | % | $ | 609 | $ | 29.97 | N/A | N/A | |||||||||||||
| South Bend Orthopaedics Medical Office Building | Medical Office Building | Mishawaka, IN | 2,007,000 | 100.0 | % | 45,198 | 100.0 | % | $ | 1,195 | $ | 26.44 | N/A | South Bend Orthopaedics | |||||||||||||
| PinnacleHealth Medical Office Building | Medical Office Building | Harrisburg, PA | 1,990,000 | 100.0 | % | 27,601 | 100.0 | % | $ | 614 | $ | 22.25 | Pinnacle Health Hospitals | Pinnacle Health Hospitals | |||||||||||||
| Pinnacle Health Medical Office Building | Medical Office Building | Carlisle, PA | 2,002,000 | 100.0 | % | 10,485 | 100.0 | % | $ | 265 | $ | 25.27 | Pinnacle Health Hospitals | Pinnacle Health Hospitals | |||||||||||||
| Grenada Medical Complex | Medical Office Building | Grenada, MS | 1,975,000 | 100.0 | % | 52,941 | 94.7 | % | $ | 1,071 | $ | 21.36 | N/A | N/A | |||||||||||||
| Mississippi Ortho Medical Office Building | Medical Office Building | Jackson, MS | 1,987,000 | 100.0 | % | 44,269 | 100.0 | % | $ | 1,319 | $ | 29.80 | N/A | N/A | |||||||||||||
| Carmel Medical Pavilion | Medical Office Building | Carmel, IN | 1,993,000 | 100.0 | % | 28,572 | 100.0 | % | $ | 350 | $ | 12.25 | St. Vincent’s | St. Vincent’s | |||||||||||||
| Renaissance Ambulatory Surgery Center | Medical Office Building | Oshkosh, WI | 2,007,000 | 100.0 | % | 24,622 | 100.0 | % | $ | 703 | $ | 28.55 | ThedaCare | ThedaCare | |||||||||||||
| Presbyterian Medical Plaza | Medical Office Building | Monroe, NC | 2,008,000 | 100.0 | % | 29,422 | 100.0 | % | $ | 611 | $ | 20.77 | Novant | Novant | |||||||||||||
| Summit Urology | Medical Office Building | Bloomington, IN | 1,996,000 | 100.0 | % | 15,946 | 100.0 | % | $ | 386 | $ | 24.21 | N/A | Surgicare, LLC | |||||||||||||
| 500 Landmark | Medical Office Building | Bloomington, IN | 2,000,000 | 100.0 | % | 65,000 | 100.0 | % | $ | 1,319 | $ | 20.29 | N/A | Premier Healthcare | |||||||||||||
| 550 Landmark | Medical Office Building | Bloomington, IN | 2,000,000 | 100.0 | % | 15,000 | 100.0 | % | $ | 282 | $ | 18.80 | N/A | Premier Healthcare | |||||||||||||
| 574 Landmark | Medical Office Building | Bloomington, IN | 2,004,000 | 100.0 | % | 10,000 | 100.0 | % | $ | 187 | $ | 18.70 | N/A | Premier Healthcare | |||||||||||||
| Carlisle II MOB | Medical Office Building | Carlisle, PA | 1,996,000 | 100.0 | % | 13,245 | 100.0 | % | $ | 251 | $ | 18.95 | Carlisle Regional Medical Center | Carlisle Regional Medical Center | |||||||||||||
| Surgical Institute of Monroe | Medical Office Building | Monroe, MI | 2,010,000 | 100.0 | % | 24,500 | 100.0 | % | $ | 480 | $ | 19.59 | ProMedica | The Surgical Institute of Monroe Ambulatory Surgery Center | |||||||||||||
| The Oaks @ Lady Lake | Medical Office Building | Lady Lake, FL | 2,011,000 | 100.0 | % | 27,992 | 100.0 | % | $ | 739 | $ | 26.40 | Munroe Regional Health System | Munroe Regional Health System | |||||||||||||
| Mansfield ASC | Medical Office Building | Mansfield, TX | 2,010,000 | 100.0 | % | 15,662 | 100.0 | % | $ | 633 | $ | 40.42 | N/A | Baylor Surgicare | |||||||||||||
| Eye Center of Southern Indiana | Medical Office Building | Bloomington, IN | 1,995,000 | 100.0 | % | 32,096 | 100.0 | % | $ | 883 | $ | 27.51 | N/A | Eye Center of Southern Indiana | |||||||||||||
| Wayne State | Medical Office Building | Troy, MI | 1,986,000 | 100.0 | % | 176,000 | 100.0 | % | $ | 3,168 | $ | 18.00 | Wayne State University Physician Group | Wayne State University Physician Group | |||||||||||||
| Zangmeister | Medical Office Building | Columbus, OH | 2,007,000 | 100.0 | % | 109,667 | 100.0 | % | $ | 2,555 | $ | 23.30 | Mid Ohio Oncology | ||||||||||||||
| Ortho One - Columbus | Medical Office Building | Columbus, OH | 2,009,000 | 100.0 | % | 75,873 | 100.0 | % | $ | 1,463 | $ | 19.28 | N/A | Orthopedic One | |||||||||||||
| Ortho One - Westerville | Medical Office Building | Columbus, OH | 2,007,000 | 100.0 | % | 19,876 | 100.0 | % | $ | 382 | $ | 19.22 | N/A | Orthopedic One | |||||||||||||
| Berger Medical Center | Medical Office Building | Columbus, OH | 2,007,000 | 100.0 | % | 31,528 | 77.7 | % | $ | 509 | $ | 20.78 | Berger Hospital | Berger Hospital | |||||||||||||
| El Paso - Lee Trevino | Medical Office Building | El Paso, TX | 1,983,000 | 100.0 | % | 75,484 | 92.8 | % | $ | 1,092 | $ | 15.59 | N/A | EPOSG Clinic | |||||||||||||
| El Paso - Murchison | Hospital | El Paso, TX | 1,970,000 | 100.0 | % | 86,971 | 100.0 | % | $ | 2,310 | $ | 26.56 | N/A | El Paso Specialty Hospital, EPOSG Clinic | |||||||||||||
| El Paso - Kenworthy | Medical Office Building | El Paso, TX | 1,983,000 | 100.0 | % | 16,245 | 73.6 | % | $ | 457 | $ | 38.23 | N/A | EPOSG Clinic | |||||||||||||
| Pinnacle - 32 Northeast | Medical Office Building | Harrisburg, PA | 1,994,000 | 100.0 | % | 19,110 | 100.0 | % | $ | 364 | $ | 19.05 | Pinnacle Health Systems | Pinnacle Health Systems | |||||||||||||
| Pinnacle - 4518 Union Deposit | Medical Office Building | Harrisburg, PA | 2,000,000 | 100.0 | % | 39,009 | 89.5 | % | $ | 651 | $ | 18.65 | Pinnacle Health Systems | Pinnacle Health Systems | |||||||||||||
| Pinnacle - 4520 Union Deposit | Medical Office Building | Harrisburg, PA | 1,997,000 | 100.0 | % | 10,200 | 100.0 | % | $ | 162 | $ | 15.88 | Pinnacle Health Systems | Tristan Associates | |||||||||||||
| Pinnacle - 240 Grandview | Medical Office Building | Harrisburg, PA | 1,980,000 | 100.0 | % | 19,446 | 100.0 | % | $ | 370 | $ | 19.03 | Pinnacle Health Systems | Pinnacle Health Systems | |||||||||||||
| Pinnacle - Market Place Way | Medical Office Building | Harrisburg, PA | 2,004,000 | 100.0 | % | 30,000 | 100.0 | % | $ | 332 | $ | 11.07 | Pinnacle Health Systems | Pinnacle Health Systems | |||||||||||||
| CRHS - 2000 10th Avenue | Medical Office Building | Columbus, GA | 1,989,000 | 100.0 | % | 40,341 | 83.2 | % | $ | 471 | $ | 14.04 | Columbus Regional Health System | Columbus Regional Health System | |||||||||||||
| CRHS - 1942 North Avenue | Medical Office Building | Columbus, GA | 1,971,000 | 100.0 | % | 6,808 | 100.0 | % | $ | 94 | $ | 13.81 | Columbus Regional Health System | Columbus Regional Health System | |||||||||||||
| CRHS - 920 18th Street | Medical Office Building | Columbus, GA | 1,982,000 | 100.0 | % | 6,055 | 100.0 | % | $ | 89 | $ | 14.70 | Columbus Regional Health System | Columbus Regional Health System | |||||||||||||
| CRHS - 1900 10th Avenue | Medical Office Building | Columbus, GA | 1,976,000 | 100.0 | % | 50,930 | 94.2 | % | $ | 740 | $ | 15.43 | Columbus Regional Health System | Columbus Regional Health System | |||||||||||||
| CRHS - 1800 10th Avenue | Medical Office Building | Columbus, GA | 1,980,000 | 100.0 | % | 38,650 | 100.0 | % | $ | 626 | $ | 16.20 | Columbus Regional Health System | Columbus Regional Health System | |||||||||||||
| CRHS - 705 17th Street | Medical Office Building | Columbus, GA | 1,994,000 | 100.0 | % | 44,995 | 82.8 | % | $ | 646 | $ | 17.35 | Columbus Regional Health System | Columbus Regional Health System | |||||||||||||
| CRHS - 615 19th Street | Medical Office Building | Columbus, GA | 1,976,000 | 100.0 | % | 9,048 | 100.0 | % | $ | 95 | $ | 10.50 | Columbus Regional Health System | Columbus Regional Health System | |||||||||||||
| CRHS - 1968 North Avenue | Medical Office Building | Columbus, GA | 1,966,000 | 100.0 | % | 3,952 | 100.0 | % | $ | — | $ | — | N/A | N/A | |||||||||||||
| CRHS - 633 19th Street | Medical Office Building | Columbus, GA | 1,972,000 | 100.0 | % | 11,315 | 71.2 | % | $ | 112 | $ | 13.90 | Columbus Regional Health System | Columbus Regional Health System | |||||||||||||
| CRHS - 500 18th Street | Medical Office Building | Columbus, GA | 1,982,000 | 100.0 | % | 15,877 | 71.8 | % | $ | 143 | $ | 12.54 | Columbus Regional Health System | Columbus Regional Health System | |||||||||||||
| CRHS - 2200 Hamilton Road | Medical Office Building | Columbus, GA | 1,992,000 | 100.0 | % | 17,805 | 84.9 | % | $ | 254 | $ | 16.81 | Columbus Regional Health System | Columbus Regional Health System | |||||||||||||
| CRHS - 1810 Stadium Drive | Medical Office Building | Columbus, GA | 1,999,000 | 100.0 | % | 27,620 | 65.2 | % | $ | 255 | $ | 14.15 | Columbus Regional Health System | Columbus Regional Health System | |||||||||||||
| Carle Danville MOB | Medical Office Building | Danville, IL | 2,007,000 | 100.0 | % | 46,663 | 100.0 | % | $ | 622 | $ | 13.33 | N/A | Carle Foundation | |||||||||||||
| Middletown Medical - 111 Maltese | Medical Office Building | Middletown, NY | 1,988,000 | 100.0 | % | 27,264 | 100.0 | % | $ | 710 | $ | 26.04 | N/A | Middletown Medical | |||||||||||||
| Middletown Medical - 2 Edgewater | Medical Office Building | Middletown, NY | 1,992,000 | 100.0 | % | 8,162 | 100.0 | % | $ | 212 | $ | 25.97 | N/A | Middletown Medical | |||||||||||||
| Napoleon Medical Office Building | Medical Office Building | New Orleans, LA | 1,974,000 | 100.0 | % | 65,775 | 88.9 | % | $ | 1,251 | $ | 21.40 | Oschner Health System | N/A | |||||||||||||
| West TN Bone & Joint - Physicians Drive | Medical Office Building | Jackson, TN | 1,991,000 | 100.0 | % | 23,900 | 100.0 | % | $ | 454 | $ | 19.00 | N/A | West TN Bone & Joint Clinic | |||||||||||||
| West TN Bone & Joint | Medical Office Building | Jackson, TN | 1,996,000 | 100.0 | % | 12,524 | 100.0 | % | $ | 257 | $ | 20.52 | N/A | Jackson Ophthalmology ASC | |||||||||||||
| COMPLETED PROPERTIES TOTAL WEIGHTED AVERAGE | 2,577,609 | 97.1 | % | $ | 56,525 | $ | 22.59 | ||||||||||||||||||||
| Portfolio Total/Weighted Average | 3,100,701 | 94.6 | % | $ | 66,162 | $ | 22.55 | ||||||||||||||||||||
Scheduled Lease Expirations
The following table provides a summary of lease expirations for our properties owned as of December 31, 20142017, for the periods indicated.
NUMBER OF LEASES EXPIRING | NET RENTABLE SQUARE FEET | PERCENTAGE OF NET RENTABLE SQUARE FEET | ANNUALIZED RENT(1) (thousands) | PERCENTAGE OF ANNUALIZED RENT | ANNUALIZED RENT LEASED SQUARE FOOT(2) | ||||||||||||||||||||||||||||||||||
| 2015 | 29 | 86,971 | 2.8 | % | $ | 1,795 | 2.7 | % | $ | 20.64 | |||||||||||||||||||||||||||||
| 2016 | 28 | 110,075 | 3.6 | % | 2,425 | 3.7 | % | $ | 22.03 | ||||||||||||||||||||||||||||||
| 2017 | 21 | 68,298 | 2.2 | % | 1,647 | 2.5 | % | $ | 24.11 | ||||||||||||||||||||||||||||||
| Expiration (1) | Number of Leases Expiring | GLA | Percent of GLA | Annualized Base Rent (2) (thousands) | Percent of Annualized Base Rent | Annualized Base Rent Leased per Square Foot (3) | |||||||||||||||||||||||||||||||||
| 2018 | 27 | 203,922 | 6.6 | % | 4,306 | 6.5 | % | $ | 21.12 | 115 | 412,406 | 2.9 | % | 8,266 | 2.9 | % | $ | 20.04 | |||||||||||||||||||||
| 2019 | 25 | 202,606 | 6.5 | % | 4,057 | 6.1 | % | $ | 20.02 | 105 | 539,574 | 3.9 | % | 11,939 | 4.2 | % | 22.13 | ||||||||||||||||||||||
| 2020 | 13 | 49,028 | 1.6 | % | 969 | 1.5 | % | $ | 19.76 | 116 | 498,110 | 3.6 | % | 10,548 | 3.7 | % | 21.18 | ||||||||||||||||||||||
| 2021 | 11 | 73,855 | 2.4 | % | 1,784 | 2.7 | % | $ | 24.16 | 160 | 688,399 | 4.9 | % | 14,709 | 5.1 | % | 21.37 | ||||||||||||||||||||||
| 2022 | 11 | 106,611 | 3.4 | % | 2,669 | 4.0 | % | $ | 25.03 | 106 | 684,229 | 4.9 | % | 16,300 | 5.7 | % | 23.82 | ||||||||||||||||||||||
| 2023 | 17 | 178,001 | 5.7 | % | 3,941 | 6.0 | % | $ | 22.14 | 87 | 594,185 | 4.2 | % | 13,023 | 4.6 | % | 21.92 | ||||||||||||||||||||||
| 2024 | 45 | 523,238 | 16.9 | % | 10,017 | 15.1 | % | $ | 19.14 | 87 | 862,954 | 6.2 | % | 17,524 | 6.1 | % | 20.31 | ||||||||||||||||||||||
| 2025 | 132 | 1,027,311 | 7.3 | % | 24,384 | 8.5 | % | 23.74 | |||||||||||||||||||||||||||||||
| 2026 | 126 | 3,576,886 | 25.6 | % | 71,566 | 25.1 | % | 20.01 | |||||||||||||||||||||||||||||||
| 2027 | 78 | 1,362,904 | 9.7 | % | 27,181 | 9.5 | % | 19.94 | |||||||||||||||||||||||||||||||
| Thereafter | 58 | 1,328,091 | 42.8 | % | 32,517 | 49.1 | % | $ | 24.48 | 104 | 3,199,457 | 22.9 | % | 69,153 | 24.2 | % | 21.61 | ||||||||||||||||||||||
| Month to month | 2 | 3,323 | 0.1 | % | 35 | 0.1 | % | $ | 10.53 | 44 | 73,781 | 0.5 | % | 1,077 | 0.4 | % | 14.60 | ||||||||||||||||||||||
| Vacant | — | 166,682 | 5.4 | % | — | — | — | — | 476,606 | 3.4 | % | — | — | — | |||||||||||||||||||||||||
| Total/ Weighted average | 287 | 3,100,701 | 100.0 | % | $ | 66,162 | 100.0 | % | $ | 21.34 | |||||||||||||||||||||||||||||
| Total / Weighted average | 1,260 | 13,996,802 | 100.0 | % | $ | 285,670 | 100.0 | % | $ | 21.13 | |||||||||||||||||||||||||||||
| (1) | Excludes leases related to the Company’s 108,843 square foot corporate office building. |
| (2) | Annualized base rent is calculated by multiplying (a) base rental payments for the month ended December 31, 2017, by (b) 12. |
| (3) | Annualized base |
| (4) | Includes 4 leases which expired on December 31, 2017, representing 0.1% of portfolio leasable square feet. |
Tenants
As of December 31, 2017, our properties were 96.6% leased. No single tenant accounted for more than 5.6% of our total annualized base rent or 4.3% of total base revenue as of December 31, 2017; however, 18.7% of our total annualized base rent as of December 31, 2014, by (b) square footage under commenced leases as of December 31, 2014.2017 is from tenants affiliated with CHI.
The following table sets forth certain information about the 10 largest tenants in our portfolio based on total annualized base rent as of December 31, 2014.
2017.
| Tenant | # of Properties | Property Location | Leased SF | % Leased GLA | Annualized Base Rent(1) (thousands) | % of Portfolio Annualized Rent(2) | |||||||||||
| LifeCare | 3 | TX, PA | 310,352 | 10.0 | % | $ | 4,697 | 7.1 | % | ||||||||
| East El Paso Physicians Medical Center | 1 | TX | 77,000 | 2.5 | % | $ | 3,381 | 5.1 | % | ||||||||
| Wayne State University Physician Group | 1 | MI | 176,000 | 5.7 | % | $ | 3,168 | 4.8 | % | ||||||||
| Crescent City Surgical Centre | 1 | LA | 60,000 | 1.9 | % | $ | 3,090 | 4.7 | % | ||||||||
| Foundation Hospital of San Antonio, LLC | 2 | TX | 68,786 | 2.2 | % | $ | 2,902 | 4.4 | % | ||||||||
| Northside Hospital | 3 | GA | 88,003 | 2.8 | % | $ | 2,242 | 3.4 | % | ||||||||
| Mid Ohio Oncology | 1 | OH | 98,325 | 3.2 | % | $ | 2,233 | 3.4 | % | ||||||||
| Pinnacle Health | 6 | PA | 105,199 | 3.4 | % | $ | 2,011 | 3.0 | % | ||||||||
| Columbus Regional Health System | 9 | GA | 125,189 | 4.0 | % | $ | 1,909 | 2.9 | % | ||||||||
| Premier Healthcare | 3 | IN | 90,000 | 2.9 | % | $ | 1,788 | 2.7 | % | ||||||||
| Tenant | # of Properties | Leased GLA | % GLA | Annualized Base Rent (1) (thousands) | % of Portfolio Annualized Rent | ||||||||||
| CHI - Nebraska | 13 | 893,098 | 6.4 | % | $ | 15,906 | 5.6 | % | |||||||
| CHI - KentuckyOne Health | 11 | 744,101 | 5.3 | % | 13,120 | 4.6 | % | ||||||||
| Baylor Scott and White Health | 2 | 268,639 | 1.9 | % | 7,402 | 2.6 | % | ||||||||
| US Oncology | 6 | 256,988 | 1.8 | % | 6,706 | 2.4 | % | ||||||||
| CHI - St. Alexius (ND) | 7 | 362,284 | 2.6 | % | 6,239 | 2.2 | % | ||||||||
| Northside Hospital (GA) | 4 | 329,249 | 2.4 | % | 6,018 | 2.1 | % | ||||||||
| HonorHealth (AZ) | 6 | 243,482 | 1.7 | % | 5,768 | 2.0 | % | ||||||||
| CHI - Franciscan (Seattle - Tacoma) | 8 | 329,754 | 2.4 | % | 5,594 | 2.0 | % | ||||||||
| Great Falls Hospital (MT) | 3 | 185,085 | 1.3 | % | 5,194 | 1.8 | % | ||||||||
| LifeCare | 3 | 310,352 | 2.2 | % | 5,021 | 1.8 | % | ||||||||
| Total | 63 | 3,923,032 | 28.0 | % | $ | 76,968 | 27.1 | % | |||||||
| (1) | |
| Calculated for each tenant as the monthly contracted base rent per the terms of such tenant’s lease, as of December 31, 2017, multiplied by 12. |
